Irvine Housing Blog

Do you think it is banks not hesitating to foreclose in Vegas that has pushed prices so low, or is it a supply-demand fundamental.

The cost of housing should instantaneously have only loose correlation with incomes.  If you have excess housing, sale prices will be low, even if there are high incomes in an area.  Likewise, if supply is tight, then people will push DTIs.  What should cancel that out is the invisible hand of new construction. 

A huge problem with supply-demand with housing, relative to real consumptive goods, is that the supply does not really move downward.  The housing supply only gets bigger.  (I understand that some homes eventually get condemned and torn down, but that is a much slower process than shutting down a line at a GM factory).

This becomes an even bigger problem, the higher the rate of home construction, because of the intensity, you can have a large percentage of your local jobs in the home industry.  So when it goes, not only do you have this supply overhang, you’ve got lots of workers unemployed, creating more supply overhang…

Another occurrence related to the inability for housing supply to be downwardly elastic is the rate of speculative purchasers who do not intend to live in the homes, or have them function as cash-flow investments.  Especially with the zero-low down mortgages, these buyers are the first to walk.  As with Miami condos, where 80% of peak bubble purchasers did not intend to occupy, you can get a complete evaporation of demand, leaving supply hanging.

One idea that might be implemented related to underwriting is using an average of people’s incomes, especially if they are business-cycle dependent.  How many construction workers/realtors/mortgage brokers used their 2006 incomes - the best they would pretty much be of all time - to qualify for loans?  When you ramp up those groups’ purchasing power, with them being a significant portion of a local economy, and then have their incomes yanked, you get trouble.

Great news:

Per IHB
1/24/2011 Irvine Inventory 738 homes
1/25/2010 Irvine Inventory 485 homes

Per Housing Tracker
01/17/2011 OC 75% asking price $629,900
01/31/2010 OC 75% asking price $724,475

Are there any industry rules on how fast banks can move from NOD to NTS?

As IR said, this home went through the process fast… but there are many others that have taken quite a few months to years to move.

Homes that we looked at the early part of last year that were in default are just hitting the market now… even months after the bank (or other party) has taken ownership from auction.

And if lenders tighten credit standards even more, won’t that keep interest rates from rising in order to keep the “qualified” people borrowing?

Nice simian theme today… I feel at home.

I’m sorry I keep going back to this refrain.  But, it doesn’t matter what price you buy at…it only matters what price you sell at that matters. 

If you buy now and live in your home in Irvine or the expensive OC coast for 20+ years you will likely make money within limits.  That said, if you buy now and pay $1M for a nice home in Irvine what will happen IF you have to sell in the next 5-10 yrs???  You will likely be buying with 5% money or less leverage only to sell into 8% to 12% money in a decade. 

Every 1 point rise in rates evaporates 10% purchasing power. If rates rise 5 points over the next decade (which the could easily do with inflation and a weakinging dollar) you could easily loose 50% of the purchasing power to those that will be bidding a decade from now!

There is no hurry to buy…just a slow grind lower in home prices in OC as rates rise. 

This story has an result.  It is nearly identical to what happened to Japan only worse…

The home will become an underperforming asset class for a decade or more.  God forbid CA raises taxes on RE or on income or the feds reduce the tax deduction on interest paid on a home.

Somebody PLEASE make any case that prices will be higher a decade from now!!!  If they are you only have one thing to hope for…and, that is a dramatic rise in incomes that exceeds the coming rise in rates….

Please- make the case! 

My .02

BD

Hello?? PR or other please make the case for prices higher for Irvine or costal RE in a DECADE or more. 

Unfortunately, too many think of RE is like a liquid investment that doesn’t involve serious leverage.  Somebody, tell how prices will rise from here?? 

Ask yourself the following questions: 

1.  Do you think mortgage rates will rise over the next 5-10 years?
2.  If they don’t rise then what does that tell you about the US economy and what is happening to the US consumer and unemployment?
3.  If they do rise, how much will they rise from artificially low numbers put in place by the fed to help save debtors - and allow them to refinance leveraged purchases at lower rates?
4.  Do you believe that rates have anything to do with prices?  (rates have dropped consistently over the last 30 years allowing people to pay more for the same monthly payment)?
5.  Do you believe that incomes are going to rise dramatically in SoCal? 
6.  If incomes do rise and unemployment shrinks in SoCal do you belive they will keep up with rising rates for leveraged purchases?
7.  Do you believe in regression to mean?  Regression around housing costs and ability to pay? Or costs of renting vs. owning? Or Housing prices in SoCal to the rest of the country? (it really doesn’t matter what you belive it happens always and is a statistical fact. 
7.  If only a few of these things happen what will the result on RE be in SoCal? 

I know this is disappointing info.  The good news is that people that bought and sold RE in Irvine and SoCal durring the housing bubble likely skipped 20 years of appreciation and captured it immediately (if you bought in 1999 and sold in 2005).  These people will live a grand early retirement.  Their properties earned more than they did in many instances on a yearly basis. 

Just do the math and look forward.  Housing in SoCal has been like MSFT stock!  Growing wildly for many decades but, hits the limit of large numbers. 

At best, we will see flat numbers for 5-20 years from her as rates rise and incomes slowly respond. 

For instance, I’m getting ready to lease a condo in HB that costs me $2700/month but, at 4.5% rates it costs me 3600/month to own.  I know this is an anectdote but, this is what you have in Irvine and desirable OC coast. 

Just think!  And PR and others just give me a business case for why prices will be higher a decade from now when adjusted for inflation?????

My .02

BD

Hah,, i love the monkeys.

I don’t think anyone can be assured that housing prices will increase. Currently the way home prices are moving, inventories are filling up and it seems that confidence is dropping faster than ever in our financial systems.  Very little points to our housing market stabilizing this year, let alone rising home prices.  I just hope that we have dissolved the bubble and are at more realistic valuations currently.