Irvine Housing Blog

Smart money buys cheap assets with expensive money.

Dumb money…well…

The financial blindness surrounding real estate in California never ceases to amaze me.  Today’s property is completely unaffordable to a family earning $125k unless they entirely forgo life insurance, retirement savings, college savings (why 4 BR if no kids?) and many, if not most, of the fun things in life.

IHB,

I am impressed with your property valuation report. I just wish I had half the brain to come up with something like that. Thanks for all your efforts on this blog.

The typical home buyer is an ignorant chump.

First of all, the idea of “loan” is complete nonsense when talking about banking.  If I lend you 10 dollars then I actually have to lend you 10 dollars that I have posession of.  I must take 10 dollars from my wallet and put it in yours.

Whereas banks don’t even have to have the money that they “lend” because they just wave a magic wand at the computer screen and the money just enters the economy out of nothing.  Sounds like a counterfeiting scheme to me!  If I just printed my own 10 dollar bill and gave it to you as a “loan” - I would go to jail.  Yet this is exactly what banks do because the government gets to be in on the scheme.

Nevertheless, let’s go ahead and be good donkeys and pretend that banks actally loan money to people -

What is so magical about a 30 year loan?  Why do we not have 35 year loans?  Why not 40 year loans?  What is the magic in the number 30?  You never hear a single person question this.  People accept the number 30 as though it was handed down to them from God.

We do have 15 year loans, but that never crosses anyone’s pea-sized brain.  I mean, come on, who wants a higher monthly payment?  The typical American wants what is best for him in the hear and now.  Life is all about minimizing your monthly payments and maximizing your long term costs.

The people of this country have been completey brainwashed.  They have been made to believe that they need 30 year loans in order to afford houses.  They are too stupid to take 5 minutes of their day, pull their snouts out of their bucket of KFC and contemplate what the 30 year loan actually represents and its distortional influence on house pricing.

The banks know a very low percentage of people will actually stay in a house for 30 years.  To them, these houses financed with 30 year mortgages never get paid off and repesent a never-ending cash stream that changes hands every 10 years of so. MOO!

Suppose that all of the mortgage masters came together one day and proclaimed that 15 year loans were the new ceiling.  30 year loans would no longer be available for borrowers.  A great many of new borrowers would become absolutely incredulous at such a move.  They have been made believe that if they do not have access to a 30 year loan, they cannot afford a house.

What they do not realize is that if the average chump cannot afford current pricing with a 15 year mortgage then sellers will be forced to lower their prices (probably 50%) and the buyers will actually buy the house for cheaper and pay it off in a reasonable amount of time.

The 30 year mortgage is one of the biggest crock of S*** perpetrated on this country.  It rigs the game against prudent savers who have to compete with the counterfeit money being pumped into the system by the banks on behalf of some “borrower” who has no concept of how long 30 years really is.

Take the guy who works hard and saves 100K over a 5 year period and wants to go buy his first house.  He finds that even though he has a higher down payment than the chumps and their piddly 10K down payments competing with him, it does not matter to the sellers because the banks will just conjure up the rest of the money out of thin air on their behalf.

Think about it.  You begin to realize how our entire economy is smoke and mirrors.

It does not matter how smart and responsible you are - you have no choice but to play ball.  The game is completely rigged against you because the creators know that the majority of the ignorant players will drown out the few that understand it.

We can try to kick and scream logic into our fellow man’s ears but they will almost never listen.  This is our reality.

This will not end well.

Interest rates are superficially low because of Bernanke’s financial wizardry.  Like a beach ball being pushed under water, they will eventually pop.  Natural law will take over.  This will lead to the next big leg down in housing.

This is heresy in California:

Don’t bank on your home as an ATM

The coming decades won’t repeat the dramatic rise in real estate values that previous generations experienced, economists say. It may be time to return to viewing the home simply as a place to live.

For generations of Americans, a home was seen not simply as a dwelling, but as an engine of personal wealth. That view was promoted by the home-building and real estate sales industries as well as the U.S. government, which subsidized home loans and provided tax deductions for mortgage interest.

There have been booms and busts along the way, but from the second half of the last century through the start of this one, nothing derailed the real estate locomotive on its uphill climb. The train stalled here and there and rolled back now and then, but each time it roared back up and got homeowners to the mountaintop.

Now, however, the worst housing crash since the Great Depression may mean that a home purchase ought to be considered with the same warning issued to investors in securities: Past performance is not indicative of future results.

The economic fundamentals that drove home values up in the 20th century—sustained growth in incomes, population and household wealth—have been sputtering for decades. Though the future isn’t necessarily bleak, economists say there’s no reason Americans should continue to see a home purchase as a path to wealth.

“We can no longer assume that housing will be as good an investment for the future as it has been,” said Robert Reich, public policy professor at UC Berkeley and U.S. Labor secretary in the Clinton administration.

“We can expect a gradual rise [in home values], but not the bonanza we’ve become accustomed to between the end of World War II and 2006, and especially the last 20 years.”

Millions of homeowners have been rewarded handsomely as house values climbed steadily for decades after World War II. Houses in Valencia, for instance, sold for $22,000 to $33,000 in 1967 when that suburb was brand-new. Many of those homes sold in the mid-$500,000 range during the housing bubble and are now hovering in the high $300,000 range, property records show.

If you paid $33,000 for a house in 1967 and sold it in 2006 for $550,000, the annual return would be about 7.5%. If you missed the peak and sold this year for $375,000, you’d still have about a 6% annual return. Adjusting for inflation, $33,000 in 1967 would be equivalent to about $213,000 today.

But a broader look at home prices over time in Southern California shows that price appreciation usually has been more gradual than magical.

If you bought a home in 1988in Southern California for the median price of $133,500 (according to MDA DataQuick) and sold it in August for the median price of $275,000, that would represent about a 3.5% annual return. If you had sold the same home at the peak price of $505,000 in 2007, it would have yielded about a 7.25% annual return.

The same home purchased in 1988 and sold 10 years later, in January 1998, at the median price of $159,000 would have returned about 1.8% a year. Those more modest returns were quickly forgotten during the bubble years, when, for instance, the median Southern California home price shot up from $265,000 in July 2002 to $505,000 in July 2007—an annual return of 13.8%.

The housing market may be hitting its bottom, as median prices lately have held steady or declined only modestly in many regions. But Reich and other economists say there are many fundamental reasons the coming decades won’t repeat the kind of dramatic rise in real estate values that previous generations experienced.

For one thing, many of the baby boomers who fueled the demand for homes in the 20th century are now retired or retiring, and as they move out of their homes, there are fewer younger people to purchase the houses. The years after World War II were exceptional, says Thomas Lawler, an influential housing consultant and a former Fannie Mae official.

“You talk about pent-up demand; you had all these people coming out of the Great Depression and others coming back from World War II at the same time, then that was followed by the baby boom”—a convergence of events we won’t see again, Lawler said. “There were all kinds of demographic conditions conducive to more positive increases in real home prices. Those fundamental things started to shift a while ago.”

Despite rancorous debates over immigration, the influx of new residents isn’t enough to slow the aging of the population. In fact, the Census Bureau estimates that California’s working-age immigrant population grew an average of only 2% a year in this decade through 2007, down from 4.4% in the 1990s and 9.5% in the ‘80s.

The current OC, CA issue is the attempt to retain the bubble prices instead of adjusting for “normal appreciation.”

IR,  The maintance cost of 0.2% is realtor estimate.  Even the Fed. govt allows a depreciation schedule of ~7 years on applicances.  Some likely cost are AC system ($3000 to $5000 in S. CA), carpet replacement each 15 years, painting each 7 year,  Irvine cement tile roof may last 50 years, but the unlining wood is likely to rot by then.  I’ve haven’t check out the cost to pull a water heater permit, but one bay area county was charging $70 for just the inspection portion back in 2001. What’s the permit plus inspection cost here?  What’s the landscape cost—I hear a daily drone of leaf blowers in Irvine, what the typical landscaping cost?

Lets just enjoy it while we can!

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IR,

A few articles ago, you solicited recommendations for format improvements. I have one.

1) Return to the use of Redfin links for the featured properties instead of the Ideal Home Brokers (IHB) links.

Bottom line: Redfin is better. I suspect this is the case under any circumstance (you can’t really expect to come up with an RE site that’s superior to Redfin, do you?), but Redfin is especially superior when the IHB link returns this message: “System Offline This site is currently offline”. I’ve gotten that message for several hours now.

-Darth

I was surprised to see how much of the first payment went to equity. I never really thought about how the low interest rates will help drive early amortization.

Aren’t all the comparable sales SFH in the report in gated northwood pointe? They are supposed to be more expensive than this detached condo. For me, at least 40~50k difference. Also, this is a REO property. That make 730k a fair market price at this moment.

This place will sell for a lot more than 650,000. I’m guessing that bidders will pushed it up to 725-735. We shall see.