Irvine Housing Blog

Ipop, I hear you and agree on some of the underlying points.  Stable increasing rents results in higher GRM / lower ROI expectations.  Higher interest rates decrease affordability psuhes for lower owner prices.  Decrease affordability results in higher rental rates.  They’re all interelated.

Higher inflation typically pushes higher mortgage rates. Higher inflation pushes increased rents.  Except in 91-96 timeframe.

Regarding your inflation from ‘86 to ‘90 and the bubble, I’ll point to the mortgage rates from 1980 to 1990.  In ‘81ish mortgage rates where 17%.  By 1984 they were 13% and then in 1986 dropped to 10% and stabalized from 86 to 90 at 10% +/- 1%.

In other words, the bubble in 1986 to 1990 occurred at a time when inflation was increasing and yet mortgage rates remained stable at a rate 50% below their prior recent history of the first half of the 80s.

From 90 to 94 inspite of continued decreasing mortgage rates, prices still fell.  Prices fell and money got cheaper.  Can you imagine what would have happened in the early 90s if money got more expensive?

Here’s the Fed’s mortgage history.
http://research.stlouisfed.org/fred2/data/MORTG.txt

I jumped to vote and I voted incorrectly.
I looked at the house, and I said: I would pay $2500 in rent for it. Maybe a little bit more, but not too much more. So I voted “2000-2999"…
My real answer: for a house that big, I want a pretty good discount for ownership.

Most definitely smarter to sell my place now and become a renter.  Alas, the wife still is not interested in joining the ranks of renters.  Matter of fact, I just asked her again last night.  She’d rather have 2400sf and not have to rent, move twice, uproot the kids, etc. vs. selling now and perhaps getting 3000sf after two years of renting.

IPO, it may be true that what you own now will drop $250k in 2011 for argument sake. However, since your holding cost on this $300k condo will be smaller, the pressure for you to have a forced sale at the wrong time should be somewhat less. You still can support it with one job easily....

You can tough it out much easier.

Also, by the time the featured property is at $875k, your condo is no longer at $550k… but less. You’ll need to put up more of your saving to get it.

Perhaps, it is advisable that you sell your condo at $550k and become a renter first?

As far as I can tell (because of the changes in the tax law), you have the option of selling and renting for awhile. The cost will be ~3K extra in moving expenses and of course the disruption to your life.

Some good points Lucy, although from your response I take it that you realize it would NOT cost way more to buy vs. rent in this situation.

“The tax deduction is a variable that fluctuates with income. You may lose your job or be without a job for some time…life happens”

Life happening in most situations is income increasing as a result of promotions, inflation, investment income, etc.  My family will likely make much more ten years from now than it does today, not the other way around.  Neither my wife or I have entered our peak earnings years…

“Also, your monthly after-tax foregone interest income is too low, this should be closer to $500 (I am myself pulling over $300 in interest per month on a less than 100K right now). “

Good for you.  My figures are for my buying decision and my personal situation.  For every dollar in interest income I make, I lose approximately $.42 to taxes.  Maybe you aren’t taxed as heavily as I, I have no idea… Personally I’d have to earn 6% on $100K to get your $300/month after-tax.  If you can show me and rest of the good savers here a safe, liquid place to keep my cash and earn 6%, it would be much appreciated.

“what about college costs for your kids?”

I have been putting $800/month toward college savings for my kids since pretty much birth.  That is a permanent part of my budget.  My 3-year already has $25K set aside for education between his IRA and 529 plan.  My 1-year old has almost $8K.  With earnings at 5% per year on this pace, I should have around $275K available to fund college by the time my oldest is in his freshman year.  I don’t think I’m going to need to HELOC myself to death to pay for school…

Wow, I didn’t realize I would provoke such hysterai from ipop on the figures.  First of all, kudos to you for saving such a nice down payment (or whatever equity your have left in your condo), that’s admirable.  Your calculations and your turbo tax friend are nothing more than what I call a typical “Disneyland math” for a couple of reasons.  What’s giving me a pause is that your are mixing constants and variables in one basket.  your are substracting your tax deduction from your monthly mortgage payment and costs, as if each moth you will write a check to a bank less $1600 with a note “Uncle Sam will pay the rest.” Your paycheck will be fatter, but your COST of ownership will stay the same $6,473 (which is more then renting).  The cost of ownership is a constant and will more or less stay the same over the span of your ownership.  The tax deduction is a variable that fluctuates with income.  You may lose your job or be without a job for some time...life happens.  This extra tax deduction will not always go to your principal.  To calculate a constant tax deduction over 30 years span is optimistic, but is ultimately too speculative.  Also, your monthly after-tax foregone interest income is too low, this should be closer to $500 (I am myself pulling over $300 in interest per month on a less than 100K right now).  Another thing - you want to put extra into your equity once childcare costs are taken care of… what about college costs for your kids?  This one is why many American home-owners HELOC-ed their homes up to the max.  Also, you talked about renovating the place for another 50K...I suspect this is not all you are going to do on the house in the next 20 years?

I don’t want to bicker further about it, if you want to buy this house of your dreams, then by all means.  And good luck.

Remember George, I’m not a renter… If the featured home is $500-550K in 2011, what I own today will be going for $300K.  Even if I don’t buy anything bigger, prices falling that far would/will cost me $250K of equity.

Move-up buyers have different metrics on purchase decisions than renters looking to enter the market.  Many people here on the good ole IHB conveniently overlook that…

IPO, your 30-year hold move up house plan will work like a charm if all your assumptions follow through. But, if any of your assumption fails in the wrong time, potentially you will lose all your hard earned housing equity plus more.

How? A long drag out stagflation can do huge damages. How likely, your guess is as good as any one else’.

Let’s say you bought the featured home at $875k with $700k 30 year 7.5% fixed. And in 2011 or 2012, the 30 year fixed is 9.5% with CPI at 7% and your $875k house will be at $500k-$550k. If you can stick to your original plan, you will be fine. But, life could throw a curve ball at you at the lease convenient time. Well, loss of one job or two, forced sale because of relocation or even divorce, etc…

Your $875k gets sold in 2011 at $575k. You lose $300k in equity in the trade.

Thanks zoiks.  You’ve confirmed my suspicious about you uber bears.  You rail about the idiots that are buying and yet you don’t even realize your own forecast renders waiting to buy almost pointless…

A move up in mortgages to 8.5% would effectively negate a 20% drop in home prices for the median buyer.  For the most part, they would be in no better position in terms of monthly payment if they waited as you suggest and bought when mortgage rates went up 20% and price were down another 20%.

It’s sad that you’ll post an 8-paragraph manifesto on the topic but not even take the time to consider the implications of what you are forecasting yourself…

The trailers have air conditioning and running water.

There.

It is two houses, for the price of one Irvine condo. Two more houses, and you have a decent investment property.

So what is poor Irvine going to do, when the school district is short $18 million, and they begin laying off teachers and staff? Is it already one of those overcrowded trailer school districts? Did I read that there is a school that consists entirely of trailers in Irvine?

I thought Irvine is different.

Ipoop, if you want a WAG on mortgage rates in 2 years, try 8.5%.

Here’s my argument: I think it’s objectively likely that inflation will continue to be a problem. Headline CPI inflation is about 4.3% right now, and trending higher. In the face of this, the Fed continues to cut rates. They always say there’s a lag between rate cuts and inflation of 6-12 months. Well, guess what, 6-12 months ago the funds rate was at 5.25%, our recent peak in rates. So, what do you think inflation’s gonna do 6-12 months from now, and beyond? It’s probably going up.

Greenspan has warned that inflation is here and will be with us for a while. Bernanke just todays said pretty much the same thing. Let’s just say that headline inflation increases by 50% (of its current value). That puts it at 6-7% in two years. At that rate, a reasonable premium to place on mortgage rates might be 2%, so voila we have 8-9%. It’s not reasonable to think mortgages will be available below inflation. It’d be much safer for people to put their money in TIPS, or broad asset classes than giving it to a mortgagee for lower than inflation rates.

Right now, 8.5% sounds outrageous for a mortgage rate (unless you’re subprime), but it’s also more inline with historical rates.

The inflationary scenario, for the next several years, is what keeps us employed and avoids a severe recession. If we start deflating instead, then it won’t matter that we can get a mortgage at 5% because we probably won’t have a job.

One thing I can tell you, Ipoop, you keep harping on $4k+ rent for that place, let me tell you you are dreaming. You *might* get that much *right* *now*, and then it will be probably vacant again in a few months or in a year. By the time the market price for this home gets to $700k, nobody’s gonna be getting $4k+ rent for it. Not gonna happen.

I think some of the people on this blog lack imagination, especially Ipoop. In fact, I wonder if he experienced our massive real estate decline in the early 90’s. I have my doubts. People seem to forget that what happens in the future tends to be outside of what people’s expected ranges are. Ipoop was shopping for a home last year, salivating over a 6% discount against previous comps. He had little idea at the time what was in store for the next 6-9 months. Now he knows and just says it was stupidity at that time. Well, Ipoop, have you purged all possible denial, stupidity, and herd mentality from your thinking? I don’t think so.

It’s very hard for people to think outside the herd. Humans act largely on memory, habit, and emotion. Rational thought is probably only 10% in the best of us. In the worst, it’s certainly 0%. The best economists are those that can use clinical tools to analyze the economy and draw proper conclusions from the analyses. A good example of such an economist is Robert Shiller. Everybody knows he called both the stock bubble and the real estate bubble. He has laid out in his books how he’s able to identify a bubble, its causes, and its progression. But who’s going to believe him when he calls the next bubble, if there is one? Probably only a few.

The reality is that the economy has been propped up by real estate for the last 6-7 years. This has lead to economic activity based on debt, and lots of it. The debt machine has overheated and is now starting to sputter. Don’t believe for a second the talking heads that tell you it’s a temporary sputtering - we’re in for long term credit problems. The creditors have seen what happens to our asset valuations when they take a temporary break from loaning us money, and it ain’t pretty. They’re going to want to see stabilization before they feel comfortable opening the debt spigots again. That’s the problem, for the time being the closing debt spigots means things are *not* stable, and won’t be for a while.

Ok, NSR, couple of extra questions based on your points… Not trying to be argumentative, just trying to understand.

It appears the period from 1986-1990 was our last sustained period of higher and higher inflation.  CPI growth was 3.2% during the first year of that period and in 1990 it was almost 6%.  During that same period, the OC median home price shot up over 67%, from $144K in 1986 to a bubbly peak of $242K in 1990.  This inflationary period appears to have coincided with rising home prices… This mini bubble led into the early 90’s housing recession right? How does that reconcile with your thoughts?

Also, during a period of high inflation, wouldn’t rents be expected to grow considerably as well.  If that is the case, wouldn’t that tend to slow home price declines?  If rents, wages, etc. were climbing at 5-6% annually over the next couple of years, the GRMs get more favorable, i.e. we “catch up” quicker to the bubbly pricing…

My assumption is that the additional house price declines as a result of higher inflation driven mortgage rates you describe would have to be paired with recession, low to no economic growth, higher unemployment, etc.

I kept thinking Bates Motel… But then I thought it looks too chicano… So it must be Hotel De Bates

Did you notice the color on the bedroom walls?  That place is the poster boy for Cramer’s rant about bulldozing the Inland Empire.

At least in Chicago it would be buried with snow every so often and in Miami the Cubans would hide it behind palm trees and pink flamingoes… but in Moreno Valley this is out there for 365 days for all to see and cringe.

And they want a ton of money.  Yowsah!  What kind of a schmuck relator would do this?  A good one would have put the kibosh on the sellers before they listed it…

Eh Gawds.. it’s so bad it brings the Yiddish out of this gentile!!

No, it means the decline will be that much worse.

The drops in pricing is based on affordability.  The market stalled and collapsed with rates sub-6%.  They market was overpriced 40% with rates at 6%.  If rates move to 9%, the market will collapse even further to were the mortgage payments and TCO will be on par with rent. 

For example, in the bubble with 5.5% interest rates and option loans, prices for a townhome soared to $550K.  Fair rent for the townhome was $1800, puting equivalent rental “price” right around $300K, 40% overpriced.  If rates go to 9%, the market will push past $300K to about $225K to compensate for the additional expense.

Whoops, sorry.  I meant 25% higher, not 25%…

If rates are 7.25% today, they very well could be 9% in two years, which would take the teeth out of the decline in terms of affordability.

“Everything was bought/given to at different times without any consideration for how they look with the rest of the house, only for how they function. “

Hey, that sounds like me too!

(No, I’m not Asian).

I checked out your RedFin link, and I’m stupefied.

It looks like a ratty old slum motel that was converted to a single-family home. I’d like to know the story behind it. Did the owner buy it more cheaply than a conventional home? I have to think so. That’s how the place came with so many bathrooms and bedrooms, and so many entrances.

I’m sitting in Chicago, so I don’t know the neighborhood, but the bars allover the windows are a good clue.

The property looks horrid. No grass, no trees, just a cracked and pitted parking lot- another sign that it was once a motel.

This property is so bad, you should be paid to take it. The cost of tearing the place down probably exceeds its worth, if indeed you’d want to rebuild in a neighborhood like that.

buster - I think you will agree, although there are many different possible estate tax scenarios, there are none which require listing a home for sale.  For purposes of value determination, appraisal or comps are normal and adequate.  There is no way we can know what her estate tax situation is, and it is immaterial to whether or not she needs to list the home for any tax situation.  There is no tax situation which requires the listing of a home.

If rates become 25%, then wouldn’t your monthly payment go through the roof? Wouldn’t it make even more sense to rent if prices remain the same? Most likely, prices will fall through the floor, then rise quickly ONLY if your wages is rising with inflation. If you get inflation BUT no wage increases, then you’re screwed!

I think this is the most striking paragraph in the whole paper:

“The time will come – unfortunately too late – when financial institutions will realize that they are better off freezing the resets and, at the same time, write down a part of the face value of the mortgage, to allow strapped homeowners to avoid default as the alternative of foreclosure and selling homes at steeply discounted prices in a very illiquid markets involves larger losses for the creditors than a reduction of the debt burden of illiquid and/or insolvent borrowers. Unfortunately this rational solution to the mortgage credit problems will come too late and only when massive insolvencies will lead banks to appreciate the benefits of this alternative and more radical approach to mortgage distress. In the meanwhile the housing and mortgage carnage will continue at accelerated rates.”

This sounds a lot like FB’s who are not smart enough to avoid chasing the market down when they still have the equity to do so.

It would be interesting to put your forecasted home value declines along with a forecast of mortgage rates and then chart the affordability along the way…

I know you think we are headed toward significant inflation.  What do you think a buyer will be paying on a 30-year fixed jumbo loan two years from now?

“I still don’t get your urgency to buy. If you wait 2 years, the house you plan to buy to live in for the next 20 years will either be 20% nicer or 20% cheaper.”

IR, would that still be true if mortgage rates are 25% in two years?

IR

“It is a very convenient argument to call into credibility the person who is making it.”

That’s actually termed an “argument ad hominem”

For instance, I could have replied to iPoop

ah an argument ad hominem, how refreshing..

But that would have been lost on iPoop because I doubt he learned anything that sophisticated at USC (the University of Spoiled Children)

Oy Vey… Looking at Moreno Valley.. check out this disaster.

http://www.redfin.com/stingray/do/printable-listing?listing-id=1019342

That house is Asian owned for sure.  The furniture is typical of a first generation asian family.  Everything was bought/given to at different times without any consideration for how they look with the rest of the house, only for how they function.  The family portrait and the yard also gave it away.  And to top it off Asians tend to stick together, hence the Asian realtor.

And yes.. I’m Asian.

Buster,
I am at Donner Lake which is about the same elevation as Tahoe, 6000ft.  Great weather - warm, blue skys and calm winds.  If you ski at Heavenly or Kirkwood up high I think you will find powder.  We just finished clearing 4ft of snow off the cabin deck.  Lots of hard work.
We own three properties, all paid off, and maintenance is a bear.  The heater in the cabin by the lake was off again.  Another bill to pay.  A ski trip last march was ruined by this same heater.  Temps got into the teens and stayed long enough to freeze the lake so people could ice skate on it.  Heater condensate line froze and shut it down then.  This time it was the backflow preventer on the auto fill line.  The year before we had a cold snap with a local power outage that froze the water line and it broke downstream of the hot water heater and hot water ran for 3 weeks!  Ah! the joys of home ownership.
Have a good trip.

IPO how about you offer 700k at the most.  be careful with you money 8)

IPOP

one more time, price per SF will be some where between 175-200 per sf, thats if we dont go thru a severe recession.. people just dont make that kind of money in the OC.

comprende :mrgreen:

“It is a very convenient argument to call into credibility the person who is making it. I suggest you read what he has to say and respond to his points, or would you rather listen to experts like Lawrence Yun?”

I was just messing with Weird Al IR, but I did read it.  Every word… Echoes much of what you and others have posted here.  The catastrophic scenario detailed does indeed seem plausible.  I’ll be a much bigger believer when the equity market starts pricing in something of the like.  As equities are normally a leading indicator, the strength in stocks of late is surprising.

Screw it, I’m going to buy anyway and hedge my downside risk with some housing futures…

Ipo,

Yesterday was a kind of a historic day, because I haven’t seen in a long time this set of bad news for US consumers put together in one morning:

* Oil price above $100, it made an intraday high of $101

* Year-over-Year wholesale inflation at a record since 1981

* Historic valuation of Euro vs. USD 1 = 1.51

* Record percentage decline in home prices since 1987

And Fed cuts haven’t reduced substantially mortgages rates so far.

Don’t worry, ipoplaya, 3/1 rate will go around 4.25 % by midsummer, when the equity market fall down badly. i miss refin 5.25% 30fix last month. still I am waiting for 5.5% 30fix for new conforming loan, my loan is less 500K, reset is time04/2009.
it is difficult to get timing the max benefit point. an optimal range, which is good enough, i guess. economics is so important in this country, lots of data and information available , one could take advantage from that.

It is a very convenient argument to call into credibility the person who is making it. I suggest you read what he has to say and respond to his points, or would you rather listen to experts like Lawrence Yun?

http://www.irvinehousingblog.com/wp-content/uploads/2008/02/roubini022608.pdf

I’m a little concerned about SC making the tourney this year.
Would love to see them beat Stanford and get in with some momentum.
Still get physically ill when I think about losing to Stanford in football this year. 
That national title was ours. Oh well, pasting Illinois in the Rose Bowl helped me get over it, somewhat.

Hey ten, you think SC will make the tourney this year?  If they win 3 of the last 4, they are a shoe-in.  Winning only another 2, unless one is Stanford, and they are seriously on the bubble…

If the good doctor really knew his stuff, he’d be at MIT, University of Chicago, Harvard, Princeton, Stanford or Cal.

The boys at CNN probably smartly realized the bloke couldn’t hack it at any of the top six econ schools in the country and left him off…

Roger Clemens testified before Congress too but I sure wouldn’t want to hear what he thought about the economy.

Watch what you say about my Bruins.  And my alma mater.

It feels better without a Trojan.

who decorates these homes? They have a total of 500 bucks in furniture in there. and by the look of it, bought at garage sales.

Let’s hope they don’t overlook the Heat tomorrow nite either. 
The big showdown is coming this Sunday against the Mavs.
It’s a nationally televised home game so I think the Lakers are going to lay the wood on them. Anyway, mean’t what I said about going for quality and not compromising.

I love the banter between Ipoplaya and Alan.  It makes me smile.  I do think you are way too optimistic though, ipop.

Waiting to do something because of your opinions on where rates will go is too damn risky.  Anything can happen with interest rates, long and short term.

LOL Maestro, you witty fool you…

Do those in Harvard square and those withn the “Yale Loop” hate each other?

Alan,

You’ll get no argument from me. Although we may not always agree on housing, with regards to sports thus far we’re sympatico, unless you’re a UCLA fan. Now, I recall correctly, you’re also a fan of women’s beach volleyball and hot chicks in general. I’m looking forward to seeing the Blue play the BoSox next month. The new Japanese pitcher we picked up is light’s out. He’ll be in the rotation following Penny and Lowe.

DeNile....  that river in Egypt

Denile is what you do when you feel the need to mock the testamony given to the United States Congress from a senior economic professor at NYU.

I guess since Dr. Roubini isn’t from Irvine Valley College that he must some random person.

Oh well, you do what you gata do iPoop

By the way, was it your cousin in programing at CNN who decided that this testamony wouldn’t be news worthy?

Gail?  Is that a dude’s name?  Do you mean “I’ve been a Sparks fan”?

Just kidding Weird Al.  In spite of me being a baby when they played, I do have an appreciation for Stumpy and The Logo.  Although my love for J.W. mostly stems from his pairing of Kobe and Shaq…

IPOP, I’m with you.  I certainly wouldn’t calculate paying back principal as a cost of ownership.  Over a long run (you said you would buy and stay), paying back the principal should just mean investing the principal at your mortgage’s rate of interest, no?  And for that matter, when someone is calculating the opportunity cost of the down payment, I hope they subtract out the interest cost of the mortgage.  Theoretically, if the source of funds are available to you, you can borrow the entire amount (that good ol’ 100% financing bugaboo again), thus freeing you to invest your saved down payment somewhere else.  The opportunity cost is your earnings on the (former) down payment amount minus the additional interest paid on the mortgage.

Anyways, everyone knows being an owner has intrinsic values of its own.  I’ll probably get lambasted for saying this - but if that wasn’t the case there wouldn’t be such a great deal of interest in IR’s blog.

whoops—reversed my bull and bear in the first para.  Yikes, back to Econ 101 for skek.

I hear ya ten. 

I was sweating out the Lakeys last night.  They looked ugly against lowly Roy-less Portland for a good three quarters.  Thankfully The Machine and Far More came to the rescue!

iceweasel,

I think the thesis of this web site is that the housing market got out of wack because it departed from the fundamentals—for example, LTV, DTI and GRM.  Some of the most compelling analysis on this site points to these numbers as historically constant indicators of either borrower creditworthiness or home value.  Now you are wondering “what will the new fundamentals be?” So once again I ask, isn’t that the same as the bear in 2005 saying, “iceweasel, you are going to be priced out of the market—250 GRM is the ‘new’ fundamentals.” I think it is and I disagree with that approach.  To paraphrase Surfing: the fundamentals is what they is.

I think your post is actually less about new fundamentals, and more about the bear psychology that will cause the market to temporarily overshoot the fundamentals on the way down before settling in at a historical norm for a while.

I agree with you that even within the parameters of historical norms, none of us know exactly where we are going, including the components of the fundamentals—rent, incomes, rates.  So there’s plenty of room to argue about numbers, and it is kind of fun…

Weird Al always quotes the most random people… Next thing will be “my neighbor George is predicting a recessional tidal wave of epic proportions that will undermine the entire banking system.  George added on his way to Walmart that all credit cards will cease to work and McDonalds will employ monkey to run the drive-through in an effort to cut costs”.

The whole bubble was caused by changing the fundamentals. If they are changing, then they are not fundamentals.

LMAO!  It seems, for many on this board, once a home reaches that magical million dollar mark it automatically needs to satisfy his or her sense of “traditional” entitlements. It’s a fairly boring mass produced box on a smallish lot that (at one time) was valued by this market at over that magical million dollar mark.  It’s good that the market is starting to recover it’s sanity, but you’re going to ding them for not having a foyer?

I resent that remark, I’ve been a laker fan since the days of Jerry West and Gail Goodrich.  I remember watching the Celts beat us every year in the playoff’s until the breakthrough.  I remember West’s half court shot.

The Lakers’ haven’t always been winners.

Oh and by the way, I don’t care where the Dodgers finish, as long as they beat the Giants (or better yet, knock the Giants out of the playoff’s I’m happy).  Angle stadium has nothing to compare with Chaves ravine and Dodger dogs are the best!

iPoop is just like that deer stuck looking into the headlights.

This just in from our friends at Calculated Risk, Nouriel Roubini, Professor of Economics at at the Stern School of Business, NY University testified to the House of Representatives’ Financial Services Committee today.  Dr. Roubini says the show (my word, he said recession) just started in Dec 07 and will be historic in magnitude.  No soft landing possible.  I thought I was a bear Dr Roubini has the claws and teeth out.  CR also notes how CNN took a pass and didn’t report Roubini’s remarks as the testamony wasn’t news worthy since no child was kidnapped, no one was raped or murdered.

You can read Roubini’s remarks here:

http://www.house.gov/apps/list/hearing/financialsvcs_dem/roubini022608.pdf

Ipop,

Quit wasting time over this albatross and be thankful your offers weren’t accepted. 
Buying this place would destroy your self-esteem, even at $700K.
There’s no pride of ownership. It’s the same reason why you’re a Lakers fan and don’t support the Clippers, you associate yourself with winners. Now make a run at something truly worthwhile that you and your family can really be proud of.

My point here Skek is what will the new fundamentals be?  160 GRM?  100 GRM?  What will happen to wages in the next two years?  I think there are a lot of things “on the table” here, as it were, that could affect this semi-mythical when it comes.

At some point yes, fundamentals will set pricing, but what fundamentals?

That’s one reason why predictions are so much fun and nothing more than hot air.  None us knows where this is going.  Some of us see a confluence of a large number of factors that could create some hellish changes in the ways we perceive real estate.  Some of us of it see if differently.  None of us, however, know what’s going to be a meaningful fundamental and what won’t be.

The impact of principal repayment was calculated in the cost of ownership in the post I did.

Stupidity Kyle, plain and simple.  I was at least trying to get the place for 6-7% off peak pricing.  Thank god the sellers were crazy people and stuck firmly to 2006 pricing… They are down another $100K now.  Too bad for them.  Unfortunately I am down $75K in equity loss since that time as well.

Last summer mino, I made multiple runs at a 2700sf house

What?  Why on earth were you trying to buy a house during the bubble’s peak?  And why are you still expending so much energy attempting to buy at one of the most precarious moments in real estate history?  Good luck to you, but what a shitty time to buy.

Ah buster, ye of little faith… I can refi today into a 3/1 interest only conforming at 4.875.  Helps that my LTV is around 65% or so.  If the March Fed cut can just get me .375 lower, I’ll be happy to pull the trigger and lock up at 4.5% for three more years.

I will be sad to see my 3.875% rate go away though.  It’s been berry berry goot to me.

“the words “real estate” and “home ownership” will cause people to puke in public places…….time will tell”

LOL....That will be the sign of a bottom...but we have a ways to go before we get to the “puke” stage.

The cost of everything else is going up, making the budget for house payments almost impossible for buyers. This will get worse.

At some point, like the kid who said the emporer had no clothes, someone will say “Damn, 500k is a hella lot of money”.

ipoplaya - keep hoping.  Oh, can you hope for me to win the lotto, too?

As inflation kicks up, interest rates will surely rise.  With inflation running over 4% and looking to heat up as the Fed deflates the dollar, who’s going to lend you money at 4.25%.  So let’s see, I can lend money against real estate (a depreciating asset) in a mortgage market with increasing defaults at a rate that doesn’t keep pace with inflation (real inflation-adjusted loss on investment).  Sounds like where I want to put my invested capital!

Yup - keep hoping.  Almost forgot, I’m going skiing this weekend.  Can you hope for some powder in Tahoe?

Well it indeed doesn’t include principal repayment in the number as I’d plan to electively start paying down $1500-2000 per month in principal starting around year 7-8 of the loan after my daycare expenses mostly went away.

Last time I checked, landlords didn’t take a portion of your rent you pay, save it for you, and then return it to you with interest when you moved…

“How is a 30-year fixed loan product risky?”

“7.5% interest only “

I was responding to this statement with the risky financing. I thought you were using an interest-only number which would not be including principal repayment and takes on the reset risk at the time of refinance.

As oil rockets above $100 a barrel…

Thanks, Fed!

Can not the golden age of a country exhibit affordable housing?

Your logic eludes me Nano. One would hypothesize that a land of opportunity would imply the ability for everyone to buy a chuck of it.

Once IR finishes his time travel machine we’ll all take field trip and see if there were any housing hick-ups in Rome or China’s golden age.

Looks like traders are pricing in 100% chance of a half point Fed cut in March and another .25 to .50 to likely follow.

I’ve been holding off on the refi for this.  Hope to see 3/1 conforming ARMs at 4.25 to 4.5% in March…

Where’s my girl Lucy with her calc?!

I did mine…

http://www.ipoplaya.com/arizona.htm

I want to see how it will “cost you WAY more to own this house than to rent it” given that hypothetical $875K price I would pay. 

Let’s see the math Luce.  You said I’m using fantasy math and I put my numbers up on the web for all to review.  I ran calcs in Turbo Tax, checked the property tax load via the assessors site, checked out mortgage rates at my fave lender. 

I’m curious to see how much thought or data is in your conclusion…

surf, dude, I wouldn’t buy this as an investment.  I’d buy it as a house for my kid’s to grow up in… I really don’t care much at all about the equity risk associated with the down payment.  I care about my monthly spend and long-term affordability.  If I put $175K and it went to zero in three years, no big deal.  By the time I retire, it will likely be worth well over $1M given inflation over the next 25 years or so.

Why is everybody so focused solely on the economics?  If you like the place and you want to make sure you can stay there long-term, go ahead and buy if it’s a fair price.  Pay a little more if there is something about the property that appeals to your personal sense of what is important.  Like the morning sun through the breakfast area window, pay a little more.  Like that there’s room for a tomato garden, pay a little more.  If you hate yard work, you’ll want to pay less.

I guess my point is: Start with a fair price and add a premium for stuff you really like about the house, or deduct a discount for drawbacks that you don’t like but with which you can live.  And since most of us bought a place we like and had some attributes we really appreciated, we usually paid a premium over what somebody else (who didn’t really have the same tastes as us) might have paid.  It’s all good....

You shouldn’t calculate the opportunity cost of the down payment using a money market rate. That down payment has significantly more risk as an investment than a money market account. Previously you could estimate that risk by comparing the rates for a 80% LTV to a 100% LTV financing. The difference in the payments would represent the return required for that 20% to compensate for the risk.

I guess it would be a little more complicated than that. As you experience inflation, your original down payment is not as risky as an investment so the required ROR would decrease over time, but it would never be less than the interest rate on the loan itself.

As a CPA, I can tell you it all depends.  I am assuming the widow is trying to get the full $500,000 gain exclusion, and to do so you need to sell your primary residence within a certain time of your spouse’s passing.

But, if it’s owned as community property, she should get the basis step-up.  And if she gets the basis step-up, then foregoing the $250,000 of the $500,000 income exclusion is a mute point because the new tax basis is the fair market value at time of death.

Finally, it can be complicated if the survivor is NOT a US citizen.  The deferral of estate taxes by passing estate tax free to a spouse is predicated on the assumption that, upon the passing of the surviving spouse, the estate tax will then be paid.  It’s basically deferred into the surviving spouse, not eliminated entirely.

But if the surviving spouse is NOT a US citizen the concern is that he/she may bid a fond farewell to the USA before paying the estate tax.  My advice as a CPA for over 20 years—get some good advice from a CPA.

I disagree; this house is not a move up it’s a big move down.
A big move up would be similar priced home in either Northpark, Northwood Pointe, or Woodbury.  There’s no reason to compromise or lower your standards in this market.

Put your numbers up here Lucy… I’d love to be convinced that is the materially more expensive to buy and finance this particular house for $875K vs. renting it for $4K+.

I assume there are number keys on your keyboard just like the rest of us have?

“You are ignoring a number of costs, and utilizing risky financing to get to this number. The true breakeven is closer to $720,000 than $875,000.”

True, IR, that $175K down could earn me $350 per month after-tax.  How is a 30-year fixed loan product risky?  The payment amount will be the same, measurable, forecastable, etc. for the next 30 years.  Heck, I’ll probably be dead before that rate expires…

Your 25% tax savings may work for others, but it doesn’t for me.  I took my 2007 returns and worked the numbers for this hypothetical Arizona purchase.  For the spend, the tax savings in my personal situation is almost 34%, not 25%.  Even if we rented, we are likely itemizing due to state taxes.  I wouldn’t lose any benefit of standard deduction.

Check out the figures.  Are they really that far off?

http://www.ipoplaya.com/arizona.htm

Oh, and did we forget to mention the OPPORTUNITY COST?  I think one of the postings here had a very good discussion on this.  Calculate how much money you would lose in unearned interest from money market accounts (or other investments), then we’ll talk about “breaking even.”

Isn’t saying “the rules don’t apply anymore” in support of unprecedented price drops the same as saying “the rules don’t apply anymore” in support of unprecedented price increases?  Fundamentals will pop a bubble, but they are also going to support an eventual floor.

I tend to agree with Ipop and Formerbanker.  As low as this thing is going to get, I don’t think we are going down to unadjusted ‘98 prices.

With this house you wouldn’t need to MOVE UP… that’ the point.

The house is large enough, has a big lot ( for Irvine ) in a good location, a three car garage, five bedrooms, three baths and a nice sized backyard.