Irvine Housing Blog

Interesting Statistic

O.C Metro Magazine, September 2011, pp 22

“O.C. Housing vacancies rise 64 percent in 10 year period

2010 Census figures show that 56,126 units were empty last year, up from 34,197 in 2000”

Anyone waiting to buy at the next interest rate peak will need to wait 10 - 20 years.

In the mean time Mortgage rates will be pushed into the 3s% and the trough will be long with prime areas still fetching $3XX+ per sq ft.

We are a few months from 2012, wasn’t today’s featured property supposed to be selling for $400,000 by now?  Those peanut gallery price predictions from yester year are hilarious.

I think people underestimated the amount of government intervention. This has turned into a long slow bleed - welcome to Japan 2.0.  I noticed Dataquick latest median number for the OC showed -6% or -7% YoY drop in OC median home prices and a -12% drop in single family homes.

As a potential buyer, I look at this and say why bother? Every year I can hold off from purchasing I save 10% (or can buy 10% more). We probably have a few more years of 10% drops don’t you think?

I just need to hold off the wife’s nesting instincts as long as possible.

IR - your blog has been an invaluable tool, every time she gets fired up from browsing Redfin or watching house porn on TV I send her here.

“In a low interest rate environment, the primary reason to buy is to save money over renting. This should be the focus of buying decisions for the next several years.”

Just curious, I am trying to figure how to do rent vs. buy for my situation (and probably many others)

If my wife and I were renting, we would be buying a minimal place (like a 1/1) to maximize savings.  However, if we were buying we would buy something bigger like a 3/2 to anticipate family growth.

For rent vs. buy should we be comparing against a 3/2 (that we never plan to rent anyways) or vs. the 1400-1500 a month of a 1 bedroom apartment?

Up til now, I have been going in the middle and been comparing buying (at least 10% down) a 2/2 vs renting a 1 bedroom apartment.  Basically trying to keep the payment close to 1000, so that the remaining H0A/taxes/etc. can cover the remaining 400-500/mo that would go towards rent.  Then just assuming if I want to go for a 3/2 that would be an incremental jump.

“In a low interest rate environment, the primary reason to buy is to save money over renting. This should be the focus of buying decisions for the next several years.”

Beautifully said. I have been reading your site for over almost 2 years now, and waiting and watching the irvine market for just as long. All this time I have been renting, and looking to buy a house when it made sense. Wait and watch was what I did.

This weekend I pulled the trigger. I dont expect any appreciation in the property value. I am buying despite knowing it isn’t the best “investment decision”. However, when I did the math, I realized that I would be living more comfortably, and paying about $200 less monthly compared to renting a place. (I need a 3 bedroom place regardless of whether I rent or buy. I am married, have 2 kids (sharing a room) and my parents stay with me 6 months a year).

About 2 years ago, the numbers were coming out even. This year, it looks like when I renew my lease the rent might go up, while my monthly payment on the home (tax adjusted) is about ~$200 less than last year. I am not counting the amount going towards equity.

Putting a roof over your head, is not an investment decision. It is an expense. It is a cost of living. Treat it as such. If house prices everywhere go down, your costs of living go down. If house prices everywhere go up, your costs of living go up.

Yeah, I am one of those that bought in Irvine in ‘09 thinking that things would drop a “little” more, but I had the 20% down payment, got a place close to rental parity (versus my Irvine Company appt) and wanted a place to call my own. Basically I got screwed by the tax credit program, which I wasn’t eligible for, but I was bidding against those who were.  So I got screwed in both bidding up the price and believing the market had “stabilized”.

I have now noticed similar floor plans in my area (but worse locations) go on Redfin for well over 10% below what I paid just two years ago.  I looked into refinancing at today’s lower rates, but my 20% equity has turned into something like 10-12% equity in only two years, so I can’t refi without putting more $ down, and I am not going to do that.

I still love my place and am paying about what I would pay to rent, but if I ever wanted to sell, with realtor fees and adding what I paid to move in (new carpet, paint and other work), I am effectively under water on a 20% down mortgage in less than 24 months.

I was planning to stay “very long term” when I moved in, so there is no loss unless I sell and I am okay financially with paying the mortgage.  But the fact I can’t refi, and knowing that my down payment is basically up in smoke is pretty depressing and definitely has an affect on my disposible spending: I am not doing any.

I think this is notable:

However, in today’s market environment, this advice just doesn’t work. It may be seven to ten years before we see the peak of the next interest rate cycle. How long to you want to wait?

So the High Interest Monster is no longer waiting around the corner. Previously, every time the rates went lower, there was always this “they’ll go back up” rhetoric and to wait for them because prices will go down conversely.

Is this what people meant by 1999/2003 prices? Because if you factor in low interest rates and inflation… aren’t we there? Larry is buying up property in Vegas, selling to first time buyers and awgee is a homeowner again… the water must be fine… everyone jump in!*

*Except for certain hoods in Irvine… prices are still at peak levels.

They can’t be serious about the garage still being a sales office, can they? Did this place go REO from the builder?

Of course, the flipside to his policy is to reduce the profits accruing the member banks of the federal reserve he is trying to support. Banks were borrowing from him at zero percent, buying treasuries and earning a 3% riskless trade. As long rates go down, the profits from this trade are diminished, and banks will take longer to earn their way out of insolvency.

——
This is not technically accurate. If banks were buying treasures and the fed is now buying those treasures back at higher prices, the capital appreciation or gain would be enormous and actually help immediately add capital to the bank’s balance sheets vs. the drip drip of a 3% net interest profit.

Bonds aren’t traded on yield. they are traded on price. All the banks are going to book a huge profit on this trade. And if they don’t sell, what difference does it make what the current yield is, they already locked in their net interest delta and will keep earning that 3% delta until short term rates go up.

(from bloomberg)
Treasuries due in 10 or more years have returned 28 percent in 2011, exceeding the 24.4 percent gain in all of 2008 during worst financial crisis since the Great Depression, according to Bank of America Merrill Lynch indexes. Not since 1995, when the securities soared 30.7 percent, have investors done so well owning longer-dated U.S. government debt.

—-

This discussion has generated some issues I have never seen put forth elsewhere, that many banks will profit hugely from the sudden surge of treasuries values they bought a few years back, using zero-cost fed loans (or close to that).  You don’t suppose…this plan to load the banks up on treasuries, then goose their values, then the banksters sell…and the public is caught with the losses. 
It is an utter screwing and “can’t lose” by the banks.  I will vote for the purposeful conspiracy theory, can anyone put numbers to this for any particular bank’s run of profit on treasuries bought in the last three years…say, bank of America?  Because in the tradition of Wall Street/Fed, a “boiler room” does a PUMP and soon after…the DUMP.  Like what just happened to silver in an utter crash mode, would then happen to the treasuries (suckers get burned, banks all cashed out first, then the Fed reverses course and all the little people eat their big loss).  Silver went from almost $40 to $30, and that market is no where near as manipulated as the Fed can do to the carry-trade treasuries with even modest steps to reverse their policy.  Amazing.  Likely true, planned, nasty.  Time to sell those long, low-yield treasuries, folks, don’t be the last chump out the door, I will wager.  Thanks to those who followed up and suggested these facts!

Larry, how can we have very low interest rates when we were recently a negative savings rate country?

Interest rates hinge on the supply and demand of SAVINGS.  If current low demand for borrowing savings drives interest rates lower, why did interest rates not soar when the borrowing was manic?

When a nation is borrowing and spending instead of saving, banks must raise interest rates to incentivize savers and discourage borrowers. 

I doubt this Fed manipulated, slow bleed is going to work.  This is setting up a Treasury Bubble and Dollar Rout because the longer we suppress interest rates, more savings is depleted, resources redirected inefficiently, and the higher rates have to go to correct the imbalances.  This is a time bomb, not like Japan.

The astute readers who pointed out this Fed-manipulated Lowest Interest Rate in History and Highest Treasuries values, isn’t so much about saving the banks through lower mortage rates yet again (which may work, may not) but a pure gift to the banks making believe it is to help anyone else.  Here’s one synopsis of this:
http://www.forexfactory.com/showthread.php?t=316906
QB Partners’ Paul Brodsky and Lee Quaintance wrote in a letter to shareholders yesterday: “This is a move to help recapitalize banks under the guise of supporting the housing market… This is all about the banks income statements.”
Note this treasury-lower-lower-lowest manipulated rate thing ONLY works if some dragged out, manufactured crisis spooks the PUBLIC into buying treasuries, not a (formerly) stronger currency like the Euro…say a Euro crisis involving some podunk economy like Greece, and it is dragged on and on for no reason apparent:  thus both the US and European banks that are pulling off the carry trade, now reap that cynical massive profit and THEN announce Euro “salvation”.  Time will see if it is that disgustingly obvious and manipulative, but at this time it certainly appears so.  The banks net result, they literally printed and helped themselves to money and profits from this carry trade carried to the extreme, at huge public loss.  Irvine Housing Blog has pointed out the pieces of the evidence of the Fed’s putting their Biggie Banks as their sole target for profit.  This is the easiest carry trade in history, now carried to the nth degree.