It is often represented as an index that compares the cost to finance a median house price (50% above and 50% below) to the percentage of the general population with the income to support this house price. … When affordability drops below 50%, there is a problem in housing …

Are you using “house” as a generic term for all types of dwelling?  Certainly not everybody should be in SFH.

And persistent rental units will screw up that calculation since during a price rise, the landlord is insulated from increased financing cost.  Thus they could be making an acceptable profit despite having a rent lower than that required to support a comparable property newly purchased.  Only in times when rental demand is unusually strong WRT purchase demand (as during a price decline) should we expect total cost to go towards parity - although it will probably overshoot.

So, I would expect that affordability could be sustained at slightly less than 50% in a generally healthy market.  I’d guess at ≈45%.

Perhaps my analysis is faulty.  I really would like to know if so.  Better to make my mistakes here than to catch a falling knife, no?
——-

This is a very good post.

I’ve been saying from the beginning that it all comes back to the entry level buyer.

Right now all of the people doing the buying in the current market are mostly pre 2002 buyers who are “trading up” while they still have some bubble equity left on a previous home.  The people selling are most likely trading down or cashing out.  There is no first time buyer in this equation.

Most transactions going on right now are dependent on current debtors basically exchanging properties with each other as the first time buyer is still priced out. 

You cannot sustain these prices without a large number of first time buyers with access to what mortgage hustlers refer to as creative financing “products”.

The people who are “trading up” in the current market are going to see all of their bubble profit evaporate by the time all is said and done and the market correction has completed.  Some will even go underwater.

The pool of people buying right now is going to dry up eventually.  It’s only a matter of time.  At this time in one year, we’ll be reading NEWS articles about Joe Blow Dumbass who couldn’t resist the 2007 bargains and bought a house at 30% off peak and is now underwater and worried about losing his shirt and his “American Dream”.

The market has to re-absorb a lot of money that was raped from it over the past 8 years.  I’m glad that we have this group of people willing to throw their money away in the name of market correction so that I don’t have to.

I wonder if someone could enlighten the blog with historic affordability data or charts?

Wow, reality is a tough nut to swallow, eh?  Everyone wants to say prices will go to this or that or whatever and they have their reasons.

Darn, you can’t edit these comments can you?
IR, Thanks for doing the research and having the guts to tell it like it is.

There is a difference between affordability and eligibility.

Let’s assume that 0% down financing is common.  Calculating affordability is a simple income calculation.

Now let’s say 0% down financing disappears and a buyer needs to have either 10% or 20% down.  Calculating affordability is not simply an income calculation.  You also must consider how many people have that 10% or 20% of the price of a home saved up. 

I wonder if the figures that are thrown around for affordability reflect this.

“Are you using “house” as a generic term for all types of dwelling?”

The effect you described of long-term rentals having lower rates is true; however, when evaluating current rental rates, one would use recent comparable rentals just like an appraiser uses recent comparable sales.

Affordability in California has historically been lower than 50%, even at the bottom of price declines. I don’t think we will see 50% affordability in Irvine. We do not have enough workforce housing in California, and the McMansion craze during the bubble did not help this situation any. This relegates the bottom 1/3 of our population to rentals, and it keeps measures of affordability at below 40%.

AC/DC is one of my little secret delights.  A simple band, nothing musically complex, but a hell of a lot of fun.

I find it interesting all of the cost of rent vs cost to own comments. I have to admit that rental costs never once factored into my thoughts about real estate. I think my perspective is different.

My history of living out of my parents home…

College (dorm, then sorority house) All group living
After graduation… Group living. CHEAP rent For almost 8 years
Married (1994)  bought a town home that was affordable with two person income and 20% down etc. No thought of rental prices. It was the thing you did when you got married at 30.
Now have family of five in a 2 bedroom house…explored other bigger REAL houses (SF) but were shocked and horrified at costs. Still haven’t moved up.

We bought some land for a mountain cabin to allow our boys to run wild and play. We made this decision rather than encumber ourselves with a larger house that we did not want to pay outrageous prices for ($700 k or so)

At no point in this process have we been comparing rental prices vs our cost to own. We wouldn’t move to a rental at this point with a family unless a disaster struck. It is just peer pressure I guess. Our ability to buy a larger house will be based solely on our ability and comfort level with the price at a traditional 30 year fixed loan. As we have taken a large hit in the “equity” area and would need about $100k to put down on a move up, we are perfectly fine where we are.

Could we use more room? Sure who couldn’t, but not if it means doubling our taxes, utilities etc.

I don’t even understand the need to move all of the time unless you are in the military. Or job transfers I guess…

“The foundation of a residential real estate market is the entry-level buyer.”

Take a look at the MLS for any city you are interested in and you will see the most distressed properties are at the entry level. The number of foreclosures and short sales in this segment is huge right now.

And this has only just started. I see more and more short sales and foreclosures in the mid level market.

The average entry level home based on incomes should be around 150 to 200k. Not 400 to 500k. The crash will continue until the prices come back in balance with incomes. This tells me that the Ipop homes in the 700 to 900k range will come down to the 400 to 600k range.

Slightly off topic:
I am thinking that the suburbs will suffer even worse in the next few years as fuel prices keep rising. This will continue until we move away from burning fossil based fuels and find some alternative. When you do buy, try to buy a home as close to your work as possible. I would also suggest that you try to find a home that is walking distance to your grocery shopping etc as well. We have had many easy decades of just hopping into the car when we needed something which is coming to an end.

There is a lot of news right now in regards to peak oil, global warming etc. So far, the best show I have seen on this is a show called Crude which aired on the History Channel. I suggest you try to watch it before you buy your next house or car.

Very responsible thinking and behavior - first sign of lowering of standard of living. In terms of housing, it is less sf per person, and more minutes to commute, etc.

IR, you forgot to add the following choice

1) accelarting inflation driven by global demand coupled with a complicit Federal Reserve appears to a make Real Assets desirable. If I can find a place I would want to live for a few years at a payment I can afford any premium paid over renting I will consider inflation insurance.

“I have to admit that rental costs never once factored into my thoughts about real estate.”

The rental costs relative to owning are mostly used during an academic discussion of real estate. True, most people dont think about things like this before buying and that is perfectly fine.

The rental costs was one of the variables that was used to prove that we were in a housing bubble.

“..a complicit Federal Reserve appears to a make Real Assets desirable”

Whats happening is that the only thing that the fed is inflating right now is commodities. Not real estate.

I am finding it ironic that the fed may actually be making things worse for real estate. By inflating everything else, even cheap real estate seems expensive.

I do see lower rates helping the refinance segment however.

>...By inflating everything else, even cheap real estate seems expensive.

I don’t understand your comment with my high school economic education.  If building material is more expensive due to inflation, won’t a cheap house seems even cheap if you considering how much it would take to build it from scratch?

You bring up a good point. Unlike the stock market where there are usually discussions about P/E ratios and other indices of performance, you really don’t see people doing that for housing that they are purchasing for themselves. You might see it (a GRM like calculation) a little more often for condo’s because they may be thinking that they will buy and live in it for a little while and then move up and rent the condo out. So, part of the purchase decision is related to whether or not rents will result in a positive cash flow.

When I bought my first house, I did pretty much the same thing as you. Picked the neighborhoods I wanted to live in and then shopped for something I liked and could afford. But realize that the neighborhood that you pick is usually based on your income, so indirectly you are selecting the range of housing prices you want. What happens if you can’t afford a house? Do you rent in that neighborhood or do you buy something less expensive in a different neighborhood? Doesn’t really matter, both impact the demand for housing and rentals and therefore the GRM. So while we talk about GRM’s from a financial calculation standpoint; what’s really important are the historical GRM’s.

It’s actually quite interesting that historical and rational GRM’s are about the same. It says a lot for American intuition of what is a good buy and what is not under normal (i.e. not bubble mentality) conditions. When the GRM’s deviate from historical norms, then it becomes important to understand why. What is driving that deviation. Is it speculation or is it fundamental change? A fundamental change would for example be a neighborhood that is going through a tear down and rebuild stage. In our area that was happening in Newport Beach and Costa Mesa neighborhoods. So in that case, the land value will exceed the rental value of the dwelling. Another fundamental change would be changes in the real interest rates (and not nominal interest rates).

mortgage rates…the ones that we care about are actually going up, not down.

The important part is who will pay for that increase? The landowners or the buyer? I would say that in our area it will be the landowner that pays for that increase in cost.

Yes, prices have a long way to fall in OC before residual land values go negative. Riverside county is another story as residuals are negative over most of the county for residential real estate.

7,

When construction cost of a house falls below market pricing, new construction stops until prices go back up to where a builder can make a profit. Right now in OC, prices are much, much higher than the cost of construction, so the excess ends up in land value. As prices fall, it is the landowner who loses out.

http://www.irvinehousingblog.com/2007/07/16/land-value-101/

“Picked the neighborhoods I wanted to live in and then shopped for something I liked and could afford.”

That would have been nice, but sadly the bubble changed all that. What pushed me over the edge is when we went out a couple years ago to look around and realized that even though we made about $100k a year we couldn’t even afford a 1-bedroom place with a conservative mortgage…or a bigger place in areas we didn’t even want to live in.

I don’t like today’s poll as it leaves out a very reasonable no.  I will buy when it gets closer to equivalent rent but not necessarily the same.  There are a couple reasons for this:

1) Selection - we want to pick an ideal house and location and if its very close to the 160 GRM, we will jump on it.

2) Timing - we want to have kids soon and would like to be in a house before we have them.  I am not going to throw away all my money for this but I am willing to buy with fully understanding that it will drop further.

Which reminds me of the time we went and looked for houses a few years ago. Looked at a house they wanted ~1M for. After we looked at the house we cruised the neighborhood to see what else was selling. What we found was a similar house renting for less than 3K. Needless to say, we didn’t buy, but I think the house did eventually sell.

Affordability -

Finally that is what I have been wondering all along for the last 5 years -

When someone buys a normal tract 800k house, they have to be making payments around 5,000 a month after the taxes are written off.

That includes all the crap that goes with the house - mortgage, property taxes, hoa, maintenance etc.

People ofcourse found ways to lower their payments with interest only loans (in my opinion - this is just renting) and they said they will pay 5-7 years later (won’t happen, because expenses will always go up - kids, etc.) Even with the ‘fancy’ loans, it will be minimum 5,000 a month.

So to make a 5000 payment or 60,000 a year, you need to make 80k a year after taxes to pay for this house.

Living life (for wife and I) is average 4,000 a month (credit cards, cars, trips etc.) I think that’s a fair average for everybody.

So 9,000 a month just to pay the monthly expenses without getting ahead

9 * 12 = 108,000

To pay 108,000 you need to make 150k before payroll taxes.

Tell me how many people make atleast 150k a year.

Not very many.

So people don’t kid yourselves, now that banks will only loan to quality individuals and homes - prices will come down because many people will not want to pay 80k a year from their salaries. People were willing to do this for the last 5 years because prices kept going up and homes became a piggy bank. The HELOC’s amounts people did were amazing.

I know everyone here will say we make for than 150k a year. We are in the minority, most people make less than that and with the recession coming, jobs will go and prices will fall and fall.

Just my two cents.

Wait, till it becomes affordable and you can breathe and not be stressed all the time about money. Don’t want to live like that.

“The HELOC’s amounts people did were amazing.”

Yep, many who did not buy an overpriced home found a way to get deeper in debt.

Financial storm clouds are thickening and the final shoe to drop will be the unemployment situation. If this gets worse then its time to duck and cover.

I agree, I for one don’t understand how our service economy sustains itself.  I know some people think it’s good we have a service economy but I still think we would be better off if we actually made stuff.

Looking at OC employment base, I see huge risks.  15% of jobs were in the real-estate-industrial complex which is tanking.  10% are in state and local government which is just starting to get the winds of lower budgets and layoff’s (see school district budgets).  Auto sales are declining, tracking home sales.  Retail sales are way off, stores are starting to close (e.g. sharper image BK, sears sales has fallen every quarter for the last 11 quarters).  Discretionary health care (glasses, Lasix, plastic hooters, botox) has got to start falling if it hasn’t fallen off already.  This will tapper down to the professional level.. accountants, architects, lawyers.

Looks to me like OC is a house of cards waiting to come down over the nest 2 years.

I take it you haven’t started reading http://www.theoildrum.com/
yet.

Here’s some food for thought/debate on the topic of affordability:

http://www.ipoplaya.com/afford.htm

Hey Ipop,

Thanks for taking the time to put that together and post it up.
I found quite helpful in terms of analyzing my own situation.
My question is regarding jumbo loans.
An agent told me yesterday, there’s no need for a jumbo loan now that they’ve raised the conforming limit to $729K.
Wouldn’t that provide a much better rate than a jumbo?

Smoke and mirrors Alan, that’s how us service companies stay in business…

Actually, business trends toward outsourcing will likely only continue and the service economy will in part be sustained by that.  Nowadays, companies can and do outsource almost anything.  We are looking at acquiring a competitor company and they are almost completely virtual.  No leases, no accountants, no HR people, no nothing.  Everything is outsourced…  They get more for their dollar and have ultimate flexibility.  Companies don’t even need to have employees any longer, they can just co-employ staff via a professional employment organization and reap the benefits of those economies of scale.

Heck, we are an IT consulting company and we outsource our own darn IT!

I think the mortgage interest on the first one should be 52,000.
800,000 x 6.5% = 52,000.

But still a good way to show how much the rate does matter. The downside is when you buy high with a low rate, you can never refi your principle if your value declines, but you can always refi your rate. Also, you pay property taxes on the higher purchase price.

If you believe most here, the change in conforming limit will only lead to higher mortgage rates overall.

Personally, I won’t believe anything until I see it offered at a lender.  The lender I will use is offering 30-year fixed rates of 5.875 for amounts below $417K and 6.875% for amounts above $417K today.

Thanks house.  Updated the calc…

Only in Irvine (or South OC) would people create “affordability” charts based on $1 million and $750k purchase price.  >_>

Personally, I would rather service a smaller debt at a higher interest rate because if interest rates drop, I will be able to refinance and save. If interest rates go up, and if an interest-only product is used as in your example (something I would never do,) then the large debt load is going to be a payment buster.

That is what I was exactly thinking.

Per ipoplaya’s example -

I would rather buy a home at 750k 2 years from now at 8.5% interest , than 1 million today at 6.5%

Rates will usually come down in the next 10 years and you will be carrying a smaller debt load.

Also the less you borrow, banks will probably give you lower rates.

btw- i am usually pretty positive and I am itching to buy a home. I think we will be saying 750k is wtf price in 2 years.

People like to think 25% is a good drop, not when 450k homes (2001-2 prices) went to 1 million.

I think 2-3 years from now (even with inflation) homes will be back to 600k for a house that was at 1 million.

iPoop, you resident bull you.  You still try to justify buying more house than you should.  (must be the need to conform with Irvine’s materialistic culture)

Fiancial planners will tell you not to budget more than 30-35% of your after-tax income on housing.  Assuming you are one of the blessed who makes $200k/yr, I’ll bet your state and fed tax liablity is about $45k which leaves $165k/yr or $13k/month.

This means that your total spending shouldn’t exceed $3,900-$4,500/month.  Property taxes (2.2%) alone on a million dollar house are $1,800/month or 40% of your budget.  I always look at the fully amortized loan because the principal payment and the tax savings will balance out from a monthly budget standpoint.  $750k at 6.5% fully amortized, 30 year fixed will run you $4,700/month, again this is more than your total budget should be.

Realistically, you should be looking at a $600k house if you make $200k/yr.  With 20% down your fully amortized payment at 6.5% would be $3,000/month, taxes $1,100/month which puts you at $4,100/month before insurance/maintenance/etc.

3x income is considered the affordability limit in normal markets.

Shure everyone always wants more but greed is what got us into this mess.

I would as well IR, especially given my track record re: gambling with interest rates.  When I refi my current loan, and if I stay in my place until 2010, I’ll have nine years of owning with an average mortgage rate of 4.275%.

I’m not trying to say “buy today”.  I just want people to realize that a 25% price drop might not have nearly the impact on their future monthly housing spend they imagine it could have…  A couple of years from now significant inflation is very possible.  A couple of years from now could feature very skittish lenders and investors that demand a much bigger risk premium to lend.  I’d think a nearly 40% drop in home prices over three years could lead to that.

While monthly afforability will get better, large scale price drops in home prices may only yield an improvement/savings in the low hundreds of dollars per month.  It may not be a magic pill.

Yeah, I do relish my resident bull status.  It’s good to have a bull on board…  Stimulates discussion.

Just an FYI, on the house featured yesterday, if the price was $1M, the property taxes would be around $12.5K per year.  Yes, a little over $1K per month.  It would take 36 years at 2% roll value growth for the property taxes to become $1800/month on that property.  Of course by then, the MRs would be good, so it would take perhaps 45 years to have $1800/month prop taxes on that property. 

Your 2.2% is a bit of a fantasy my friend.  Even at places with the highest mello roos (VoC), a million dollar place will have a tax load of approximately 1.8%.  It would get to be 2.2% of purchase price after 17 years of 2% roll value growth though…

Orange County has always been 4 - 6x income of what you should buy.

We got up to 10x incomes.

So a 100k income family could afford 500k, it would be a stretch but they could so it.

I think 4X still is very doable.  5X feels too risky for me…

Your calculations are correct with respect to the payment part of whether or not it makes sense to buy a house. As I have argued previously, the GRM fundamental only changes if real interest rates change. While the initial payment in your scenario is not that much different, the fact that the fixed rate mortgage rate is higher implies that the market expects more inflation. Because of this people will tend to live with the higher payment now because relative to income it will be going down faster.

What you are betting is that interest rates are going to go up, but housing appreciation will somehow be significantly less than inflation. This is happening now because of the credit crunch, but I don’t think I’d take the bet that it’s going to get as bad as your assumption.

Yeah its kind of silly to say in absolute terms that someone should spend 30% of their net on a home.  That doesn’t take into account their tax savings, their lifestyle, or anything else.

And does anyone else notice the resident bears seem a little more bitter every week?  They must be upset that houses are still moving.

All we need to do is to build those fancy maglev trains to LV and Phoenix. 

Then our entry level market will be there and those kids can ride the high speed train to work in the OC.  Surely it’ll take less time that driving a car from Moreno Valley on the 91 and 55.

I’m with rkp as I will probably buy when we come down to close to “parity”, which I define as the 3% inflation adjusted Case-Shiller data from 1987. It went below parity in ‘97 but
1) taxes are killing me with 2 incomes
2) the dollar is rapidly tanking right now

It may go lower than this but I am willing to accept that. Of course this may correspond with the cost of rental anyway.

Originally (‘87) I wanted to buy a house in Costa Mesa’s East Side.  Very close to, almost Newport.  A nice place then that had the looks of an area that was about to be torn down and renovated. 

Relatively large lots with no HOA and very close to the beach.

Close to the restaurants in NB, close to the Beach.  Around Irvine Blvd.

Schools were OK…weather perfect.

The wife ( we were newlyweds then ) said she didn’t like the area.

So we bought a fixer upper in TR.

Years later we drove through Costa Mesa’s East Side.  The wife liked the place.  She admitted that she had never been on that part of town and had no idea what it looked like.

My looks could have killed.

anyone who has an ARM is renting in my oppinion

why anyone would want to take on the risk of inflation / interest rates is beyond me ?

let the banks deal with this risk and get a fixed rate for a higher rate.

the whole point of buying is a hedge against inflation

with an ARM your payments are going to increase as rents increase

The oncoming energy crisis could hit us when it will hurt most.  Like the housing bubble it was entirely avoidable.  Instead we have a set up for the perfect financial storm; very scary stuff out there on the horizon.

It isn’t just your commute that will get more expensive as oil prices continue to rise.  If it wasn’t for that I would gladly pay $10/gal to drive on empty freeways.

$150K per family is much more common than you think.

Indeed, I think it’s on the low side.

Well. with virtual computing you could virtually host your company .  The only thing you can’t do yet is virtually sell… but that’s may change soon.

Virtually speaking that is.

Maybe you should instantiate yourself in an RV park in Reno and inherit yourself into virtual consultants as needed…

Yeah… I’m curious about that.  When will rates reflect the “new” limit?

Ever looked at the South Bay, the Westside and Pasadena?

4x income may be doable for iPoop who is very financially suave, but it starts to turn homeowners into slaves to their mortgage and leaves little disposable for unforeseen expenses.  5-6x incomes is not realistic.  You people sure talk big like big spenders, just like the State you live in.  Currently 80% of your State’s budget is locked by various propositions and only 20% does your legislature have any discretion over.  Oh and your State is now $16 billion and growing in the hole.  The city of Vallejo will be the first CA city to declare bankrupcy today.

People have to learn to live within their means.  Until that happens, this crisis will not end.  Get over it.

When I was in college we sometimes made the opposite commute to LV for the cheap buffet breakfasts.  Those maglev trains would have come in handy then.  Although back then gas was well below $1.00/gallon so gas didn’t figure into the equation.

IHB has made me think about this too.  How is it that GRM is so closely related to housing prices when most people don’t include the comparison in their home buying decision?  We didn’t—we wanted to buy, so we found the best house we could afford.  Could we have rented the same neighborhood for less?  Probably (this was 2001), but that wasn’t even considered.

I don’t have an answer, but I like the suggestion that our collective intuition, over the long run, is pretty accurate.  Another possibility that I’ve posed before is that people seek out neighborhoods that “feel” like places they should live, based on their age, income and family situation.  Rents would reflect these factors, too. Therefore, rents don’t necessarily affect prices (or vice versa), but both prices and rents are driven by a neighborhood’s desirability, with rents discounted by the ownership premium at the time—high during the bubble, less so now.  By comparing the relative costs of renting vs. owning, you are actually measuring the ownership premium and perhaps THAT’s the important historical measure?

Wikipedia begs to differ:

“According to a 2006 estimate, the median income for a household in the city is $84,270, and the median income for a family is $103,604”

There must be some serious underground economy going on then. Because the median income stats are per household, not per tax return or person.

How many people do you know who are house-poor? 

I am betting quite a few!

You probably don’t know it though as everyone is working hard at keeping up appearances.

North Pasadena is more affordable and has the advantage of having authentic BBque joints, if you don’t mind living on the other side of the tracks.

IPoop, YouPoop, WeAllPoop…

Didn’t you guys hear ? In the IE, since we’re all so wealthy, home price is holding up. Yeap, yeap. I have friends, family, neighbors, coworkers telling me this. They say “for you younger people, you cant ever buy, even if you make 100k a year” hahahahaha….. muahahahah… the median income out here is like $55k…lol

I agree, but I wouldn’t ask “how many people have that 10% or 20% of the price of a home saved up.”  The question is, “How many people have access to 10-20% down?”  That includes savings and contributions from parents/others.

I agree with you mav.  A major benefit to homeownership is the fixed monthly cost.  You give that benefit away if you choose something other than a fixed-rate loan.

Or if you don’t mind your children’s bedroom getting a bullet hole through the window.  (My good friend’s experience).

I’d like to see historical rent vs buy statistics for an area like San Marino or Pacific Palisades.  Something from the 70s.  Does that exist?

I wrote here way back when, thinking about buying a 1 million dollar house with no yard in a bad school district (but in a safe, normal folks area) in Pasadena.  I’m so glad I didn’t buy then.  Thank you guys for helping me convince my husband to wait!

  I just recently seriously considered buying a 1 million dollar house, in a safe (posh) neighborhood, with a gigantic yard, and terrible schools /  (also needed major repairs).  Comparatively, it was about a 200-300k savings over what I saw when I considered buying the house with no yard.

As I said way back when, we have a ton of savings.  We can “afford” a million dollar house now, in the sense we can give up our retirements and college funds for our children, and hope our incomes rise so that we can afford to start saving again.

My family is here, my job is here, I’d prefer not to move (which is stilll the smartest answer).  And I want a house, plain and simple.  For coveted areas, what is the ratio?  Is it still 160 times rent for San Marino, Pacific Pailsades, and Beverly Hills?  Is it 4-6 times income in those places?  Or does the increased savings these type of people have change the ratio?

Any real figures?

If the 4x or 5x income theory is true.
Why is it that we’ve yet to see any significant price declines on the higher end homes in Irvine? 
Higher asking prices seem to be the norm.
Two homes I have an interest in came to market this week both at the $1.45M mark.
Even at 20% off list, that puts these in the $1.160M range, which is a still a considerable amount of $$$.

Houses aren’t commidities, I think IR explained in previous posts that there are resistance points that limit the rapidity of the rate of asset deflation.  Or in laymans terms, people will hold their house and stop eating out, cancel the newspaper, etc before cutting the price.  The high end often takes longer to deflate than the low end.  From what I’ve been reading you should look for about 10%/yr thru 2012 in deflation.  I think the numbers indicate we are still following those projections.

From my experience in the last bubble, what will drive down the million dollar homes in Irvine is when the 1.7 million dollar homes in Newport come down to 1.2 Million buyers will stop buying million dollar homes in Irvine and sellars will have to lower their prices.

As I recall, San Marino really doesn’t have a rental pool to compare to, and was always considered “old money”, not a place that normal working slubs could afford.

The people with large, verifiable incomes are still being given access to exotic financing and they are able to borrow 6 or more times their income. This is propping up prices somewhat at the high end. Transaction volumes are still very low, so the support is feeble at best. When the people who leveraged themselves into these properties with liar loans and big HELOCs, the high end will implode just as the low end is doing now.

“We are looking at acquiring a competitor company and they are almost completely virtual”

Question, what you talking about is consolidation.  Is your competitor local?  If so will you keep their employee’s (I would assume not).

So wouldn’t that involve layoff’s affecting the local OC economy?  e.g. you would be downsizing your competitor thru acquisition.  How many people are you talking about letting go, 50? 100?

And isn’t there an iPoop at your competitor’s company too.  Maybe he has a wife who teaches too with a couple small kids.  Maybe he dreams of a million dollar house just like you.  Aren’t you crushing his dreams?

How do you sleep at night?

For those places ten, you can bet the household incomes are quite large.

For example, my Woodbury friends in Villa Rosa probably gross around $250K.  They paid $1.25M for their place.  5X and they aren’t saving much of anything, contributing big to anything, etc.  Many of their neighbors make a good bit more than them…

Speaking of which, 24 Sanctuary (Mille Fleurs plan 2) is back on the market.  List price - $1.49M.  Keep dreaming sellers!

That affordability curve is about to take a steep turn for the worse.

As of tomorrow, Wells Fargo is reclassifying most CA counties as “Severely Distressed” and upping LTV requirements to a maximum of 75%. Anyone hoping to refinance out of the hole better have a good pile of equity, as well as anyone hoping to buy in most of CA.

http://biz.yahoo.com/bizj/080228/1597695.html?.v=1

Banks tightening lending playing out to script.  Almost supprised this didn’t happen sooner.

If I remember right, Harbor View Homes (nicest family neighorhood in Newport Beach - but no views and not close to the water) was selling for ~800K in 2002 and rent was ~3K. That works out to a GRM of 266. Right now the apples to apples comparison is 1.5M vs. 3,700 or a GRM of 405. In 2002, the price was probably being set by developers buying to build Mc Mansions because the house size (1700 sf) no longer matches the demographics of the neighborhood.

$10/gal gas won’t empty the freeways, but building more freeways would help a great deal.

Alan’s right, there is a lot of old money embedded in San Marino.
The barriers to entry are extremely high.
Particularly the area surrounding the Ritz Carlton and Huntington Library.
imo, $1M will get you a small home, less than 2,000 square feet built in the 1920’s.
Unfortunately, that is the low end for San Marino.

Yup Al, it is consolidation.  My company and their company are small.  Between the two of us we probably have only around 200 or so employees, most of those are revenue-generating assets.  Very little on the staff side…  Highly leveraged model.

We operate nationally and so do they, and the consolidated entity would likely represent the termination of no more than 3-5 staff, none in OC.  The synergies are quite good.  Their lack of backoffice (they outsource) is holding them back while the economic slowdown has created some excess capacity in my operation.  They don’t really have an iPoop on the other side.  They have an outsourced iPoop to a small degree…

Actually, the combination will more likely allow me to keep all the OC staff I have now.  Othewise, I’d probably have to street some people by the summer.  I’m doing OC a favor by helping keep the unemployment rate down.

I’m a CFO Al.  I get paid to NOT care about crushing someone else’s dreams unless my company can profit from it.  As I’m responsible the HR function, and have been for many years, I’ve learned to sleep well.  It’s not personal, just business.  I’ve had to terminate guys I drank with, guys I played hoops with, people with cancer, people with lots of kids, the list goes on and on.  I had to whack 25 people in one week (a third of the previous company I was at) during the last recession…  Sadly, you get used to it.

How many people do I know are house poor?  Personally not too many.  Obviously there are some, otherwise there wouldn’t be so many forclosures in irvine.

But I’d bet for ever forclosure you have someone who paid cash or a rediculously big downpayment.

We’re seeing a lot less forclosures in the high end neighborhoods.

My parent’s neighbor paid cash for a 4,000 sq. ft northpark home.  Their other neighbor has multiple homes across the country and could retire on a whim. 

Sounds like Alan and AZ just can’t imagine a world where people are orders of magnitude more successful then all of us are.  (With the exception of maybe ipo and biscuit)

Not everyone makes 45,000 dollars around here and lives way beyond their means.

You gotta realize that the people who live in San Marino, these are the people who own multiple properties, vacation homes on the water in Newport or Balboa, Santa Fe, etc.  Kinda like the Vanderbilt’s.  The only person I knew who ever bought there scored big on an IPO and his monthly expenses ran north of 25k/month (including chauffeur).  Then of course he got divorced and had to give up the San Marino house so he could live with his younger mistress but thats another CA story.

So here’s the million dollar question…

With so much varied expertise on this site, how do we profit from what we all see happening?  We have real estate professionals, economists, CPAs, lawyers and collectively, access to a significant amount of cash.  Who’s going to propose a business venture based on the collective wisdom and expertise of this community?

“People have to learn to live within their means. Until that happens, this crisis will not end. Get over it.”

That’s the beautiful part of democracy. We the people can just keep voting ourselves largess from the public trough.

This is huge news, because other banks will surely follow.

You could get a second somewhere else, but this tells me that Wells Fargo is factoring another 25% decline in home prices so they don’t get killed.

Regardless of what the fed does, I think borrowing money is going to become more expensive as time goes on because banks are going to go through every sale with a microscope to minimize their losses.

25w100k+

I know wealthy people, you know wealthy people, no one is disputing the existence of wealthy people.

What you have to look at is total inventory and numbers of available buyers.  For inventory of multimillion dollar homes to be in equilibrium with the buyer pool, the inventory should only be about 4-5 months worth of sales.  Even in the relatively slow season we are in now inventory of 2 million dollar homes in OC is already at nearly 20 months (per Lasner) and for the 4+ million dollar homes there is a 5 year supply.  And inventories are expected to spike this summer.

The problem is not the existance of wealthy people, there just aren’t enough of them available to soak up the stock of houses.  That’s why the bears are out.

sounds like you should audition for Trumps apprentice.

Stilldoubtful

“Orange County has always been 4 - 6x income”

No, I the game changed in 2001.  Before the current decade started 3x income was considered the limit for housing.  Don’t confuse recent experience with historical norms.

looks like 25% down isn’t that far. lower we go again

Huge news and good news.  Credit tightening will remove less worthy buyers from the demand side and help get prices down to lower levels quicker.

Anyone sitting on 20-25% down right now should be smiling…

I think the high-end implosion is coming sooner rather than later…  Another $1.7M unit just hit MLS.  Seems like everyday lately another $1.2-1.7M place pops on to the market.  I’d guesstimate that 40-50% of new listing over the past few weeks have been in that price range.  That high-end Irvine inventory is swelling.

Most constructive comment!

Indeed, how?

Housing future maybe?

http://www.cme.com/trading/prd/re/housing.html

ten,

When they bump the conforming limit to $729, they will also definitely be bumping the rates.  Increased exposure necessitates the move.  It will be somewhere in the middle of the two rates existing now, and unfortunately it will hurt more of the low-end would-be buyers. 

For example,
When you get health insurance, you can pay for:

1.) A group that requires an initial check-up to verify your baseline health, offers some selected options, copays, etc., but does not cover everything.

or

2.) A group that does not exclude anyone for any reason, and covers every procedure known to man.

Which one will cost you more? 

If you need it, option 2 is great.  But if you want a better rate it might be nice to have that option one if that’s all you need. 

Bumping the conforming limit takes away that option for those who would have just barely qualified at the $417K mark.  That said, the increase will be a benefit to those who were considering around the new $729 limit.

The banks are still going to get their cheese.  They will evaluate your info, plug you into their tables, and pop out a determination of how risky you are as a loan candidate.  They will give you a rate accordingly, and just like in Vegas… the “house” always wins.  Your new loan helps to pay for all for all of those foreclosure losses, and that’s already been factored into your rate.

Yap, just keep building freeways. Encourage sprawl. Wrong. Build more downtown lofts and condos. Incentivise good, rather than bad, behavior. What a concept.

More freeways? What is this, 1952?

Myself and others made out pretty well shorting the real estate and financial sectors.  Pocket change compared to how much the fraudsters made, but my gains were all legal.

I think vulture funds are going to be all the rage, if they aren’t already.  Just make sure to leave your compassion at the door if you go that route.

Not knowing the extent of Heli Ben’s madness is tempering my desire to invest a large amount of money in any one place.

I’ll be smiling when I have that hoop hung up in my driveway.  This will definitely move me to that place faster though : )

Anyone gonna watch the Bruins tonight?

Gotta go with a telescoping backboard with break-even rim Genius, maybe on a slab next to the driveway.  One simple adjustment, and you could be doing dunks!  Can lower it down so the kiddies know what it feels like to jam.

My dream, have a big enough backyard to drop a small halfcourt on…  The house I was chasing in Harvard Square during the summer would have accomodated a small half court in the backyard.  No NBA 3-point line but then again I can barely hit from the college distance.

Break-even, sheez.  I’ve been doing too much M&A related forecasting recently…  Break-away of course.

On Bruin and Laker nights, it has to be the Lakers.  They’ve been way entertaining since Pau got there…

I’m with you on the matter of more freeways.

It has been shown many times that more roads only increase congestion, instead of easing it. There are many theories as to why this is the result, but my empirical take is that more roads invite more driving.

Remember, also, that roads are very expensive, in addition to dispersing the population to low-density, hard-to-service areas, and the more of them you build, the more likely the population is to disperse itself to places where you can’t so much as buy a gallon of milk without driving 2 miles or more. The result is more road mileage for fewer people- a recipe for an overbuilt infrastructure that is becoming an unaffordable public burden that rests equally upon those who don’t derive any utility from it along with those who do.

Additionally, more road mileage equals more pipe and cable mileage, to serve fewer people per mile, who are forced to drive greater distances and more frequently to accomplish the same tasks that could be done so much more quickly and economically in a denser, more centralized area.

Even people who are well-off and can bear the financial cost don’t enjoy driving 2 hours each direction to work, and the murderous commutes are hard on our health and well-being.

Who says I need to lower the rim to throw it down?  Oh wait, I’m not 18 anymore.  I can barely grab the damn rim anymore, getting old kinda sucks ; )

I may end up chasing 1/2 acre up in north county SD, and there will definitely be at least a half court going up somewhere in proximity of my pool.  I’ve been playing indoors for so long I’m not sure if my knees can take playing on pavement.  One way to find out.

And keep practicing, the college 3 gets further away next year.

“...unfortunately it will hurt more of the low-end would-be buyers.”

No, it will hurt the would-be sellers.  In a buyers’ market, which is what we are in now, when borrowing money becomes more expensive, it will hurt the sellers.  They will need to lower their price to attract the buyers who now have access to less money (since the “cost” of money is higher).