Irvine Housing Blog

I don’t have much respect for professional investors, because many don’t seem to know much about what they’re doing, even if some actually do. That is, I’ll speak with someone who is wealthy as a result of investment in asset class X, but it’s clear that he has little understanding of the macroeconomic factors which are driving X that have nothing to do with his technical analysis.

Again: this does not apply to all professional investors, some of whom are far better informed than I could ever be.

But the amateur investor class is another thing entirely: pretty much 3-4 rungs down the evolutionary ladder from the lowest expert investors.

I know a couple of failed land barons. Successful in their regular jobs, they figured it was time to plow the proceeds into real estate, which always goes up, except that it doesn’t, but that knowledge is reserved for people who actually research the asset they’re buying.

It’s scary how much dumb money was enabled during this hysteria, because the banks augmented it was huge amounts of cheap loan money. And the dumb money was really, really dumb.

Blaming our educational system is too popular these days, but I’m going to go there: most people have no idea what markets are, how they might work, and how basic arithmetic should apply to investment decisions. This is not about a recent decline in our schooling: many of these people throwing blood money away are in late middle age.

A decent history course covering other investment bubbles, or the series of booms and panics of the 19th century, should have done the trick, but most people don’t connect history with now, and tell themselves “it’s different this time.”

Who cares what they’d say?

Who cares what people would think?

Why spend so much energy on worrying about that?

Seems strange to me winstongator.

It reminds me of the expression, “you wouldn’t worry about what other people thought about your if you realized how little they did.”

The prisons we build for ourselves.

It would be true that we spend the rest of our lives trying to patch the insecurities induced by who we were in high school.

Reminds me of David Foster Wallace’s defense of religion: it allows you to be ruled by something which is not an unachievable earthly goal. Worship your body, money, brains, or social standing, and you will never be fit enough, or wealthy enough, or smart enough, or important enough, and these things will consume and destroy you. Worship some external invisible force and it will merely distract you instead of destroying you, because there’s no unattainable goal to chase.

I love Hedonic Wednesdays!

I don’t think Coto and Irvine compare well either.

Mission Viejo would compare better because it has a similar mix of older and newer homes (even shares some of the same exact builders/floorplans), straddles the freeway, has a “flake” and some elevated areas.

Or for something newer, Aliso Viejo.

But it is interesting to see what features are valued more, it’s a bit telling that the population down there prefers a one-story over a 3-car garage, but… the 3-car is still in second place!

I actually managed to (painfully manually) look at the Northwood area by school district as I’d described in the comments to Jaysen’s previous post. After adjusting for age of the home, there is a clear premium to the Santiago school area, that is slightly lower than for the Canyonview area (by around 2%). I also see the Brywood area at a slight (again ~2%) premium to the Northwood elementary area. With regards to the premium for Northwood point relative to Northwood old, my results are similar to Jaysen’s (around 10%). Thus it’s Canyonview, Santiago, Woodbury, Brywood and Northwood in that order (which may or may not be exclusively due to the elementary school) which was fairly consistent with various ways of torturing the data.

Coto is very much a mix.  When we first moved here it appeared lily white, but now that we have interaction with my daughter’s friends and their families, we realize that many are a mix like my own.  Lots of hapa haoles and other hapas.  Economic demographics are what you would expect; upper middle class to rich, with a few posers who are in default on their mortgages.  More Ferraris than you would guess with a few Aston Martins and Lamborghinis thrown in.  Public schools are good, but not as intensely competitive as Uni.  Sports are big.  I mean BIG!  Lots of folks like SMHS and St. Johns.  And a few attend St. Margaret’s.

Now I have to hold my nose.  There seems to be a lot of folks who went to USC and send their kids there.

That’s fair, but how would you describe the “culture” of Irvine? Is it possible?

Propensity to substitute real estate product X for product Y is going to be a very interesting topic on this blog going forward. 

Technically, all local real estate is subject to the substitution effect.  As Wikipedia notes (http://en.wikipedia.org/wiki/Substitution_effect#Substitution_effect), the classic micro-economic model is to assume a fixed budget constraint and then look at how the price ratio of one good to the other impacts the propensity to buy.  The classic model is not a great analog to real estate because the quantity demanded is generally only one—but the conceptual intuition is still useful.

Because lending standards are now reverting to normalcy (i.e. your income and wealth will determine the max loan you can obtain), most buyers will be budget constrained.  Thus, the consumer choice question will be “For $X, what I can get in Irvine, Coto, Lake Forest, Mission Viejo, Corona, Long Beach, Torrance, etc.”.

Since the buyer pool for real estate all place different values on different attributes, different buyers will make different trade-offs.  For a given price, some may want the biggest home possible (giving rise to the Corona buyer).  Some may want to be nearest to the beach.  Some may want the to be near the same ethnic group.

All local real estate options are substitutes for each other.  Coto is, indeed, a substitute for Irvine—just as is Lake Forest and Mission Viejo. The degree to which the buyer pool utilizes adjacent cities as substitutes varies but it is a non-zero effect. 

As we get more hedonic analyses completed for substitute cities, my belief is that we will be able to better understand the substitution effect on SoCal real estate. 

An interesting thought experiment, for the economically inclined, is to imagine a world where there is really is no substitution effect.  That is, every buyer who wants a home in Irvine has preferences such that they won’t consider non-Irvine housing—at any price ratio.  Such buyers would be willing to spend up to their budget constraint in order to secure Irvine-based housing.  In such a market, we would expect the bottom of the market to rise dramatically because the Irvine location would trump the value generated by the physical attributes of the property.  Cheap condos and small older homes would be bid up, and competition would be fierce at the low end.  Many Irvine-only buyers would have a budget constraint that fell below the market price for even starter housing.  Such buyers would risk become renters for life—or until their preferences shifted away from their initial values for Irvine-only.

In my view, the outcomes from the thought experiment diverge from reality (low end is falling the fastest, markets clear as some buyers opt to substitute). 

A great quote to remember is that “desire is not demand.”  Many buyers may desire to live in Irvine, but demand is realized only by the desire combined with the financial ability to convert that desire into a transaction.

There are clearly many substitute areas for Irvine.  The difficult part is quantifying the substitution effect.

I think a fairer way to recast the above topic sentence would be that the numbers for both Irvine and Coto do tell a true story, but that numbers alone are not sufficient to gain a complete understanding of each market.  A good analyst will use a hedonic price model as one many tools in his toolbox.

However, the key comparative insights presented are true regardless of the fact that Coto homes are larger and have larger lots.

The fact that Coto values are down 34% from peak and Irvine values are down 15-20% from peak is derived independently from each dataset.  The fact that Coto buyers place more weight on square footage vs. raw land value is also derived mathematically from the hedonic regression results.  It is certainly true that the physical layout of each city affects these results—but such differences in physicality don’t invalidate the approach of using a hedonic method to reveal buyer preferences.

June existing home sales drop, cancellations up
(Reuters) - Sales of previously owned homes unexpectedly fell in June to touch a seven-month low as cancellations of pending contracts surged, indicating continued weakness in the housing sector.
The National Association of Realtors said on Wednesday sales fell 0.8 percent last month from May to an annual rate of 4.77 million units, the lowest since November. May’s sales were unrevised at a 4.81 million-unit rate.
The drop in sales was a surprising given that pending home sales contracts rose in May, but the NAR noted the cancellation rate rose to 16 percent from 4 percent in May.
This was the highest since the NAR started tracking cancellations last year and was well above the usual rate of 9 percent to 10 percent, the NAR said.
http://www.reuters.com/article/2011/07/20/us-usa-economy-idUSTRE7662I420110720

There’s that “unexpectedly” bad news again. All down news is always unexpected with the NAr. Good thing we’ve got the IHB to point out the unexpected before it bites us in the rear!

Also…

Mortgage applications see biggest increase in 4 months
(Reuters) - Applications for home mortgages surged last week, racking up the biggest increase in four months on a flood of refinancing demand as interest rates remained low, an industry group said on Wednesday.
The MBA’s seasonally adjusted index of refinancing applications soared 23.1 percent, but the gauge of loan requests for home purchases dipped 0.1 percent.
The refinance share of mortgage activity rose to 70.1 percent of total applications from 65.6 percent the week before.
http://www.reuters.com/article/2011/07/20/us-usa-economy-mortgages-idUSTRE73C1ZG20110720

Well, with mortgage apps down, the further decline in sales in the coming months SHOULDN’T be unexpected, but somehow I think that it might surprise the NAr anyways.

-Darth

Perspective,

You are correct. I have no idea what other assets they may have. I have changed to post to be more precise.

That’s why you come here every day to read and comment, right?

See posts above - the “cultures” are different in Irvine and Coto and may attract different types of families respectively.

You are correct… MV Lake is more a lake than a flake. I believe Woodbridge Flake is fish stocked too but I wouldn’t recommend swimming in it… that’s why they have the lagoon areas (does MV Lake have something like that?).

I think Irvine might trump MV when it comes to recreation centers, tennis courts, parks, basketball courts and pools (and yes… they also have an Aquatic center and are building another in Woodbridge).

But I think you’ve pointed out why a comparison would be good.

I’m sure if MV had more new construction, a 99 Ranch, an 85ºC Cafe and Persian markets they could tap into that FCB money… but it’s tough to match the proximity to work centers… although not sure how many FCBs hold down 9-5 jobs.

Too bad we can’t “hedonize” ethnicity… although maybe you can link it to the census results.

Every home built on the Ranch has gone through a design process specifically approved by TIC. Nothing happens in TIC land by accident or by any choice other than a decision made by TIC.

I think Laguna Altura might be one of those oopsies.

The redesign was horrible (less parks, less walkability) and the prices are ridiculous.

Woodbridge has a sizable senior community with a variety of nearby housing, medical and even religious support. It’s no coincidence Woodbridge has a Senior Center.

Other parts of Irvine can also be argued as senior-centric (the University area Park has the Rancho Senior Center).

Does MV have a giant orange balloon ride?

By here, I mean Irvine.

No, no one in Coto has a job.

WT_?

@Feral, you are exactly right!  Financing for investment properties is based on the income they produce.  Financing on residential properties is based on the borrower’s income and it’s ability to make the loan payments.  With apologies to IHB, this business of “rental parity” is a part of the problem.  In order to attract investors, regular, steady price appreciation needs to happen and leads to short-term ownership.  Single family homes are meant to be relatively long-term ownership.