Markets and the Sea

. . . however baby man may brag of his science and skill, and however much, in a flattering future, that science and skill may augment; yet for ever and for ever, to the crack of doom, the sea will insult and murder him, and pulverize the stateliest, stiffest frigate he can make; nevertheless, by the continual repetition of these very impressions, man has lost that sense of the full awfulness of the sea which aboriginally belongs to it.

. . . these are the times of dreamy quietude, when beholding the tranquil beauty and brilliancy of the ocean’s skin, one forgets the tiger heart that pants beneath it; and would not willingly remember, that this velvet paw but conceals a remorseless fang.

Moby Dick — Herman Melville

Wall Street financiers came up with a number of financial instruments designed to minimize their risks (Collateralized Debt Obligations, Credit Default Swaps, etc.) In doing so, they created a false sense of security and moral hazard which caused huge sums of money to flow into residential home mortgages. Like the first quote from Moby Dick above, the market participants “lost that sense of the full awfulness” the markets can inflict upon them.

For all our wisdom and collective experience, none of us knows what the markets will do next. Like an ocean current or a raging river, a financial market charts its own course. It is fickle and feckless and flows without regard to our hopes and dreams. To forget this fact is to book your financial passage on the Edmund Fitzgerald (Link to great music video).

The ebbs and flows of financial markets are meaningful to us, but in reality they are just movements in price; nothing more. Price rallies make homeowners blissful and renters bitter, while price declines make homeowners gloomy and renters gleeful.

Sub Prime Move Up Chain

These feelings and emotions are independent of movements in price. The market just moves, that is all it does. It is benign, yet dangerous; it is indifferent, yet demonstrative; the market is a paradox which me must simply accept.

It has been argued — convincingly in my opinion — that the health of a real estate market starts at the bottom of the food chain. Like the plankton in the sea, the entry-level buyer is the base of the real estate food chain. If the organisms that make up the base of the food chain are not healthy, the entire ecosystem is in peril. So it is with our real estate market.

In several posts I have talked about the complete lack of sales at the low end of the market. It occurred to me I haven’t profiled enough of these properties to show just how bad things are. Today I am going to profile three properties in “The Lakes:” a severe rollback, a bank REO and a peak buyer hoping to limit their losses. Enjoy…

79 Lakepines Front 171 Streamwood Inside

Asking Price: $270,000IrvineRenter

Purchase Price: $340,000

Purchase Date: 12/15/2005

Address: 79 Lakepines, Irvine, CA 92620

1st Loan $255,000

2nd Mtg. $51,000

Downpayment $30,000

Beds: 1

Baths: 1

Sq. Ft.: 934

$/Sq. Ft.: $289

Lot Size: 763 sq. ft.

Year Built: 1977

Stories: 2

Type: Condominium

View: Water

County: Orange

Neighborhood: Northwood

MLS#: S488313

Status: Active

On Redfin: 86 days

From Redfin, “Charming, Spacious two story Loft Bedroom home in resort like Lakes community. Best location. Tranquil Back patio faces serene stream and water features. Cozy fireplace, Catherdral scraped ceilings, Skylight, Garden Window, new lighting fixtures, designer paint, Newer appliances including stove, microwave, dishwasher. Walk in Closet in bedroom. Turnkey.”

.

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Look at this depth of this rollback: 20% off; even at this asking price it is still on the market after 77 days. Further price reductions will be necessary before this sells. If they manage to get the asking price, and assuming a 6% commission, this seller and their bank stand to lose $86,200 — that is 25% off a 2005 price!

The lake, it is said, never gives up her dead

When the skies of November turn gloomy.

The Wreck of the Edmund Fitzgerald — Gordon Lightfoot.

Real estate always goes up, or so our next seller hopes…

171 Streamwood Front 79 Lakepines Kitchen

Asking Price: $241,500IrvineRenter

Purchase Price: $191,826

Purchase Date: 6/11/2007

Address: 171 Streamwood, Irvine, CA 92620

1st Loan $178,500

2nd Mtg. $31,500

Downpayment $0

Beds: 0

Baths: 1

Sq. Ft.: 415

$/Sq. Ft.: $582Knife Catcher Award

Lot Size: –

Year Built: 1977

Stories: 1

Type: Condominium

View: Trees/Woods, Water

County: Orange

Neighborhood: Northwood

MLS#: S497917

Status: Active

On Redfin: 17 days

From Redfin, “Enjoy the sounds of meandering streams from one of the least expensive condos in all of Irvine. This studio unit is on the ground floor within a great community close to shopping, dining and transportation. Numerous association amenities including 2 clubhouses, 2 pools, 2 spas, and tennis courts make this a great place to live!!!”

The obligatory three exclamation points…

.

.

Look at this sales history:

Sales History

Date Price

06/11/2007 $191,826

03/21/2005 $210,000

04/16/1998 $57,500

This was a 2005 rollback foreclosed on by the Bank of New York in early June. Does anyone want to bet this will sell for less than the June sales price? And look at the 1998 price. If you calculated its rental value — and at 415 SF, it is only useful as a rental — the 1998 price is probably not far from is real worth.

Back to the behavior of lenders and our moral hazard:

By this, he seemed to mean, not only that the most reliable and useful courage was that which arises from the fair estimation of the encountered peril, but that an utterly fearless man is a far more dangerous comrade than a coward.

Moby Dick — Herman Melville

3 Lakepines Front3 Lakepines Inside

Asking Price: $399,999IrvineRenter

Purchase Price: $427,000

Purchase Date: 3/2/2006

Address: 3 Lakepines, Irvine, CA 92620

1st Loan $340,800

2nd Mtg. $85,200

Downpayment $1,000

Beds: 2

Baths: 1.5

Sq. Ft.: 1,202

$/Sq. Ft.: $333

Lot Size: –

Year Built: 1977

Stories: 2

Type: Condominium

County: Orange

Neighborhood: Northwood

MLS#: U7003339

Status: Active

On Redfin: 1 day

New Listing (24 hours)

From Redfin, “Very spacious and open floor plan. Combination kitchen/dining/living room great room. Private patio area for a small animal, and or bbq area and relaxing. Vaulted ceilings with sky lights. Association area includes two pools & spas, tennis courts. Lakes and streams running all around complex.”

.

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Given the whopping $1,000 downpayment, I am not surprised this would be millionaire is walking from this stellar investment. If this property sells for its asking price, the seller bank stands to lose $51,000.94 after a 6% commission.

The Captain wired in he had water coming in

And the good ship and crew was in peril

And later that night when his lights went out of sight

Came the wreck of the Edmund Fitzgerald.

The Wreck of the Edmund Fitzgerald — Gordon Lightfoot.

75 thoughts on “Markets and the Sea

  1. irvinesinglemom

    IR: you truly outdid yourself on this post. With the sad, beautiful Gordon Lightfoot song playing in the background, I read about the pathetic Lakes condos (what else can you call these ugly old closets?) and the ridiculous amounts of money involved…This post should be required reading for the many, many intelligent but terribly ignorant people who still don’t recognize the insanity for what it is.

    Keep up the brilliant work, IR!
    —–

  2. Mr Vincent

    Nice work IR!

    This is an apartment complex and nothing more IMO.

    I would have no interest in purchasing any of these units – either to live in or to rent out.

    Biggest negatives:

    People living above or below in a wood-frame construction(Although the loft unit looks like it is on its own…not sure).

    Carport parking. That right there is a deal breaker for me.

    Probably a very large % of rentals in the complex.

    HOA dues are pretty high considering the living space you are getting. Is it worth to pay for the nice common area and have to live in a box?.

    Some might think that if prices came way down that places like these would be good to buy for investment income. My number one rule for investing in real estate is: Never buy a place that you yourself would not live in, because some day you might have to.

  3. Bill Jones

    Irvine Renter…

    Great post! I hope that some day someone will write a simple explanation of what Wall Street has done to the mortgage business. Once upon a time a mortgage was a simple thing. It was a promise from one party to pay to another party a specific sum of money over a certain period of time. Then Wall Street got a hold of these mortgages and all hell broke lose. There were AAA pieces and AA and A pieces and B pieces, and master servicers, ratings agencies, etc.

    I am in the loan business and I was in a meeting recently where two execs. were talking about the sale of mortgages. I am a reasonably intelligent person and I could only follow about 25% of what they were saying. It was almost like rocket science. The thing is, I think the rocket science talk obscured the reality that anyone who loans money on real estate is taking on real estate risk. No getting around that.

    What if the same Wall Street guys who carved up the mortage business had designed the wheel? Well, different parts of the wheel would be owned by different people, and would have varying degrees of reliability. An entirely different person would be responsible for maintaining the wheel, and parts of it could be bought and sold at any time.

    Irvine Renter, do you think the market for one bedrooms has bottomed out? I know the $275K one is kind of crappy, but it’s cheap. How much lower do you think it could go?

  4. IrvineRenter

    Rent * 160.

    If you could rent this place for $1000 a month, it would be worth about $160,000 to an owner/occupant. For an investor it would be worth about $120,000.

    When the mental fog of the rally clears, people will go back to the basics of cash flow and financial analysis. When they do, they will see just how ridiculous the bubble prices were.

  5. Ochomehunter

    Great Job again.

    I have no mercy for any of these flippers as because of these flippers, I have been priced out of market for the past years. They continue to get burned yet another moron comes along thereby prolonging the fall.

    Fed should look into these things before deciding rate cuts in the future. If they do cut rates, these flippers will thrive again, the whole point on new downfall should be to teach a lesson to wall street, brokers, banks, and greedy flippers, let them go belly up! Market needs to correct to norm with no flippers or money makers, it should strictly become a market for people who really need shelter and not an immediate cash flow investment.

  6. Darin

    The Lakes … Edmund Fitzgerald on the Great Lakes. If only it was that simple, yet the mortgage market does indeed look to go down much the The Big Fitz did. The Edmund Fitzgerald was at the time the biggest ship on the Great Lakes. Time (17 years of service) and weather finally broke her.

    Time and weather will break the mortgage market as well. In a couple of years, it will be lying on the bottom unable to be raised just like The Might Fitz.

  7. carl

    Mr. Vincent,

    I have never heard your number one rule of real estate investment, but it sounds quite wise. I have heard of people purchasing real estate investments sight unseen. Amazing.

  8. Halfnote19

    As always your posts are very good. Just one thing 171 Streamwood is not in The Lakes complex, its in The Springs condo complex.

  9. Kurtyboy

    As soon as I clicked on the video, and the ballad began, I was reduced to tears. The song has played in my head many times over the years, as it takes me back to a maritime tragedy that at its heart, came about because of greed. It was not the Wreck of the Edmund Fitzgerald, but the loss of the A-boats, two crab fishers of a fleet of five based in my boyhood hometown, Anacortes, Washington. In a single day in the winter of 1983, the fishing vessels Altair and Americus capsized and sank in the Bering Sea with the loss of fourteen fishermen.

    It remains the worst fishing disaster in American history. I knew most of the men lost that day. It was the first time I ever saw my father break down and sob uncontrollably. My hometown has never been the same.

    The two-year Coast Guard investigation found that the boats had been too heavily laden with crab pots as they headed out for the infamous rodeo—a competitive race that Alaska’s fisheries managers then thought was the best way to exploit the resource. A single quota was set for the entire fleet, and as soon as the number was reached (usually in a matter of days), fishing for all vessels ceased. It didn’t matter if one boat, through luck and cunning, got the entire quota for itself, or it was distributed equally among all of the fleet. Crew-members in my home town would often come back with pay-settlements of forty or fifty thousand dollars—and this was the late 1970’s and early ‘80s. Everybody wanted to be doing what they were doing.

    The rodeo system encouraged risk-taking of the highest order. More pots meant more crab. But how could a skipper get more pots onto a boat that had hit its load limit, which was easy to see from the “boot-striping”, a line of paint around the hull? (When the boat was loaded, the stripe touched the water.) In the cases of the Altair and the Americus, the problem was solved by painting the stripe higher on the hull.

    When the weather turned rough, staying in port was not an option. The opener was not a negotiable date. So the two craft ploughed into the icy swells of the Bering Sea, and so far as we can tell, sank within fifteen minutes of each other. They capsized because of their load, and dropped to the bottom in so quickly that they didn’t even get a Mayday call off. In spite of one of the hugest Coast Guard search and rescue operations ever mounted, not a single body was ever recovered.

    The disaster was preventable. Implicit in the way the boot-striping had been properly applied was conventional engineering wisdom. The owner of the boat, the skippers, and the boatyard willfully ignored conventional wisdom in order to multiply potential profits. Think of it as leveraging capital—moving a stripe is a helluva lot cheaper than buying an extra boat.

    A rodeo system, with loose controls, that encouraged inordinate risk-taking. Sound familiar? No matter how good your seamanship skills are, some days it’s just wiser to stay in port. The weather cannot be controlled or timed any more than the market. Some things are bigger than all of us.

    To find out more about the loss of the A-boats, read the book Lost at Sea: An American Tragedy by Patrick Dillon. (Dillon was about three years ahead of me in school, and I recall that he was a pretty good fly-fisher. He went on to Harvard, and I believe he still maintains a close friendship with a wealthy software guy named Gates)

  10. patience2007

    I still worry that instead of purchase prices coming down to line up with rent prices, that rent prices will go up to real estate prices – or maybe the two will meet in the middle.

    I am paying $1950 to rent my house. (The rent just went up $150/month last month.) It’s a 3 bed, 1400sqft house. That multiplies to a $312,000 house. I’m still not sure if I’d pay that much for this house. The owner purchased this house for $208,000 in 1999. 3% per year puts it at $263,000.

    But this is still about the cheapest rent available in the area for a house. I can’t imagine that rents are ever going to come down. I keep expecting people who can’t afford to live in their houses, and can’t afford to take the loss at sale, will try renting their houses out. If enough people try doing this at the high rents it would take to get close to break even each month, won’t it have the effect of raising the rent in the market?

  11. Halfnote19

    171 Streamwood (The Springs complex) is a studio on the bottom floor. They have neighbors on both sides and on top.

    The Lakes complex have garages and carports, The Springs have carports.

  12. FamilyGuy

    Patience, you bring up a very interesting point. This is one of the arguments of the bulls.

    IR keeps touting the fundamentals of the rent vs. own equation and how the purchase price must come down dramatically to restore equilibrium between the two alternatives. But on the other end of the spectrum (and just for illustrations purposes) the rents could come all the way up to balance the equation as well.

    This is not a likely scenario because household incomes would not support such dramatic rent price increases, but I think it is reasonable to assume that there will be a combination of the two ends giving way to re-balance the equation.

    In case you haven’t all already seen it, see Lasner’s post for today, it looks like this is already playing out:

    http://blogs.ocregister.com/lansner/

  13. No_Such_Reality

    The problem with rents is similar to the problem with listing prices. Everybody sees the outrageous listing prices and assumes that’s the market.

    Rents will stabilize or drop. I doubt you will see that in any rent report since the report only publishes the asking price of the major complexes.

    As of the 2005 census survey, Irvine had 3.9% housing vacancy, which is fair. Costa Mesa had 4.7%, Newport Beach 14.1%, Mission Viejo 3%, Lake Forest 5.3%, etc.

  14. biscuitninja

    Patience,
    You won’t get super high rent increases. People just can’t afford them, so if you want to have high vacency rates, then do. Otherwise there is no mechanism for people to a portion of excessive rents (they are the fundemental barriers). Don’t get me wrong, rents will rise, but not uncontrollably.

    Bill,
    there are several things to consider when buying a rental. First and foremost is that you have to find a nice place that people WANT to rent from, then price it accordingly (I like to price it 5-10% below market, this way I can pick and choose who I want to rent to). Second figure out what type of cashflow do you want (be sure to be as comprehensive with costs and data, also be objective with the data as much as you can, don’t lie to yourself).
    With that said there are several things you can do to arm yourself against a depreciating asset. With rentals you can depreciate them (from your taxes) up to 10% per year, but realize that doing so means that when you sell your house (and if it is for a BIG profit) you will need to pay back that depreciation….
    Anyways good luck
    -bix

  15. buster

    A buddy of mine owns a 1-bed, 1-bath on Streamwood. He gets $1,125 per month as a rental. 1,125 * 160 = $180,000 (not subtracting taxes or HOA from the gross rent of $1,125.)

  16. No_Such_Reality

    If you tour open houses or the MLS, you see a significant number which are sitting empty. Where the rubber hits the road is in the following numbers, Irvine has 60% home ownership rate in 2005, it had 2700 empty housing units, 66000 occupied units and 28,000 renters.

    That means empty housing is equal nearly 10% of the renter pool.

  17. Incredulous

    When you’re tempted to buy property, read this instead:

    Mighty Fitz: The Sinking of the Edmund Fitzgerald
    by Michael Schumacher

    It’s a wonderful book that chronicles events leading up to and including the day that the Fitz sunk – and what has happened since. I felt that I was on the boat with those guys while reading it.

    It is a great metaphor for today’s housing market – and will give you a chance to come back to your senses before you purchase.

    Tnanks IR!

  18. IrvineRenter

    Thank you for that touching story. I did not know of any of these events before your post.

  19. Live And Work In Irvine

    My brother almost purchased a 1 br, 1 bath in 2005 for 415K, but I talked him out of it.

    He still paid 440K for a 2 br 1 bath in Tustin Ranch, but that complex blows away this one. At least I convinced him to get a 10 year I/O and he makes good money.

    My stepdaughter lives in a unit at the Lakes. I believe they pay $1,200 for a unit that is 700 square feet.

    This place is really run down and needs quite an upgrade on the grounds.

  20. oc_fliptrack

    I’ve always enjoyed watching these Lakepines units. These are some of the least desirable properties in Irvine, and I’d expect declines to show up in an area like this before anywhere else in Irvine.

    The most common 2br floorplan over there seems to be the 2/1.5 1204sq ft with no garage. I’ve been watching these things change hands in the low 400’s for the last two years. I hate to say it, but there’s been little meaningful and sustained depreciation trend over there. 3 Lakepines at $399k is encouraging, however.

    These things are fetching some 250x market rent. I don’t see the appeal.

  21. Live And Work In Irvine

    Thank you for sharing that story.

    I recently watched a show on the Discovery channel called Deadliest Catch about crab fisherman. It looks like one of the most dangerous jobs in the world.

  22. FamilyGuy

    I’m having trouble posting today, anyone else experiencing difficulties? Maybe this site doesn’t want to hear what I have to say! ; 0 )

    Was trying to reply to Patience, to agree with your assesment that rental increases will play a role in re-balancing the rent vs. own equation. As long as employment level remain healthy, rents will continue to escalate. Particularly in light of the fact that a lot of landlors have new mortgages to pay for.

    In case you haven’t see it already, take a look at Lasner’s blog for today. It appears there is anecdotal evidence this is happening. Housing CPI (which is based on rents) was up 5.5% in all of 2006 and is up 6.0% in the first half of 2007 alone.

    http://blogs.ocregister.com/lansner/

  23. Kurtyboy

    The Discovery Channel show is a dandy, and I become addicted to it. Many of the people you see on that series are from Anacortes, and at least one is a relative of the owner of the A Boats. The rules have changed, and the risks are lessened, but crabbing is still horrendously dangerous–whether in Alaska, Washington, or Oregon. Each year more fishers are lost at sea trying to cash in on our collective taste for seafood.

    I just found this recap of the a boat tragedy written by a reporter for my hometown paper, Nancy Wallbeck. (She used to rent an apartment from my best friend…) I don’t mean to hijack the thread–I just thought that since I got started, I ought to fully honor the memory of these fellows.

    “The men who died, on the Americus: George Nations, 43; his son, Jeff Nations, 19; Brent Boles, 24; Larry Littlefield, 29; Paul Northcutt, 24; Victor Bass, 19; and Rich Awes, 20; on the Altair: Ron Beirnes, 47; Lark Breckinridge, 24; Troy Gudbranson, 21; Jeff Martin, 23; Tony Vienhage, 27; Brad Melvin, 26; and Roy Harvey, 23.
    Later, questions would be raised about both boats’ stability and whether modifications to the original designs doomed the craft. But in early 1983, overwhelmed and grief-stricken families and their community tried their best to cope with an unthinkable event — one that took away fathers and brothers and many young men of a single generation.

    Anacortes is a town that has it benefited from the sea but also suffered greatly because of it. When the crowd at the downtown vigil moved on that tragic week, it was toward the Seafarers’ Memorial at Cap Sante Boat Haven. There a candle was lit, in hopeful prayer, at the base of a memorial that already bore 96 names, losses inscribed since 1913.

    The Americus and Altair crews now have their own memorial, alongside the W.T. Preston snagboat and in a garden with flowers and benches and a picnic table. The monument is beautifully plain but sturdy, with the names listed clearly for anyone who might happen by and wonder about these Anacortes fathers and sons.”

  24. IrvineRenter

    Rents cannot increase at a rate faster than wage growth for any sustained period of time. If they did, nobody could afford to live here. Rents are much more tightly tethered to income than home prices because you must pay rent out of current income, and you cannot use equity to bid up rental rates like you can home prices.

    Unless there is a dramatic increase in everyone’s wages, rents will moderate and not bring balance to the fundamentals equation.

    If anything, rents are likely to decline as the artificial constriction to supply created by flippers holding empty properties stops, and the increases in unemployment in the REIC start to mount.

  25. IrvineRenter

    From the thread above: Yikes!

    Here is a breakdown of the amount of loans resetting through 2008 (source: JP Morgan). This is frightening. These numbers are approximate. It will be a hairy 2008! There is still an incredible amount of business out there even if only 25% of these can refinance.

    March 07 = 6 billion $
    April 07 = 7 billion $
    May 07 = 9.8 billion $
    June 07 = 10 billion $
    July 07 = 12 billion $
    Aug 07 = 17.5 billion $
    Sept 07 = 18 billion $
    Oct 07 = 20 billion $
    Nov 07 = 23 billion $
    Dec 07 = 22.5 billion $
    Jan 08 = 25 billion $
    Feb 08 = 25 billion $
    March 08 = 23 billion $
    April 08 = 22.5 billion $
    May 08 = 24 billion $
    June 08 = 18 billion $
    July 08 = 20 billion $
    Aug 08 = 25 billion $
    Sept 08 = 23 billion $
    Oct 08 = 23 billion $
    Nov 08 = 23 billion $
    Dec 08 = 20 billion $

  26. Fake Wealth Created

    Must be nice to hear your roommate oh — I mean neighbor vacuuming in the upstairs unit at 3AM. And all this for only $400 per sq ft?

    Oh and what about guest parking? I guess you could park across the street at the Vons and hope you dont get towed.

  27. Iblis

    Comments? Sure. Since when has personal responsibility stopped anyone from demanding a tax-payer financed bailout? Build your house in a hurricane zone, get bailed out by the Feds when the hurricane wipes you out. Get a suicide mortgage, get bailed out by the Feds when it’s time to pay the piper. They’ll probably get it too. Nothing new here.

  28. FamilyGuy

    You make very good points.

    But, it is possible for rent to rise faster than wages for some period of time – due to the inelastic nature of demand for housing.

    As for declining rents I really don’t think that is likely. We have alerady seen dramatic increases in the supply of houses for sale and yet rents have only gone up. And though layoffs in the RE sector have been troublesome, there are far too many alternatives for empoyment in the financial sector within a reasonable commute of Irvine for this to have any measurable impact.

    So while purchase prices are coming down, and rental rates are increasing, the gap between the two choices is closing.

  29. No_Such_Reality

    “But, it is possible for rent to rise faster than wages for some period of time – due to the inelastic nature of demand for housing. ”

    Yeah, that has been the last five years…

  30. Jim Jones

    These units are very similar to the one I rent in HB. Large mega Apt complex “converted” to condos. In the state I came from Condo construction codes were different than apt construction codes IE required dead space in walls separating units, etc. It seems like you need to spend at least 500k in order to get into a marginally decent condo. Everything under 500k screams “warmed over Apt.” I cannot imagine being financially tied to one of these dogs. Anyways, here’s my question: Housing in many ways seems to be influenced in a significant way by emotions and subject assessments. Is there any possibility that the masses will finally say enough! If all I can get for under 500k is one of these lame condos I’m just going to rent forever. I for one refuse to buy something for which I will never have any pride of ownership. I wonder what portion of the renters out there feel the same way.

  31. T.J.

    Let me just say that this is the best real estate blog ever! Unfortunately, we are set to close on a house a week from Monday. At least it isn’t in Irvine – it’s in Nashville. It is for our mother-in-law to live in and it will be perfect for her (she would never live in a rental), so not an investment by any means. I just hope we break even if we end up selling it in 10 or 15 years. Once again, thanks and keep up the good work!

  32. T.J.

    patience – I don’t think that is how supply and demand works – if more people decide to rent out their houses, supply will go up and rents will go down, not up.

  33. RW

    FamilyGuy-

    You’ve butchered the CPI stats on Lansner’s blog. The 6.0% increase is for last year (January through December 2006) — the 5.5% increase is for a more recent 12 month period (July 2006 through June 2007). That tells me the rate of rent increases is slowing down, not speeding up.

  34. carl

    One thing which I’m sure is understood by all on here, but not mentioned yet, is that rents are capped by the income of the area. This is because you cannot finance rent, you must pay it out of current income, therefore the average rent simply cannot exceed the populations ability to pay. People will move away and the rent will decline. The bubble happened because of financing. There cannot be (and there obviously is not) a rent bubble.

  35. Darin

    Politicians make horrendous businessmen. Everything Iblis said too.

    Japan spent many years languishing because there was a referendum against recycling the carnage. The U.S. thinks it’s a good idea to keep airline carriers afloat even though they should have had the plug pulled and their capital recycled.

    The types of businesses and markets that benefit from government assistance are those with steep barriers to entry AND no competition. Even then, the market often moves slower and more effectively than the 6 and 2 year terms of congressmen.

    Financial instruments can be created, marketed, and sold in a very short time with a relatively small barrier to entry. Additionally, helping the ignorant sets up the exact moral hazard that IR talks about in the original post. If I don’t have any skin the game, and will get bailed out (whether I am a bank or borrower), why worry about the consequences.

    IMO, let them rot and let the vultures do their thing. The blighted neighborhoods, general recession, increased unemployment is enough for me to take.

  36. lendingmaestro

    The 10 year IO is a good product. Unfortunately most people did 5 year IO’s or worse, the dreaded option arm.

    Borrowers fail to realize that options are set by the bank, and the bank reserves the right to take your house!

  37. lendingmaestro

    Considering the massive foreclosure tsunami thatis coming, I believe the demand for rents will skyrocket. Housing requirements always increase just due to population growth.

    If less people are buying, and the ones who already bought are getting evicted, we’ll see tremendous increases in the demand for rentals. An increased demand should decrease the supply of rentals in theory, or am I wrong? Banks are going to massive amounts of REO’s on the books that they can’t rent. All of these vacant homes then cannot be considered in the rental supply.

    Considering these factors, as well as inflation/cost of living increases, I can see rents rising

  38. graphrix

    FamilyGuy,

    First let me say that I sincerely appreciate your comments. It is nice to see someone who is on the bullish side willing to comment and have a rational discussion. I hope you continue to post regardless of the flack you may have to endure. As you will notice if you are respectful which you have been you be treated with the same respect from the bears.

    Speaking from the perspective of an investment property owner the amount of rental rate increases you see in the media is not a true reflection of reality. Most of what you see is from large complexes like IAC on the market data. At IAC rent increases were relatively flat up until about 2005 so they are due for an increase and an increase in demand. However what you don’t see is the property owners of smaller complexes and the increases they pass on to current tenants. If you are smart and have good tenants which I have I only raise rents 1-2% a year.

    Not only that but I pray right now that none of my tenants leave right now. I have talked to a few other owners who have available units and they all complain that the prospective tenants have the worst credit they have seen in years. The other fear I have is what happened in 2002 when I had a tenant leave during the tech bubble. I had priced my unit below market and had to lower the price three times in three months to finally get a qualified tenant. The amount of money I lost for the three months of vacancy would have taken three years to make up for if I rented it at the original price. The current market is very similar to this right now.

    With the job losses in the RE world it is not a good sign for the rental market. It is about supply and demand but it is also about the quality of the prospective tenant. Two years ago one of three prospective tenants were high quality and now it is one in eight and it might go as high as ten. This isn’t just fluff from a bitter bear but the real world truth from the streets.

    I recommend that you read my job analysis post https://www.irvinehousingblog.com/2007/05/23/the-real-jobs-situation/ and determine if the RE job situation is overblown. I did a quick calculation on the amount of gross revenue from the amount of RE sales transactions using 5% and that is a loss of over $1 billion in gross revenue loss in 2007 from 2005. I figure that 5% is low and could be as high as 10% but either way a big chunk of revenue is gone.

    As for your comment not showing up the spam filter can be picky. I have been blocked at least three times and I am a moderator here. We would never block a comment unless it was really out of line. I know I try my best to unblock any reasonable comment as soon as I see it.

  39. IrvineRenter

    lendingmaestro,

    I think you might be overlooking the impact of what happens to the house of the evicted owner. This property is either converted to a rental (which increases supply) or it is purchased by a renter (which decreases demand).

    The only way rents can increase is if there is an influx of people into a market (with high salaries) at a rate greater than the ability of the market to provide new supply. This creates a temporary shortage until new supply is brought to market.

    I would like to note that if the local economy is not destroyed by the deflating real estate bubble (a big if), then apartments will do well, and fundamentals will catch up to real estate prices quicker — perhaps in 22 years instead of 27. 😉

  40. IrvineRenter

    You have touched on the very reason the low end of the market collapses first — nobody actually wants to own these things. The only purpose for owning an apartment-like condo would be as an investment. Since the cashflow value is about 1/3 to 1/2 of its peak pricing, only stupid specuvestors and bubble maniacs were purchasing these things. Once they stop going up in value, there is absolutely no reason to own one. That is why the prices of units will drop very hard, very fast.

  41. lendingmaestro

    Wages earned is an important part of it. If the demand for rentals increased and incomes did not decrease than rental rates would increase. However, I agree with you that even if supply shrinks, people won’t be able to afford rent increases. In order for landlords to attract renters, they may have to lower rent prices.

    But if the Irvine Company tries to raise my rent again, I’m coming looking for you! LOL

  42. FamilyGuy

    I appreciate the kind words and enjoy the blog very much. From either side of the fence, I think it is interesting to watch and fun to talk about.

    To all the moderators- keep up the great work!

  43. MMG

    I dont know about everyone but IAC actually raised the rent this year by 35 bucks, I think if I were to negotiate I propably cancel that raise out. They have been struggling to fill units in my complex.

  44. Major Schadenfreude

    I didn’t discern any calls for a huge government bailout in Clinton’s proposal. (Perhaps I missed it?)

    She just wants to prevent another sub prime mess by increasing the clarity of the loans and counseling people.

    Perhaps no one told her that they aren’t issuing sub prime loans any more. A typical politician trying to fix a problem that no longer exists. The legislation would have been more effective 5 years ago, but then the industry was dumping money into the politican machine, so politicians would never have addressed it. They can pretend to be working for John Q. Citizen by addressing it now, though.

  45. SDChad

    I think I have told my wife the same thing. As much as I would like to own my own place again, I will not buy anything here (San Diego) if there is no value in it; especially when rent is cheaper. To this end, it seems that at some point, buying will make sense again someday, but who know’s how soon that will be.

    One thing I have noticed is that people in SoCal are clearly delusional and just as stupid as the rest of the country, but they have gotten it into their heads that $500k for a condo is reasonable. I still hear about people at work buying houses. This is going to be long trip down unless something drastic happens that forces these people to stop buying into overpriced homes.

    I don’t think that a lot of people understand that you can actually rent a SFR! They seem to think that the only way that you can be in a house is to buy one. They also seem to think that in order to be in a certain school system, they have to buy a house there (my wife works with one of these). Mass stupidity/ignorance abounds and I almost succumbed to it, but I started doing my research because things didn’t make sense.

  46. n cty

    IR-II enjoy reading your well-written blog. I have another song suggestion for you that may work on one of the blogs–Police – ‘wrapped around my finger’. A few verses in there may aptly apply.

  47. Renter

    One thing that doesn’t seem to be mentioned is how multiple families are crowding into smaller and smaller spaces. People will always need a place to live and if rents are 2500 a month and a person can only afford 500 a month, it only means that that he will share a 2 bedroom with a minimum of 4 other rent-paying people

  48. graphrix

    I am just happy that we finally have someone on the other side of the fence who appreciates the blog and is willing to have a reasonable discussion. I have tried many times to get some of bulls who comment on here to back up their opinion and add value to the discussion. Most just get frustrated and leave without ever adding anything of value. Then they go off on a diatribe on Lansner’s blog.

    When we have comments from you you add value and open up the discussion. We need this otherwise the blog would just be a constant drone from the bears as IrvineRenter likes to say.

    By the way did you check out my jobs analysis post? I double checked and I didn’t see any comments by you on there. IRCC you just recently started commenting here. I would really like to hear what you think.

  49. IrvineRenter

    Or how about this one for my next deep rollback:

    I have stood here before in the pouring rain
    With the world turning circles running ’round my brain.
    I guess I’m always hoping that you’ll end this reign,
    But it’s my destiny to be the king of pain…

    The Police – King Of Pain

  50. n cty

    Unless we have an oversupply of housing relative to the population…

    Rents will go up just as house prices will go down. They will approach somewhere in the middle, but don’t look for equality between owning costs and renting costs. It will always be more expensive to own than rent if you look it in present worth. You have to expect at least 5-10 years of owning before you can ‘break even’ on owning expenses vs rent collected.

    5-6% or more per year rent growth seems pretty reasonable given inflation pressure esp. as credit tightens and renters don’t have options.

    Rents have been held low be the extreme buying pressure due to cheap mortgage credit. Everyone who was going to buy has bought.

    In my opinion, this has given me less quality and more transient tenants because the good ones bought. Before I could get a professional working couple where recently it has been someone who would rent for one year and buy.

    Now, the opposite cycle may be happening for a while.

  51. angryowner

    I have to tell you the rent for a studio unit is easily around $1000/mo. I’m telling you this from my own experience, I owned 3 units (studio and 1 Br), for a combined total of 28 years (adding 3) The total combined vacancy I had for all 3 units in the 28 combined years. is 30 days. (total for 3 units), this even include the time when it was waiting for escrows to close. Always, the old tenant would help me with showing after giving the 30 days notice, and the new tenant will be in the day after the old tenant moved out.

    I already sold mine, so I am not trying to encourage buying at the Spring. just want to tell everyone that nice people (like my tenants) do live there, and to me, those are great investment.

  52. IrvineRenter

    They are a fantastic investment — at a price with a positive cashflow. Unfortunately, prices are still much higher than that right now.

  53. IrvineRenter

    “You have to expect at least 5-10 years of owning before you can ‘break even’ on owning expenses vs rent collected.”

    The only place on earth were people believe this is California. To me it is not a prudent investment model to run a negative cashflow. The only possible exception to this might be commercial/retail properties where you want to “crowd out” your competition by being first to the market.

  54. awgee

    “Borrowers fail to realize that options are set by the bank, and the bank reserves the right to take your house!”
    What options? What do you mean the right to take your house. Don’t you have to default? Doesn’t the property have to go through foreclosure?

  55. awgee

    I think the housing component of the CPI is based on what is refered to as “rent equivalent” and I think it is not actual rents at all. I am unsure of what it really is, and am unsure if anyone understands what it really is. But I am fairly sure it is another made up number that has nothing to do with reality.

  56. No_Such_Reality

    5-6% or more per year rent growth seems pretty reasonable given

    Prior to buying my home, I lived in a rental, in 5 years, I had 0 increases. After selling my place, I moved into a rental. My landlord asked to renew the lease for another term, I said no. I’m still there, the rent is still the same.

    Your 5-6% going forward is completely unrealistic given the increasing vacancy rates and return of units to the rental pool that were removed by speculation.

  57. patience2007

    I figure that is also a partial reason for the housing prices in So Cal. I know in my cheap ass neighborhood, there are a handful of houses that have more than one family living in them. These people can help drive up prices for rent and purchase.

    “I can’t afford a $400k house, but if I can get my buddy’s family to move in with me I can.”

  58. No_Such_Reality

    Try Kate Bush’s “The Dreaming” the whole album… 🙂

    Okay, maybe just “Suspended in gaffa”

    Out in the garden
    There’s half of a heaven,
    And we’re only bluffing.
    We’re not ones for busting through walls,

    But they’ve told us
    Unless we can prove
    That we’re doing it,
    We can’t have it all.

    Of course, a nice upside down NOD may like “Get out of my house”.

  59. Cayci

    My husband and I got there last year while house shopping. I couldn’t imagine living in anything we could reasonably afford. They were all small, ugly, dirty, no parking, bad neighborhood, etc. After talking it over with parents and each other we decided that it was better to keep renting in our safe, relatively big townhouse and have extra money to travel and buy toys (and SAVE) than move into a place that would make us unhappy every day.

    I just isn’t worth it.

  60. lendingmaestro

    Yes, I was just being silly…playing with words. Some loans are callable and it is up to lender how many late payments they allow you to make.

  61. lendingmaestro

    The theory of repetition. If you hear something enough, it becomes fact. If you see people wearing a new hideous fashion it may become mainstream eventually. Ahh..psychology of the masses is great, isn’t it?

  62. biscuitninja

    IR,
    As you realize its a VERY long term goal. Besides just to make things positive most lender (on a investment property) make you put a tremendous amount of money down to make it work. It just depends up on your willingness to take risk, opportunity of cost, etc. etc.

  63. lendingmaestro

    I saw the sign and it opened up my eyes
    I saw the sign
    Life is demanding without understanding
    I saw the sign and it opened up my eyes
    I saw the sign
    No ones gonna drag you up
    To get into the light where you belong
    But where do you belong
    I saw the sign and it opened up my mind
    And I am happy now

  64. Betty Black

    Better still: “Wave of Mutilation” by the Pixies

    Cease to resist, given my goodbye
    Drive my car into the ocean
    You’ll think I’m dead, but I’ll sail away
    On a wave of mutilation, wave of mutilation
    Wave, wave, wave

  65. Halfnote19

    Yea, The Lakes are right across the street from The Springs and even tho they are larger units the entire complex is very run down, the grass is dead, the lakes are dirty. I don’t know what their HOA fees pay for.

  66. n cty

    Owning expenses include considerably more than P&I. This year on my rental–leaking skylight, new 1/2 roof, water heater, new oven, landscaping work, carpet, paint, etc. Then factor in a percentage of vacancy and property management fees.

    I didn’t buy this property with the intention of renting it out, but I kept it when we moved up in ’03. I have owned it since ’97 and are only truly making a profit now. The rent has been higher than my P&I + tax + ins payment from ’03. The rent has increased around 150% in that time.

    In the time I owned however the house has gone up alot in value (we’ll see how much is taken back). I think it has been and will be an important financial tool.

    I am obviously no real estat mogul, but I guess my point is that the decision to buy can’t always be determined by looking at a balance sheet.

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