Remember, prices are set at the margin not the average.  If no one wants to move out and the people moving in are wealthy then the price of housing can be much higher than what one would expect by looking at average household income.
——-

these statistics are very eye-opening in terms of affordability (or lack of it) in the local area.

however a few comments/observations:

based on the graph from 1986 to 2006, it appears that the local area has been willing to sustain a price that exceeds the 4 time multiple that is used in calculating home prices as a ratio of income.  maybe a consideration of home prices as a range between 4-6 times income would be a more accurate representation of home prices (the current wtf range definitely seems outrageous).  the local area (and much of southern california) does offer homeowners something where they are willing to sacrifice more of their income on housing.

a comment i frequently hear is “who can afford these homes?”  keep in mind that the above numbers are much more applicable to first-time buyers and recent move-up buyers.  many in the local area have been living in the same home since before the recent gold rush and purchased their home at a “reasonable” price and those of this group that sold near its peak to buy something more expensive, had a much larger down-payment and thus are financing much less than 80%.  obviously there are still plenty who bought with little to no down payment in the area that are truly feeling the pinch.

i forgot to add that this 4-6 time multiple range would result in an affordable price range for the average irvine household (based on the $85K mentioned above) between $340K to $510K.  still well below current prices buy maybe not quite so low as what some people might expect.

i would be curious to see what the average home’s square footage would be to determine this range’s cost per sq ft.  i would assume that the average irvine family would need between 1,500 to 2,500 square feet.

Too bad - you’re still using the argument that housing should be “priced at 4X income”.

Why would it be so hard to say “loan balances should be no more than 4X income”? 

To portray every household in Irvine with no more than $160,000 downpayment or equity is just plain deceptive.

If you prefaced the article with a “first time homebuyer” caveat, I could understand.

Yesterday, you said that all real estate wealth will be evaporated, leaving no one with deposits.  Is that so patently obviously as to not deserve mention in the post?

Make that “obvious”.

Your table shows that 22% of people can support a LOAN balance of $800,000.

I interpret the chart differently than you do.

It is clear from the chart people are not willing to support prices at greater than 4 times income or we would not have had the slow, steady decline from 6 times income to 4 times income in the early 90s. (We did not have a six year job recession, so that argument doesn’t work.)

The bubble from 4 times income to the present was created by exotic financing terms and the expansion of credit to subprime borrowers. This is also not sustainable and is going to result in another market crash down to 4 times income or perhaps lower.

Interesting too that almost 20% of people in the table make under $35,000.  As a family, mind you.

Irvine is not a market for buyers in this income range.

Frankly, I wish we did have something to offer these people, but we don’t.

Great infoporn! 

If only we could have another column…
What percentage of people in that group has that kind of *cash* on the side? 

My guess is the number would start below 10% and rise to *maybe* 10% or 15% by 149,999?

People may need to cash in those non-qualified accounts in order to buy a house.  The result is a transference from long-tern retirement planning to an asset that historically keeps up with inflation.  Additionally, the initial purchase would be a loser until the prices come down more.

It would be hard to say loan balances should be no more than 4X income because loan balances should be no more than 3X income. When you add a loan at 3 times income and a 20% downpayment, you arrive at a number close to 4 times income. This is still above the norm in the rest of the country where houses go for 3 times income.

I am not portraying anything about downpayments in Irvine. The chart merely points out the minimum downpayment required to buy a home at that price level assuming a 20% requirement. Some people will have more, and some will find ways to make the purchase with less.

My point on the evaporation of real estate wealth is fairly simple: When a highly leveraged asset declines in value by 40% it wipes out everyone. Even those who have paid off their houses will lose 40%. Those with mortgages will lose much greater percentages of their equity with 100% losses being the norm.

No, It shows that 11.7% can support a house price of $800,000.

Only those at the very top of the $150,000 to $200,000 range can support a house price at $800,000. Those at the low end of this income range can only support a house price of $600,000.

JMHO

Incomes are truly the bread and butter for real estate.  Income increases generally equate to a strong economy, with good job growth and low unemployment.  According to Melissa Data, several zip codes in Irvine have seen declines in adjusted gross, household incomes the last few years.  This is mainly due to all the new, cut-out, tract housing that’s been developed in Irvine since 2000, attracting new buyers with less income.  Under normal circumstances this would have been pulling the median price down in Irvine, but we’ve seen the complete opposite due to extremely liberal lending standards.

Now that the lending standards are rapidly changing, it’s creating major problems not only for the people that can no longer qualify for a time-bomb mortgage, but also for the white collar executive or business owner, who has suddenly discovered that an 800 fico score with a $200,000 a year income, will only qualify for a 2200 square foot box home in Portola Springs.  If you want to live in Turtle Rock, you better be prepared to pony-up some major scratch, and have a mighty large, documented income.  Only a tiny percentage of potential buyers can qualify under the new, tighter lending standards for anything over 1m.

Yes, the times have changed.  The tug of war is on, and something has got to give.  Price?  Yes!

“My point on the evaporation of real estate wealth is fairly simple: When a highly leveraged asset declines in value by 40% it wipes out everyone. Even those who have paid off their houses will lose 40%. Those with mortgages will lose much greater percentages of their equity with 100% losses being the norm.”

This is a circular argument.

How will prices go down 40% if people can afford what they have?

After the last several years of 100% financing availability, nobody had any incentive to save money. I speculate that nobody has any cash at all. This is going to be a huge problem for the real estate market moving forward because there are no first-time buyers with cash. This will cause the move-up market to seize up and keep transaction volumes depressed for quite some time.

People can only “afford” what they have based on the availability of exotic financing which is disappearing.

They never could afford what they had, they were merely given the temporary ability to borrow beyond their means to inflate asset prices. Now that this ability to borrow is being curtailed, asset prices will decline.

If we were Santa Barbara, Carmel, Beverly Hills, or some other city with multi-generational wealth, that might be an issue. In Irvine, people still work to make money to pay mortgages.

Wow - you really believe that, don’t you?

Yes, I do. It is at the core of the bearish argument for declining house prices.

Hmmmm.

All the people who bought in the 60s, 70s, 80s, 90s used “exotic” loans.

Who knew?

Is this really worth responding to? You know this is a silly argument.

Nobody is arguing prices will not rise. They will rise at a rate equal to income growth. Income growth had very little to do with the rise over the last 7 to 10 years.

Ah…no, I don’t.

“Too bad - you’re still using the argument that housing should be “priced at 4X income”.

Why would it be so hard to say “loan balances should be no more than 4X income”?
“

It’s a rule of thumb.  In low credit cost environments, it’s much higher.  In high cost environments lower.  The price of the home isn’t important, it’s the carrying cost that the price creates.

Would you care to set forth some guidelines for front and back DTIs?  Front being just PITI, back being all debt?  That is the next argument many claiming people really can afford the prices go to, that the higher income, can afford a greater percentage.  Many if not most people’s consumption rises with income porportionately.  In the marketing materials for Orchard Hills and Crystal Cove, the food/beverage consumption was proportional to lower incomes.

The old standard on DTI was 28%/33%.  Pushed first to 33% front end, then 40%, than basically no limit with backend DTI of 55% or 75% being heard of.

Those are pre-tax benefits also, not post tax.

There is good news though.  A $900,000 home with $180,000 down, and a 80% LTV 1st only at 7%, meets a 33% front end DTI (not accounting for insurance).  At 28%, it pushes it to $237K for income.  Of course, a 35% front end pushes it down to a mere $190K. 

Living wage propronents time wage discussion to local rents and housing expenses and base the so called “living wage” on 3X rent.  When front end housing expense exceeds 33%, the decent into deeper poverty is significantly increased as other expenses, health, food become neglected.

JMHO

I can see a day when the lenders are going to look at pre-qualifications differently.  Contingency, equity, transfer sales, are going to be treated differently in the future.  Liquid CASH is going to become King, NOT perceived home equity, or 401k extractions.

I wonder how many people that frequent this venue have the ability to pony-up $200,000 without selling or borrowing against their home, or qualified retirement plan?

Your chart shows much better affordability than even I expected.

The top 30% of earners drove up prices as well.

“How will prices go down 40% if people can afford what they have?”

Under today’s lending standards, I don’t think most people can afford to purchase their own homes in Orange County.

The chart will support full doc loans.

Did they do that because of their income or because of their borrowing power? Leveraging ones income 8 times can really bid up house prices.

My point is being (conveniently) discarded.

The distinction is loan balance versus home price.

They are totally different things.

A loan balance will not equal a home price when people have cash.

What you have to think about is the purchasing power of those most likely to buy new homes in the next five years.  I don’t think these purchasers with equity are either going to be willing to pay current prices, or they’ve spent the gains (plus some) on their current residence by tapping equity.

I work at a company with many long-time OC residents and they intend to stay in the house they’ve had for the past 10 or more years due to the favorable tax rules.  Also, they don’t seem interested in purchasing at the currently inflated prices.  10 years of raises has not meant that they’re flush with cash, they only earn maybe 40% more than when they originally stretched to purchase the place they’re in now.  Their kids are nearing college age, which is an additional expense and for the first time their mortgage has shrunk to more tolerable levels.  Cashing out their equity (assuming they could even sell the way things are going now) would not leave them much more capable of getting a nicer place because they’d just pay more per square foot for their house than they originally paid, the taxes would be a heck of a lot more and they’ve got their remaining money earmarked for the expenses of mid-life.

Another problem I see is a crap-load of fancy cars being driven around that I KNOW are financed by HELOC’s.  I earn in that top 10% category you show above and find it tough to afford rent for a 3BR place, a VW and a Honda.  I see 30% of the cars on the road are $50,000 plus range and am always thinking “How do they pay for this stuff.”  I know the answer, they tapped their equity.  Those who are financially prudent enough to have not tapped their equity are equally unlikely to be comfortable with spending even the assumed 4X income on a house outlined above.  That’s still a big mortgage payment in my eyes, not leaving you much savings after taking out taxes and other living expenses.

Therefore, I think you have to assume that most of the people purchasing in the next few years are going to be first-time homeowners or relos who probably don’t have much of a down payment.  Unless maybe they’re relocating from NYC or something.  Even if the relos have the money, I’m also guessing there are not many of them based on the lack of population growth in OC around here lately and my experience with being a relo myself.  When I first responded to the job listing, the recruiter told me many stories about how hard it was to get people to move to California because they couldn’t buy a house.

I think the vast majority of new purchasers in the future, therefore, will be first time homebuyers.  Without creative financing and little equity, we’re looking at a pretty hard landing around here.

I think you might be missing our point that very few people either do or will have cash.

Nobody was saving over the last several years, so no first-time buyers have any cash. Move-up buyers are about to see a serious equity evaporation and will not have the ability to convert their house to cash. The lack of downpayment money is going to be a very serious problem for the real estate market for the next several years.

“I find it interesting that 78% of the households in Irvine make less than $150K.”

I think it’s more interesting that 22% earn > $150k!  Glass half full?  I guess it depends on your perspective.

It’s not discussed often here, but the housing market doesn’t operate as efficiently as the stock market.  Bears think that prices must reflect fundamentals, and prices would if every five years every homeowner was forced to sell and repurchase it or another home. 

But, if only 5-10% of all homes in Irvine are on sale at any given time, then the incomes of the prospective homebuyers at that time will set the prices.  Liberal rates & terms will inflate their buying power, tighter standards will do the opposite. 

4-times median is the best measuring stick, but that doesn’t mean it always indicates a mis-priced area.

I agree with IrvineRenter.  Since moving to Sacramento in the spring I’ve met MANY people who bought way over their heads and who either walked away or were able to short sell their home. 

The two most common situations I’ve seen are people who got the adjustable rate mortgages and when the adjustments began this spring they just stopped paying their mortgages and are walking away.

The other situation I see alot of is people who re-financed themselves into a corner.  One couple bought 5 years ago for 150K.  They were selling it in the spring for 375K and it was a short sale.  They also had a hefty speedboat parked in the driveway that they were trying to sell!

I almost can’t believe there are people who don’t believe that the market is in for a very rough time in the next few years as these mortgages readjust and people can’t keep up.

The median income of homebuyers isn’t $85,000.

It is dragged down by the 20% of people making under $35,000.

Those are not homebuyers.

Okay, how many people in Irvine have $160,000+ disposable?  Not equity.  Equity is funny, you have to sell or HELOC and then carry payments, which is right back to income.

So, how many people have $160,000+ to put into a home?

Of the 22% how many are already comfortably housed at a much lower cost basis?

I say most, for the most part the point is moot.

The relationship between median income and median home price prior to this nationwide real estate bubble has held steady a 2.7-3.0. Only during the bubble has this relationship ceased being predictive of house prices because of the impact of exotic financing.

The relationship between median income and median home price in California as demonstrated by the graph in this post has been volitile. This volatility began during the inflationary period of the 70’s when the traditional PE of 3 was last seen in California. Once we started having bubbles in California real estate, the greed of market participants worked to create more. We had our first in the late 70’s/early 80’s, our second in the late 90’s, and now this one. Each bubble has shown a greater detachment from fundamentals than the last, but after each bubble the market bottoms at 4 times income.

Because this bubble is so large, and because there will be so many foreclosures, we may see 3 times income again at the bottom. I have been predicting 4 times income to be conservative. Unfortunately, Californians will probably not learn their lesson, and we will create another bubble once the pain of this one fades from memory.

The point I was trying to make before I launched into this diatribe was that the median income of homebuyers is not relevant. The relationship between median home price and median houshold income holds. There are low-income people who cannot afford a home in every market, not just in Irvine. We have a worse problem with it here which is probably why we did not get down to 3 times income at the bottom in the late 90s.

Let’s exclude the bottom 20% households, and call the other 80% the “potential home-buyers”. 

Your median potential home-buyers’ household income would still only come in at the $100k-$125k/yr. range.  This income level falls far short of the income level required to purchase a median priced home in Irvine today.

Well.. unless you bring back those exotic mortgages.

I think people make and have a lot more money that is indicated in these numbers.  There is lot’s family wealth in Southern OC, that also helps support housing.  I can name ten first time buyers off the top of head, who   obtained the down and/or financing for their first home purchase directly from their parents.  Now this may represent a small portion of the overall housing market, but it is a portion.

One memorable quote I recall from a mid-twenties girl immediately following her marriage, “And, we’ve been looking for houses, and starter homes suck, I am not going to live in some box.  My parents are helping us with the house so we are going to get a REAL HOUSE”.

charlesH is basically right; prices are set by market forces not directly by affordability. But it can go the other way too. Before the last house price boom began owning a SFR in Irvine was acutally below what could conceivably be supported by the median household income in Irvine. Whose to say that can’t happen again.

All of California is way too high.  We recently went on a trip.
Homes in Wine county are over 1 mil.  Driving home along the 101 - there is a new home development in nearly every city.
Typically these are homes are under $2000sq ft on tiny lots sold for low $600,000.  I have never seen anything like this before - over a hundred miles from nearest major city.  There are no inexpensive new homes in California.

I enjoyed reading your post, Elric.  From my perspective as a recent transplant from the Midwest, another barrier to a home purchase here is how little quality your money will buy.  Even if prices come down to a range I could comfortably handle, I can’t see spending my money on 95% of what I see listed for sale in Irvine.

Back in 1999 I applied to our local credit union for a home loan.  Household income was low to mid six figures and the MAX purchase amount they would permit was ~350k.  Interest rates at that time were around 7+% for a 5/1 arm.  This also required a 20% DP.  Of course, the credit bubble was just in its infacy.  We are already seeing the market lock-up because of tighter lending standards.  Unlike the 90s grinding descent, this tectonic shift in lending standards will bring a rapid, painfull fall in prices.

I agree that the bottom will be:

median house price = 4X median salary
(without exotic loans and no speculation).

Though, I expect a temporary oversold condition:
median house price = 3X median salary

Due to panic selling by banks dumping REPO inventory, panic selling of inexperienced investors and people with cash on the sidelines just watching, at the end they coul provide the bottom rock support, this group of individuals currently are hibernating until they see real bargains.

This is what I’m currently being offered in Ventura County

Suggested Minimum Income to Qualify to Purchase:
Assume 10% Down Payment and Good Credit:
80-10-10: 1st Loan: 6.25%, 2nd Loan 8.5%
Qualifying Ratio: Debt to Income: 45% Housing:

Sales 1st & 2nd PITI Income Needed to Qualify:
Price Payment Payment Monthly Income Annual Income
  500,000 $ 2,847 $ 3,493 $  6,327 $  75,929
  525,000 $ 2,990 $ 3,668 $  6,644 $  79,725
  550,000 $ 3,132 $ 3,842 $  6,960 $  83,522
  575,000 $ 3,274 $ 4,017 $  7,276 $  87,318
  600,000 $ 3,417 $ 4,192 $  7,593 $  91,114
  625,000 $ 3,559 $ 4,366 $  7,909 $  94,911
  650,000 $ 3,702 $ 4,541 $  8,226 $  98,707
  675,000 $ 3,844 $ 4,716 $  8,542 $ 102,504
  700,000 $ 3,986 $ 4,890 $  8,858 $ 106,300
  725,000 $ 4,129 $ 5,065 $  9,175 $ 110,097
  750,000 $ 4,271 $ 5,240 $  9,491 $ 113,893
  775,000 $ 4,413 $ 5,414 $  9,807 $ 117,689
  800,000 $ 4,556 $ 5,589 $ 10,124 $ 121,486
  825,000 $ 4,698 $ 5,764 $ 10,440 $ 125,282
  850,000 $ 4,840 $ 5,938 $ 10,757 $ 129,079
  875,000 $ 4,983 $ 6,113 $ 11,073 $ 132,875
  900,000 $ 5,125 $ 6,288 $ 11,389 $ 136,672
  925,000 $ 5,268 $ 6,462 $ 11,706 $ 140,468
  950,000 $ 5,410 $ 6,637 $ 12,022 $ 144,264
  975,000 $ 5,552 $ 6,812 $ 12,338 $ 148,061
1,000,000 $ 5,695 $ 6,986 $ 12,655 $ 151,857
1,025,000 $ 5,837 $ 7,161 $ 12,971 $ 155,654
1,050,000 $ 5,979 $ 7,336 $ 13,288 $ 159,450
1,075,000 $ 6,122 $ 7,510 $ 13,604 $ 163,247
1,100,000 $ 6,264 $ 7,685 $ 13,920 $ 167,043

You sound like one of the new landed wealth here in beautiful Irvine. That is to say, you’re desperately trying to hold on to the notion that this is somehow a very desirable place to live.

In lending, many first time homebuyers that have down-payments usually receive it from family.  I am seeing anywhere from 10-75% down payments as “gifts” from parents.  This definitely may not seem like the norm but it is more common than most people would think.  Unfortunately, I have not seen a strong savings pattern in these lucky homebuyers.

Also, there are a lot of potential homebuyers who have been waiting on the sidelines for the bubble to pop.  I have ~10-15 serious borrowers who wanted to get pre-approved in hopes of finding that gem.  Obviously they are not in any rush but they are out there.

Hint: anecdotal evidence does not make for a very convincing argument.

The median income->median home price relationship is totally valid. As IR has shown, this is easily synthesized from volumes of data going back many years.

The fact that only 22% of Irvine households make grater than $150K is proven out by the local economy. How many F500 companeis have major operations in OC? How many?

Now up here in Silicon Valley, the statistics are skewed by high incomes, but the home price insanity remains. As an example, let’s take a look at the city demographics of Los Gatos, one of the most desireable communities (all figures courtesy of the town website at www.losgatosca.gov):
***
Population: 29,132

Current Households: 12,257
Average Household Income: $212,207
Median Age: 41.9
Median Housing Value: $1,039,780

Occupational Categories 16 and Over:

23.1% Executive, Administrative, and Managerial
25.8% Professional Specialty
32.2% Technical Sales, Administrative Support
12.9% Service
11.4% Precision, Production, Craft and Repair
2.5%  Farming, Forestry, and Fishing
14.6% Operators, Fabricators, and Laborers

Education Age 25 and Over:
18.1% Population earned a Graduate/Professional Degree
29.8% Population earned a Bachelor’s Degree

Race Classification:

86%  Caucasian
8.1% Asian
5.2% Latino/Hispanic
.07% Other
***

I wonder how the LG avg hh income compares with Irvine (the website doesn’t list hh median, which I suspect is much lower). Still, notice that even using the more skewed average value (especially up here where your neighbor might just be sitting on a few million from the IPO of the week or last 10 years) the income:house price ratio is 5x. I know of people up here who make a hh $300K and stretched to buy the $1.5M place in 2005, and now are searching for any way possible to get out rom their exploding loan, because as math bears out $300K cannot service a $1.5M loan (or even a $1m loan) at fully amortized rates.

In summary, the bigger they are, the harder they will fall. The belief up here is that the “bubble” is an LA/OC/SD phenomenon, and that there is “too much cash in the Bay area” for it to ever rear it’s head up here. Let me tell you first hand, they are in the initial stages of panic up here. The higher incomes and excess wealth from company equity simply delay the inevitable.

One thing is different up here: the local economy is on fire. Jobs are plentful for the skilled, and pay is high.

Hint: What do you think the Beige Book is?  A bunch of anecdotal evidence the Fed uses to decided monetary policy.

Interest rates are the wild card in all the projections.  If the Fed lowers 125 bps over next several meetings, the entire problem will be “solved”.

Don’t delude yourself about aggregate wealth. People have lots of cash.  Lots and lots of cash.  Please see the wealth study from Northern Trust Below.

http://www-ac.northerntrust.com/content//media/attachment/data/white_paper/0702/document/wealth_america2007.pdf

Janet is very astute.

How many of those high earners were real estate agents or had other real estate related jobs which will no longer be bringing in >$150k?

Think of it this way.  If interest rates were 0%, and there was 1 house for sale and 3 buyers, the conversation might go like this.

Person 1: I’ll give you $200,000 for that house
Person 2: $250,000
Person 3: $300,000
Person 4: $500,000
etc. etc.
Person 1: Almost infinity ....

Something like that’s been happening.

You don’t have to take Janet’s word for it, the market is telling you that.

86% Caucasian? Are Indians (from India) classified as Caucasian? I’m a software engineer and I’ve been to Silicon Valley. It’s turban city. My boss and most of my co-workers are Indian. All the Caucasians in my department have been laid off. (Except for me - I’m the only one who can converse fluently with clients. And I wonder if being female helped as well - American born female software engineers are as rare as a $3 bill.)  Caucasians (meaning American born) cost too much to employ.
But I’m not bitter.

Oh wait, I am…

Does anyone know of a blog like this for the Miami area?

Or even all Florida or any part of it.  I surfed a bit and couldn’t find
anything like the quality (and quantity) of this blog.

I am a real estate lawyer and if I didn’t do real estate litigation,
I would be out of business right now.  The bankruptcy lawyer
down the hall, in Hialeah, just hired a couple of secretaries
laid off from title companies.  (Don’t feel sorry for me, I am of
retirement age, with a spouse with a good pension and my house
will be paid off by the end of this year.)

Prices here never got as bad as there, but our incomes never
came close either.  Of course, there is and was lots of fraud,
but lots of it was and is small scale.  A lot of income here is
under the table.  So, in that sense I suppose “stated” does
make a little sense, unless you have the idea that people
who cheat the IRS deserve to be punished by not being able
to buy a house.

Great post!  Thanks.

You’re assuming the 22% making more than $150k don’t already have homes or want to trade up. 

That seems unlikely - they probably already own a house, and probably will take the same housing price ride down as everyone else.

Call Kurtis: Winning And Loosing Foreclosures
http://cbs13.com/seenon/local_story_251003327.html

The Kihn family was renting a Fairfield home that went into foreclosure. Now they’re moving a few miles away to Vallejo into a two level house big enough for the growing family.

“The house was purchased in May for $599,000. We put an offer it for $385,000,” said Albert Kihn.

That’s $200,000 less than the original purchase price, but the bank agreed and threw in extras.

“They did closing costs and all the pest work and repair damage on the house,” said Kihn. “There is no one luckier than I.”

No shortage of short sales
http://www.ocregister.com/money/short-sales-sale-1841712-lenders-home

The total number of short sales is still tiny: 597 Orange County listings in the MLS on Aug. 23 indicated that the seller sought a short sale, the Southern California MLS reported. That’s just 3.3 percent of the 17,881 homes listed for sale in the county on that date.

On the other hand, the rate at which they have been added to the MLS has accelerated steadily in the past year.

“We saw a huge increase in this in May or June,” said Mac Mackenzie, an agent for Coldwell Banker in Irvine. Between 15 and 20 of the 60 listings he now has are short sales, Mackenzie said.

Mackenzie also believes that the number of short sales is far greater than indicated in the MLS. Many sellers are afraid that disclosure would scare off potential buyers since short sales are more complicated and take far longer than normal sales.

“I would take the rate of disclosures that you see and (multiply) it by five,” he said.

Lenders backlogged

Mackenzie estimated that only one out of every two proposed short sales succeed, with the rest ending in foreclosure. Wagner heard estimates that just one in 10 or two in 10 such deals go through.

Most short sales fail because lenders have a backlog of such cases to process and because escrows usually take much longer, causing many buyers to back out before a deal is completed, said Vanessa Liddell, president of Shortsaleplan.com, a short-sale consultant in Yorba Linda.

Ron Garber, founder and chairman of Shortsaleplan.com, said lenders are starting to show more willingness to approve short sales.

“The lenders are starting to gear up their departments and be more efficient,” Garber said. “It’s becoming more of a pure economic decision where lenders are looking and thinking what makes sense. … Before, they were playing hardball because they didn’t think it would be as dramatic as it truly is.”

no wonder there are so many young A-holes in the OC, they’re all being supported by mommie and daddie!  trust fund babies are always the most wacked out kids!

He’s talking about “Los Gatos”, which is not your average Sillicon Valley community, very desirable community, though old, right?

He said he was using Los Gatos as an example of a Silicon Valley city. But you’re right, the one person I knew who lived there had lived there for probably 30+ years - mother of a friend of mine.

“I think people make and have a lot more money that is indicated in these numbers. “

Where were all these people 10 years ago when houses were going for 4 times income? Are you arguing that the statistics on household income used to be accurate and now they are misleading because everyone secretly makes more money?

It sounds like you are ignoring facts which don’t support the conclusions you want to reach.

If you obtain a large enough number of anecdotes, it starts to become statistics. Your sample of 10 people does not provide the reliability of the governments sample of tens of thousands.

I don’t know of a good real estate blog tracking the activity in Miami. That is too bad because Miami, and in particular your condo market, is a prime example of bubble excesses.

You are already “out of land” there, so you must hear the same nonsensical arguments there. Florida has a long history of real estate bubbles going back to the 1920s, so it is not without precedence.

I imagine there will be a lot of work for a real estate attorney after the bubble. You won’t be putting together deals, but there will be plenty of litigation on all the deals gone bad.

They will still finance at 5.5 times income.

I have to wonder how many people will stretch this far to buy a depreciating asset. Why put 45% of your income toward something that is declining in value and you can rent for about 25% of your income?

I will hold out for my 3 times income loan at a 28% DTI.

OT:  I would love an update of whatever happened to those homes purchased by that infamous investor Shagi Indud.

With 110 Million households nationwide, that means less than 3.7% are millionaires.

3.7% of the households aren’t going to save Irvine.

Take a look at page 9 which highlight portfolio allocation.

Millionaire households in 2006 reduced their exposure to investment real estate from 13% to 8% of their portfolio.

In other words, the people with piles of cash as you say are getting rid of their real estate.

This really isn’t a very good way of determining affordability. The problem is with the use of a multiplier. The reality is that it is the mortgage payment that determines affordability. Mortgage payment is determined by the loan amount and interest rate.

I do agree that a 20% down payment should be assumed. Now, there is a question of how much someone should be paying in mortgage payments. I think 33% of gross wages is close. I base this on historical data for Irvine which I’m not going to dig up again and list here. It’s a royal pain in the ass and I’ll already be long winded enough.

Admittedly, 33% is an arguable amount, because of tax advantages that differ for varying income groups and a plethora of other things, but I think it is a good number when trying to figure out median house price. I came up with 33% for past median prices (actually, a range with 33% being about center), so I consider it apples to apples.

So, here’s what I think:

Year Income House Price
2007 $85,000 $457,870
2008 $88,400 $476,185
2009 $91,936 $495,232
2010 $95,613 $515,041
2011 $99,438 $535,643

For 2007, I assume a $91,574 down payment with a loan of $366,296 which means yearly mortgage payments are about $28,050 ($2338/month - 33% of income) with a 6.5% no points fixed rate loan.

I was lazy, so I didn’t do everything as finely as I should have (i.e. monthly compounding vs. yearly), but since these are rough projections I don’t think it much matters anyway.

The rest of the years are with a 6.5% interest rate with income growing 4% annually.

So, if the base median wage is correct (bet it isn’t) and income growth is correct (no way it is) and interest rates remain about 6.5% (not likely) and the bubble is fully deflated in 2010 (no idea) then we should end up with a median house price of $515,041 in 2010.

But, my bet is interest rates rise to 7% to 8% for conforming loans which will push down house prices further. So, if 2010 is the year the bubble is dead that would mean a median house price of $465,808 with a 7.5% rate. ($93,162 down, $372,646 loan, $31,552 yearly or $2,629 monthly)

This is why I say that anyone who thinks they got the price nailed is full of crap. There are too many factors involved just on the fundamental side of things. Then there is the irrational emotional side of things that manages to fuck everything sideways. It could be that people are scared off of houses and drive the price below the fundamentals. Or everyone can become idiots again and bid up the prices. There is no way to tell.

Still, I think these are reasonable projections. I go with $465,808 in 2010 give or take $50,000. Big range? Yep. I’m reality based.

It would be interesting to dig up past rates and apply them to the chart you have to see how it changes it historically. But, that would be a big pain in the ass and probably isn’t worth the effort.

Yeah, I’ve riden the roller coaster at least 3 times since I came
down here in 1972.  Never either made or lost a whole lot of
money in Miami.  Did buy a nice house in 1996 in Brevard County (long distance marriage; hub works for NASA), and hub was dying
because we borrowed $95,000!  That we did make a whole lot
of money on, but it is totally unknown what the house could
sell for, since hardly anything is selling.  We don’t want to move
for a while anyway.

Yeah, in Miami,  we really are “out of land” more or less, but that doesn’t mean struggling immigrant families can afford half a mill condos.

On the other hand, single family houses under $300,000,
and condos under $200,000 are still around.  And the prices are holding up reasonably well.  An appraisal
buddy of mine was appraising a condo last week for about $180, and he found lots of comps.
And people more or less can afford them.  Especially since they
(illegally) set up small apts which help with the mtg payment.
The cities don’t like this and Hialeah sends inspectors out with
each sale to check and see if there are
any illegal renters.  The owners
simply take the partitions down, and then the Buyers put them
up again with a wink and a nod.  These arrangements are
in reasonably good areas too.  The bloodbath is in the $400, 450 and above range.  I don’t deal with super expensive houses usually, so can’t tell you about that.

Some realtors, mtg brokers and contractors are hoping for a hurricane!!  Right, then we’d never ever be able to get insurance again.  It would take a lot of beach condos off-line tho!!

Some poor soulds who live in the empty blges, have a real problem with maintenance.  I’m told that the few who bought are, in some cases,struggling to make maintenance payment that
were mean to be covered by many more owners.

Do you guys have a problem with this?

In Tampa, my son was unable to buy an old “cracker-style” house
because the program—with Countrywide—went away the day he
was to send the downpayment over.  He has excellent credit, but
had just graduated from college, and had a job—but hadn’t started it yet—so needed an “exotic” program.  He was going 5% down, no docs.  Sales price?  112,000.  Yep, you read that right.
In addition, he graduated summan cum laude and is a vet, so could have gone VA, but by that time he was sick of the sellers, and so moved to another rental. 

What I am afraid of is a death spiral, where people stop spending
and people get laid off and. . .

Hey Irvine guy, are you on the net full time??

I am not saying its bullish for housing.  I just thought it was important to recognize that there is A TON of money in this country.  Constantly talking about how poor people are is Bullshit. People in the US are rich rich rich, and it is not “fake wealth created” through real estate.

“I speculate that nobody has any cash at all.” - IR

This is a ludicrous statement.

Oh, I forgot to mention (if I even need to) that I assume that house prices will return to affordable levels (33% of income). I consider affordability the core component of house pricing. Everything else is just hot air and I alternate between annoyance and humor at hearing inane justifications for overpriced housing. Really, there is nothing outside of affordability - other than stupidity on the part of home buyers. Sorry, but that’s the truth.

The prices I listed were what I consider affordable based on projected data. For example, I don’t expect the median house price in 2008 to be $476,185. I consider that to be the affordable price for that year. The bubble will have to fully deflate to return to an affordable price. I’m thinking that year may be 2010 while hoping it’s 2008 so I can finally get my damn house.

Otherwise, people can rent their house to me for a loss for all I care. After all, they are the ones that will have to fix the plumbing when I eat too many burritos

Commonly known as the Beige Book, this report is published eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by District and sector. An overall summary of the twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis.

Note: The Beige Book is not a collection of facts and figures.  It is a collection of comments on economic issues. 

Who new the “soft information” helped decide policy? 

Here’s the latest:

http://www.federalreserve.gov/FOMC/BEIGEBOOK/2007/20070905/default.htm

No No, I am just refuting the statement that you made regarding there being no cash around.  If you want to talk about ignoring facts… Let’s talk about the global savings glut and the problem of excess liquidity.

As usual it would make more sense if I could spell.

More on why I believe there is TON of cash in Orange County.

OC is Third in the nation in the number of millionaires excluding homes.

Rank County Millionaire households Population (rank)
1.  Los Angeles 262,800 9,935,475 (1)
2.  Cook, Ill.  167,873 5,303,683 (2)
3.  Orange 113,299 2,988,072 (5)
4.  Maricopa, Ariz.  106,210 3,635,528 (4)
5.  San Diego 100,030 2,933,462 (6)
6.  Harris, Texas 95,593 3,693,050 (3)
7.  Nassau, N.Y.  78,816 1,333,137 (28)
8.  Santa Clara 75,371 1,699,052 (17)
9.  Palm Beach, Fla.  69,871 1,268,548 (29)
10.  Middlesex, Mass.  67,552 1,459,011 (23)

http://www.ocregister.com/ocregister/news/atoz/article_1076369.php

the above comment was provided to share a mortgage person’s experience into the type of activity that I see occuring in the current market.  there was no claim that my experience speaks for the whole mortgage industry.

anyone assuming so is foolish.  i was of the understanding that forums such as this are meant to share different viewpoints in hopes of gaining greater understanding.  as a result much of what is supposed to be shared will be anecdotal.

IR - Using house price (or loan value) to income ratios is not a precise way to measure prices over long periods of time.  This is because interest rates, which fluctuate greatly over time, are a large factor in what price to income ratio is affordable.

By far and away the best measure house prices over time is monthly payment to (gross) monthly income. 

The local house price bubble was spurred by a credit bubble of historic proportions.  While the credit bubble expressed itself in many ways (no down payment, no proof of income required, etc.) the biggest contributer to the house price increase was the ability of buyers to borrow larger amounts for the same monthly payment in comparison to historical.  This was the result of three factors: historically low interest rates in general, special low “teaser rates” which made initial monthly payments lower, and interest only and negative amortization products that allowed buyers to purchase a house without actually making any payment towards the loan balance (in the first several years). 

Now that the credit bubble has started to burst in a meaningful way (and I believe will actually get significantly worse), interest rates are increasing and affordability products are disappearing, the monthly housing payment is rising, though prices are falling.

I expect a 25-30% decline in nominal housing prices over a period of 5 years (we are in year 2 of the decline) for a total real price decrease of 40-50%.  Average monthly payments, however, will decrease substantially less due to a return to traditional lending standards.

More on the wealth in OC (BTW the definition does not comprise RE Equity)

http://www.ocregister.com/ocregister/news/atoz/article_1076369.php

Hopefully this will silence the, “Nobody has Cash Brigage”, that seems eager to cling to the notion that everyone is living hand to mouth.

I am a realtor/real estate investor and was in OC in the early 90’s. This down turn is different.  This down turn has come fast and hard. Sales came to a crawl in 1991-1993 with the REO and short sale market picking up in 1994. By 1996 the new home market picked up with new homes priced below resales, and we had a nice 10 year run. We have only been in the down turn for 12 months and we have a solid 20% reduction in values. I cover MV,Ladera, Santa Margarita and Coto, if you own a condo- for get it values back to late 2003 maybe early 2004. For single family its better but only if you are priced $300.00 sq foot and under. 

Yes the early 90’s market was a long slowdown and drop in prices. But this time we have gone over a cliff. Get access to the MLS and look for your self.

This credit bubble implosion has a ways to go.  Based on these figures, they’ll still make loans at greater than 60% of net monthly pay in the $150K annual income range - that is simply unsustainable.

A figure I’m tracking is that Countrywide (or at least those they represent) owns over 2,800 homes in California worth over $2 billion at their current asking prices.  This is up over 1,000 homes and $1 billion since I began watching this number in early July.

Are you arguing that people in Irvine have plenty of saved cash or other liquid assets outside of real estate? The lenders on this board, the lenders who see peoples real financial situations are making the opposite statements. Most people in this area are leveraged to the max. They refinanced with neg am loans which I suppose you could argue gives them cash, but generating cash by borrowing money does not accomplish much.

I stand by my contention that the lack of available cash savings is going to be a very serious problem for the real estate market for the next several years. Some will have cash (I do,) but there will not be enough people with cash to generate sufficient transaction volume to sustain our real estate market, particularly at today’s pricing.

I wonder how much of the global savings glut is actual savings or a result of the printing presses in Japan gone wild. Japan has been giving money away at 1/2% for over a decade. The carry trade is largely responsible for the excess liquidity in the worlds financial markets. The Japanese as a culture do save too much, but they have been devaluing their currency and printing Yen at a blistering rate for a long time. Not long ago I read that in Hong Kong residential real estate goes for 30 times earnings. You can bid prices up very high when you only have to pay 1% interest on a home loan.

I wonder how much of our disagreement on the amount of cash and savings stems from a difference in how we are defining the term. When I think of cash savings, I think of liquid net worth. If I borrow an additional $500K against my house and put it in the bank, I have not generated any more cash savings even though there is money sitting in a savings account because if I go to sell my house, this money will disappear to pay off the loan.

Based on the statistics I have seen regarding the national savings rate, the anecdotal evidence presented by the lenders on this board, and my personal observations of the behavior of people living here, I don’t think there are enough people with sufficient liquid net worth to sustain our housing market, particularly when tapping this liquidity will be essential in the future when 20% down becomes required again.

“i was of the understanding that forums such as this are meant to share different viewpoints in hopes of gaining greater understanding.”

Yes, it is. Please keep posting. I value your viewpoint as do the other readers of this blog.

No, I have a real job in the real estate industry. I am one of those traitorous insiders.

Kirk,

Your projections and analysis are very similar to the ones I did in these posts:

http://www.irvinehousingblog.com/2007/05/07/your-buyers-loan-terms/

http://www.irvinehousingblog.com/2007/05/14/the-anatomy-of-a-credit-bubble/

You may end up being right on with the numbers you have presented. As you noted, there are so many variables that making accurate predictions would be a wild stroke of luck; although, I feel pretty confident about the direction.

If you get a chance, you should check out those posts, I think you would enjoy them. There are lots of “what ifs” to explore.

It’s the older crowd that tends to be wealthy (ex. empty nesters) and that is also the crowd that doesn’t need to upside to a bigger space anymore.

As ElricSeven pointed out in his post lower down - why raise your property taxes by moving when you’re in that situation?

...and I thought that making $108k a year somehow made me rich.  Thank you for shattering my delusions.

How can you say that?  With all due respect you have zero facts to back this statement up.  I appreciate the song/lyrics/tie to house..yadda yadda but seriously…  You have no idea about where “some” of the money in Irvine comes from.  There may be some people out there that actually have generational wealth.  I read your bio…you are NOT a local.  I was born and raised here.  It always amazes me that the outsiders are so quick to judge.  Remember, it was YOUR decision to come to Irvine.  Nobody held a gun to your head.  I can appreciate the blog but as the primary poster you have the responsibility to get the facts 100%...or at least try.  Generalizing like this does nothing but destroy your credibility.  Now I better not visit the site for at least a week as the replies from all the “fan boys and girls” that come to your defense will try to insult me.

You might be correct. Perhaps a working-class community that is barely 40 years old has lots of old money. It would seem plausible that much older communities with a reputation for old money might actually have more of it.

BTW, do you have any data that suggests otherwise? I am certainly open to changing my opinion if it is in conflict with the facts.

IR,
what is your opinion about this house in westpark listed again for $614,900. the house looks good (bit too high at 473 per sqft for me)the sale history seems interesting.

http://redfin.com/stingray/do/printable-listing?listing-id=978363

Sales History
Date Price Appreciation
04/18/2007 $601,917 -14.4%/yr
04/25/2006 $701,000 20.5%/yr
09/28/2005 $630,000 120.8%/yr
10/30/2003 $138,643 -3.8%/yr
07/26/1995 $190,500 —

IR,

Since there are a grand total of three mortgage professionals contributing here, I know this is patently false.

I KNOW you are not speaking for me.

Go take look at Turtle Ridge stats - then come back and tell me how leveraged those people are.

IR -

Keep it up.  Even though I have decided to pass on Irvine (now decided to look in the South Bay Los Angeles area), I still read the blog because I find the info and perspectives invaluable in my search for a home.

I enjoy watching prices slip and I enjoy even more, the sellers that get heckeled for WTF pricing.  Keep up the great work!  I tell everyone I know that is looking for a home about this blog.  And can’t wait to order a T-shirt.

I’ve been reading this blog for awhile now. First time I’ve looked at the comments. I didn’t realize there were so many trolls on here. Very funny. There are only two reasons I can think of that a housing bull would bother to read this site:

1. They work in real estate -or-
2. They’re up to their eye balls in housing debt

My household will make ~$210K this year. We will continue to rent for at least another 2 years. Why? If we were to purchase something at price we could reasonably afford, we’d be living in a working class neighborhood, not one with families like ours. Clearly, that’s not a choice worth making.

Cheers,
Jim

“I think it’s more interesting that 22% earn > $150k! Glass half full? I guess it depends on your perspective.”

How much of that $150K+ is commission-based?

A few people I know in Irvine are making close to $200K, and a big chunk of that comes from a commission of some sort - their base salaries are fairly low by Irvine standards, around $60-70K.

When economic times get tough, those commissions evaporate. I read an article on some site (can’t remember offhand) that analyzed the residential RE market in Manhattan (NYC) and it all came down to the stock market. When the market is doing well, there is a ton of cash floating around the financial sector in the form of bonuses and commissions, and RE prices get and stay bloated. As soon as the market dips, the party’s over.

How do commission-based jobs factor into a bank’s decision to issue a mortgage? Is a person making $120K salary any less of a risk than someone who makes $80K plus $70K in commission?

I know a girl like this. . . Her ‘wealthy’ parents from Laguna Niguel gave her a downpayment, courtesy of a HELOC on their own home. To top that off, her father’s employer decided to cut his pension benefits, forcing him to return to work after what he thought was a comfortable retirement.

There’s a lot of money floating around, I won’t deny that, but it’s not as much as people think they have.

Who has admitted his employer is anxious to take over Lennar.

Did they lose out on the Great Park and now want revenge?