Irvine Housing Blog

...The most inflated zip code remains 92603—Turtle Rock, Turtle Ridge and Quail Hill…

Spot on analysis.  I follow Turtle Rock very closely and I have sometimes wondered if the prices have been stuck [on high] with super-glue.

However, as noted, the logjam may be finally breaking. Example: 15 Skycrest (listed last week).

Question:  Does the rental parity calculation include the influence of property taxes, HOA dues, maintenance and limited insurance (i.e. fire) on the property owner?

It would seem to me that these costs could significantly skew these calculations, particularly at the higher end.

Below rental parity mean you can finally buy your 4 bedroom single family house in Irvine for…. Wait for it….

$650,000

Not $400,000 not $450,000, and not $500,00 like so many clowns said you would be able to….

$650,000 welcome to below rental parity

Let’s all rejoice, the day is here.

Payments may well be less to buy but you are missing the vital point that if your circumstances change you are stuck with an anchor around your neck that will take every penny you have and bankrupt you. Whereas if you rent you have the painless process of down scaling. Until prices bottom it is worth the premium.

Your example of different interest rates and purchase prices held to term doesn’t make a lot of sense to me.

Yes, if you look at 3 different loans with a 30 year term and a $3000 a month payment, all of them will add up to $3000*360.  That isn’t anything surprising, its just math.

But prices don’t automatically adjust to maintain a $3000 level.  People in normal parts of the country don’t automatically adjust their housing expectations so that they always pay 31% DTI.

And at the end of a 30 year term, and spending $1.1m I’d much rather have an asset worth $628k in your 4% example than an asset worth $291k in your 12% example.

Maybe I just missed your point…

While I agree with most of the analysis. In my head I worry the most about my monthly cash outlays. The money that I am making on my down payment is small, and when I throw it at a house I won’t worry much about the interest that I am losing on it.

If I were doing a rental parity analysis I would look at it like this:

$3,237 .......... Monthly Cash Outlays
-$416 .......... Tax Savings (% of Interest and Property Tax)
-0 .......... Equity Hidden in Payment (Amortization)
$0 .......... Lost Income to Down Payment (net of taxes)
$182 .......... Maintenance and Replacement Reserves

=$3003. That is the true monthly cost of carrying the property. That is what I would need to rent it for to not have a real cash loss every single month.

The Equity hidden in the payment is irrelevant. Price may continue to drift down for a LONG time as in Japan. If that is the case, I might lose more equity that I gain through payment due to the market if I have to sell in less than 10 years. Hell 20 years.

Also,

After ten years on this loan my loan balance would be = ~$408,000.

In other words I’ve gained ~110k in equity on a 649k house.

Therefore, if prices drop another 17% over ten years, all my payed equity is wiped out.

The renter pool at present is artificially boosted due to buyers renting till the bottom is reached. Once these buyers do not need rentals anymore there is going to be a huge glut of empty houses looking for non existant renters causing rents to crash. My landlord bought the condo I am renting for 900k my rent is 32k a year and he has already lost 400k in equity this is a very sobering example of why being a landlord at the high end is fraught with risk. Buying in areas like vegas for 150k makes sense buying to rent in OC does not.

It’s good to see prices starting to fall there in 2011. I’m surprised it’s taken so long. I would expect that home prices in communities to the south now to decline even further. I think renting is the wise thing to do.

I bought an SFH in LF in Sept 2010 after renting for 6 years. According to Zillow.com I’ve lost $50K in value over the last 12 months. I’m sure it will lose much more valuation over the next 12. If my home were a dividend paying stock, it definitely has been a “non-performing dog”. 

My main worry is about interest rates and the value of the dollar over the next 12 to 18 months.  At some point rates will increase and perhaps suddenly to the point where home prices have no where to go but down. This would be a good development for long-time renters with savings and solid jobs in recession-resilient industries to swoop in and “make a killing”.

I don’t see how interest rates can remain this low over the next 2 to 3 years.  The US debt situation remains completely out of control, so how long until confidence in the US debt sales abroad starts to wane? The Fed can’t lower rates much more. They do have barrels and barrels of green, black and peach ink though.

Thanks for another execllent article.

I am a renter, I live in a shoe box of a room in the University District up north in Washington State.

I believe that the interest rate on the US Ten Year Note, $TNX, will be rising rapidly; and there may be a influx of supply as banks my release shadow inventory.

And I see a rising 30 Year Interest Rate, $TYX, from deleveraging out of US Government bonds, ZROZ, EDV, TLT, caused by China retribution for being labeled as a currency manipulator, as seen in the Flattner ETF, FLAT, falling, and the Steepner ETF, STPP, rising; and about disinvesting out of World Government Bonds, BWX, and Emerging Market Bonds, EMB, caused by debt deflation, that is, falling world currencies, DBV, and falling emerging market currencies, CEW. The 10 30 Yield Curve, $TNX:$TYX, is steepening, opening the door for bond vigilantes to start capital depletion of US Treasuries. The world is passing through peak credit as is seen in total bonds, BND, falling lower. Lee Adler writes in Financial Sense Foreign Central Banks Selling US Treasuries At Unprecedented Levels. And Tyler Durden reports 30 Year Bond Prices At Record Low Yield As China Flees, Direct Purchases Soar.

I am even more concerned about Money Market Funds, MMFs as they are between a rock and a hard place: the managers want safety and need safety, but are ever seeking yield to maintain customer base, which exposes them to buying high yield French bank debt. I see the very real possibility, as US Treasury yields continue to increase caused by a flight by China, that the MMFs wil break the buck and that there will be a run on the MMFs.

International central banks will be unable to stem the ongoing competitive currency devaluation which is due to global soveign debt angst, inflation destruction,  unwinding yen carry trade investing, and the failure of China’s ponzi credit system with its reliance on copper as collateral. I see the major global banks BSBR, ITUB, BBD, BMA, BBVA, BFR, IBN, HDB, WF, UBS, RBS, STD, DB, LYG, seen in this Finviz Screener and this ongoing Yahoo Finance Chart, falling strongly lower.

Basic material stocks and small cap stocks in carry trade investment countries, such as BHP, KROO, VALE, BRF,COPX, ECH, KOL, will be turning lower. As will the US Small Caps, the Russell 2000, IWM, which are highly dependent upon credit funding to buy inventory, cut checks, and meet payroll and as a result there will be a total economic collapse in the US.

These are factors that all those who are going to invest in becoming a debt owner should consider.

IR,

Your calculation includes the mortgage interest deduction.  In the near term, the mortgage interest deduction appears to be in play in Congress as the Feds look for ways to close the deficit.  I’m not sure I would count on this deduction continuing, I think there is a 50-50 chance it will be modified in the future, so buyers should be advised of this possiblity…

IR,
  Apologies for being OT but a while ago we were having heated discussions about title defects caused by robo-signers, improper securitizations & MERS. Looks like something recently blew up in Massachusetts called the Bevilacqua case.

A Massachusetts man who bought property in a faulty foreclosure sale isn’t the true owner and so doesn’t have the right to sue over it, the state’s high court ruled.

The Supreme Judicial Court, which in January found that banks can’t foreclose on a house if they don’t own the mortgage, went one step further in a closely watched case and said a sale after that foreclosure doesn’t transfer the property. Therefore, the buyer couldn’t bring his court action against a previous owner, the court ruled.

The high court upheld a lower-court decision that said Francis J. Bevilacqua III, the buyer of residential property in Haverhill, Massachusetts, never owned it because U.S. Bancorp foreclosed before it got the mortgage. Today’s ruling could have implications in the foreclosure crisis, in which banks are accused of clouding home titles through sloppy transferring of mortgages.

I do realize that CA foreclosure laws are different from MA (or for that matter, TX) foreclosure laws but anything that clouds the chain of title is something I find vey disconcerting and is why I would be very leery of buying real estate these days. Your thoughts?

This was an especially good post!  I would make one change in this sentence: “I remember early astute observers on the blog who quipped, “Irvine has never traded at rental parity.” Well, actually it has. In fact, it traded well below rental parity during the late 90s, and it will likely dip below rental parity again for at least the next few years.”
Exchange the word “likely” for the word “certainly.”
I remember people telling me over and over again the same basic thing “houses in California never go down.”  I always responded by saying “what happened between 1991 and 1996?.”  This always resulted in people either not knowing what to say or saying “well that was just a one time thing.”

Memories are short.  Very short.  Every 20 years a new generation comes through and knows little about what happened before.  We’ll get here and where we were in 2006 again by 2030.  In the interim it is 1993 again.  It’ll take a few more years to get to 1996.

Finally, low interest rates often make for a poor time to buy in my mind.  Buying with a 30 year mortgage when interest rates are very high and prices are forced low enough for rental parity would be a far better time, since you can always refi in the future at a lower rate and if not, you still have rental parity or better.  Alas, we must live with the markets we have…

Is zestimate true? I see many properties bought in 2009 have gone up in value according to zillow.

Once again, I need to provide adult supervision ...

Don’t use “rental parity” and “bubble-inflated comps” in the same sentence.

The average house price in the USA is $200,000.

So rental parity is about $1,000/month.

If you don’t think that applies to California, then you need to explain away the hollowing of our economy, and the fact that half the adult population is not productive (either unemployed or public employees.)

Interest rate and purchase price matters little when the loan is held to term. If a borrower makes 360 (30 x 12) equal payments, the composition of principal and interest is irrelevant. However, very few borrowers hold a loan to term as many sell or refinance.

If the interest was not deductible I would agree.  However, I think you are ignoring the tax consequences of this set up.  Lower principal/higher interest rate will be more affordable since you are using a larger percentage of your “gross income” to pay for you housing expense.