Irvine Housing Blog

I am a housing price bear and agree prices will fall.  The major problem with the graph in this article is that it arbitrarily starts the 3% growth from the bottom of the first bubble in 1987.  Where does one start the 3% growth line?

Many people believe higher inflation will justify higher prices.  Actually, inflation puts downward pressure on housing prices if there is no corresponding inflation of income.  Unfortunately, inflation except for income has been going up but real incomes are going down.  This is not a good combination for the future of housing prices.

I predict the jobs situation is ony going to get worse, more banks are going to fail.  That doesn’t bode well for housing at all!  Credit is so tight already, what happens next when more banks fail?

Kirk,

Excellent point about M3.  M1 is falling.  M2 is growing at 7%.  M3 at 17%+

M2 is generally considered the best indicator of inflationary pressure.  7% is YOY growth is high…but not disastrously high.  M3 is growing rapidly because the FED is trying to push credit into the system.  But we have reached debt saturation.  No one WANTS to borrow.  So that explains the divergence between M3 and M2/M1.

Pushing on a string

Pretty soon we will be jumping the fence going south!

I don’t think angle of ascent=angle of decline. It didn’t in the last decline. Ascent is greed, decline is denial, decline will happen slower, and this bubble was bigger. 2015.

And perhaps just even more important, how will TR continue at those high $/sq ft as Quail Hill and Turtle Ridge Fall which is happening now.

The high end always falls last because the properties are the most desirable and the owners have the most resources. IMO, when the high end does fall, it will fall very hard. The degree of overvaluation is at its most extreme at the high end, and if these areas fall to rental parity—which is likely—prices will fall 50% or more on properties there. If will be impossible for TR to get $600 / SF when houses are going for $200 / SF in the rest of the city.

To comment on the graph, I do think house prices are going to fall much more slowly that it is showed here. Look at the previous cycle:
1897-1990 to get the peak = 2.5y
1990-1996 to reach bottom = 6years

For this one, it took far more than 3 years to get to the super-high peak, and likely it wil take more than 6 years to get to the bottom. Look at 2013 or even 2014… unfortunatly.

Second comment: if some areas in Irvine have fallen drastically (-20%) since 2006, other have clearly NOT (Turtle Rock mainly)

Super IR, any comments on TR ?

India is a net exporter of agricultural products. India is not driving demand, they are driving supply. Also, although they are a net exporter, they have inefficient production. One has to think that they will eventually work out their production problems and increase their yields. India is a poor example of a developing country that will drive increased demand for agricultural products as any increase in demand will be met with an increase in production within the country. The net effect will likely be an increase in exports.

China is a net importer of agricultural products. However, China has greatly expanded their production in this area and has programs to restore wasteland back to arable land. I view China as neutral as to an increase in demand. Some years demand will increase as crops fail and other years demand will ebb.

This whole thing about China and India increasing net demand for agriculture products in the long term is just more irrational justification for another bubble. This won’t be the first time the commodities markets crash and it won’t be the last. I’d also say that it is entirely fair to use the general term “commodities” since an unsustainable run up has occurred in aggregate much like the housing bubble where all real estate was “local”.

But, I could be wrong.

Bear Sterns 52-week high $159.36. Now they are sold for $2 a share. $21 billion,  down to $236 million. Also of note, the toxic portfolio that even JPMorgan wouldn’t touch, which the Fed will cover for $30-60 billion. Main Street hits Wall Street.

Interesting analysis.. This looks very similar to South West Coast Florida graphs.. Pricing is dipping now, but an overabundance of new construction inventory keeps the resale market suppressed.. Change in federal government should spike the economy.. Tough to instill a sense of urgency in anyone looking to buy real estate right now..

Question is - how much longer can places like Irvine hang on?

I expect prices in Irvine to really start dropping big time now. The stock market crash coming up is confirmation.

Tomorrow looks like it is going to be ugly… CNBC World with commenters from around the world all saying the Fed’s actions smack of desperation.  Lehman Bros is rumored to be the next failure.

That’s “at”

Dow futures are now down.  Where is everyone?

Calculated Risk as record blogster count.

Carnage.  That’s what I see coming.  Prepare yourselves everyone!

Anyone buying as a speculative investment in this market is facing the same circumstances. There will not be enough of these people to absorb the inventory of REOs currently flooding the market. In short, all of these people are knife-catchers, and they will lose money on their investments.

The rental market in Irvine is crashing.  Also we are seeing an out-migration of people in So Cal.  People are moving away.  Population grows slowly.

JP Morgan acquiring Bear for 2 bucks.  That’s 2 dollars.  The employees owned between a quarter and a third of the stock depending on who you listen to.  Middle of last week they were 57 dollars.

At least Countrywide sank slowly enough that you could get out.

Dow futures are up.  This makes no sense.  Are they gonna rescue everybody?  All this does is show that all the banks are bankrupt.  Well, a whole lot of them anyway.

Any predictions for tomorrow?

“Standard inflation” is, unfortunately, often unsuitable. When we say “prices going up” what do we use? There are so many things with pricetags on them. Wage inflation, currency, assets, goods inflation. What good is it if the price of gas goes up, or anything else, if wages are what supports affordability? (I.e. not the price of soybeans, copper, or concrete.)

I think it’s reasonable to look at wage inflation. Just in terms of growth of HH income between 2000 and 2005, it’s been about 2.8% in Irvine. (Of course it’s more complicated than that, if e.g. the job mix or household makeup changes.) Remarkably, Costa Mesa where I now live is about 1% HH wage inflation calculated the same way. (Tustin: 0.2%, Mission Viejo: 3.0%)

So, 3% is quite a reasonable value to use, even if it is a rough guess.

Of course people point out that interest rates have change, and that could affect affordability. True, but I would add 2 points:
1) Interest rates 2001 were not much higher than they are now. My wife’s mortgage in 2001 was 6.7%. Average conforming loans last I checked were in the 6.0-6.3% range.
2) No matter what the interest rate is, there is an expectation that at least the principal should be paid off at some point. A great many people couldn’t buy these homes even if interest rates were 0 - they wouldn’t even be able to pay the principal! (Note that principal payments aren’t even tax deductible.)

So, given all that, one has to wonder, why the heck would housing prices be so different between 2001 and now? Were people in 2001 just insane? Rates aren’t that much different. I’m sure we can find all kinds of excuses, but finally we’ll be faced with the question of whether home prices were outrageously low in 2001/2000 (and few realized it) or home prices are outrageously high today (and few realize it).

Hmm. That’s a tough question, isn’t it? I have a good idea what the answer is, and most new homeowners aren’t going to like it. Considering I have predicted the twists and turns of the latest housing debacle to my wife, friends, and colleagues, even long before I discovered the housing bubble blogs, I think I like my odds.

IR

What I did a month ago was normalize the data using 1987 as the basis. Then I used a 3% inflation adjustment and this uncovered the “double bubble” that stood out compared to the last bubble. This made it clearer to me.

I went back to my model and tried 3.5% and 4% inflation rates. These did not appear realistic as they imply we are closer to parity. I go back to my original conclusion: we are almost halfway down to parity. This makes sense to me in that areas already 15-20% down will go down at least 30-40%.

They won’t be the last.

It’s not “a problem” with crops.

All the marginal producers have been forced out over the years.  We were able to outproduce the planetwide demand for calories by a big margin.  Not so much anymore.

Between biofuels and increasing incomes in China and India plus the old existing demand, the demand for corn/soy/wheat is now roughly the same as potential production.

Historically, if grains were hot, cattle and hogs weren’t becuase it caused your major input cost to eat up your profits.  Not so much these days because the demand for meats (in developing China and India) is what is driving the grains.  Biofuels aren’t that big of a bite, but they aren’t helping the demand side of the equation.

I guess my point is we’ve gotten acustom to a world where there was always a lower cost producer around the corner for whatever you wanted to do.  Today?  Not so much anymore.

This probably is the owner who bought the place 20-30 years ago with 95% or more equity. When they sell they use yesterday’s price. But when they rent they mainly use their cost as basis.

I guess we all wondered where these losses were going, the $100,000 - $200,000 on all of these featured properties, multiplied by so many in Irvine, and all of the other cities. I am sure that you could feature more than one per day. With the collapse of Bear Stearns, I guess now we know.

Hi Syvanen… I see the same thing here in SoCal.  There is a house around the corner in Huntington Harbor for sale at $2.75M or for lease at $7K / month.  I wonder how in the hell these people ever came into the money in the first place???  They clearly don’t do math well.  I wouldn’t hire them for anything other than janitorial work. 

BD

Do you have any idea who those 1-2% growing LA population are? They are unskilled, poorly educated laborers. The composition of the workforce in this region is astounding. You have not been paying attention. This does not bode well for housing. These are essentially transients.

Vacancies on the west side of LA are something like 1-2% - basically enough to account for people moving in and out. The only reason prices are dropping a bit here is that the cost to buy was still higher than renting. The rental market has definitely not softened.

I think you are overlooking the part…

Exactly.  As was pointed out in the Floplords article, vacancy rates have risen over the last few years with cheap/easy financing, creating downward pressure on rents.  But that gravy train is over.  So those ‘people’ who are out of the housing market are now part of the rental market (unless they’ve moved away). 

So the question is, are we are going to have more renters competing for available rental stock?  Will vacancy rates drop back to historical rates and thus rental prices will rise?  At the same time, house prices will of course drop.  And eventually we’ll be back to an equalibium of 160-200 GRM. 

My point, with respect to this article, is that I disagree that prices will drop all the way to an index of 123, because I expect that house price inflation is actually somewhat higher than the general rate of inflation.  While the population (demand) is growing at 1-2%, supply for a given geographic area is not perfectly elastic.

A bit ot but I have a question.  Here in N Californi I live in a upper middle class neighborhood.  In the past three months 3 houses in my vicinity have moved at prices that are about 15-20% below the bubble height.  What surprised me was that all 3 places were then put up for rents that wouldn’t begin to cover their costs.

Does anyone know how much the current market is still being driven by this kind of speculation?

I’m not sure if that population increase will continue.  if Mexicans don’t come or go back to Mexico, then the population will not increase so much.

And the people who rant against illegals will miss them when they are gone and not spending their wages, no matter how pitiful those wages are.

If you change the assumptions of future inflation moving forward from today on the graph, the point of intersection does not change much. Instead of a 55% drop, you have a 50% drop, and this does not change the inflation adjusted drop which is about 66%. Also, this projections does not include any overshoot, and prices will likely drop below support for some time.

Well, I agree that in any bubble market you can still find items priced at fundamental values.

Agriculture commodities fluctuate all the time dependent mainly on crop yields. Since I don’t trade commodities I don’t have enough information to make a real determination on their pricing. But an over 100% gain in wheat prices from Jan 2007 till now would be a fair indicator to me that prices are be driven more on speculation than reality. I would assume that if there was a problem with crops that I would have heard about it on the news. And I don’t buy that demand has increased that much. All of a sudden a billion Chinese added that much wheat to their diet? I don’t think so.

I would agree however that many agricultural products may see a long term price increase due to the switch to biofuels. If farmers can make more money growing a crop that supplies biofuels rather than food items they will do it. Wheat, soy, corn, etc. will go up in price even if they aren’t used in biofuels. This is one of the things that got Fidel Castro to declare biofuels immoral. Who says a communist doesn’t understand market fundamentals?

But, my feeling is that this rise in prices has already been priced in and surpassed by rampant speculation. However, I’m not betting against future price gains, because I have no clue when prices will collapse. One year? Two? In the mean time they will go up. No argument from me on this.

In fact, if food and energy go up and wages don’t, that leaves less money to spend on housing and things could be even *worse*.

I haven’t been tracking vacancies, but since we are planning to move to a different rental this summer, I’ve been tracking prices. The prices for larger apartments seem to be coming down.

“3 bedroom 2.5 bath townhome with 1,507 sq ft. Direct access 2 car garage. Attached patio perfect for bbq, table, and chairs. All appliances included. Wonderful location with TONS of bright light! Only $2975, down from $3230.”

http://orangecounty.craigslist.org/apa/606236957.html

That would be a 9% decrease in less than a year.

Comments on the OC Register blog seem to suggest that for smaller apartments they can still raise rents.

“I meant mainly from a financing perspective - their ability to have a down payment and otherwise qualify for purchases. Prices will certainly drop, and that will help with affordability, but there will still be a larger percentage of people who are effectively priced out of the housing market by stricter financing rules.”

I think you are overlooking the part where a whole bunch of “buyers” came with zero down and had creative financing tools and lax lending standards enable them to aquire the american dream that they never really were capable of sustaining.  20 years ago, they would have still been locked out of the housing market for the simple reasons that they had no money saved for the traditional 20% down and their REAL income did matter and would be determined to be below what lenders would take as acceptable for paying a house mortgage.

That group is out of the market now.  And the ones who walked away and ruined their credit are not going to be in the market again for a whole lot more time.

I read a book on Alan Greenspan 8-10 years ago and his biggest focus was making the american dream affordable for a larger percentage of this country’s citizens.  He must be proud that he helped make that happen.

However, it must be bitter/sweet b/c so many people got a taste of the good life and homeownership only to have it snatched away when the ARM resets and the bursting credit bubble snapped them back into reality.

At the end of ‘05 I was hoping for a 50% decline because that would be what it would take for the numbers to make sense (for me at the time) with traditional financing.  When I said such things to my co-workers you can imagine they thought I should be fitted with a straight jacket.  As time goes on, I’m more confident everything will come full circle.

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You are saying we’ll be oversold by summer, but is it true that many companies have yet to revise earnings for the “common sense” recession we are currently in and then revise yet again once the companies have a sense as to how severe the recession or little ‘d’ depression may actually be in?  I wonder if October would be a better time to invest in these great companies again for the long haul.

I don’t think I understand your comment about people being priced out of the house market again. Prices are not going to rise any time soon.

I meant mainly from a financing perspective - their ability to have a down payment and otherwise qualify for purchases.  Prices will certainly drop, and that will help with affordability, but there will still be a larger percentage of people who are effectively priced out of the housing market by stricter financing rules.

And I agree that rents can’t get detached from incomes, but the ‘average’ income calculation doesn’t take into account that there are 10% more people in LA now than 10 years ago.  Has the rental stock similarly increased 10%, or is there a larger number of people competing for them on a relative basis?

I wish this Kirk showed up more often.  He has a good grasp on concepts, save one.

I don’t know if all comoditiy prices are overpriced to the point where you could call them a bubble.  Specifically, ag commidity pricees have been lower YOY for roughtly the last 30 years because there was capacity to overproduce demand.  We had nearly record stock carryovers almost every year since 1990 in wheat, soy, corn, and cotton - yet every year, they traded lower.  Inventories aren’t going up. 

It’s a minor quibble but I don’t think you can lump oil and gold into cotton and rice, although I’m sure there’s a lot of dumb money treating them all the same.

Have you looked at vacancies? We have record vacancies across the United States. I doubt L.A. is any different. These vacancies show the demand is not there regardless of any population growth. Perhaps this is from overbuilding. Perhaps it’s from more people living under the same roof.

That’s my view also. We aren’t seeing classical inflation at all. We are seeing price inflation driven by a commodities bubble that will eventually burst. The irony is that this price inflation is driven by people like Jim Rogers saying the Fed is printing more money. So, people flock to commodities and drive up prices thus reinforcing their idea of monetary inflation and causing them to double down on their positions over and over. Bernanke is right that this is unsustainable.

On the money supply of things, the last time I looked only M3 was going up. But, this is phantom money. It only exists on the banks books and isn’t making it to the general economy. This money did in fact exist at one time. It was the money people already spent with their home equity lines of credit and all the other refis and purchase money loans. Most of it was spent on housing. This money is evaporating as MBS is being repriced.

M3 is being driven up by the Fed when they accept MBS as collateral through repos or their new auction facilities. But the increase in money supply is only being used on bank books to keep the banks solvent and delay the ultimate repricing of MBS. If the Fed didn’t take this action then we would already have had mass bank failures. The Fed is merely buying time for the banks so they can figure out how to bring in more money and stay solvent. So far the banks strategy has been to increase fees, raise credit card rates and hound prime customers to take out personal loans. I doubt it’s enough to save many of them.

Of course, I’m not an economist. So, perhaps I am misreading things. Oh, and my point was that I agree with your wage comment. If new money was making it to the general economy then wages would be rising. They are not.

The S&P/Case-Shiller indices use an arbitrary index number, so the 274 doesn’t mean much. This index is the best for tracking price changes in the market because it relies on the repeat sales of properties. It is not subject to many of the problems of the median for measuring market prices. The main problem with this index is that it does not provide a price number like the median does.

Rental rates are closely tied to incomes because you can’t finance a rental. Supply and demand issues may cause temporary disruptions, but rents cannot rise beyond peoples ability to pay, and rents cannot get detached from incomes nearly as much as house prices can.

Past history has been that rents tend to move with house prices. During bubble rallies, rents go up, and during declines rents go down. We are about to find out how many empty houses have been being held by flippers as these properties are either sold through foreclosure or rented by floplords. Nationally, there has been a 64% increase in vacant homes between 2004-2007. In all likelihood, the occupation of these home is going to lower both house prices and rents.

I don’t think I understand your comment about people being priced out of the house market again. Prices are not going to rise any time soon.

“I would expect house prices to increase faster than the simple rate of inflation”

How exactly are people going to pay for this? House prices cannot increase faster than wages in the long term. If they did, people would have to put higher and higher percentages of their income toward housing until finally, there would not be any money left. Trees cannot grow to the sky.

The lack of available infill sites did not stop the Japanese real estate market from declining 64% over a 15 year period. If supply is permanently contained due to zoning restrictions, it does not mean prices can continue to rise forever due to scarcity. At some point, the limit of affordability is reached, and either wages go up, or the local economy stagnates as businesses are unable to expand because they cannot attract new hires to the area.

Oh, and I suspect that rental prices have been lagging their natural growth curve over the last few years.  The natural growth curve being some function of general inflation and population growth induced demand. 

With easy purchase money available, you’ve had a disproportionate number of house buyers relative to renters.  Had these people stayed in the rental pool, rental rates would probably have increased faster than we’ve observed. 

So can we expect to see rental rates increase over the short term (faster than normal inflation) as people become once again priced out of the house market (or evicted)?  This effect may help us get back to 160-200 GRMs faster than we’ve been estimating.

I’ve been reading this blog for awhile, and I wanted to point out that I think you repeatedly underestimate the level of natural house price inflation - i.e. you are not factoring in the increase in demand due to population growth. 

With the LA basin growing at 1-2% per year, I would expect house prices to increase faster than the simple rate of inflation - though I admit calculating that impact is probably non-trivial.  You also have a situation where potential infill areas are disappearing, thus demand in central locations will naturally grow faster than inflation.

A decline of 55% seems very reasonable and makes sense considering the size of the bubble.

I sense a new mantra among Americans in the coming years: Saving is good, debt is bad.

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The boomers will have learned that there is no easy way to early retirement. Why do I keep bringing up the boomers? Becasue they/we are the ones who have been driving this economy and the worlds economy since the 1970s.

We will get through this mess. Over the next several months there will be many great companies whose stocks are at fire sale prices. I would consider averaging into them and plan to hold for many years.

It really doesnt matter what energy prices and food do going forward. Wages will not go up in response.
Housing prices are a product of income. If anything, housing will drop farther than this trend line because jobs will be scarce for the next few years.
Watch out below

3% isn’t realistic going forward.  Actual inflation is running well ahead of 3% and the FED’s money policy is accelerating inflation.

It would be interesting to show 4% and 5% trend lines… I suspect that most people would disagree with how inflation data is computed… and a hypothetical 4% or 4.5% trend line may prove more accurate when you take into account food (wheat/corn), energy (oil/gasoline) cost increases, or consumer goods purchases (weakness in dollar)...

Generally I agree that a sizeable pull-back is in the works… and we have seen the first 4-5 innings of the game.

Lordy be.  274 is a median house price?

Since inflation is going to be much higher, maybe the right end of the curve should go up a bit more?  But that is a mere quibble.
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