Unable to enlarge 2nd chart, 1st charts okay.

Since ABBA is one of my favorites, how about Money, Money, Money. That would fit the greed of the get rich quick flipper mentality.

When asked how long I would be leasing by the owner of my house, I replied about 2 to 4 years. That appears to be bracketed by the red and yellow lines on your second chart.

Nobody would have believed that you could buy gas again at $1.65. Nobody believes this condo will eventually sell for less than $300,000, even in the “resort community” of Woodbury.

IrvineRenter, I think that your book should have included an appendix containing the spiritual teachings of Master Bkshopr that lay the foundation for the sacred house prices in Irvine.

“Hot Asian market are often over-inflated than most other non-Asian location”

“One can not predict the wealth of Asians.”

“Asian will do anything to have their kids attend a good school at any price.”

“Lexus, Honda, and Toyota are vehicles that Asians drive”

“When It come to buying a home no one really can predict the bags of cash that Asian buyers bring to the purchase”

“While the rest of us are waiting for the price to tumble the Asian buyers are coming out in flocks with the cash that they hid under the mattress.”

“ I also think the design of the upcoming homes will be designed especially to target the Asian buyers like having good Feng Shui and good Wok “chi”.”

“Asians do not drive the home price up. The sellers increase the selling price knowing the Asian population will only buy in certain areas of high demands”

“Asians cluster around excellent schools and good Asian cusines and markets. The Irvine Company knows that”

“Asians will not buy a house that is cheap due to a divorce, loss of a business, foreclosure, and especially death. A house that has negative feng shui has been the cause of the mis-fortune to the inhabitants.”

“Asian American or immigrants are taught by their parents or relative that one must own their own home”

“There is much to learn about this culture and I have done very well knowing this “ancient chinese secret”.”

Why did even the most bearish people still underestimate the strength of this collapse?

JMHO ~ Most of us bears never had a thorough understanding of what was actually happening in the mortgage market.  We had little idea how all this money was ending up in the hands of people that would not be capable of repaying it.  We knew it was unsustainable and stupid, but most of us didn’t know “how and why”.  We were using previous models and past events to conclude what we thought was gonna happen.  But history is less applicable this time, and for good reason ... the securitization of the mortgage industry had morphed into a massive enigma.  People that worked in the mortgage industry didn’t have any idea how this was working ... even some of the management were clueless.  I remember the first time I read the words, “collateralize debt obligation” in the WSJ.  I asked a high-level management guy for a fairly large lender in Irvine, what a CDO was ... he had never heard of the term.  The only thing he knew, was these loans were being sold to investors.

What’s the moral of the story: Home prices will be influenced the most, by available financing.  It’s that simple.

I see where you’re going with price comparisons, however there’s one major variable that your chart doesn’t fully account for: median income.

I’m less optimistic than most, but what if the median income assumed for 2014 is exaggerated? What happens if wages stagnate, assuming people can stay employed?

2014 may seem like a long way off, and we all could only hope that our economic situation improves by then. However we’ve never experienced any of these economic conditions before and there are so many unknowns.

I’m a megabear, and I didn’t underestimate this crash. There’s still a long way ago - as I mentioned in a previous comment a few minutes ago, the IR’s predictions above assume a median income. That median income can be a big variable in this current economic environment.

I predict median incomes are going to continue to decrease for several years as wage growth stagnates and job losses continue to mount.

Someone should hurry up, we need a new bubble!

I disagree with your logic here:

“...but with the ARM Problem still facing us, a problem 60 minutes just discussed at length, it certainly looks as if prices will continue to fall…”

The “next wave” of ARM resets (Option ARMs) will not be a very big issue with 1-year treasury rates below 0.5%.  The rates on these Option ARMs resets to the trailing 12 month average of the 1-year treasury plus ~300 basis points.  Yes, these people have to start paying principle after the initial five years is up, but at less than 4% interest it won’t be a huge shock.

I still think prices fall another 20% or more, but the ARM argument is no longer valid. IMO, the struggling economy (job losses) begins to affect property values instead of property values affecting the economy.

The point I was trying to make about incomes is that incomes may not increase and may continue to decrease. Lenders are returning to a model where they’re forced to factor in borrower’s ability to repay a loan, which is directly affected by incomes.

So yes, Lee in Irvine, home prices are directly affected by available financing. Available financing is now dependent on borrower’s income again.

I almost forgot about the down payment - does *anyone* have a 20% down payment at current prices? With all the outstanding consumer debt, my guess is not many people have that.

As Alice Cooper says:

“We still got a long way to go
We all got a long way to go ”

I fixed the second chart, you should be able to enlarge it now.

I have used Money, Money, Money already. Great song.

http://www.irvinehousingblog.com/blog/comments/deer-wood-you-spend-the-house-please/

Check out the post: How Bad Could Bad Get?

http://www.irvinehousingblog.com/blog/comments/how-bad-could-bad-get/

I projected a recession with declining wages and rents.

“the ARM argument is no longer valid”

IMO, this is the latest mantra of denial for beleaguered homedebtors.

The FED is certainly doing everything it can to make the ARM problem less severe. They know that the light at the end of the tunnel is a freight train coming. Best case, they simply stretch out the problem and prolong the misery. Even if they refinance some of these people, there are still far too many with Option ARMs, liar loans, and other forms of toxic financing were they cannot afford the payments at near-zero interest rates. Plus, you are still going to see people walk who are underwater.

Are you the same guy who advised Mr. Paulson back in March 2007 that subprime was largely contained?

Believe me, you’re speaking to the converted.  I am almost certain, we’re gonna see income declines in most (if not all) of Orange County’s white collar zip codes.

I also believe rents are going down for single family housing.

JMHO ~ Since the turn of the century, most economic growth in The OC, was a result of leverage that is now evaporating.  Once you form this opinion, it’s easy to connect the dots to Armageddon.

These cortile homes are tiny doll houses inside.  1,200 sq ft!  It seems to me that their whole design comes from the delusional concept that a 2,000 sq ft home in Woodbury should cost $800k, so to make a home ‘affordable’ at $600k than it must be proportionally less.  You can can’t turn around in these places without hitting a wall.  The bedrooms are closets.

When capitulation finally drives 2,000 sq ft homes down to $450k (where I am waiting money in hand) than where will these Cortile doll houses wind up?  Assuming we don’t see a massive immigration of hobbits from Middle Earth..

I’ve been following this very interesting blog for a little over a year and I have not seen a single comment about that crook George Bailey who’s scamming the poor working class into buying instead of renting their homes.  I apologize if I missed the thread but we really need to expose these S & L vultures for the crooks they are.

“but at less than 4% interest it won’t be a huge shock. “

LOL! How long do you think interest rates will stay at 4%? 

WallST is already prepping for hyperinflation.
I think our deflation party will be over in March.  Housing will continue to tank, but get ready for higher gas prices again.

Will be difficult to pay down ANY mortgage (even a cheap one) if you don’t have a job…

You mean asians?

The median is skewed because there’s more sales in the lower end area.  This causes the median price to appear lower than where we are.

We are way down anyhow…

Just keep that in mind.

Median does not mean average.

No David, I’m the guy who was pounding the table back in early 2006, one of the first to recognize and profit from the bubble. 

And “idrnkurmlkshk” you have no idea what you’re talking about. Hyperinflation is dead, where have you been the last few months?  Hyperinflation was dependent on the BRIC economies decoupling from developed economies and continuing double digit economic growth, thus driving up commodity prices and inflation.  That bubble burst.  Commodities are done.  You have the dollar tanking over the last few weeks and oil/copper/corn tanking as well.

Rates will stay low for years.  And yes people will still walk away from underwater loans but that has nothing to do with resets, since the payment shock is gone.  The interest rates on these ARMs that reset in 2009 will actually fall!

And I’m a renter (by choice) in Huntington Beach, not a beleaguered homedebtor. I’m also an analyst who helps manage billions in fixed income securities (for those who don’t know, that means I have experience with interest rates)

I’m also an analyst who helps manage billions in fixed income securities (for those who don’t know, that means I have experience with interest rates

Lots of people have experience with interest rates and many of them have been wrong.  Many of them are part of the reason we are in trouble.  Are you one of them?

I would not want you to be responsible for investing my money.

Do the Traders know that you are “helping to manage the fixed income securities” as an Analyst?  They must be very grateful for your help.

Could get even worse if incomes don’t rise as projected, but continue to stagnate or even drop.

I make a simple, factually-based argument and you conclude I’m incompetent.  Make an argument yourself, like calculating the payment shock on a 2005 Option ARM.  And that chart that shows resets spiking again in 2009 is at least 2 years old, and does not factor in ANY refinancings that have taken place since then.  And given the huge push by the mortgage industry to get you homedebtors back into traditional fixed-rate mortgages (at the exact wrong time, I knew/love it), there has been a lot of refis since Credit Suisse published that chart back in early 2007.

Get a clue, write something useful.

No, I mean only 4ft-tall halflings would find these homes spacious inside.  Asians are too big, especially Yao.

The Traders affect the trade on my recommendation. Do you think Analysts just analyze for the hell of it?

Wow Bkshopr’s generalizations on Asian are off. I would know.  I’m Asian.

Are you claiming that the majority of OptionARM holders are now in 30 year fixed and easily making the new higher payments?  It does not make sense since most of these people took OptionARM because they could not afford under the 30 year fixed model.  To say that all of these borrowers can now suddenly afford it and have since refinanced sounds foolish.

I have no idea whether you are imcompetent or not.  All I know is that you are exhibiting signs of “the bull” to come here and proclaim that the OptionARM problem is contained.  It sounds extremely suspicious if not outright deceptive.

Irvine Renter:

I haven’t had time to look up the cites, but I think I have been pretty vocal that you were not bearish enough in your projections.  This is a different from the perma-bear-donkeys who said you were crazy for projecting an increase.  I digress.

AZDavid is being particularly moronic this morning.  His characterization of Bks is unfounded and unreasonable, and his critique of Jason is just stupid.  My poker tournament travel partner has Bill Gross’ numbers in his auto dialer.  Suffice to say Jason knows more than you, and I know more than you. 

Stick to the photo shops and leave the comments to folks with a brain.

I remember the old days when people were laid off from jobs, and there were other jobs available to go to. 

Once, (this is years ago) I left a job at noon, and was sitting at the desk of the new job before the executive lunch service was completed.  Ah, for the old days of living “paycheck to paycheck.”  What a comfort to know I have somewhere to go every Monday morning….

Irvine Renter,
In your second graph showing comparisons between fundamental valuation, DataQuick projections and future price correction curves, it is interesting to see that the gulf between DataQuick’s projection and future price correction projection is widening as DataQuick’s curve seems south bound at a much faster clip. I believe by mid 2010 we should have dipped below fundamental valuation into the ‘adverse’ correction zone.

Where did these come from?  Are these past quotes from other posters?

The only way hyperinflation is coming is if the US government defaults on its debt. That could happen, but it is years away if it ever happens at all. Budget deficits do matter. Time to introduce a new top tax bracket of 50% to prevent a default from ever happening. We can’t cut government spending without making the economy worse so the only choice is to raise taxes on the people who aren’t putting their portion back into the economy.

David adds a lot to this blog. No need to get personal. Put on your big boy pants and act like an adult.

Thanks for the reduction in hostility.  What I am saying is that some Option ARM holders have successfully refinanced or already been foreclosed on, and that the chart (which I happily showed to everyone back in Feb 2007 when it first surfaced) is out of date. I had my parents, brother, and Uncle all get Option ARMs in 2004-2005, and all 3 have refinanced since then. 

Moreover, IF interest rates stay where they are, one cannot argue the payment shock will force refinancing and thus foreclosure if refinancing is unavailable due to high LTV or DTI levels.  That argument was perfect in late 2007 when short-term interest rates were high, but ARM resets are no longer AS BIG AN ISSUE as they once were. 

I think it is funny/sad that everyone rushed back to traditional fixed-rate mortgages over the last year when an “exotic” 1/1 ARM would have kicked butt in this low short-term rate environment which will inevitably continue for the next couple years until the global economy recovers.

Jason,

LOL!
Who said we were in hyper inflation? I said IT’S COMING.  Just look at what the Fed is doing. Where have you been? Did you not notice how the dollar is starting to tank again? You say you know something about interest rates, but you seem to have no idea about supply and demand.

Yes, and I know many BSD’s would agree.

Bond Trading is high stakes gambling, pure and simple.  Hundreds of people owe millions of dollars in their earnings to Volcker’s decision to let rates float.  How ironic that he is back in the picture again despite all of the lightly regulated high-risk risk taking that resulted from this move.

I worked at Citi when the Solly guys were rescued and “integrated” into the bank. I know the culture.  “Liar’s Poker” is a true reflection of the relative attitudes of the Traders when it comes to Analysts, Salespeople, Trainees etc.

Bond trading is driven by the dramatic assymetry between personally profiting from gains and sticking the institution (read shareholders) with the losses.  It is amazing how much traders expect to keep of their profits but how unwilling they are to cover a portion of their losses from their personal account.

Peronally I think it should be illegal to bury trading desks within large institutions.  Investors would be better off in trading houses were standalone instutions that investors could analyze as the gambling houses that they are.  This won’t prevent future LTCMs, but will at least allow investors to understand the risk they are taking.

I am sure your focus on fixed income markets has made you an expert in the field.  It is not that complicated after all.  However all trading desks have access to this research.  That is not how money is being made (or lost).  How is PIMCO lately anyway?

What about all the loans tied to LIBOR?

From http://www.bankrate.com/brm/ratewatch/other-indices.asp:
“The LIBOR is among the most common of benchmark interest rate indexes used to make adjustments to adjustable rate mortgages. This page also lists some other less-common indexes.”

I think you underestimate the problem by assuming all these ARMs are tied to 1-year treasury rates.

Kirk, raise taxes on the rich? Are those the ones not “putting their portion back into the economy”? I hope this is not what you meant. 

Alright I’ve got to get back to work.  It’s almost mid-day on Wednesday, which means I start earning money that I actually get to keep.  I live in CA so my marginal tax rate is already near 50%.

Duh!

IF there are as many low-end sales as before, but half as many high-end sales.  The median will move down even if the price of homes would be flat.

Duh!

I had a couple chances to work there, but I’m currently working for a smaller competitor that is performing much better.

idrnkurmlkshk: You’re not as smart as you think you are.

The dollar has tanked in recent weeks, yes.  The last time the dollar was weak in 2007-1H08 we saw higher inflation, interest rates and commodity prices. Yes, good job.

This time it is different, for the reasons I discussed (BRIC stands for the four largest emerging economies, Google it).  BRIC growth drove commodity prices higher, creating global inflation.  The weak dollar contributed to that bubble, but didn’t cause it.  BRIC growth is slowing SUBSTANTIALLY, you cannot have massive inflation in a global recession.  Trust me you’re 6 months too late on that argument, stop watching 60 minutes and reading the Journal, do your own research

I was in IT at New Century. Of course I got laid off, but I had jobs asking how soon could I start.

Now my friends out there looking are not finding new jobs so easy to come by.

Question is, just how bad will it get?

Guess I better save my pennies and be a good boy at work.

What’s that old saying, there are two types of people in this world, those who think they know where interest rates are headed and everyone else.

The moral is no-one knows where interest rates are headed, although the smart money is on low rates for at least the next 2-5 years depending on how bad the recession gets.

The downside for you youngins is that bad old Mr. Volker, the man who blasted interest rates up to 18% in the late 70’s to “stop” inflation will be making a return appearance at the Fed.

The median numbers are a bit misleading due to the increased activity at the low end. The median is artificially high when a bust first starts, and it is artificially low when it nears the end.

While true we are in a deflationary period, hyperinflation is hardly dead. The government is printing money at such a massive rate that after this short term deflationary period you will see a inflationary period, unless you really believe that a near 0% feds rate has no effect. I mean do you really believe handing out money to banks for free is not going to cause inflation years from now? I know assets are imploding, but once the feds print enough money to surpass these loses you will see inflation.

my 2 cents

http://www.irvinehousingblog.com/blog/comments/what-if-prices-dropped-to-fundamental-values/

And if it’s bad tech, so much the better right?

Eat me.

A logical argument, the Fed’s current policy is absolutely inflationary. But in the big picture, the global economic crisis (and resulting demand destruction) has clearly overwhelmed the Fed’s attempt to stimulate the economy. The “effective” Fed Funds Rate has been near zero for months now, and the Fed pumping money into the banks is simply filling the whole left by bad mortgages.  If the banks had excess money to lend they would have already. 

A agree with your logic, except that I believe the global economy is a lot worse off than current estimates (China still growing 7-8%... no way).  IMHO, the global recession will dominate any inflationary stimulus for the next few years.

When have prices in Irvine ever been in sync with the fundamentals?

Never, and they never will be….

get over it…

Sure there will be additional price decreases but those will end far before they get in line with your estimated rent/median/income ratios…

That is how I see it as well. Perhaps the exchange above lacked some clarification on the timeframes involved.

I think we will continue to see deflation for the next several months, perhaps even all of 2009. At some point, inflation will rise above the FED Funds rate (which is what Bernanke wants) then the economy will start to improve as the velocity of money increases. In a few years time, I don’t see how interest rates cannot rise in response to all the money we are printing, unless you believe Bernanke can shut down the printing press as soon as deflation ends (not very likely, IMO).

Besides, we are at zero interest rates, does anyone think that will go on forever?

This condo was actually lived in, and (apparently) not additionally remortgaged/HELOCed since the purchase. (OK, maybe they wanted to but couldn’t when the price didn’t go up 20% per year.) It could be “just” a bad gamble, and more sympathetic with less schadenfreude than the more usual profiles. Serious lack of rational thought to buy it though. Sad for the kids sake.

“If the banks had excess money to lend they would have already.”

I don’t believe this is true. They are currently holding excess reserves. Of course, they probably know they have many more write-offs coming, so they may not be truly excess.

If the $600,000,000,000 they are holding in excess reserves where put into the fractional-reserve lending system, there is the potential to write almost $6 trillion in new loans.

http://globaleconomicanalysis.blogspot.com/2008/12/humpty-dumpty-on-inflation.html

What is your point?

There will always be a larger pool of qualified buyers for cheaper properties in any market; independent of a recession.

You suggested that the median is unreliable because it is “skewed” and not representative of “where we are”.

Perhaps you need to qualify “where we are” so I can understand the point that you are trying to make.

“When have prices in Irvine ever been in sync with the fundamentals?”

Prior to 1975, from 1983-1986, from 1995-1999.

The periods missing are the bubbles from 1976-1982, 1987-1994, and 2000-now.

“Never, and they never will be….”

Do you understand what fundamentals are? Fundamental values are those to which asset prices fall after crashes. That is why they are called fundamentals.

I know I should just let the homeowners in denial keep up their illusions, but I couldn’t help myself. Yes, prices will remain elevated above fundamentals forever, we are at the bottom, and prices will be back at the peak by the end of 2009…

Stay classy, no_vaseline!

Excellent as always, though 6.5% is quite high.  4.5% 30-year fixeds should be here any day now if they aren’t already.

I think the market under 417K will start to go from horrible to a bit more steady, while prices above will be under great pressure.

no_vaseline -

Let me know where I have strayed.  I’m more than willing to hear your reasoning and even let you change my mind.

Let me know when you are done chanting slogans and have wiped the froth from your mouth.

Bkshopr said that he/she is Asian as well.  I think perhaps the mistake is in assuming that we are all the same within our own ethnic groups.

You can mock it all you want AZ, and people can pound their chest that these statements are not PC—- but BKshpr is right on with many of these observations. I am not saying that the Asian population is going to single handedly support the bubble prices—- but the desireability Irvine holds for much of the Asian population will definitely be a factor in sustaining Irvine well above some similar neighboring communities such as AV, MV, Ladera…etc.  Believe me, AZ, for a lot of Asian families in SoCal there is absolutely no substitute for Irvine.  They simply will not consider living anywhere else.  BK knows what he is talking about.

Ok, fair enough, I’ve heard a lot of rumbling about the banks not loaning people and businesses money over the last year or so.  Lending standards have tightened and thus rates are higher and supply is down.  BUT, we should also consider that demand for money is ALSO down substantially, as people and businesses don’t want to borrow money if it costs them an arm and a leg and if their economic situation is uncertain.  People are so quick to blame the banks, when it is clear that people are simply deciding to postpone purchasing new cars, remodeling their homes, and taking fancy vacations. So it’s not just supply, its demand.

0% Fed Funds can easily last a couple years without creating meaningful inflation.  This economic recovery won’t occur until housing prices stabilize, which is at least 2010. 

And finally, nobody knows what will happen to interest rates any more than IrvineRenter knew housing prices would fall.  But obviously a little research and common sense can point you in the right direction.  I’ve done the research into what drives interest rate, its the common sense that commonly gets clouded once you start focusing on past economic cycles and ignore the fact that THIS RECESSION WILL BE UNLIKE ANY OTHER.

Thanks for the updated chart. I was wondering when someone would re-do the older data with fresh info.

Now, getting a REALTOR to understand what it means…that’s another story.

I thought Analysts just put together working group lists?

I’m in favor of a new 50% bracket (or as I like to call it, the “playa hata bracket”).  I don’t really see a reason not to soak the actors, athletes, lawyers, doctors and others pulling in seven figures.  I can’t imagine a significant number of those people are going to work less if confronted by a higher tax rate.

...OC median at $400,000. It’s lonely at the top….

November price declines exceeded 30% throughout Southern California, though Orange County’s November median price of $400,000 remained the highest among the six counties despite being down 31.4% from a year earlier.

San Diego County recorded a slightly smaller November drop than the rest of the Southland—its median price for November was down 30.7% to $305,000, while Ventura County’s median of $355,000 was 31.9% lower.

San Bernardino County’s 43.9% price decline from the previous November was the steepest in the Southland, and its median sales price of $185,250 made it the only county in the region to have a median price below $200,000. Riverside County prices fell 38.3% in November from a year earlier to a median of $220,000.

http://www.latimes.com/business/la-fi-homes17-2008dec17,0,2443063.story

I used to discount stereotypes, preferring to wave them off as a by-product of the mind’s desire to categorize things and people into the smallest number of classes.

But that was before I read today’s realtor prose. How can anyone write so poorly and earn a middle-class income? Enough: ALL (all all all all ALL) realtors are demi-brained bimbos too stupid to become cheer leaders. They are all alike.

If you bought in 2005 with an option-arm, and tried to refi in 2007 you would not qualify.  No lender would refi you into a loan with >> 100% LTV, and most of those properties would have seen significant price decline, so you would not have been able to get a appraisal high enough to justify the new loan.  To get the refi, you’d have to make up the difference in lost equity and at that point, the homedebtor would walk instead.

Thanks for the heads up, CK - I am in the process of getting a Lexus, Toyota, and Honda dealership set up in Irvine.  Someone is going to need to sell these people the vehicles that they are genetically pre-disposed to driving.

Nor does it show the recasts on option arms that really flatten out that second spike and push it to the 2009-2010 period.  Nor does it show the minority of of people who have long since sold nor the ocean who have long since given up and walked away.

Keep in mind to that by the fed’s estimates over 40% of all ALT A loans have already reset.

Bottom line, I dont think the ALT A problem lies in the future - the problem is here, the problem is now.  Thus, there is no serious “future” ALT A problem to deal with.

Here’s an example.

10 properties sold in 2008: 4 of them were $300k, 2 of them $500k, and 4 of the were $1M. Median = $500k.

8 Properties sold in 2009 (all equivalent on a Case-Shiller basis meaning a $300k home sold in 2008 still seels for $300k):
6 of them were $300k and 2 of them $500k, and 2 of the were $1M. Median = $300k.

This indicates a drop of 40%.  This is not true, the mix of property sold caused the median to drop.  Note that the actual value of each home satyed flat.

In the current market, there’s more sales in lower-end areas that already saw big drop in prices.  This causes the median to drop more than th actual drop in home prices.

Does that make more sense?

It doesn’t matter if he is Asian or not.  Racism is racism.

Imagine if somebody said “Nobody can predict the wealth of the Jews”

I am not Asian, so I guess Master Bkshopr would say that I am much less likely to want my children to attend a good school or that I am far less likely to enjoy Asian cuisine.  Makes perfect sense.

I agree.  The other thing that could happen is, what happens when the low end foreclosure pipeline stops, and the high end properties are marked down?  In these cases, the high end (even severely marked down) are still way above median.  If they start moving, and if the ocean of low end foreclosures starts to dry up, you could actually see median RISE even though in actuality, “prices” for lack of a better term, are still falling. 

In fact, I would not be surprised to see say a +5% jump in median towards the middle of next year.  Many will proclaim that “its over” but in actuality, its just the mix of housing that changed.

For anyone interested in how these money changers, Fed and Wall Street, are manipulating the money and debt go to:  The Long Wave Analyst web site, he gives you a very clear picture.  It is mind blowing.

People are still trying to borrow money.  They are being denied.

Well, at least you didn’t dispute my point—that’s a start. Maybe we are coming to a common ground?  Come on over and visit some time, AZ. We could get a couple of those little counter thingys and go hang out at the Costco parking and tally up the ratio of Toyota to Ford.  And then you can tell me what the ratio is in Scottsdale. Would be a blast!

Yes, I see what you are saying now - good explanation.  I didn’t realize that you were assuming the median price of only the houses that sold.

So yes, I agree with you.

My forecasts are still pretty close to 18 months ago.  I have a matrix.  No recession, 42% off peak end of 2009 (case shiller).  Bad recession 55% off peak.  Modest sensitivity to interest rates.

We are in a bad recession, already 36% off peak, and the most recent CS numbers are for September.  With a 3% per month drop in prices we will almost exactly nail the 55% decline by the end of 2009.

When I told people this in 2006 and 2007, they were baffled.  They knew I did finance research for a living, and that I had done careful calculations which I was willing to walk them through.  I got a number of people to agree prices would drop, but almost none of them thought it would drop quickly.  When you adjust for inflation, the rate of rise in asset bubbles is typically close to the rate of decline in the bust.  The bust has dropped somewhat faster than prices rose in the bubble, but it was an OK approximation for my models.

do you have a specific link? That site is too big to sift through otherwise.

I think the real reason that IrvineRenter and others underestimated the severity of the crash isn’t attributable to not understanding the fundamental situation. If anyone here has a solid understanding of the necessary skills to formulate a fundamental valuation model for home prices, it’s IrvineRenter. IrvineRenter has also been gracious enough to explain to others how a fundamental valuation of real estate is prescribed and to desribe it both qualitatively (for the laymen) and quantitatively (for the math geeks) so that everyone can also learn and understand.

No the real reason for IrvineRenter erring on the side of timidity is more due to the emotional bias that was prevalent in southern California. I think a lot of us forget how much mockery was made of those who weren’t smoking the koolaid and didn’t agree with the ‘real estate always goes up’ mantra.

I remember feeling strong envy and depression two years ago when everyone else we knew was buying real estate and my wife and I were still renting. My brother bought a place, by parents bought a place, my brother’s best friend, a good friend of mine, co-workers, you name it they were into real estate. We’d go home to my parents for the annual Christmas party and everyone would be gaga over someone’s new real estate purchase. Such a deep immersion can generate feelings of self doubt and denial. After all others also have good educations and solid understanding of the situation. My wife and I are the plain engineers in our group, both my brother and his wife’s brother hold the MBAs. If anything, they should know more about money than I do. Yet they ended up buying real estate and asking me when it was going to be my turn (this coming from a ‘younger brother’ buying first).

I don’t think posters realize how much flack AZDavidPhx got for his dire valuations. Now it’s considered standard and he’s a bit of a minor celebrity. The people who argued with him and called him crazy (the only one that I can think of at the moment is ipoplaya) don’t post anymore. Take it for what it’s worth, but two years ago it was difficult for anyone to go against the grain and state that RE was going to half in value, much less state the possibility of it declining.

Dejnov.

Jason,

Not sure where to start.  It’s not used home sales that predict the end of a recession, it’s new home sales.  Used homes sales involve moving a product which already exists between two owners.  Prof Leamer has some pretty convincing articles on this topic. 

Regarding not loaning money, well it depends on how you look at it.  There are a lot of credit lines, standbys, etc., that are not drawn on, yet. While banks have been shutting some down, many are irrevocable for a period of time.  Many of them are to companies or individuals that they really wish they hadn’t extended a guarantee credit would be available.

0% Fed Funds rate and a similar t bill rate means the Fed Govt can continue to act as the world’s largest hedge fund.  It also creates a lot of perverse incentives for anyone who can borrow at those rates. 

I am interested in anyone’s opinion on something that might be called “the other oil inventory”.  It’s not crude or gas, it’s the final products and delivery.  There is a great deal of food that is being grown using fertilizer and transport that were more expensive.  Plastics that were made when oil and gas were more expensive.  Products delivered when gas was more expensive. 

Without lowering anybody’s wages, the next round of similar food and products will be cheaper.  Given production cycles, I’m guessing that effect will last 12-18 months.  I have a hard time believing that deflationary effect can be overwhelmed during the 12-18 months.  After that, it sure seems to me that 0% interest rates and dropping money from the sky will cause a lot of inflation.

You can smoke kool aid?  Is that like freebasing?

It’s a little “apples and oranges” to compare IrvineRenter and David.  IrvineRenter has published daily on this blog for over a year and written a book, putting his name and reputation on the line to make predictions others thought were crazy.  David is a commenter on the blog who is best known for his creative photoshopping.  IrvineRenter has done all the heavy lifting here.  In fact, folks like graphrix, ipoplaya, IrvineRealtor, Lee in Irvine, MalibuRenter and awgee have all contributed much more substance to the discussion than David has.

David gets flack because his analysis is superficial and he attacks straw-men, not actual arguments.  A number of us just gave up after the nth time David asserted that [Orange County property] wasn’t worth [$X] because [Arizona property] was worth [$Y].  He doesn’t do that as much anymore, to his credit.

By the way, ipoplaya’s beef with David wasn’t that prices were or weren’t declining, but that houses would sell TODAY at prices David claimed were impossible.  I would venture to guess that ipo was right more often than David was.

And at the risk of exposing a dirty little secret, all of those people who locked heads with David are still active on IHB if you know where to look for them.  But David knows this, we’ve seen him lurking.

“BK knows what he is talking about.”

Yes, he does. He has earned the respect of most on this blog. Actually, that was why his comment jumped out at me from the earlier post.

“The bust has dropped somewhat faster than prices rose in the bubble, but it was an OK approximation for my models.”

The rate of decline has surprised me. Even the most bearish acknowledged that house prices are “sticky” on the way down. This drop has required no vaseline…

LOL.  Right on, CK.  Truth-based generalization != racism.  A lot of what Bkshopr said is indisputable, including common-sense things like the desirability for Asians of living near a large number of high-quality Asian restaurants and markets.  To one of AZDavidPhx’s points, yes, such a thing is desirable for non-Asians who are particular fans of Asian cuisine as well, but that doesn’t at all negate Bkshopr’s point.

About the most that can be said is that Bkshopr made the generalizations sound too universal by saying just “Asians” rather than “most Asians” or “most Chinese and Koreans”, or whatever would be appropriate for each item.

Yes, we could very well see that phenomenon occur. At the very bottom of the cycle, we will see rising home prices and a falling median as the velocity at the bottom takes over, but in the interim, we could see a temporary bounce in the median while house prices are actually falling.

So, where would like like your 50% fed bracket to kick in? Do you think households earning $250k+ are “rich” like Obama?

My wife and I can pay our housing costs and student loans on either of our incomes. If the fed rate moved up to 50% for a good portion of our joint income, we would certainly consider working less and/or one not working (on a payroll).

> the vehicles that they are genetically pre-disposed to driving

I think it’s pretty clear Bkshopr is talking about cultural biases, not genes.

Thank you, thank you, I thought no one was going to mention the house and the “gourmet kitchen”. That is absolutely the worst designed high price kitchen I’ve seen on this blog. Nasty little condo. All the oomph was put on the outside.

While his “I think your price dropping theory is way too unrealistic” comment, as with his Asian generalizations, may have been somewhat overstated, it’s clear he was only disputing it in the context of Asian enclaves.  I think the points he put forth no doubt help explain part of why Irvine is falling more slowly than other areas, and why it may not bottom as hard.

You never know when AZ might appear.

Hot Costco market are often over-inflated than most other non-Costo location.  One can not predict the Davids of AZPhx.

Wow, I didn’t know ALL Option ARM loans were 100% financing ($0 down).  Of the 3 Option ARM holders I know (who have since refi’d), my parents refi’d their home in 2004, extracted equity, but kept the LTV below 80%, my brother purchased a new home and put 20% down (borrowed from my folks) and used an Option ARM for the rest, and my uncle also put 20% down.  So wow, MOST BUT NOT ALL people will have trouble refinancing the Option ARMs. 

Think about things first eh…

It really is a wonderful life, isn’t it?  LOL!

LOL.

It was a joke - an obviously ridiculous exaggeration.  The point is: to say all Asians drive a particular model of car is just as dumb as saying all Asians have a genetic pre-disposition to like a particular model of car.

Come on now.  “Truth-based generalization” sounds like a codeword for “stereotype”. If what you are saying is not all stereotypes are racism then I agree with you.

There are plenty of non-Asians who would do whatever it takes to put their kids in a good school.  There are plenty of Asians who do not drive Lexus, Toyota, whatever.  There are plenty of non-Asians who do not blow all of their money.

If you want to say that there is a large Asian community then that is fine - but to start popping off about how Asian culture is more suited to one geographic area is nonsense.

Like I said before, go back and re-read the quotes, but replace every instance of “Asian” with “Jews”.  Clearly such statements are socially unacceptable on the latter, but there is a grey area for some of you on the former.

Yeah, not stated that clearly in IR’s post or in the Register one, but the DataQuick numbers are only for completed sales.

The Asian population is 30% of Irvine according to the 2000 census, certainly higher now.  Asians are approximately 10% of California, and make up 4% of neighboring Newport Beach.  The top high school in Irvine, University High, is 47% Asian.

It’s always dangerous to deal with racial stereotypes and generalizations, but anyone who lives in or near Irvine understands the special relationship between Irvine, Irvine schools and Asian-Americans.  You can see it in the fact that BK does very well for himself helping builders, developers and merchants take advantage of those demographic trends.

Not all racial observations are racist.