On the average, the featured homes are listed at about 2003/2004 roll back. Your target price would put it at around 2001/2002 level, which is very likely, say in two years.
——-

fantastic analysis. how much time do you spend for one?

RK
http://www.rentalandrealestate.com/

These rental market posts do take a little longer than the regular property profile posts. The full analysis posts take quite a bit longer, but they are something I enjoy, and they are part of a larger project I am working on, so I consider the time spent and investment.

As a subtext to this story, the REO at 802 Terra Bella is undercutting the property for sale at 1204 Terra Bella…

http://www.redfin.com/stingray/do/printable-listing?listing-id=1101344

Irvine Renter,

I agree, these properties will see a GRM of 160 or lower.  The 160 changes based on interest rates, but whatever 160 is a few years from now, condo properties like this will see those ratios. (and some lower than 160 GRM as you point out)

However I think the property you featured yesterday could fetch 180 - 200 at bottom. I think there will be a slight premium on detached single family homes in Irvine due to supply / demand.  In more desirable neighborhoods it could be more than a 200 GRM.  You can take the extreme and look at coastal neighborhoods which will clearly not see GRMs anywhere near 200.

There are other areas of the OC that will see 160 on single family homes.  “Affordability” will return to the OC.  “Affordability” is relative though by neighborhood.

It seems GRMs have been coming up in discussion more and more lately.  It might be good to talk about how they relate to interest rates.  The 160 GRM you quote frequently is not really a constant.  That might be confusing to some people.  In the short term if the stimulus bill package that GRM will likely go up…. long term I could see GRMs going down… but who knows what our government will do.

“if the stimulus bill passes” ... sorry

the underlying reasons for my theory / assumption (guess?) is that I believe housing is tied to income growth and I believe in our capitalist society income growth for higher income demographic segments grows faster than lower income demographic segments.  I also think the percent of housing in an area available for ownership plays a huge factor in the equation.

mav,

The argument you are making is that there will be enough knife catchers to support prices above the breakeven threshold with rents. This is possible, but given the degree to which credit is tightening and the onslaught of REOs coming to market, I do not think this will happen. I would note that fear of this possibility will motivate you to become a knife catcher and most likely experience equity evaporation.

That’s a good point on fear.  But I could also just be right
We’ll see, keep up the good work.

Just wait. 

In another year, the media will start doing stories on mad-as-hell knife-catchers who bought in ‘07 who thought they were getting a “GREAT DEAL”, but soon after had their down payment evaporate.

That will help dry up the lines of greater fools even more.

I would not want to be a seller in ‘09.  EEK.

“The argument you are making is that there will be enough knife catchers to support prices above the breakeven threshold with rents.”

I’m not really saying that.  I said plenty of properties will be in the 160 GRM and below range…... at equivalent rental levels or below.

I am saying that fundamental pricing varies by neighborhood desirability, income distribution, and income growth by demographic segment.

put another way:

GRMs are the P/E ratios of a housing market.

More desirable neighborhoods have a higher GRM (IMO).

If the income growth is higher for the top 30% of earners then GRMs for more desirable neighborhoods is higher.

I think roughly 60% of properties in Irvine are already rental properties, that also plays into the equation.

Great piece IR.  Thanks for your work.

Early adopters such as the long term readers of this blog figured out that there was a real estate bubble in orange county 5 years ago.

However, the general population is just getting the message now through the media and that is what will cause substantial downward pressure on home price and rents. Every news channel, newspaper, and web portal has stories of reduced home prices. Now the average potential home buyer is being frightened away….and will stay away from purchases….....as they should.

IR, the thing you aren’t considering is that ownership has its own intangible benefits. Even if you can rent a place for much less, a lot of people just want a piece of property that they own and will pay a premium for that. Don’t you just want to plant your feet on an expensive piece of real estate and know that it belongs to you?

Mortgage: $3500
Maintenance: $200
Insurance: $150
Taxes, HOA, super-HOA, Mello-Roos: $500
Being able to whip out your **** and piss all over the carpet, walls, and kitchen: priceless.

Of course, I am kidding. But I figured I’d steal the troll’s thunder.

Chapman sees O.C. homes unafforable as late as 2011

http://lansner.freedomblogging.com/2008/01/29/chapman-sees-oc-homes-unafforable-as-late-as-2011/

Chapman U. economist Esmael Adibi told a Building Industry Association of Orange County banquet Monday night that falling consumer spending and a drop in construction will lead to a recession at the national level. And while the Federal Reserve’s three-quarter-point interest rate cut last week will help the economy, it’s no cure.

Adibi, director of Chapman’s Anderson Center for Economic Research, repeated his forecast issued last month that homes will be overvalued by 20% even after prices fall 8.1% in 2008. It’s conceivable that home prices could drop by another 20 percent after this year, or prices could stay flat until income catches up, he said.

Based on ratios of median incomes to median prices, Adibi predicted that home prices won’t return to “reasonable affordability” until 2009 or 2010 at a minimum, and possibly not until 2011. Adibi noted that the last housing slump lasted 54 months and home prices fell 17.7% peak -to-trough. The current slump is in its 27th month.

Several times I have noticed posters stating that GRM is not constant and depends on interest rates. That is true if you mean REAL interest rates. However, real interest rates remain fairly stable over time. I ran various scenarios with the New York times rent vs. buy calculator and found that GRM (which to me meant the equivalent rent such that after 10 years there is no economic difference between rent vs. buy). The GRM is very sensitive to the difference between house appreciation and inflation (real appreciation), which makes sense because of all the leverage. However, there is almost no variation based on interest rates as long as all the interest rates (mortgage and investement) have the same relative Real interest rate. Note, I only looked at small variations of inflation since the literature was unclear whether the yield spread was a constant interest rate or a percentage of the inflation rate.

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?_r=2&adxnnl=1&oref=slogin&adxnnlx=1201709162-3z8Bdq7zMMwJTluatu2CFQ

Ten year T-bills on average have a fixed spread over the expected rate of inflation. This can be seen as the yield spread between a T-bill whose return is indexed to inflation and a regular t-bill.

Mortgage rates track the ten year t-bills because the average maturity for a mortgage is 10 years. They do not track short term interest rates.

So, to the extent that mav’s assumption about relative income growth of the different classes is true, then you should see higher GRM’s for more affluent neighborhoods. You might also see higher GRM’s where there is more value in the land (older and affluent neighborhoods). However, this should be tempered with the fact that during the past several years OC has added more jobs below the average income level than above.

“Over the 2001-06 period when home prices
appreciated annually at double-digit rates, we
argued vigorously that the economic
fundamentals (i.e. income, job growth, and
mortgage rates) did not justify the historically
high levels of housing demand and home
price appreciation.  Since 2001, Orange
County created about 119,000 payroll jobs. 
With the exception of 2003, however, most of
the new jobs were in below-average salary
sectors while the jobs lost in 2002 were in
higher-paying sectors.”

from Dec. 2007 Forecast Press Release from Chapman University

Nice houses in nice neighborhoods trade for a higher GRM because you expect to live their longer than in other properties and older homes are typically less desirable to rent. To the extent that you live in a property longer, the less the impact the fixed transaction costs of buying and selling.

I really like that condo at 1204 Bella Terra; not that I’m planning to move out there.  It’s really charming, and not too small.  Not that I’d pay that price anyway.

What’s the REO going for?

That first house is really getting there.  Suppose you could bargain the owner down 50K, would anybody here buy it?

And excellent job.

mid-line condos wills see a GRM in the 100-120 range.  That’s the level they saw last time.  Granted at that time interest rates were 7-8%.  With conforming rates in the low 5s, that’ll drive owners up higher provided fear doesn’t win out.

I’d bet we’re going to see 2001 price levels by late fall at time when the banks have a 1000 homes a month in the foreclosure pipeline for OC.  Even worse, if the Fed doesn’t hold the line today on rates, and it isn’t likely pushover Ben will, they’ll paint themselves into a corner of having to prevent inflation in Q3/Q4 and start raising rates.

You would think that would be the case.  Simply based on my own conversations with co-workers and friends, it seems like everyone thinks that this is the bottom or close to it.  I have so many people telling me that this spring or summer will be the perfect time to buy.  I don’t really bother arguing too much about it, other than just saying that I don’t agree.  I wonder what it will take for these types of people to really believe that it will take several years to see price increases on homes.

Another way to look at this is the per-square-foot buy/rent.  According to your methods, a price of $220/sq foot looks like the equivelent price point.

I was laughing to myself as I read this. “know that it belongs to you?” You mean, know that it belongs to the bank, and you are paying ridiculous rent through your interest payments.

The REO is the 802 Terra Bella profiled above. It is listed for $61,000 less (more than 10% less.)

It will probably take several more years of price declines before people realize there is a problem. That is one of the reason speculative buyers and sellers are always late. They wait until the rally is well underway to buy, and they wait until the decline is well underway to sell. By the time the general public comes to believe real estate is going down, then we will be at the bottom.

Hi Ir,
I leave in Westpark, and of course I rent.
Last year we look for byuing, but a short analysis shows it was not the right time, and obviously ....
We rent a house 1800sF for 2300
GRM of 180 => 414000
A very very similar house is 17 coromande, 92614, for sale now at 700k$.
It is very cheap (just kidding) and a very good deal knowing that when we started looking, this same house was offered for only 817k$.

So in about a year, it fell ~15%, but at 700k, it is still 70% too much of a GRM-180-value.
I haven’t seen too many house really following 15% Y2Y in Westpark, where (like turtle rock and some other ‘old’ areas) less people are panicking.

Getting back to fundamental is going to take a lot of time, as I really dont expect these guys at 17 coromande or elsewhere to drop their price 70% at once.

You know, I screwed up the taxes line. Taxes alone would be near $500.

mav,
  Wouldn’t rents in the more desirable neighborhoods also be higher, thereby keeping the GRM around 160?  If not, then why wouldn’t people rent in those desirable neigborhoods instead of buying?

The Terra Bella condo is the best of those profiled.
It’s newer and looks to be in good/excellent condition.
The flooring, in particular, looks really nice. 
If this got under 400K, I think it would make a good starter home.

With all due respect, I don’t think that statement is true.  You own the purchase price of the house and the fixed payments that you make won’t be going up with inflation (taxes excepted).  I think you can only compare it directly to rent over the first few years of ownership.  Rents will go up with inflation which is out of the renter’s control.

The bank only has a lien on the asset much like a car or piece of machinery or whatever.  How and what an owner does to the house is not regulated by them.  The owner makes the decisions controlling the asset.  The owner can also use the asset as collateral.

Please Mr. Landlord can I have permission to change the landscaping or paint a wall a different color? 

Renting vs. owning is different on whatever psychological level that someone much smarter than I can figure out.

This is precisely the problem I have now…I try to convince my wife that although it appears that prices have fallen and there are good deals…the prices are still way over fundamentals.  She’s addicted to redfin and other sites constantly showing me 3/2 SFH in the low 600s built in the 80s.  I say look at the sales history and what was it going for in say 01-02 (usually 250-350, I think) and I say that’s where the prices are going.  Her response..“By the time the prices get there all the good ones will be gone.”  Oy.

No, you are paying a premium for the call option on inflation/HPA.  It’s pretty simple.  The housing market is made up of longs are shorts.  The longs are betting that inflation will rise over the long term to a point that offsets the “call-premium” paid via ownership.  The shorts are renters who believe that same call-premium is over priced and the inflation will likely not compensate howeowners.

However not everybody is taking an explicit view on inflation.

Included with renters are those that simply don’t have the money buy, and will be lifelong renters.

Included with the long are price insensitive buyers, or place added value on the control premium afforded homeowners.

I rented an irvine company property right next door to terra bella…....3 beds, 2 bath….....rent is about $2350 if you want to sign a 1 year lease. The unit is 1260 sq. feet.

I cannot see paying more than about $200,000 for one of these units…..I may be out of my mind but I would just as soon rent for the rest of my life.

The GRM is an interesting concept if there is balance in the market….that is that there are a constant flow of first time buyers with a down payment large enough and DI ration large enough to purchase a home. At this point it is not clear what the supply of potential first time home buyers is…but my guess is that it pretty small.

and they are part of a larger project I am working on

Is IrvineRenter writing a future NYT best-seller on the rise and fall of the Orange County housing market?  I’d buy that book…

IR, thanks for the great information…..

I follow this blog but mainly I am interested in resale properties in North Tustin. I lost my job in the tech bubble after I had just purchased a property in late 2000. Not wanting to work for someone else, I sold in 01 and used the profits and equity to start my own business. My business has been succesful, but the house I sold in 01 for 475,000. shot up to almost a million dollars in three years. Needless to say we have been priced out of the market now for 7 years.

I cant tell how gratifying it is to see this market crater. I got so tired of all the talk about “the house down the street just went for”, “back up offers over asking”, “putting in a new gormet kitchen, Viking…”. It was like they would look at me and say “It must suck to be you!!!!! As they were all doing the rising equity/heloc parties because they were all so smart and bought their homes (with help from their parents) in the 90’s.

Well that talk has ended and now those homes that were fetching 900K are on the market as short sells in the 600’s and the banks are taking offers in the 500’s. My feeling is recovery is a long way off, but there are some deals to be had even now if you are willing to be patient. IMO every asking price right now is WTF, no one is getting asking price and realtors are begging for ANY offer to take to the seller weather that be a occupier or a bank. If a place is listed at 650K, offer 525, you never know.

I guess what I’m saying is I dont think making an offer now is a bad thing as long as you price in the decline. IOW, if you have a price point for a property dont be afraid to ask for it. Everyone knows there is going to be a lot more inventory comming on line here in the next six months and they want to get their propery moved. So whether they are bank owned or the owner has lots of equity, right now the name of the game is PRICE, and it is a buyers market.

Can you tell I have been a bitter renter?

Not because I have had to rent, and not because the prices went through the roof, but because of the attitudes of all the morons that taked down to me like I was an idiot and did not join the “O.C. Real Estate Party”.

I agree that too many on this board take a purely economic view of the own vs. rent question.  While there is nothing wrong with making the choice to rent (and lately, it has been the more financially prudent decision), some people clearly see an intangible benefit to owning that would cause a reasonable person to be willing to pay a premium over renting.

Now, whether that premium is at 160 GRM (IrvineRenter has indicated that cash flow investors are likely to get in at 100-120, so 160 already represents a premium to some extent) or higher, I don’t know.  But if I had the choice to rent or buy the exact same house as a long term residence for my family, I’d pay a premium to buy.  How much depends on the house and my personal financial situation.  Economically irrational, I know, but c’est la vie.

Has the overall GRM for irvine EVER been at 140?  I believe I saw a chart on here that showed pre-bubble it was closer to 200.

I could be wrong though.

Also, while I DO think all those condos will come down another 10-20% (hopefully) in the next year or two, they are kind of an apples to oranges comparison.

You would really actually prefer to live here

opposed to
here?

You’re making me not want to get married.

Half percent cut.

I predict price declines of 85% off peak in los angeles.  Tokyo, here we come.

1.25% rate cut in 8 days!!!
another bubble is on the corner, could it be real estae?

Right on, Skek.  Right on.

...but the yield on 10 year T-bills is up…and that’s what mortgages track.

Risk aversion in individuals is a complex subject. For example, in gambling (lottery, vegas, penny stocks, ...no money down financing) you find that people are risk seekers. That is, they play the game even though they know the odds are not in their favor. On the other hand, if the game can not be repeated, they turn risk averse. For example, the payout offered in Deal/No-Deal is always less than the expected payout. This is because the player only gets fewer and fewer chances at winning as the game goes on, while the bank continues to play game after game.

So what is more risky now: owning or renting?

Tim,

It’s true rents vary by neighborhood, but home prices have a much larger variance by neighborhood vs. rents.  This is due to the fact that renting is short term while buying is longer term.

Interest rates have a big impact on monthly payments.

The GRM compares rent versus monthly payments… hence GRM varies by interest rate.

IMO….. interest rates should go up, but that does not mean they will.  Who knows what our crazy government will do.
In the short term it looks like interest rates are likely to go down.

“Being able to whip out your **** and piss all over the carpet, walls, and kitchen: priceless.”

Actually, this goes under the plus column for renting!

Had to post this one…  $125K price drop coming on this VoC bad boy.  A little capitulation action.  New list is $799K:

http://www.redfin.com/stingray/do/printable-listing?listing-id=1404362

The all-in price on this house was probably about $1,050,000 in 2006.  That’s a pretty quick $275K or so gone.

“Equity evaporation” if you will.

But you forget, this is not an decision based on just this years payments. If interest rates are going up, it’s because the “experts” feel that inflation will be higher in the future. So, you should expect rents and housing prices to increase relative to your fixed payment. Both of which making owning a house more desirable.

Basically, it’s a wash.

It’s real interest rates that matter.

It’s real interest rates for 10 year T-bills that matter…and those actually went up today.

Actually, I had renters who brought in animals that did just that.  Ended up ripping out all the carpet, the padding was rancid w animal urine.  Had to take them to small claims to recover the recarpeting costs.

OMG, the mello roos alone are $6900 per year on this property and that ain’t changing no matter how low the price goes…

Even at a purchase price of $700K, the full property tax (MR’s included) on this VoC property would be $14,500 per year.  Egads what were these people thinking!

IR:  I would point out that these are the advertised asking-for rents.    Everything is negotiable, including rents.  I have always negotiated my leases.  Thus, I say the actual rents these places get will be some percentage below their asking prices, just as is the case for homes for sale. 

Again, one can tout that such and such place should rent for $3200 but it is another thing entirely to actually write a non-deductible 3K rent check every month, even when you are relatively well paid.  There is a monstrous bubble in OC whose implosion will bring down a lot of things, rents included.

surfing in newport,
explain yourself further
my understanding of GRM is that it simply compares todays rents to todays housing payments.  todays rents are fixed (more or less, fairly inelastic), while interest rates on a fixed rate mortgage can drop or go up, impacting the GRM equivalent for renting vs. buying

isn’t home equity vapor in any market, bull or bear?

Nah mav.  In a bull market, you can borrow against it.  It’s not vapor if if you can get a boat with it…

Damn mortgage rates have done nothing but go up since the stimulus package BS was announced.  I was so close to locking a sweet refi and rates just keep moving further and further away…

Ipop,

When are we going to see similar drops in Northpark? 
I’m still waiting for the seller at 1 Poway to cut their price from 1.2M to 950K so I can scoop it up.

Yeah.  The rediculous mello roos are going to keep me from places like VoC.  And 330 a squate ft?  Still too much for anywhere but Shady Canyon or TRidge.

Did anyone see this nice quail hill condo for 285 a sq ft?

I’m a little shocked.  Prices all over irvine might be in for a sharp decline sooner rather then later.

The buy now because interest rates are low is a lie from realtors. If you want to get a bargain, you should buy when interest rates are high and then refinance when they go lower.

While interest rate go up and down, for 10 year and longer notes the interest rate relative to inflation stays fairly constant. If you finance with a fixed rate mortgage, you fix your house payment for the next 15-30 years. However, inflation will increase the rent for your apartment and increase the value of the house in the future. You have to compare the present value of the house after the expected number of years you will live there with the present value (cost) of all the rent payments you will be making over the same number of years.

These are long term and average trends. In the short term and for specific markets, housing prices are always determined by supply and demand. The assumption here is that the type of housing and rentals available for the market match the living style affordable by the people in the area. What I’m trying to say is that this analysis only works if people are not stretched to the limit by the payments. Under this assumption you can substitute between the amount of cash used for other investments and cash used for the housing investment. that is, the demand for housing is not constrained by the maximum payment a person can make. Obviously this is not the case right now, but at the bottom that should be the case because you will have a supply of renters that want to be homeowners.

You’ll see actual GRM’s flucuate with interest rates because interest rates are based on expected inflation and expectations can be wrong. You also have affordability issues. If interest rates spike, then all of a sudden higher priced homes become unaffordable, not because they are bad investments, but because demand dries up because fewer people can make the payments. But after several years, you will find an equilibrium with a normal GRM because empty houses/condo’s will be converted to rental units causing rental supply to increase and therefore rental prices to also drop. So, higher interest rates will cause prices to fall, but it will also cause equivalent rentals prices to drop because of the empty units.

When I talk about GRM’s, I’m referring to what I would expect them to be under normal times, not during and right after a bubble. And not right after sudden changes in interest rates.

I can tell you I absolutely don’t have this problem with my wife.  But, in all fairness, she’s the smart one and I have the MBA.

Hey, we’re gonna be neighbors after June of ‘09 or so!

Blame Prop 13.

Thanks for explaining, I understand your argument, but from a rent saver standpoint all you care about is the GRM that makes renting equivalent to buying, Today….  that varies by interest rate.

What you are describing sounds like speculation to me…. all be it, educated speculation.

Why don’t you make an offer and see what happens?

If you are a serious buyer, offer them 900 and see what they say, it never hurts to ask, you might be surprised at the counter.

$1.2M is a 2004 rollback on 1 Poway.  You are talking about a super premium property in one of the best parts of Irvine IMHO.  No way in the world they take less than $1M today.  2800sf places in NP in less desirable locations are still going for $1M+.  Take 18 Sunnyvale for instance.  In escrow now for I’m sure over $1M.  Another 2800sf on Sunnyvale closed recently for over $1M as well.

I don’t think you’ll see a sub $1M price on something like 1 Poway until 2009.  Someone will buy that puppy for $1.1-1.15M before too long and feel like they got a deal…

that’s a bad metaphor.  a short position in equities is not a cash position.  there is no way to do a literal short sale on real estate to my knowledge - i.e., a deal where the sale comes before a purchase with the buyer pocketing the difference.  a much better equivalent to equity shorts are the ‘owners’ who successfully refied at the market peak and managed to walk away, perhaps even buying a similar property at lower levels.

that’s the rub, incomes may well be falling as prices fall.  probably not as quickly, but it isn’t hard to visualize a nasty feedback loop between the two when one considers how real-estate dependent the socal economy is and was.

American_Screamer - I don’t know if this helps, but when my wife used to say stuff like, “All the good ones will be taken”, I replied, “The worse things get, the more good ones will come to market.”

The same psychology that makes owning more emotionally attractive than renting reverses during a complete real estate cycle and renting becomes more attractive than owning.

Recently is 10% ago.

literally that is how fast the market is deteriorating.  Something that entered escrow in late December will likely 5-10% underwater by the time they close escrow.

Look at redfin, they have plenty of competition at their price point.  There are a couple that are cheaper too.  21 Upland tilts in at a full 10%/sf cheaper.

well i guess a boat is fun… but you still need to be able to pay off that loan…. the equity is vapor, the boat and loan are real

Problem with those places is the schools.  You wanna send your kids to Beckman with ~700API?  Unless you are planning on ponying up the dough for a private school, these places seem fairly undesireable for families with school age children.

Alternatively if you are considering moving into one of the less desireable school areas and sending the kids to private school, you may consider the amount of mortgage that private school tuition could carry.

I actually lived in Terra Bella in 2001-  I bought and sold an “02” unit just like the REO floor plan.  Only lived there 8 months.  It is a pretty complex on the outside—but what they don’t show you is that most of the units (including this one) have detached garages- and you have to enter your unit thru a main hallway (florescent lighting, indoor/outdoor carpet, et all).  The “02” units start on the second floor of the bldgs-  so you come in the main “hall” thru your garage and walk up a flight of stairs to your front door. 

And-  the condo board at the time was run by some nutty people.

Glorified apartment if you ask me….. with nice upgrades.  We lost approx. $20K over our mistake (and I say we got out lucky!).

Now that you mentioned it, I’ve looked at and am highly interested in 21 Upland.
This is one sweet house, an absolute trophy, and I liked it better than 1 Poway.
Only problem is the 1.299M price tag, not to mention the seller isn’t moving, at least not now.

Oh those lucky sellers are certainly short housing.  I don’t know that the metaphor is all the bad however.  The point is the both renters and homeowners can be considering speculators on inflation with homeowners betting on rising inflation and renters betting decreasing inflation.  The assumption that the call option on inflation is the premium an owner should be willing to pay to the renter (subsidized rent) in order to immunize future housing costs from inflation, is my argument for the base price on housing for owners always falling above the rental equivalent value (in a rational market).

Don’t confuse being “short” with short selling.  I am not referring to short selling a house (and yes there is not way to do this, there was a futures contracts designed to payout based on regional housing index movements, but last time I checked there was not enough liquidity on the contracts to the long side).  By short I am referring to a view on a an economic variable, in this case inflation.  If one believes that inflation were likely to spike to late 70s/early 80s type levels in the near future the fundamental analysis used to compare rent vs. buy changes completely (I don’t believe this, but then again I am not 100% sure). In an environment of rapid reflation (rising inflation), the renter is forced to endure ever rising costs of housing because he is “short inflation”.  To a large extent this increased cost of housing should be mitigated by rising wages with the assumption that the economy can’t have sustainable reflation in asset prices without the commensurate increases in wageds (the dreaded wage/price spiral). 

On the other hand, the hedged homeowner using a fixed rate loan is immunized from reflation in housing prices, thus he is “long inflation”.  In this instance the homeowner benefits tremendously because while his wages are increasing along with everything else, his real cost of housing is shrinking.  Again this is exactly what happened in the late 70s and early 80s.

I’ll wait for the TV miniseries, hopefully starring Sally Field.

great observation

What if interest rates don’t get this low again for oh 20 years?  Does that change your outlook on the realtor proposition regarding rates.  For some reason everyone assumes that low interest rates are guaranteed inthe future.  You must have a lot of faith in the Fed, and that the inflation genie is safely bottled up.

Just tell her that at that point it won’t matter which were good ones to start with.

With the money you save you’ll be able to rebuilt the kitchens, bathrooms and most of the house before you move in. 

The end result is that you’ll have a home that was made for you.

Let them buy.  Sales prices and the median price can’t fall until people start buying.  It won’t be enough to stop the freefall in prices so they will continue to fall until more people want to buy than sell, at which time prices will start to be bid up.

Personally, I’d rather have this one in Northwood:

http://www.redfin.com/stingray/do/printable-listing?listing-id=1182645

If you have little kids, you get Canyon View.  High school kids, you get a short little walk to Northwood High.  Forget Beckman.

Inflation certainly has some strange effects on people’s behavior. In the late 70s, people were purchasing houses with DTIs over 60%. It sounds insane, but if inflation is running 20% per year, and the economy is in a wage/price spiral that DTI drops very quickly to something manageable.

We just locked in two CDs.  One for a year at 5.05% APR and another for two years a hair below that.

Hopefully my wife’s 401K trustee will get off their ass and send us her money so that we can lock into more CDs before the interest drops crater the market.

I don’t know if you remember.  Back in 1981 CDs peaked at 18.5%.  I had my parents sell all of their CDs at 15%, take the penalty and invest the money into 18.5% for anywheres between 2.5 to 4 years.

They thought I was a genius.

He made money.

Since I have a fixed 30 year, I wouldn’t mind a bit of 15% rates for a while so long as my income keeps up with inflation.  It would make my mortgage flat out cheap.  ;-D

Low interest rates and low inflation are not good for long term ownership.  We want some serious inflation to make our payments cheap.

BTW- What is a “chef’s kitchen”?  It was in one of those listings.  Is that like a gourmet kitchen without the granite, stainless steel and gas range?

Super Premium?  On the wrong side of University Drive?  You gotta be kidding me man.  ROTFLOL.

You are the victim of the Irvine Co.‘s marketing.

Capitalismworks,

was that directed at me?

I don’t assume rates will go up or down.  I think they should go up based on the state of our economy, but I realize I have no control over them….. and I also realize our government is prone to make mistakes.

If you think the OC is bad…I live in Carmel.  Inventory is not moving here at all…. I live in a 3 bed room, 2500 sqft 1959 house.  It sold in August for $1,240,000.  I rent it for $2700, on a month to month.  60 second walk to the beach.  I stand in the front yard and look at the 18th at Pebble Beach

I see two distinct types of housing economies:

1) Bubble market where housing is bid up to what the marginal buyer can just barely qualify for.
2) Normal market where housing and rents are balanced…don’t care what the GRM is, just that it’s where it “should be”. That is based on home appreciation at just over the rate of inflation.

In scenario #1, rising interest rates will cause housing prices to decrease because the price is determined by what people can afford. If the interest rate is higher, then the price must decrease to stimulate demand. So why would I want to buy when interest rates are at historic lows? The only thing that can happen is for interest rates to go up and therefore the price of my house to go down.

In scenario #2, rising interest rates are because the “experts” feel inflation is going to be higher in the future. The spread between mortgages and 10 year T-bills and between T-bills and inflation are fairly constant. That is why the fed lowering interest rates had no effect and by ipop’s account causes mortgage rates to rise. Why? Because cheaper credit usually means more inflation. So in this scenario, rising interest rates will increase the monthly payment, but you will be willing to live with the higher payment because while it is more expensive than rent now, you have locked in that payment for 15-30 years, so eventually it will be cheaper than rent and inflation will make your house worth more. But note, that if you invested your down payment, your investment returns would also be greater, so it’s not that big of an effect. So in this case, the interest doesn’t matter with respect to rent vs. buy, just as long as the interest rate reflects the actual expectations of inflation.

Given that we are currently in scenario #1, I’m personally hoping for rising interest rates.

Ipop,

That’s a very nice house indeed.
I don’t think you could go wrong with that one.
We’re just in different places, schools and kids are not a factor for me right now, but I can see where you and others are coming from.

You really think we would have higher interest rates without the threat of inflation?  I guess I could come up with some crazy scenarios, but chances are much higher interest rates and higher inflation will go hand in hand.

The other likely scenario (IMO) would be low interest rates and deflation.

I must not have been clear.

Mortgage Rates = future inflation + spread.

Spread is approximately 2 to 3%

Most likely, fed will cause inflation so that deflation in the housing sector does not spread to the rest of the economy.

The prices that people have paid over the past few years tells the story tonye.  The house under discussion here sold for $1.25M in 2004…  Pricing at peak was probably $1.4M.

You may be partial to TR, but obviously others disagree with you as they have paid big money over the past few years to buy in Northpark.  Not as much as to live in TR, but much more than probably almost every other area in Irvine.

You are a wise and educated fellow.  In spite of personal preferences, I am sure you realize that people have different tastes and that where the dollars go tells the story about valuations.

Any gain or loss is vapor until you press the magical sell button.

That’s a nice place, but at 119 days on the MLS it has the appearance of a ‘make me move price’.

Look at the new purchase price in 1998.  5% annual inflation puts it at $730K.  3% puts it at $620K.

Today probably needs $999K to sell.  Or maybe $900K.

Inflation does not guarantee a rise in home prices, and in this particular cycle it appears that home prices will decline while other prices will rise.  The rise is non-discretionary goods may even cause home prices to fall further.

Does this include a free pass to drive on 17 mile drive?

Fair Economist and IPO—- C’mon guys, don’t push that propoganda that the TUSD schools serving Irvine are somehow inferior to IUSD schools. 

Beckman comes in a little lower than the Irvine comps—- But Beckman API is 804, not 700.  Northwood is 858 and Irvine HS is 827.  Check for yourself:

http://www.cde.ca.gov/ta/ac/ap/apireports.asp

Further, anyone who remembers how they drew the boundary for Beckman knows why score is 804.  A little drilling into the Beckman numbers reveals a score of 890 for Asians, and 836 for Whites. Northwood HS is 895 for Asians and 834 for Whites. This indicates to me that little Emma or Ethan is going to get a pretty comparable education regardless of which side of Culver they live on. Not to mention that Beckman is the newest HS in the area by half a decade—- which equals the latest technology. 

One more thing—- Pioneer MS in TUSD outscores ALL Irvine middle schools at 923.

Sorry Fair Economist (from the discussion board)....I meant “Capitalism Works”.  I guess econ and capitalism tend to blur together in my brain…

CK my boy, who’s talking about APIs?!  I just hate Beckman’s mascot…  Patriots, who wants their kid to be a Patriot?  Makes me think of Tom Brady and that makes me want to vomit.