“deceased equine over ARM resets”?  You mean they don’t get a pony?

“He told me the foreclosure problem is far worse than most people realize. As he started telling me about the growing problems with Alt-A and Option ARMs, I felt like he was reading from the IHB.”

IHB has always felt like reading news from the future to me.  The general media is like reading news from the past.  If you follow fundamentals, you have an idea where things are going.  If you wait for the data to turn up, you are reporting on the past.  Even Case Shiller, which is pretty good housing data, arrives almost three months after the close of the month the index summarizes.  Deals closed in Nov 2008 were made in Sep & Oct.  It is 4-5 months behind current market conditions.  Taking that into account, we are reading info on IHB which won’t be in CS until July.

I think the baseline income numbers in this chart are too optimistic.  Because of both the recession and deflation, there is a dip starting in 2008 that will continue at least through year end 2009.  That means that the housing price drops will be faster, and a little further.  On my last round of calculations, I got 58% off peak for LA/OC at the bottom in 2010/11.

Still over $300.00 per square foot.

On the Alt-A issue, here is some data from a representative Alt-A securitization that was undertaken in late 2006 of a pool of loans originated by (what was then) Countrywide.  I don’t have the data by state but can assume this is largely from markets where there is a high portion of Alt A product like california/Florida.  The number after the month-end date is the % of all loans that are 60+days delinquent or more, including bankruptcies/in foreclosure/REO.  When i dug a bit deeper the fastest growing category over the past few months is 90+ day delinquencies, so this implies to me there will be a big pick up in notice of defaults in the near term….

Feb-08   18.5343469
Mar-08   20.68500772
Apr-08   22.56469905
May-08   23.82063312
Jun-08   25.92819204
Jul-08   26.72187037
Aug-08   27.59461065
Sep-08   30.13973902
Oct-08   30.93601927
Nov-08   31.9318828
Dec-08   36.22155617
Jan-09   39.42174623

“It is important to note that this does not mean that premium neighborhoods will retain a premium on their premium. This is another common misperception. For instance, Turtle Ridge commands an approximate 10% premium over Quail Hill on rentals for identical floorplans. Since the rents are 10% higher, the resale prices will be 10% higher as well. The GRMs in both neighborhoods would be the same. It is not that Quail Hill will bottom with a GRM of 160 while Turtle Ridge bottoms with a GRM of 200.”

Irvine Renter, I’ve grown tired of this stale debate.  I will leave you with this: I have lived in multiple neighborhoods both in Southern California and outside SoCal during previous down turns where GRMs of 160 were never met.

IrvineRenter-

Check out the Business section of today’s LA Times.  There is an article about how housing in West LA is dropping.  This is somewhat surprising because this market was SO strong for so long…it never experienced a lot of new development (due to strong slow growth pressure and scarcity of land) and people who live there have A LOT of dough.

Just what I was thinking.  Another 35% to go.

IR,

In Thornberg’s report cited, he is calling just recession, but not depression. I understand 2 quarters of negative GDP is defined as recession. I however do not understand how depression is defined.

So, how is depression defined?

I was not too convinced by Thornberg’s conclusion since he did not provide his supporting arguments why depression would not occur?

Why no sub-Armageddon profile?

I’m having a tough time with that chart, IR. I look at the fundamental increase line of what looks like 7% a year and then I remember a couple weeks back where you said that home prices since the 1900’s have only increased at a mere .7% rate (inflation adjusted). So what gives? Why the difference?

And I really don’t think we have any idea how a deflationary recession is going to play havoc on asset prices. Your numbers right now are sobering but I think there are better than decent odds that the final results will be worse still.

I maintain that the neighborhoods with the highest GRMs will be those with high income households and loan values just below $1 million.  That group has the highest home mortgage interest deduction and the highest marginal tax rates.

This also helps explain why GRMs tend to be lower in poor neighborhoods than in rich ones.

$/sqft should be whatever the premium on earthquake insurance is to wipe this dump off the face of OC land.  Hit the bricks, Dump.

A Depression is just a REALLY REALLY long Recession. 

Why Be a Nation of Mortgage Slaves?

“Finally, loan modification is not only ineffective, it is evil. Coercing borrowers to continue paying a mortgage on a home that is hopelessly overvalued and not informing them of alternatives is predatory lending.”

There is no official definition of depression, but most set the bar at an economic cataclysm approaching that of the Great Depression. This recession will probably be the worst since then, but it will probably not show the same grim statistics of that era (hopefully).

Correction… this is in the Springs Association, not the Lakes.

$189 in HOA fees monthly, too.  It’s still overpriced.

Yup, there is a long way to go. The unemployment crisis is certainly not going to help real estate prices. Salaries are not going up anytime soon.

I would add that not everyone wants to own a rental in the hood. We own a number of donut shops and Chinese fast food places. The locations in Compton throw off much more cash than the locations in nicer neighborhoods because there is less competition in the rough places.

So, I would expect GRMs to be somewhat higher in places where you don’t fear for your life. Newport Beach for example seems to have high GRMs in all markets.

“...Would it be better to drop quickly then resume its ascent? or it is better to have a slow deflation as Japan did?...”

I would prefer the option that disrupts the economy the least. My guess is, that’s the first option - which would also help me (assuming our income remains somewhat stable) because my tax basis would drop very low immediately thereby lowering my housing costs slightly.

There was quite a bit of new construction near the area, especially Malibu, Marina del Rey, Baldwin Hills, Bel Air etc.

I like the photo of the stairs…are you going upstairs, or downstairs? Eerie.

Its actually $214 a month

One fairly accepted definition of a depression is a decline in GDP of 10%.  A “great depression” is sometimes defined as a contraction of 20%

From wikipedia: “Between 1929 and 1933, U.S. GDP fell around 30%”

What is it called the last twenty years of Japan’s economics?

Question about the ugly little condo…isn’t it at rental parity?  I haven’t done the math, but seems like it could be.  You might get $1,100 rent for it. Ugly properties like this will get to rental parity first!

If you like to be at break even and putting down 20%.
Currently rents are going down so that means this is still over priced.

It rubs the lotion on its skin or else it gets the hose again.

Are you talking about typical GRMs for individual properties, or are you talking about the GRM of typical rents in a city to typical home prices in a city? Two very different things, obviously, since in most cities the average rental home is much lower in desirability than the average owned home. If you are talking about the latter I wholeheartedly agree, but if you are talking about the former I find your statement hard to swallow. Do you have any specific examples to help us out?

Views of rocks and trees?

Oh, IMHO the “better” locations always command a premium.  They have done so for since the City of Irvine was created, so I see no reason why this should not change.

And even if Armageddon brings us back to 2004 (per your chart) at a “loss” of 50%, that still leaves Irvine on the expensive side of things.

As I noted earlier, anyone who bought after 2003 is screwed.  And this means all the new developments (TRidge, Quail Hill, etc…).  The degree of screwness will increase the further away from the ocean you are, particularly as in the peak the price per square foot of inland developments was in line with the ocean side.. hence the “inland” developments were “more” overpriced.

Again, IMHO… but I have lived in Irvine since ‘87 so I saw this once before in the early 90s.

Such a timely article since all I keep thinking about is when…

There still is no real “fear” in Irvine and what it will take to instill it into the local mindset. All people hear about are the job losses elsewhere (autos, banks, aircraft, etc). Except for the subprime losses there hasn’t been a shocker locally. Or will we have a national or state economic 9/11 do the trick?

When they shout “Fire!” in a crowded theater what do people do?

“Irvine Renter, I’ve grown tired of this stale debate.”

I was not singling out you for this comment. I did not realize we were debating about it.

There will be a range of GRMs among different properties with the most desirable hovering around 180 and the least desirable falling down to near 100. In as much as entire neighborhoods are composed of large numbers of desirable or undesirable properties, you could see variability in these neighborhoods. My point is that if you look at two neighborhoods with similar property composition, such as Quail Hill and Turtle Ridge, the aggregate GRMs of these neighborhoods will bottom together at similar values.

The rate of appreciation in the chart is 3.6% which is about 0.7% over the general rate of inflation as reported in the CPI.

In the past, we have always let the crash proceed in order to get back to growth. Japan when the route of the slow bleed, and their economy has been suffering for 20 years.

Is there a graph of historical GRM for Irvine or OC?  If so, please direct me to it.  If not, could you do one? 

I’d like to see the average GRM for the last 25 years.  If Irvine Renter is right, then the average GRM for the last 25 years should be 160 for Irvine.

For some reason I believe the historical data will show 180 to 200 GRM for Irvine.

There are some other options.  One of them is to try to reduce the amount of damage done to other sectors, let housing reprice, and make changes in the banking system.

For example, you could take over banks with troubles, provide some capital to the banks which are not troubled, provide money or guarantees to lenders who didn’t do housing (e.g., auto and equipment finance, municipal finance). 

While other sectors might be justifiably told they should be prepared for economic cycles, when those changes are very large and had little to do with that company’s business, I have some sympathy.

Define “screwed.” That’s a strong choice of words - could mean a wide range of things. Are you trying to convey that their balance sheet will never recover and they’ll be doomed in poverty in perpetuity? Or, by using “screwed” do you mean, they’ll be fine if they financed conservatively, but 2010 and later buyers will get in at lower prices?

That’s a wide range…

The historical data is messed up because of the bubbles. What is more pertinent is the values at the market bottom. This is where the fundamentals lie. I have graphs for price-to-income, price-to-rent, and debt-to-income for Irvine. You will find those in a number of analysis posts. The GRM is basically the price-to-rent ratio presented with a different “Y” axis.

http://www.irvinehousingblog.com/images/uploads/2008sept2/Projected Orange County, CA Price-to-Rent Ratio 1983-2020.jpg

the historical “national” grm is 181…

http://www.irvinehousingblog.com/blog/comments/wot-3-22-2008/

graph here… http://tinyurl.com/d7asnj

Screwed as in being upside down for a very long time.  The curve above shows 2021 before we attain those prices again.

IMHO, being stuck upside down for 16 years is being “screwed”.

Got it, just trying to understand what you mean.

There are so many variables when talking about different families’ finances. Renting currently is preferable to owning and having bought after 2003. How preferable?  Well, if we could compare two exactly similar families, the one renting is in a position to build a much stronger balance sheet over the next decade.  But will they?

In 2012, when that “2005 million dollar Irvine house” is selling for $600k, will they stretch to reach for it?  Will they continue to live the same lifestyle as the underwater family, or will these families’ spending diverge due to their relative circumstances?

I guess, I’d qualify your statement, and say, “Anyone who bought after 2003 is screwed if they’re not in a fixed mortgage and more than 28% of their gross income goes to housing costs.”  Otherwise, they’ll manage (barring incurring any number of variables that can destroy a renter’s finances as easily).

Again, is this a graph of typical GRMs for individual properties, or is it the GRM of typical rents in a city to typical home prices in a city? Two very, very different things.

I used to live in that complex. This kind of apartment could be rented for $1200 or maybe slightly more last year. Maybe rents have fallen somewhat now. It’s probably going to fall more since these units are bought as investment property so GRM of 120 or so for a final price looks likely. We are not at the bottom yet. Didn’t you have a similar apartment in the same area for 180k a few months back?

Not trying to be a huge jerk here but take a look at the inflation rate in each decade from the 1930’s. I don’t think averaging out the inflation rate and projecting the anticipated rise in prices works very well for predicting prices within a particular small era, I think a better analysis would be to look at different types of periods (recessionary, deflationary, high inflation) and get an average for each type of period and then apply it forward, at least as well as possible.

http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=6

I would actually expect inflation to be negative for some years to come so trending a rise in home prices due to price inflation wouldn’t be my choice.

(I don’t know how reliable this data is but heck, it’s on the internet so it must be correct, right?) 

I walked around there a couple of weeks ago.  The pools were closed until safety issues were corrected.

Some area have higher expenses, so net rents should be used for investment analysis.  Extra cost such as HOA, repairs (a times excessive), vacancy rates and insurance should be factored into the calculations.  I would estimate that if rates rose 0.5% from 5.0%, house price should drop about 7%, and if rates decline 0.5% then price should increase 7%.  Possible the effect of the Republican proposal for a bailout to reduce interest rates for a 30 year fix to 4.5%.  (That might cancel out the current decline, at least for the moment.)  Or stick someone else with the bill.

It all depends on the type of modification, reduction in rate or principle.  A reduction in rate is with low moral hazard but leaning towards slavery for the borrower.  The reduction of principle is a deep moral hazard with the tax payers as the slave.
I agree with IR than the bottom line in the price of the home should be the price of ownership vs. rent.  Less bubble caused by no-money down, special low interest and other rigging of the system.

As Reagan said, a resession is when my neighor is out of work and a depression is when I’m out of work.

and recovery is when Carter is out of work!

“Crash” is a relative word.  We’re entering unchartered waters.  This isn’t 1990 on steroids. Past crashes are nothing like what we face now.

Right now, Japan’s “lost decade” is preferable to a massive economic collapse. Sadly, we’re past that soft landing. 

How can we avoid a massive collapse and over correction?

The 1990/91 bubble bust in CA was due to recession/unemployment.  So far all the damage, very serious, due to construction slow down and bad loans.  We haven’t begun to see the impacts of all these layoffs on home inventory.

BUST.

The stairs picture looks like something from a recent or future David Lynch film. Something pretty horrible will happen to anyone going up or down those stairs. Is it a really a stairs going up or is it some entrance to a deep pit or well or… worse. Unbelievable that a realtor would post such a photo.

There was just an article in the Irvine Newspaper about terminate issues in that complex. Definitely still seems overpriced for a 650 sq ft condo.

Well, Samsung left Park Place very quietly. One week they were there, the next they were history. I’ve no idea where they went, but I bet all that missing asian money will have an affect on Irvine, there are a lot of Koreans here but I can see they are starting to pack up.

Here’s another interesting 1bed/bath condo in Irvine.

http://www.redfin.com/CA/Irvine/62-Costero-Aisle-92614/unit-308/home/5589181

Its only $2100 more and is in a much nicer community in Westpark.

The other thing of interest here is it was originally bought for $122,500 in 1999 and is a short sale at $200k. So these folks extracted at least $77,500 in “free money” on this unit, Ouch!

Not necessarily on topic, but LA times reports that sales of million dollar homes dropped 43% in 08.

Cities in the OC ranked as follows..

Laguna Beach #17 with 173 total, high $7.5 mil
Huntington Beach #22 with 159 total, high $3 mil
Newport Beach #23 with 158 total, high $8.2 mil

Irvine didn’t have enough million dollar sales to crack the top 25 cities list.

What gives Irvinites, what’s wrong with your fair city?

LOL.