Irvine Housing Blog

Interesting idea. The substitution effect should cause serious vacancy problems if TIC is attempting to get rents higher than the market will bear. Since they are planning on building even more apartments, they must not see this as a problem yet.

Of course, they may be building more apartments simply because they have the money and there isn’t anything better to plow it into. Like many of the half-empty commercial buildings around town, they may figure vacancy isn’t a problem and they will just wait for the market to come back.

TIC has a near-monopoly (but not 100% now due to places like Avalon and Calypso at the corner of Alton/Jamboree) on the big apartment complex market in Irvine.  However, I think they can only push the envelope so far on rents due to a very deep and active private condo rental market.  Many condo associations in Irvine are 30-40% rentals, especially the older/smaller units that most closely resemble TIC-equivalent housing.

“Could it be that because most, if not nearly all, apartments in Irvine are controlled by TIC, are able to hold rental prices higher than in any other market?”

No; not at all. TIC does not have anything close to monopoly pricing power. Monopolies are characterised by a lack of economic competition for a good or service and a lack of viable substitute goods. There are many viable substitutes to renting a TIC apartment, including non-TIC apartments in Irvine, apartments in nearby cities, lower-end condos in Irvine (both rentals and owner-occupied), etc.

Thank you for your post and your insight. I always like when lurkers provide their astute observations.

That is a shocking rent increase. The landlord must be pretty certain a new tenant can be found because that much of an increase would motivate anyone to leave.

The HOA fees are included in all my cost of ownership calculations, and they do often make the difference between a good deal and a bad one. Most wouldbe buyers don’t notice this fee until they apply for a loan and get their good-faith estimate back from the lender. Many are shocked at their real cost of ownership.

HOAs are a major hidden liability in California. HOA liens do not survive a foreclosure sale, so when a significant portion of owners go delinquent, there is no way for the HOA to recover its costs other than to assess the existing owners who are paying. Most of these problems will remain hidden as most HOAs will drain their reserves and underfund for necessary future improvements. As some point, when full dues-paying ownership is restored, I expect many of these HOAs to make large assessments.

CMNewbie-

You are correct that association costs can be quite significant for Orange County condos—and those costs are not included in the “own” index.  Property taxes are also not included in the “own” index.  The idea was to get a quick cut at the relationship between the mortgage payment and interest rates relative to rent.  A more detailed model should indeed include both property taxes and association costs.  The distortion is not as big as it seems because the “own” index is normalized to year 2000, and that baseline also lacked association fees.

I’m surprised to hear that your landlord proposed a 15% increase in rent, though it could be justified if you are well under-market in your present lease.  I’m hearing mostly ~2-4% as the norm, which is near the historical averages and reflects the low-growth economy.

A 15% increase during the worst recession in decades is beyond insane, either you are getting way below market rent or they are greedy bastards (probably the second).  They must be certain that they will fill the vacancy asap if you decide to leave.

Large monopolies like TIC can engage in this sort of collusion, that’s why I don’t like renting from organizations such as this.  The rents will just keep rising unless a vast majority of tenants pack up and leave.

Hi Costa Mesa,
I’ve owned in two condo complexes, and I can tell you first-hand that your worries are well-founded. Both have had egotistical, immoral presidents who have dragged the associations through long lawsuits and unnecessary costs. One wound up in jail for various charges. Both demanded help, but when help was offered, sabotaged those efforts to keep people from seeing how bad things were in reality. One went from $170/mo to $450/mo in fees over a 15-year period. I would be very hard-pressed to ever consider moving into a high HOA situation again.  I haven’t seen any problems like that with the larger associations (e.g. Woodbridge’s $78/mo fee for all owners within its association).

“In regards to your “all-in” on Vegas… that’s only for cash-flow investments correct? In a still declining market, there is no positive cash flow benefit for owner occupied buyers who will see the values of their home decrease. While their cost is lower than rent, would that offset their disappearing down payment?”

Yes, I am only buying cashflow investments there. Even with the declining prices there, the algorithm is still the same: people who buy for savings over renting are still saving money. The issue becomes how long they may be trapped in the home waiting for prices to come back. The savings are huge right now, and the market is much closer to the bottom than to the top. That being said, I wouldn’t touch a high-end property there. Those prices are still cratering.

@IHO:  Nice tie in with “deadbeats”!

In terms of Irvine being more desirable than neighboring cities, I think a straight-on comparison to rent the same structure would indicate that there is a premium in Irvine relative to say Lake Forest, Tustin, and Costa Mesa.  However, I won’t feel 100% confident in that statement until there is a hedonic or other model to compare Irvine rents to Lake Forest rents (for example).

However, the data seem to indicate that this type of premium has existed over the last 11 years.  Irvine costs more now, and Irvine cost more “back then”.  So I theorize that the relative value of Irvine is not increasing over time. 

Right now, my best data point to support this theory is that Irvine rents have only increased 2.5%/year over the last 11-years.  That’s far from exceptional, and might even be under-performing relative to Orange County.

Las Vegas
The median asking price in August 2011 -  $119,000, August 2010 - $130,020. 8.5% decline. It’ll be worse in the winter.

Why is Las Vegas better than Detroit where you can find houses for $500?

Quite the opposite may happen.
People in the world will lose trust in the dollar and will start dumping it. Hyperinflation will follow, and the average salary will be $1 million.

Gee, I thought it had 3 livingrooms, and 2 bedrooms from the photo spread. 

so_scared,

The true cost-to-own would be greatly impacted by any tax consequences.  As marginal tax rates go up, all else equal, the net tax benefit of a mortgage increases.  However, by the same token, the ability of the population to pay a given level of rent or mortgage also would decline (less after-tax income). 

For lower-priced properties, the calculation is muddied by the fact that not all owners necessarily get the benefit of the full mortgage tax deduction.  Lower-end owners only obtain a tax benefit related to the incremental tax deduction generated by the itemized total vs. the standard deduction.

If the mortgage deduction were eliminated overnight, high-end prices would deflate as payment-oriented buyers rely on the tax deduction as an offset to overpaying on a nominal payment basis with respect to rental parity.  In fact, a key risk facing today’s high-end buyer is (i) the future of tax policy with respect to mortgage interest and (ii) the future of interest rates, which could dampen (or increase) buyer demand.

It’s unlikely that any changes to the mortgage policy regime would be overnight or drastic, due to the massive political “interest” in the topic.  That said, we believe the risk in the $600,000 plus side of the property market.  Targeting home loans that are over 6x the median family income ($102 for Irvine, CA) may be a palatable compromise position for policymakers.