Who are these people who can afford houses for 900k???  I come from a family of physicians and none of them would ever buy a home for 900k to 1 million.

CK - the flat screen in the garage is a given.  I have a regular ole TV mounted up on the wall in the garage now on one of those swiveling deals so I can watch games and the kids playing at the same time. 
In IPO’s fantasy garage, there is a full-sized fridge (forget mini), HD flat panel, and a computer of course.  I spent my teenage years in the garage, tinkering on my ‘69 Camaro and later my, and I know I am going catch some crap for this, my mini truck.  There, I said it.  I’m a flippin’ ex mini trucker that spent his formative years in the IE.  Truckers were the top of the food chain then and there.  I miss my garage and driveway hoops days…

20% down on 900k is 180k.

a 6.75% Interest only payment on 720k would be $4,050 a month.

Taxes on 900k purchase would be $937 a month.  Insurance roughly $150 a month.

You are talking $5,137 a month without principal reduction AND with a massive down payment.

“Who are these people who can afford houses for 900k???”

Nice homes in KS sells for that price now…

Nice homes in West Plano ( very good school district) sells for that price now - many corp. executives lives there.

Nice homes in West U, Memorial, Galleria area of Houston sells for that price - again many corp. executive lives there

corp. sr. executives make a lot more than avg. physicians.  Now days, only speciality doc. makes a lot of money.  the days of family docs making avg. $200k plus is over…

You mean like these monstrosities with over 1/4 acre lot for only 850k?

<a id=“L_1091210031_hlDirectLink”>http://www.realtor.com/realestate/houston-tx-77096-1091210031

</a><a id=“L_1065917781_hlDirectLink”>http://www.realtor.com/realestate/houston-tx-77059-1065917781/

http://www.realtor.com/search/listingdetail.aspx?ctid=4&mnp=38&mxp=38&typ=1&sid=3e2ba90663474cfea7ca21de040134bd&pg=3&lid=1093378989&lsn=23&srcnt=150#Detail

</a><a id=“L_1091210031_hlDirectLink”>

</a>

check this one out:
http://www.realtor.com/search/listingdetail.aspx?zp=77005&ml=3&mnp=38&mxp=40&typ=7&sid=2ef5ab4f7bf64dc8912d4118672e7dbf&lid=1079071319&lsn=10&srcnt=66#Detail

small lot in h ouston…and you know what the weather like in houston…

Property tax is 3% there by the way though no income tax…

lendingmaestro,

zip 77096’s public schools are rated as unacceptable.. demographic is similar to santa ana.  so you should be comparing the house to Santa Ana not Irvine…

I know you probably don’t know Houston well…but that is not my point…Expensive housing is not a OC issues, it is all over… And the fact is many people can afford it…

The fact is most people <u>cannot </u>afford it with traditional financing in a realistic world.  This is the reason we had a bubble in the first place.  I know there are rich executives here in Orange county.  But the big baller type income isn’t going to live in Irvine.  

In the last 3 years of doing mortgages in Orange County I can count on two hands the number of people I’ve spoken to who make over 250k a year W2 stable income.  One man owned his own global shipping company and paid himself 400k a year.  Did you know that I couldn’t qualify him on full-doc income?  He wanted to refi his beach house in San Clemente.  He owed 475k on 580k value.  He also owned a 3 plex and 4 plex in HB which he owed 750k and 775k respectively.  Both have massive negative cash flow.  He also owed 885k on his 1.75 mil home in Nellie Gail Ranch.

Even the wealthy people in OC live above their means.

DTI- that is what will make it so hard for people in OC to borrow money for a house. the lease on the benz and credit card debt…. etc etc.

Damn Cox, only lets you have 10mb of web space…
http://members.cox.net/ipoplaya/

“In the last 3 years of doing mortgages in Orange County I can count on two fingers the number of people I’ve spoken to who make over 250k a year W2 stable income.”

Strange, I don’t have enough fingers (or toes) for the number of people I know personally who make over 250k/yr. Then again, I guess not all of them have “W2 stable income” as several of them are self-employed physicians and business owners. Its hard for me to believe that a mortgage processor has only seen two in three years.

1.) So you have physically seen their W2’s and/or1099 Tax Returns?

2.) They also live in Irvine?

3.) I am not a loan processor.  I can only assume your condescension comes from the fact that you possess a Medical degree?

4.) I did not say I only saw "two" in three years.

5.)  All of the people I know who make over 250k a year, including family, live in Newport or CDM.  Not Irvine.

Why do people think that Real Estate prices will even follow inflation ?

in one of the interviews with Shiller he makes this point….......for some reason during  the 1990’s Americans began to believe that real estate values would always beat inflation, that it was a great "investment". He pointed out that there was a false perception that buying real estate became a sure way to become rich. After this bubble is over, we could see Irvine real estate at $100 PSF. The value of homes depends only on the amount of down payments  that can be saved and availability(cost) of credit…......that sets the value.

IMO Lending is correct, $900,000 is a lot of money for a home. Although I can not prove it, I suspect that less than 5% of irvine families have the level of income that it takes to afford a $900K home.

my guess is most of us are not the avg joe, and not even the avg irvine schmoe.  not a stretch to believe most of us, and our peers, friends, and coworkers, are in higher brackets than the avg loan applicant LM has seen.  the median family income in irvine still only around $105k.  over 200k/yr is around the top 5%.  9.1% of the population, or 5% of families, are below the poverty line.  so the distribution of irvine families living in poverty is about the same as those with the level of income being discussed!  that was an eye-opener for me.  that does tell you something about how prevalent the facade of wealth is in oc.  i got this from wikipedia and google searches for what its worth.

given the truth about the demographics and what we all now know about the financial health of the avg loan applicant in recent yrs, what LM claims to have seen shouldn’t be too surprising.

<sup id=“_ref-4” class=“reference”></sup>

lendingmaestro, I’m not sure why your feathers are so ruffled by my comment. there was no condescension in it, I have nothing against loan processors, do you? when I said "loan processor", I meant in general, not the specific position. you may be a loan manager, supervisor, or hell, the owner of a loan company, I don’t really care one way or another. it seems, however, that you feel loan processors are a pretty low position to be in.

1.) So you have physically seen their W2’s and/or1099 Tax Returns?

Some of them, yes. I don’t go around asking my friends for their tax returns, as I’m sure you are aware. Do I ask people if they physically see their friend’s medical charts? Anyway, I have seen some of them because there were some proposed business mergers. I am also more aware than the average person of how a medical practice is run and how much revenue a practice generates based on its patient flow and practice type. So, I can pretty much tell (at least for a physician) if they can afford that $1.5M house they just bought.

2.) They also live in Irvine?

Some of them, yes. A few of them do live in NB/NC or CDM. However, it is a fallacy to think that everyone wealthy in the OC wants to live in those communities. One of those people I know is an executive at a biotech firm and moved from NB to Irvine because he didn’t like the general attitude of the residents of NB (and especially of the students at his children’s school). I should point out though, you did say "doing mortgages in Orange County", not "doing mortgages in Irvine".

3.) I am not a loan processor.  I can only assume your condescension comes from the fact that you possess a Medical degree?

Again, not sure where you see the condescension.

4.) I did not say I only saw "two" in three years.

No, you said you could "count them on two fingers" before, I think, editing the comment. So you see how I thought you meant two. So now that it says "two hands", I guess you’ve seen 10?

5.)  All of the people I know who make over 250k a year, including family, live in Newport or CDM.  Not Irvine.

See #2.

I think everyone’s observations is relative to what they know personally. Some people may have seen more than the usual share of financial information (say, a loan processor), and some may know a larger than usual number of physicians, lawyers, and biotech executives (my wife works in a biotech company).

You make me feel special Nano…  I’ve got no problem affording $900K, assuming I could sell my house today for a market price.  I would probably only need to finance $500K or so.  Conventional 30-year at 5.5% or so with an $80K 2nd @ 8%. 
After tax spend on interest, taxes, HOA, and insurance would be a whoppin’ $2700.  That’s like 25% or so of our take home pay and we don’t even make north of $200K.
Point is - it’s not all about income.  It’s about the size of the loan and expenses associated with it.  If someone is bringing big cash, they can swing $900K without much fuss.

ipoplaya—i think those numbers are on the optimistic side.

 
     
        NATIONAL OVERNIGHT AVERAGES
         
        TODAY
        +/-
        LAST WEEK
     
 

 
     
        30 yr fixed mtg
       
        5.43%
       
        5.54%
     
     
        15 yr fixed mtg
       
        4.93%
       
        5.05%
     
     
        5/1 ARM
       
        5.14%
       
        5.27%
     
     
        30 yr fixed jumbo mtg
       
        6.48%
       
        6.51%
     
     
        5/1 jumbo ARM
       
        5.62%
       
        5.74%
     
 

but i’ll give you the 5.5% 30 yr fixed.  lets even forget about the 2nd.

2838   monthly pymt

1350   property taxes (assuming its irvine with mello roos - 1.8%)

—————-

4189

slice off 30% for taxes (very crude, plus the mello roos and principal arent deductible, but whatevers)

2932   total pymt

hoa and insurance arent even accounted for yet.

Not sure if any of you noticed the following inventory trend of single family homes in Irvine:

I have been mointoring the following sub markets, and the resale inventory as of today is as follows:
a. woodbury larger than 2400 sq ft:  6 homes plus two in escrow ( not including the 10+ news homes in escrow)
b. northwood all single family, including the older section and the newer section - 23 homes total
c. quail hill - all single family above 2400 sq ft - 14 homes
d. Turtle Ride - all single family - 15 homes
e. Northpark - all single family - 13 homes

This brings a total of 71 homes in the above 5 major irvine tracks. I have been tracking those areas for years, and the inventory is on the lower end.  I understand the inventory is about to increase, it will be interesting to see how bad it gets. 

OC Register did an article about inventory comparision between Dec 07 and Dec 06.  There were extra 3000 more homes on the market in Dec 07.  It broke down the inventory numbers by prices range, and showed that all this extra 3000 homes of inventory CAME FROM HOUSES/CONDOS LOWER THAN $500k.  For homes at the upper price range, the number of inventory is similar between Dec 07 and Dec 06.  I found that very interesting, and not what I have expected.

To the Bulls, namely: Ipoplaya, irvine123 and others,
To me it is clear that you have gone beyond risk assessment and into the temptation of thinking what the current price is and what price you are willing to pay in relation to the current price. At some level that is already an emotional commitment to buy.

There are so many risk factors that can result in massive volatility in valuations, that I think only time can weed out these excessive factors such that we have manageable risks to consider. The following risks could severely impact the assumptions the bulls are making about the market’s valuation:
1) The Rate of foreclosures – we all know that predicting the rate of foreclosures is quite difficult due to the large number of variables like job stability, type of loan financing used, perception of future valuation of homes and the percentage of fraudulent loan approvals. A lot of these factors may be unknown.
2) The tightening of lending rules – If today the requirements move from no money down to 10 -20 percent, I do not know if you could imagine the impact on the number of available buyers. A symptom that shows that we are nearing this eventuality is the fact that many houses are falling out of escrow because the borrower is unable to get past the financing requirements. Banks are finally realizing that they did not do proper due diligence and quality control on loans given out to people. They are also getting pressure from the secondary loan markets because they are unable to re-sell some of these loans due to the unknown amount of risks in many of these loan portfolios. Some of this risk consideration has been extrapolated from the sub-prime loans and applied more evenly to non-sub prime loans.
3) The state of the economy – Most will agree that the US economy is headed for a blood bath. Trade and budget deficits are at all time highs; fed reserve is unable to control inflation and is too desperate to correct the housing market through rate cuts than to worry about the macro-economic picture with the deteriorating dollar and the erosion of investor confidence in American assets. We are headed for rising unemployment rates, shrinkage of demand – collectively stagflation. We are approaching a scenario where the state is financed to the hilt by foreign debt and the sovereign debt ratings of the US could become questionable because of worsening economic situation. At the same time you have a record number of Americans filing for bankruptcy. Credit card companies, loan mortgage companies, auto loan companies are all facing delinquencies. All this points to reduced availability of credit, no matter how much funds are pumped into the economy in the short run.
4) Failing banks – This could be a huge problem as it would negatively influence available credit and shrink the number of qualified and ‘able to buy buyers’ (as distinguished from ‘willing to buy’ buyers – the definition of demand per economics).
5) The fallout risk – If some of these huge factors pan out simultaneously home valuations would be way lower than what you would expect in a stable commodity market and a stable economy.

Bottom line, you have to base your assumptions on valuations that consider the broader macro-economic climate. Your assumptions do not ring true in the current state of the economy and the housing sector. You are being tempted by what declines have already occurred. You are ignoring the fact that there is still massive denial amongst sellers. Realtors have some hint of the impending doom, but sellers are still in denial.

acp - first of all, INTEREST expense on $500K @ 6.0% would be $2500/month.  Principal payments are savings, not housing expense.  I would be financing with a 30-year I/O. 

Your property tax estimate is WAY too high.  Take the Secret Garden house that started this debate.  At assessed value of $980K, prop tax is only $1100/month.  Knock $80K off that (we are talking about paying $900K for something) saves you another $1K per month for a $1000 per month prop tax load.  So, $3500 pre-tax expense with your 30% tax reduction (my rates are higher but I will go with your figures) and you have $2450 per month after-tax + HOA and insurance.  HOA is $125, insurance probably around $100.  Like I said, $2700 per month.

Don’t post on my thread if you can’t get your calcs right.  You can put that kind of stuff on Lansner where there’s more conjecture than fact.  Very very few places will have a 1.8% prop tax + mellos roos load…  Maybe in VoC since the mellos there are $6-7K but surely not in NW II.  If you’d like to educate yourself on prop taxes, use this link:

http://tax.ocgov.com/treas/

You can check the real property calcs on any property.  I do this for every property I am interested in so I can make an informed buying decision…

And trust me, with a 55-60% LTV, sizeable personal assets to back even that up, and excellent front and back end ratios, obtaining a 2nd @ 8% wouldn’t be a problem.

Purplehaze - there is a reason that Robert J Shiller, who is in a better position than many others to hazard a guess at the bottom, refuses to make a prediction….

Haze - I’m not bullish on prices, but I will be a buyer long before most on this board.  I don’t care about valuations or the macro-economy.  I will live in my next house until I retire or die.  I am concerned with obtaining the home I desire for an affordable payment stream.  It doesn’t much matter what happens to the value of the home.  I will have 20-30 years in the place and the economy will probably cycle a number of times during my stay there.
If I have to pay $900K to get the house I want but can get a cheap 30-year mortgage that keeps my after-tax monthly spend on housing in the $3K range, that’s not a problem for me.  $3K per month is only 25% or our take home pay after funding 401k, college savings, etc.  $3K per month is only a grand a month more than people are paying to rent some 2 bedroom IAC apartments.  Where’s the risk there?  The rate is fixed for likely as long as I will own the house.  What will it matter to me if the value of a $900K house I buy today falls to $500K in three years?  My payment will be the same, still affordable.  Our incomes are likely to go nowhere but up…  Heck, I still wouldn’t be upside down on my loan. 
As a current homeowner, already losing equity in this downturn, I’d be very interested on how buying today for $900K would be risky or harmful to me given the above parameters.  I am open to your arguments. 

ipoplaya - what if your 20-30 year forecast assumption turns out to be not true? (ex. job relocated, move to take care of elderly parents, or whatever life may bring ...).  Being forced to sell at the bottom would not be great…

I am a VP and CFO in my current job, #2 guy in the company, owned by the CEO that will never move from CA.  Wife is a teacher in IUSD.  Irvine isn’t going to up and move all their schools someplace else…  Relo, not going to happen.  If my company went away, I’d go get another similar gig in one of the many wonderful OC/Irvine employers.  OC/Irvine is a great job market, that’s one the reasons I live here, own here, and will buy here.  Very few people need to relo from here for a job.  They might choose to go, but most likely there are many other similar job options here locally. 

We actually want/need to buy to have extra room to take in elderly parents (downstairs bed with full bath is what we want to add) if their life situation dictates that is necessary.  Only thing I can’t forecast is some extreme medical situation that might require temporary relo or death.  Death isn’t a problem as my wife and I each carry enough life insurance to pay off the mortgage…

Not to dismiss your question anon, as it was a good one, but I’m still waiting for someone to toss out something useful that I haven’t considered…

Read the Black Swan book; the problem is unknown unknowns.  I certainly hope that you live a long happy prosperous life, but the items Haze brought up are real and can affect you, especially if you don’t keep an eye out for surprising discontinuities.