"I hope you have patience if you are planning to buy in Irvine as HBs are locked into an agreement where the Irvine Co. must agree to any price reductions."

Well… yes and no.  In most of Irvine TIC has to approve price reductions (so I’ve heard), but in two places that is not the case.  One is Villages of Columbus because Lennar and Lyon bought the land, and the second is the former El Toro Marine Base because (again) Lennar bought the land.  Keep your eyes on those places because I think they have the ability to help regulate the home prices in Irvine.  Although Lyon is now private, Lennar has shareholders (and analysts) to answer to.

socalhousingbubble: "I guess we all realize that cars are (almost always) destined to only DEpreciate.  Their value gets consumed through use, which isn’t supposed to be the case with real estate.  The house may require maintenaince and refurb, but the underlying land doesn’t get "used up."
I agree with your statement that the land does not get "used up" unlike a car.  However, I think the real estate market is going to behave like the depreciation on a car over the next 2-5 years, in that you will end up with a negative amortization if you buy today at inflated prices and low interest financing.  Regardless (or irregardless, as Tony Soprano would say) of the financial comparisons, I think people now are approaching the home purchase decision the same way they approach a luxury car purchase - it’s the endorphins talking and rational thought takes the proverbial back seat:  i.e. consider the following emotions found on this thread and other threads in this same site: "It feels good,"  "I am sucker for high performance cars," "My knees get weak…" "I had a moment of weakness…" "my dream home", "...(near) dream home," "I love the floorplan!" "We popped in here today after hitting up Verandas today, and all I can say is "Oh my!" "(i love circles in houses)".

I’m paying cash.  Thus no "neg am" on the X5.  But still, and I will confess, a moment of weakness - that has lasted for several weeks, and undoubtedly will reoccur everytime I hit the gas!

Thread hijack alert!  I’ve decided to start paying cash for cars from here on out as well.  Trouble is, when faced with the loss of interest income, I’ll probably chicken-out and not buy anything.  I just got my 1099’s from Emigrant and from TreasuryDirect and these pennies from heaven are addictive.
The car I drive now is one that I can essentially rebuild forever… There are no $5000 powertrain components that would justify junking the car when they fail, unlike most modern cars.  I really have no [good] excuse to ever get rid of it.

Guys (gals) don’t get me wrong - I like high performance cars, hybrid technology and all - as much as the next guy, and burn enough of my hard earned cash to stay warm in the comfortable leather-covered cocoon of my luxury steel trap, but I still look at TCO (total cost of ownership) and historical residual lease values from ALS, and consumer reports when arriving at my vehicle purchase decision.  I just wish other people would step back and do similar analysis and research when purchasing a house in the OC, especially in Irvine.  (This forum, and oc-fliptrack’s wonderful blog being excellent starting points…)

Here’s the link to the most recent OC Register article on the slump in housing-related industries.  Also, here is an incisive comment on this article by calculatedrisk...

PETER: Y’know, I never really liked paying bills. I don’t think I’ll do that either.
LOL!

New Century lost 36% of its value… HSBC, world’s third largest bank, reported a $10B bad debt charge from subprime loan defaults…and someone asked if prices can appreciate from here? 

Here is one of my favorite articles of late… some "poor" flipper that is caught in the tide of a retreating housing market… boo hoo.  I know it isn’t an Irvine story… but it was both amusing and instructive all the same.
http://money.cnn.com/2007/02/08/real_estate/corey/index.htm?postversion=2007020815

we have been talking about whether prices can appreciate from here.  what do you all think about prices holding/stagnating from here on out for the next 5 years?
 

Some commenters fear that may be the case (me, too, sometimes), if you read between the lines of their comments.  It’s possible, but I think that would require lending standards rates to remain the same and/or interest rates to remain the same or go lower.  There are also quite a few vacant properties that were bought by speculators.  When they get tired of having their money tied up or can no longer afford the carrying costs (especially in light of the fact that costs are higher than rental income), they will sell.  For those folks with ARMs, as those reset, many will have to refinance (if possible due to lending standards changes) or sell.  More inventory w/desparate sellers = (hopefully) lower prices.  You can find some good financial discussions

here:  http://socalbubble.blogspot.com/ 

here:  http://piggington.com/  and

here:  http://calculatedrisk.blogspot.com/

"what do you all think about prices holding/stagnating from here on out for the next 5 years?"

This is the "soft landing" scenario. There are two main problems I see with this scenario: first, the large number of foreclosures looming on the horizon will put a great deal of "must sell" inventory in the market. If there are not sufficient buyers to take all these houses, prices will fall; second, 5 years of stagnating prices does not bring fundamentals back in line. Right now, the cost of ownership is double the cost of rental. Rents would have to go up about 15% a year for the next five years to bring the cost of ownership in line with the cost of rental. That is not likely to happen.

The overriding belief required to accept the soft landing scenario is that the cost of ownership will not realign with the cost of rental. This would be an unprecedented historical event. Whenever markets "correct" or "crash" or whatever term you want to use, values drop until they realign with fundamentals. This happened in the mid 80’s and again in the mid 90’s in residential real estate in California. This happens in stock markets, bond markets, commercial real estate, etc. Every financial market does this. In some asset markets the fundamentals are more difficult to calculate and thereby they have more volatility, but with real estate it is relatively easy because the alternative to ownership (rent) is easy to figure out and it is relatively stable.

IMO, the real question to ask is whether or not you believe residential real estate is permanently detached from its fundamental valuation and will remain overvalued forever.

I sure as hell hope things don’t get any more expensive here.  Both my work and my wifes work are finding it nearly impossible to hire anyone.  We have both had openings for over a year.  These are for mid level white collar jobs in IT and in marketing.  The type of jobs that are typically held by people in their late 20s to early 30s.  The #1 issue with prospective employees is the cost of living here. 

I do question how out of line is it the cost of ownership right now in IRVINE? is it really double like you said?

Let’s take the La Casella Plan1 at $700k. If a buyer has 20% down, and doing the 7-year ARM IO only at 6%.

Interest is at $2800

Tax is $1000

HOA $400

TOTAL $4200

Assuming he can tax deduction of $1200 per month, he’d be paying net of $3000.

Now if you rent La Casella plan 1, will it cost you $3000? I dont know but I think it is very close…

We can argue who can afford 20% downpayment to buy a house in Irvine? So that could be the argument not neccesarily whether ownership is pemanenetly detach from fundamental.

red, what would the calculation be for a 30 year fixed?  just out of curiosity!

red,

I suppose it does depend on how you calculate the cost of ownership. 20% downpayments, which used to be the norm and now are an oddity, will certainly reduce the cost of ownership because you will be financing less. I remember when this bubble first started taking off, I assumed move up buyers were taking their equity and making large downpayments to keep the cost of financing low. Some undoubtedly did this, but statistics show home equity at an all-time low, so mostly people just took on a lot more debt. IMO, if 20% downpayments ever became required again, the housing market would really crash hard because nobody has it. This is the big risk with the implosion of sub-prime.

Also, if you rent from the bank with equity participation using IO ARM instead of using a 30 year conventional mortgage, you can reduce your cost even further. If you are able (with downpayments) or willing (with exotic financing) you can get the cost of ownership closer to the cost of rental (you still can’t quite get there unless you go option ARM), but then you are magnifying the risk on the transaction. If you look at the equalization point where exotic financing reduces your ownership cost to match rents, you can actually make owning cheaper if you use an Option ARM with a teaser rate. That is one of the reasons those have been so popular. The danger of this kind of financing is obvious.

When you finance with a conventional fixed-rate mortgage, you are continually building a cushion against a downturn in prices, and hopefully, locked-in to a payment you can afford. With an IO ARM, you are doing neither. You are betting on appreciation, and you are betting on being able to refinance with equal or better terms in the future. If either one of these does not occur, you risk foreclosure (which many people are about to learn the hard way). Personally, I am not willing to take that risk because the consequences of losing the bet (foreclosure and bankruptcy) are greater than I am willing to tolerate. Other people have different tolerances for risk and may be willing to accept that. If past is prologue, buyers who used 7-year IO ARMs from 1989 to 1991 were financially ruined.

If being unwilling to use exotic financing means I will rent forever, so be it. If and when I finally buy again (I have owned before), I will use a conventional 30-year fixed-rate mortgage where the payment approximates the rental of a similar unit. I will count on my interest deduction to cover the cost of taxes, insurance, maintenance, and HOA. I don’t mind waiting and saving. It beats a life of debt stress and financial servitude, IMO, which is how I would feel if I purchased now.

fk 123,

A 30-year fixed-rate mortgage on $700,000 at 6% would have a $4,200 a month payment. The interest would be $3,500.

20% less for a downpayment would be $3,360 and $2,800 respectively.

Red, you forgot to include the opportunity cost of down-payment (around $600/month in a 5% savings account). Also, how do you get a $1200 tax savings on $2800 in interest? That’s 43%; seems a bit high. Your $3000 owner-equivalent rent seems about right though.
In any case, I think you are right on about one thing. Right now buying from the builders seems like a better deal than buying resale. At 230 times rent, the La Casella plan 1 may still not be a good deal, but it is one heck of a better deal than 90% of the resales you see. I bet this partly explains the interest that a lot of buyers still have in these new developments.

red: "Let’s take the La Casella Plan1 at $700k. If a buyer has 20% down, and doing the 7-year ARM IO only at 6%.

Assuming he can tax deduction of $1200 per month, he’d be paying net of $3000."
There are several ways to skin the proverbial cat.  If you are narrowly arguing the "affordability" question, then red, my friend, you have won.
There are several other points to ponder though:
Who in their right minds today will go for a 7-yr. ARM I/O in the current market clouded under uncertainty?  The implicit assumption in going the I/O route is (was?) that property values will keep increasing at a high enough rate that it will outpace any gains on equity you might have if you had a loan with both principal & interest.
Per a simulation I ran on eloan.com with your scenario, here is what the 10 year forecast looks on the 7-year I/O and a comparable 30-year fixed traditional loan.  Basically you just pay a "rent" in the form of interest payments for 7 years.  The maket being what it is, will not return you anything in the form of equity (in fact, it may eat into some of it).  If you go for a 30 year fixed, you pay $3400 or so for just P&I, which after taxes, it amounts to a deduction of $1,000/month.  So your total monthly "net of taxes" expense for the same plan 1 will be around $3,800.  This is not factoring in any loss you will have on your equity (down payment of $140,000) from day 1.  Good luck!
 

[url=“http://picasaweb.google.com/crucialtaunt2006/Loans”]
Loans
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this is great.  love the calculations.  i do like to know both sides, and i don’t think there really is a right or wrong on anybody’s decision to rent or buy.

i’ve heard that rent USED to be more expensive than buying, now obviously it’s in reverse by alot, but it’s good to see the monthly comparisons

i used to have a 3 year ARM, so i know about the risks of it.  i sold after 2 years, so i never did see the "dear sir, your payment has quintupled…. " letter.

fk 123,

In most markets in the United States most of the time, owning is less expensive than renting. Back in the days when downpayments were required, there were not many people who had the downpayment, so the pool of buyers was smaller. The only people who could play at the real estate game where those who had money. There were no Casey Serin’s out there borrowing $2.2 million with no money down and no verifiable income. House prices stabilize near their cashflow value because this is the price levels where people with cash will invest for rental income or rental savings. The net effect is fewer buyers in the market. Fewer buyers makes for lower prices.

Lenders used to require down payments for two reasons: 1. it showed you could be responsible, live within your means, and save money. This was a good sign to a lender hoping to get repaid. 2. It gave them a cushion if they needed to foreclose because above all else, lenders do not like losing money.

Sub-prime lending was the grand experiment with qualifying buyers who used to be excluded from the real estate market. The resulting influx of borrowers and lowering of lending standards (elimination of downpayments, etc.) spurred a dramatic increase in demand which in turn drove prices much higher. Now that this grand experiment with sub-prime is proving a failure, this demand stimulus is going to be removed from the market resulting in lower house prices for the foreseeable future; perhaps much lower.

Thanks for all the responses.

bigmoney - I was assuming write-off from property tax as well. But I heard about AMT which doesn’t allow property taz write-off, and I honestly dont know if AMT will effect my tax situation. Also yes I didn’t consider the income you would get from downpayment, but your $600 saving income will get tax.

crucialtaunt - I am not trying to narrowly arguing just to ‘win’ argument. I thought using a 7-year IO ARM was a reasonable comparison to current renting cost but maybe using 7-year IO was a bad example.

With 20% down and the payment of 30-year fixed at 6.5% is $3500. To make it simpler can we count on interest deduction to cover the cost of taxes, insurance, maintenance, and HOA? So it is a bit higher than current rent but it is certaintly not double?

Also I am mainly interested in local housing in Irvine. I dont know if assuming potential Irvine buyers putting down 20% is unreasonable, and I dont have statistic on Irvine home equity level.

So I agree that the housing price in Irvine right now seems a bit inflated and most likely I wouldn’t buy if it was for investment. But for ownership I am willing to tolerate 10-15% drop down the road, knowing the price will eventually rise. But if the drop is going to be 50% then I might start loosing some sleep.

So hopefully we can quickly tell whether the drop will be significant in 6 months. With my personal situation, it would be very difficult to rent forever. I might rather move someplace else.

couple years back i put 10% down.  20% would have been brutal!  think of all the McNuggets you could buy!

red: So it is a bit higher than current rent but it is certaintly not double?
Again, I reiterate, there are many ways to skin the proverbial cat (but you cant’ skin the same one twice !).
You asked the right questions yourself, and partially answered them…
"We can argue who can afford 20% downpayment to buy a house in Irvine?..."
I am sure there are plenty of people who could afford a 20% down payment on a 700k house, and still have enough liquid assets to tide them through any recessionary/job loss/income loss scenarios for a decent length of time (let’s say your monthly expenses were $10k including housing, you should have at least 12 months reserve in case of emergencies, i.e., $120k liquid (as good as cash) assets.  So someone who is buying in this market, should, in my personal view, have liquid assets of at least $140k down payment + $120k or roughly $250k to help cover the down payment and future emergencies.
OK- Now a quick show of hands, how many people can claim to have $250k in cash (or almost cash)?  Please answer the anonymous survey - I will post the results back tomorrow.

There are people in Irvine who can comfortably afford a 700K house. The problem is that almost all such people are likely in the top 15-20% of income earners, whereas a 700K house is about a median quality house. Call me greedy, but if I was in the top tier of income for Irvine I think I should be able to afford a top tier house.