Irvine Housing Blog

That article highlights a lot of things I’ve come to accept.  Economists aren’t that smart and have terrible common-sense.  Being able to churn through equations is one thing, but being able to apply math to real world scenarios in a constructive fashion is entirely different.  So much analysis fails to acknowledge that in 2005-2007 home prices were just too high in many areas.  The academic paper (I don’t know if you downloaded the pdf from ssrn) does not mention the role of specuvestors buying 2nd/3rd/vacation properties.  Those people act totally differently with respect to defaulting when the asset price starts falling.  You also have the issue of speculating on asset prices in often-times 100% leveraged situations.

You have these academic economists putting out this bullshit garbage, and they are the ones teaching future economists.  Or you have Federal Reserve economists looking at things, but their findings aren’t made public for many years.  Then you have the people really looking at the details and reality on the street: here, calculatedrisk & others.  There is a real disconnect that I don’t see being bridged anytime soon.

I have been saying for years that the dollar will devalue and that devaluation will reflect in the price of essentials such as energy, food, and staples, but not in home ownership.  Folks pipe up and insist that if prices rise, also will wages, and I consistently say not so.  For those of you who have insisted that wages will increase as currencies devalue, are you beginning to see that you are wrong?  Are you watching as prices of essentials are rising, yet wages are stagnant or decreasing?

This is just my personal opinion which I have been saying since 2007 housing market peak:
I am fairly certain that US housing prices will not recover its inflation-adjusted price until 2027 at the earliest.  In terms of nominal prices, I am less certain but I also tend to think that housing prices will not recover its nominal prices until the same time-frame.  My reasoning is fairly simply.  Every financial bubble in human history will NOT repeat itself for at least 20 years.  Usually it’s AFTER 20 years have passed that the same asset class can have a new chance to begin to rise in prices.

The two main negatives that have not been priced in by the current buyers are
1. Bond bubble bursting causing rise in interest/mortgage rates, AND shortening of the duration of the mortgage term.  This will cause the domestic US buyers to decrease their offering prices.
2. Increasing deficits will most likely result in increase in property taxes.  This will increase the holding cost of houses and therefore decrease the home ownership benefits.

The third negative that has not been priced in by the foreign cash buyers is that the current US housing price can possibly become 50%-off, once US dollar drop another 50% against the stronger Asian(Japan-excluded)/commodity currencies.  These buyers will probably not flock into US after 50% off because the relative political/economical stability across regions can change in detriment to US, and that these “savvy” businessman and “corrupted” government officials won’t probably be throwing good money after bad.

You’re in a good industry if wages are increasing PR, be thankful yet don’t get cocky. I don’t think any industry is immune.
I work in education. More teachers may get laid off this year in CA than in any other time. Yes, there is waste in education spending but it is an easy target of politicians and such alike. In LA they estimate over 7200 will get pink slips by March 15th. Last year many of the pink slips were rescinded but that was because of federal money that came in. This year it isn’t happening. People can blast the public sector all you want but if thousands of more teachers are unemployed they are not going to be supporting a lot of other industries. It will lower the tax base that the state gets and the spiral continues. I work for another district and they too are planning a record number of layoffs.
The economists and media love to spin positive news but I don’t see that economy improving with the people I talk too.

I wasn’t trying to be too harsh PR. I don’t know if you make your own luck as luck is an intangible that we usually have no control over.
I do agree about constantly learning and upgrading your skills. It therefore creates more chances for advancement which some people will conclude he/she is so lucky.

I don’t recall if I saw all this coming in 04 or 05 but at the same time I didn’t get caught up in the real estate euphoria. I remained grounded enough and disciplined enough that it has paid off.

People are crazy again at Westpark II Irvine

12 PIENZA
Irvine, CA 92606

2450 sqft and tile countertop, asking for 1.133 million. The owner bought at 1.08 million at the peak and want to break even.

27 Arbusto

2535 sqft, asking for 1.099 million.

Perhaps the tiny swimming pool is worth 200K at least.

Very true… weak dollar from enormous deficits and debt and the printing of dollars is contributing to food and fuel inflation.  Add to that the real growth in Asia people moving from poverty to just poor people that can afford a cup of coffee of cheap automobile and you have a BAD mix for serious inflation for food and fuel! 

Now…you will also have rising interest rates to fight this inflation and you will get systematic decline in all assets purchased with borrowed money. 

Stagflation / screwflation is here… Grinding lower or flat for OC housing and Irvine for as long as we can look forward.  Higher rates, higer downpayments, lower conforming loan limits, and the government saying they are going to reduce the tax deductability of mortgage interest paid to $500-$750K. 

Wow!!  Talking about headwinds to housing prices!!  If only one or two of these things happen housing will be flat for a decade. 

If people can’t afford a house with 3% down and 5% rates wait until you see 7,8,9+% rates and 20% down requirements! 

BD

Today’s post brings to mind something that has been rattling around my head for a few years now ... the idea that homebuilding as an economic foundation for a region is really just a fools errand.

Yes, building and selling homes when there is real demand, available land and a growing economy can be a significant part of a region’s economy. However, I view it as more a contributor and not as a major core industry ... after all there WILL come a time when either there is no more usable space or perhaps more significantly, no more demand. It’s this latter point where the vast majority of efforts were and are aimed ... to build and sustain demand. A major feature of our most recent bubble was pulling demand forward, the financial products were engineered to artificially accelerate home ownership (or more to the point, loan ownership or indebtedness). The financial industry’s sole goal, stated or unstated, was to plumb the depths of a consumer’s ability to assume and service debt.

This brings me back to my original point. It’s my opinion homebuilding is an unsustainable economic engine, it cannot be the major source of wealth for a region. There must be other contributors to the pie ... manufacturing, technology and perhaps things like tourism to drive employment. Employment is at the heart of demand for housing. Without professional or sustainable job growth, housing has no real reason to exist. Put bluntly, why keep building homes if the only activity taking place is an elaborate game of trading one shell for the next? Furthermore, I think we’ve now demonstrated how easy it is to overshoot demand and overbuild. As foreclosures move from “shadow inventory” to quantifiable inventory we will truly be able to analyze how much product was built under false demand propositions and how long it will take for the natural demand rate to return and consume the inventory. It’s my admittedly non-expert opinion that it will take perhaps as long as a decade for the OC,IE, LA area to chew through the real, existing inventory. But if there are no jobs, and more importantly well paying jobs, to finance these overpriced homes then where will the demand come from?  Sure, there is the old argument about foreign investment or emigration but the census data tells us otherwise and more importantly are we going to populate SoCal with a class or idle rich or wealthy leisure class? Not likely.

Unless we see an improvement in job creation through an increase in sustainable industry growth outside of homebuilding, then I simply cannot see how $600K to $1MM dollar homes are sustainable.