I visited La Casella again today, at lunch. Gotta feed the obsession every now and then, ya know. I liked the models a lot more than I liked them the first time through, for some reason. Even Residence 1 with the casita – that could be my home gym!
I engaged the sales person in questions and she was very friendly and attentive. I was quite surprised by much of what she said, though. So surprised, in fact, that I expected my BS meter to be ringing in alarm. It was not, however. Was she just that good at smooth-talking? Or have I lost my ability to smell BS? Or could what she told me have possibly been, in fact, true????
1. Lennar has “paid the bank” for every La Casella unit sold thus far. In other words, they have sold every unit at a loss after taking into account the cost of land and construction costs.
2. During their most recent phase release, every single unit (8) sold out in one day.
3. Lennar has only purchased less than half of the land shown in their plans for final build-out at La Casella. The sales person said it was very likely the remaining units would not be built (by Lennar, anyway. She said Lennar would sell the plans and models to some other company who would take over the development). She said that they are in a “pissing contest” with TIC over final sales cost of the land, and TIC is not willing to come down enough to make it worthwhile for Lennar.
I asked, if by some chance TIC does reduce land prices, what would happen to the units’ asking prices? She said there was no way the prices would be reduced, as evidenced by the quick sell-out of the most recent phase release. She said Lennar would need to maintain or raise prices just to make up for all the losses incurred so far.
I then probed about who exactly has been buying these units. She said many single people have been buying them, with average incomes of 175k to 200k. She also told me that I needed to “change my lens” with respect to monthly carrying costs, and that if I wanted to own in Irvine, or anywhere in SoCal, then I needed to accept the fact that I would be paying 60-75% of my take-home pay on mortgage and HOA. I suggested that in fact most people were not using 30 year, fixed-rate mortgages, but she disagreed and said that most of the La Casella buyers had in fact used the standard, fixed mortgages, and were just paying big monthly payments.
So, your thoughts? Anyone care to comment? Clearly, La Casella is slightly less expensive than other options in Woodbury. But still. Sold out in one day? A loss on every unit? Mostly 30 year fixed mortgages? What is up with this story???
I would not believe a word she is saying…..not one word…..she most likely lied about her name…………
—–
175K to 200K for single people? not saying abnormal, it’s not just commom in Irvine. mid household (not a single person) income is less than 110K.
I really doubt they took a loss.
People pay 60-70% of their 175-200K to these houses and they lose money on those, just a big lie.
I find it very hard to believe what she said based on the following facts:
a. Though Lennar did report a overall lose in Q4 of 2006, they made money in their home building operation segment even with incentives, etc. Most of the loses are from land related write off, etc.
b. Builders in general has been making 25% Gross margin on their home sales ( before corp. overhead). I would assume they have been making more than 25% in CA. My best “guestimate” is unless they are offering more than 25% of price reduction from peak pricing, they are not losing money at all. Last quarter Lennar’s overall home sale gross margin including incentives, etc. was 8.6%.
c. It is possible that lady probably was referring to the fact that lennar as a corporation is reporting negative income. Since she probably doesn’t know much about financial reporting, she just interpreted as Lennar is losing money for every home they sell.
Bottom line: don’t believe what she told you. Just listen and smile…
“Every word she says is a lie, including ‘and’ and ‘the'”
Well, it may not be that bad. Lennar may be taking a loss as they overpaid for the land. Like most of the homebuilders, they wrote off a lot of acquisition costs for overpriced land.
The market does not care about the negotiation between Lennar and The Irvine Companies. Either houses will sell at a stated price, or the builders will lower price.
They wanted to sell these units quickly to try to create buying urgency. Even if they sold them under market, they will probably face a lot of cancellations.
“She said there was no way the prices would be reduced” Of course she would say that. They probably truly believe they are selling at the lowest price Irvine will see for all eternity. They are wrong, and they probably will reduce price again in the summer when sales are still poor.
“I needed to accept the fact that I would be paying 60-75% of my take-home pay on mortgage and HOA.” A bigger line of BS I have never heard. I, and many like me, will continue to put 30% toward rent and have the same quality home. There is a limit to people’s stupidity, and these people are pushing it. This one I find particularly galling. Remember about 6 months ago when oil companies were telling us we just needed to accept $4 a gallon gas? What happened?
Hmm… Some of this does does not jive with my recollection. When we were last in there about three weeks ago, all of the Plan 1s were sold out, but they had some Plan 2s available and maybe a Plan 3.
They told us that Lennar paid $750K per lot, and each lot holds three homes. (I’m sure they got a lower price on the lots that have only two homes on them.) So then we started calculating out a rough estimate of construction costs. Even if men and materials were $250K per unit (which I think is high), it only cost Lennar $500K per unit for land and construction.
That TIC is a bunch of bastards in negotiations is not a surprise to me, but I think TIC also has a vested interest in having in their developments reputable builders who are not going to go bankrupt mid-project. I doubt that anyone will take over mid-project, but if they do, I’d venture that it would be Cal Pacific (a TIC subsidiary).
Also, with respect to income, many sales people make pretty good money (in good years) and also first year lawyers at swanky firms are getting about $150K per year now. So there you have it: your neighbors would be lawyers and sales people. While the marketing says “Woodbury: Work, play, shop around the block,” it could be “Woodbury: Living in a special kind of hell while giving your college and retirement funds to Don Bren.”
If you want to have some fun, read this: http://www.irvineranch.com/whybuynow/
The stated cost is pure BS. The real cost of building including land acquisition cost is in the $150 range.
Jim at Bubbleinfo is constantly digging-up data on how buyers in his area are financing their purchases. I wonder if Zovall could pull all of the financing details on one of these tracts and let us sort through it. I’d do it but I don’t have access to the information. 🙁
The homebuilders will do everything possible to protect prices (not allow them to drop) until the project is complete, for the fear of lawsuits. They are more likely to offer huge goodies such as big upgrades, closing cost and fat commissions paid to realtors. I’m hearing stories of the builders paying 10 percent to realtors in Phoenix now, I suspect it’s coming to The OC.
What’s ultimately going to pull prices down? COMPS! It starts with those sellers that have large percentages of equity and can afford to discount the price. Then we have the massive flood of soon to be REO’s coming to market.
The cartel over at TIC can’t stop what is inevitably going to happen.
Once the homes close escrow and the title databases are updated with this info, I’ll be able to find out some details. Anyone know when the first phase will start closing escrow?
I find it a little disturbing that the salesperson “said it was very likely the remaining units would not be built”. How can a large builder like Lennar not finish a small tract that they had already begun? How will that affect the sub association HOA dues and existing owners?
10% to realtors is ridiculous. I saw an MLS advertisement like that for a resale home in Fontucky (err Fontana) sometime last year. What happens is that an unscrupulous agent will take advantage of a naive buyer’s misplaced trust and lack of education and stick them in a home that they can’t afford.
Just thought I would give me 2 cents since I just recently purchased a Plan 1 (Phase 1) at La Casella:
I have had a lot of time to speak to the Lennar reps at La Casella & I have found them to be very honest, nice people who have worked in the industry for 20+ years. I have had extended conversations with them on multiple occasions regarding all that was mentioned here.
The Phase 1’s were sold out before new years except for one plan 2 which fell out of escrow. The 8 Phase 2 units did indeed sell out in one day (I was there that day). The reason for this is they had a list of interested buyers (between 30-40). I believe most of the units sold to these people. These units were sold at the same prices as the Phase 1’s. They told me with no concessions (except closing costs), I cannot say whether that is true or not.
TIC has refused to budge so far on the land price & it is likely that Lennar will sell the rest of the community to another homebuilder. If this does indeed happen I cannot imagine they are making much money on these units, otherwise why would they go through this process?
As far as who is buying these units I can tell you that from who I have met it is mostly young couples, retirees (w/ kids moved away from home) & single child families. Most if not all had equity to roll over into these properties.
Personally, we ended up paying after negotiating concessions & including tax deductions about 40% of our net income in monthly payments including HOA, Property Taxes & Interest. We took a 7 year interest only instead of the 30-year fixed. This was very affordable for us.
After looking at Portola twice, Columbus Grove & every other Tract at Woodbury, we decided La Casella was by far our favorite & the most reasonably priced.
40% after tax would be about 60% before tax
Job matters
don’t u think u run into problem by putting 60% of ur income on home
40% after taxes on a 7 year ARM??? You better have lots of kids and plan on running a sweatshop off your property …. 😛 … oh wait, are you banking on another bubble in a couple of years? Where do I sign up !?!?!?
I have been reading this board/blog for a good 3 or 4 months & one thing I have come to realize is how many mean spirited people post on this board. Everyone has their opinion but this board is supposed to be for discussion. Every time I post, it is to inform & all I ever get is heckling. This place is like one of those stock boards pumping up penny stocks. It’s been real but this forum site is useless…
IrvineR, your math is a bit off.
40% after tax is roughly 28% before tax (probably less with deductions) — It’s well within reach for most folks (the 28% payment, that is). Albeit, it’s interest-only, hopefully he kicks in a few bucks in principal each month.
ie. 10,000 monthly gross, assume 28% taxes, take home net would be 7200. 40% of 7200, would be 2880 or 28.8% of gross.
David,
Some of the posters here missed out on the real estate train of the past 5 or 6 years and would like prices to come down so they can get on the train for the next cycle. Their eyes are on the next cycle, so they’d like to see it all come crashing down.
Some are just plain pissed that prices are so high that they can’t afford to buy a home. Some of us think a home is just a home (commodity) and not an investment. And thus should increase at current inflationary rates.
Each person has their own agenda. And some get a kick out of pushing people’s buttons.
Enjoy your new home….
tustinite,
It is your math that is off. To get to a 40% after tax percentage of income, you have to pay 60% of your income to payments and then deduct about a third of your payment at tax time. This is not a particularly good deal.
Also, drop the bitter renter BS. As a group, most people here are not looking to buy the dip and try to make a quick buck, nor are we upset that we missed the train as it left the station. You are seeing what you want to see. Are your eyes filled with greed?
Mostly we are frustrated that the cost of home ownership would require 60% or more of our income to obtain a property we could rent for 30% of our income. Many would like to own in order to have the security of knowing we could not be evicted, but with payment burdens so high, there is more risk of a bank eviction than a landlord eviction.
David,
I really don’t know what you expected when posting here. If you were looking for people to affirm your wise purchase, you are probably looking in the wrong place. Some of the sarcasm is not warranted, but one poster asked if you feel comfortable putting 60% of your take-home pay toward your mortgage. Do you? If so, you are different than most on this board who, when faced with the same decision, have chosen not to do this.
I genuinely hope you are happy in your new home. Everyone deserves that. I wish you well.
tustinite,
If after tax refund, he pays 40% of his income, if tax pays back him 20%, he ispaying 60% of his income. This is the number which people often consider.
Nobody assumes you were a bitter renter, but I guess you’ve spoken up for yourself as one. Continue to rent and rant all you want. I’ll just enjoy reading the vitriolic postings.
Look, you guys make it too complicated….
I’m a simpleton so I’ll do the calculation again.
If I take make 10K gross, and I take home 7200, and pay 2800 for P&I/HOA/Tax (assumption of 40% of net from David). That is 28% of the gross. Then get a tax deduction on April 15, which puts more money in his pocket. AS you can read, he counted the prop tax and HOA into his 40% gross so there is no tax implication. I’m assuming a 28% tax bracket without any deductions.
With your fancy math, no wonder you’re still renting and ranting….
In 2012, you’ll still be IrvineRenter… or is it IrvineRanter. Good luck with your apartment hunting.
Tustinite – that was uncalled for! I think david basically pays 40% of gross for PITI/hoa/tax, which is excessive for an interest only loan, by traditional standards, unless David is confident his income will rise dramatically in the next 7 years. Either way, he is consuming in advance of earning.
Let me try and explain this to you in the framework of your simple example.
If he makes 10K gross per month, and takes home 7200 (implying his tax rate is 28%) , David is paying a $4000 for P&I/HOA/Tax, and getting back 0.28*4000 = 1120, thus with a net expense on shelter of $2880, which is 40% of his net pay (7200)
That is a monthly payment of 40% of the gross. Tax effects can basically be neglected (40% of net income if the payment is net of a tax deduction is the same as 40% of gross, with both payment and income pre-tax)
ofcourse, he still has insurance costs, maintenance (negligible on a new home, I assume).
It is, to me, a little risky to spend so much of your income on shelter: Because he is not paying any principal, all his payment goes to cost of shelter. When you are allocating that much of your income to shelter costs, it makes it difficult to save and invest for any other goal.
One upside is that he has a real option on the appreciation of the home. If he expects the home to appreciate significantly in the next ‘n’ years, then that sweetens the deal somewhat.
Ofcourse, not knowing his situation, I assume the deal works for him, and hope he’s happy with his choices. All irvine renter was saying (I think) is that’s not a choice he would make
Vive la difference!
I know that many comments are received with sarcasm, but i think its possible that some are sent in simple disbelief – at least mine is. If you are against a wall and need to buy, certainly Irvine is a great location and even at these prices, a home purchase can be justified in certain situations… so I don’t take issue with the purchase – just the financing… that choice presents substantially more risk than the purchase itself. Also, I find it disheartening that a 7-yr interest only ARM results in a 40% of net monthly income expenditure… I’d expect to see 40% on more conventional financing as a comfortable level – and yes, even that level isn’t really comfortable.
If David is pleased with the purchase, then I am happy for him – if he is still reading these posts, I’d ask him to check-in with us in about 6 months and give us more of his impressions as his neighborhood develops and as he has additional opportunities to speak with his neighbors, etc.
Well I can see why some people might be upset. Obviously, prices can’t come down if new buyers keep scooping up properties :-). I’m sure there are plenty of people who will use 60-70% of their net income on housing if that is their dream.
That being said, to be fair, I don’t think David’s position is all that bad or extreme. I mean come on, I’m assuming his family must be making somewhere in the six-figure range from the figures he gave and the prices of the area he lives in. That leaves his family at least 60k to spend on anything else they want, so he’s definitely not under the poverty line.
Boycott TIC
I’m pretty sure that Lennar bought the land for the Great Park homes. They are planning on building 10k or so – so that should give Irvine buyers a lot more non TIC homes to pick from. Frankly I don’t see the demand for 10k more overpriced crapboxes in Irvine, but that’s just me.
BTW, if someone has to pay 40% of income on an interest only loan, the truth is that they can’t really afford the home. People are still buying homes that they can’t afford – this is keeping prices up there. What’s the point of actually paying principle these days anyway when you can get a 7 year IO? How long can this last?
@David
I’m not upset about your purchase or want to heckel you on your purchase. My concern is that you are taking a huge financial burden on a cocktail loan that is only going to baloon into a beast in a couple of years. Maybe you are counting on appriciation of your property. Maybe you are moving up fast in your job. Maybe you don’t care about saving for retirement. I just don’t know what your particular situation is. In any case, it was your decision and you have to live with it regardless of what we have to say about it. (who are we to judge you anyways ?!?!?)
A lot of people are doing the interest only thing for a couple of years as an alternative to rent. At the same time they can build up equity and make lots of money just by living there. What happens when the price of the poperty declines or barely keeps up with inflation? Interest only starts to look a lot less rosey with that scenario. I’m just surprised you didn’t go for a plain vanilla 30-yr mortgage given the present risk you incur with that ARM. Once you have to pay back principal the share of your income spent on mortgage is only going to be (way) bigger.
7 year ARM is conservative as most people will probably refinance or sell the property within 7 years.
40% of net income isn’t that bad. This means they have 60% left to spend or everything else. What’s wrong with that? Of course it’d be better if you can make it 30% but if one is comfortable with 40% so be it.
Owning a home is an American dream and this one a luxury house in a very desirable neighborhood.
Muzie has a good point. For high income family you CAN choose to spend a bigger percentage on your mortgage, and still end up with more than enough cash in absolute value. Isn’t that the point of being rich?
As far as the risk of housing price going down in 7 years, it is a different argument I think.
red,
let’s do a math with average incmoe for Irvine household which happens to be around 100K or so.
If we go with tax bracket of 28%,
after tax income = 72K
after tax – shelter expenses = 72K – 40K(40% after tax as David suggested) = 32K
So, you’ve got 32K to spend on daily needs and expenses, which are (For just two people, living a normal life in Irvine nor poverty neither luxury):
Tansportation: (9K/yr)
Car loan = 6K / yr (500/month)
Car Insurance = 1K / yr (sweet deal for Good driver, two cars)
Gas = 2K (2 Cars, not driving too far, close to job)
Food (People need food to survive) = 6K /yr (250/month/person)
Cloths( just to cover the body ) = 2K
Travel and Fun = 5K/yr
Medical: 4K
Total very basic needs: 9+6+2+5+4=2k/yr
So, you end up with 6K/yr (32-26) to spend on education, emergency expenses, retirement plan, Gifts for the love ones and list goes on and on. and remember you are just paying the interest and yet owing your house to the bank
The assumption is There is 100% job security, stream of money keeps coming. Otherwise, you need to pay 60K/yr just for your home. adding 32K expenses, 92K yearly expenses in case of losing job. The question is how much money have u so far saved. I assume u would have put it as a down payment if there was any.
Great debate guys. Thanks for keeping it relatively civil and not attacking people in a mean spirit, but instead attacking, vial logical, unemotional arguing of facts, data, and interpretation, decisions and choices. By reading well-thought, constructive, evenly delivered critiques of others’ choices and decisions, we all learn and hone our own choices with more wisdom and maturity. One point of clarification, red. These are definitely not luxury houses we’re talking about. David bought a Plan 1 which is roughly 1500 feet of attached townhome. Nice neighborhood, most certainly. Luxury housing? Well, yeah, it’s new. But not everying that is new is by definition luxurious.
Hi All,
I’ve been reading this post for a few months now since we plan on relocating out to Irvine in the summer from the NYC area. As I agree with most of you that there is a major bubble in the real estate market and that it seems unwise to take out crazy exotic mortgages, like interest only, people make their decisions for their own reasons and since we can’t tell them what to do, it isn’t productive to be mean-spirited. We should just thank David for providing us with his personal information and wish him luck. He seems like he’s made an informed decision since he has been following this blog for a few years and is not a novice and is comfortable with it. Your mean comments are not going to change his mind but they may dissuade others from providing us with valuable information about the market. So, please don’t have the either you’re with them or you’re with us mentality. That’s Bush rhetoric and look where it got us.
irvinesinglemom – Your point is well-taken. I probably should have said luxury townhome. My point is David could’ve gone with an older 3 bed 1500 sqft townhome in Northwood for example and probably save 100k-200k.
irvineR – for median income family I agree it is probably best to follow the 33% PITI guidelines as much as possible. Although it is just a guideline and I still think it is a personal choice.
Now I dont know how much David is making but I am just making a point that if you are a high income family i.e. making signicantly more than the median income than you CAN choose NOT to follow the 33% guidelines. You can even choose not pay principle or put as much downpayment and use it for investment instead.
But I do get your point, if majority of middle income class is spending 60% then it isn’t necessarily good.
And if (this is just an IF so pls dont get too work up) it turn out housing in IRVINE dont crash and in fact keep going up, David would have make a great investment choice. This is why I said housing price direction be a different argument all together.
David, thanks for your input. Not sure why anyone would attack you but I wouldn’t take it personally. It’s always good to have someone’s opinion on here who’s been through the buying process.
I’m from NorCal and we have similar issues. Some of the sales reps I can believe but most I cannot. I talk to a ton of builders and look at homes each weekend, and I get different stories each time. One builder told me prices wouldn’t go lower and the homes would be sold out and the incentives would simply disappear so I had better buy that day! And less than a month later she emailed me and said they’d accept my price, agree to all the concessions, and give me another $30K off the price and no closing costs. I thought if the housing market was getting that bad that fast I was going to sit on the sidelines. And that’s where I am today. The builder’s reps will say and do anything, except give you the bottom line price. I think it does move week to week but you need to hold your ground and negotiate your butts off. They are way more willing to give you concessions on actual assets as opposed to price so take that for what its worth. I’m sure Lennar is taking a loss at times, and I’m sure they want to get rid of the homes, even if it means going lower on prices but builders are not here to lose money. If they need to stop the development they will. No harm to them. As for the overall market, there are people out there who make $160-$200K as astonishing as that sounds, and they are probably paying well over half of their income to the house alone. But I also believe there are a lot of people and families out there who are scraping by month after month trying to find the way to pay the mortgage each month. That rep saying “you need to change your lens” is pitching you bad advice. No one should be paying that much in monthly payments, unless you have guaranteed income for life. If she’s saying that to all perspective buyers and the buyers are on the fence and scared they’ll lose out, then she’s preying on people who don’t know any better. That’s not right. It doesn’t help those of us on the sidelines because we’re playing with real money and aren’t comfortable with spending that much on a property. I’m not sure why a 7-yr loan is any better than a 30-yr, in fact the bond yield curve is still inverted so it doesn’t make a difference. The only thing I can think of is that people are in the same boat as David and making interest only payments, which is helping to stabilize the market. If people were to be in traditional loans, e.g. 30-yr, P&I, 20% down payment, and getting loan 3-4 times their annual salary, they couldn’t possibly be in this market, or most markets in CA. It’s a gamble, and many home owners are losing. And like another poster here said, they are hoping and praying rates stay low and price go up so they don’t lose everything. Otherwise, it doesn’t make sense to own now unless you truly can afford it and want to be an owner as real estate is done with the double digit annual appreciation. That’s what fueled the panic buying in the recent past. Not sure why people are buying into this development recently unless they are coming down on pricing or giving enough concessions to make people sign on the dotted line. Hold tight guys, this ship is still in rough waters.
Irvine renters sample budget breakdown, and red’s comment that ‘you still have 60% to spend’ prompted me to wonder: does no one save for retirement, or emergencies any more? do people not give away any meaningful % of their income? are people making 100k (median) willing to live day-to-day, paycheck-to-paycheck (which is what you are doing if you consume a 100% of your take home pay)
that is kind of scary (atleast to me).
red – i also always thought the more you make, the less (as a % of income) you allocate to consumption (e.g. housing) – for most wealthy people, their home is only 10% of their assets, while for the median earner, the home is the biggest asset (as much as 80% of net worth).
i guess its about choice and priorities…and i’ll end up being the ant that gets stuck supporting the grasshoppers come winter 🙁
here is what i would think is a reasonable budget if we made 100k in a family of 2 adults (no kids):
Retirement: 10K
charitable contributions (pre tax – since deductible): 5 K (5%)
Taxes 28K
net take home: 100-10-28-5 = 57k
savings: 5 k
food, utilities, phone, cable, internet (family of 2): 12K (1 K per month, assuming frugality)
clothes, entertainment, gifts and travel: 4K (just over 300 bucks a month)
transportation: 5 K (assuming car is paid off and this is just for gas and insurance)
amt avl for housing: 31 k = 2.5 k per month net of tax
With 10% down, 7% 30 yr mortgage, 1% property tax and 1% for hoa, insurance and maintenance (low estimate) this implies a maximum house value of $300K (down payment of 30K, which would take you 5 years to save at your current savings rate and 5% interest – I’m not even counting closing costs)
this budget assumes you live pretty frugally in general, that your cars are paid off, that you have no student loans or credit card debt, no kids and childcare expenses, and have 6 months of living expenses stashed in a CD. And you live in an area with 1% property taxes.
the ‘slack’ in your budget is the tax deduction you get from mortgage interest and property tax deductions. In my experience, it is best not to budget for that money, because something always comes up, especially when your budget is so tight
I guess the old rule of thumb (2.5 – 3 x gross income for max home value) does apply, atleast at median incomes….for me to be comfortable.
anon – There’s no question that I would LOVE it if La Cassela Plan 1 is $300k. I am too shopping for new home in Irvine right now but it makes me wonder if this is wishful thinking.
If the price is indeed 300k and with so many people wanting to live in Irvine now, wouldn’t it start bidding war all over again? People are still greedy.
So unless something dramatic happens in the future be it rate hikes or massive foreclosure or job loss I really can’t see price going down to 2.5-3x income in Irvine.
Irvine Wanna Be
“I’ve been reading this post for a few months now since we plan on relocating out to Irvine in the summer from the NYC area…”
Please stay in NYC! – God, we don’t want to have to create the sequel to Godwin’s Law – see how long it takes for a blog discussion to end with blaming Bush for the problems in the Real Estate market, but if your’re not dissuaded by my plea — I have some property in Ladera Ranch that I would like to show you.
Very interesting discussion, though I am left with two questions that remain unanswered:
1. Why is a 7 year interest only mortgage repeatedly referred to here as an investment? Where I come from we call that “rent.”
2. Why would anyone with a soul want to live in Irvine?
Papa
Thanks for the unproductive comment fueling into the divisive mentality.
snord – Real estate doesn’t generally go down in value in longer term unlike cars for example. So if you consider 7 year as a cycle that can ride out any downturn it will be a good investment, i.e. you’ll end up with some equity. As far as the IO option, you can save a few hundred dollars in monthly payment by not paying principle. If it turns out sometime in the 7 year the rate drops significantly enough you can always refinance and perhaps start paying principle if you like.
I can’t answer you second question. I like Irvine so maybe in your book I dont have a soul. My question to you though (not trying to be sarcastic but genuinely curious) why are you reading this blog if you dont like Irvine?
“If the price is indeed 300k and with so many people wanting to live in Irvine now, wouldn’t it start bidding war all over again? People are still greedy.”
Red,
Your comment touches on something that will change before the market hits bottom. People are greedy, and they still believe in house price appreciation. At market bottoms, they don’t.
Between 1995 and 1998 when the market was bouncing along at the bottom, people had just witnessed 5 or more consecutive years of declining real estate prices. Nobody thought prices would go up again. The only reason they didn’t continue to drop was because rents finally caught up with payments, and it made sense to buy. The fundamentals aligned with prices again. This happens at every market bottom.
Last time it took 5 years of declining prices to defeat the belief in continual appreciation. How long will it take this time? I don’t know, but I suspect with the pain that is coming, people will be much more cautious and be much more suspect of claims of perpetual appreciation in the future.
IMO, a 7 year note is still financial suicide, it is a time bomb with a longer fuse. It will take 12 to 15 years for fundamentals to catch up to this market. That doesn’t mean it will necessarily take prices that long as we may begin another bubble sooner than that, but I wouldn’t take out a 7 year note believing that prices will be higher then. They probably won’t. If you did that in 1990, you would have been toast in 1997.
Singlemom: I wouldn’t trust the sales peeps… I used to work for a large mortgage wholesaler… most people used some sort of “funky” loan to qualify. Granted we specialized in Alt-A (liar loans)… people with good credit, but stated income/assets…. we did offer full doc loans… but most people don’t make enough to qualify for these super jumbo loans (>650k) that they need to buy 750k+ homes.
David: thanks for the input… information such as yours help the rest of us understand who/how people are buying… I hope the “haters” on this blog didn’t scare you off…
Since David is probably no longer reading and providing valuable information on why he chose to do so… why don’t I give you some real life examples of why people might be buying right now.
First: my wife is on maternity leave… so IF i were to buy right now… my income would be the only verifiable income… but still probably enough to qualify for a 7/1 IO hybrid ARM for a house such as the one David bought. IF i had the balls, I could take on a mortgage @40% of my take home… cause when my wife goes back to work… in 1-7 years… whenever she decides she’s ready… our total household income would be about 80% greater.
Second: a coworker of mine… her husband just made partner at a law firm here in irvine… i don’t see why they couldn’t do a 7 year IO to buy a home they love now…. cause after he pays off school and whatever else debt they have… i’m sure they could qualify for a refi into a fully amortized loan.
Third: a friend of mine is a dentist… bought/took over somebody else established practice. He’s pulling in 250k+… but with the loan he took out to buy the business and school loans… he is agi is about 75k… he plans to pay it all off in the next 5 years or so… but after that… i’m sure he would be able to refi considering his take home would be much higher.
and all three of us are in our late 20’s too young/not enough credit to buy before the market run up… not sure if that matters… but it gives you prespective on why/how we have not bought yet and are itching to buy now.
so there you have it… 3 examples of how someone could buy now with a toxic loan and still be comfortable with what MAY happen with rising interest rates.
and finally, Snord: why would anyone want to live in Irvine… it has good schools, it’s safe… and the another reason i want to live in Irvine… becasue I’m asian… thing is most of you (i’m assuming are white) can live pretty much anywhere that is nice…. and feel safe… I can’t. I would love to move to Oregon, to Utah… heck, to Idaho… it’s so cheap out there… but I can’t… people look at me weird… i can’t even go to ventura county or san bernandino without people telling me to “go home” (this was as i was helping my cousin open up a store… chicken shits yelling it out of a car as they drove by)… or callling me my wife a “nip” cause she was saving a seat for me in the theater… this happened only a few months ago in camarillo. so there you have it… why i NEED to buy in irvine… go ahead and flame me for whatever… i’m going to go yell at the fools over in quail hill thread.
irvinerenter – you are speculating something bad will happen in near future that changes people psychology and trigger housing crash. Although there’s a possibility you are right, there’s also a possibility of soft landing and Irvine’s infrastructure becoming strong enough to support high housing price.
The waiting game can be mentally exhausting, and some of us just want to find the best deal we can afford out there right now as a place to live. New home pricing has dropped 10-15% from the peak, and there’s sign that people start buying again.
And if the housing do crash and we are still around with some cash we can probably buy one or two investment properties to offset the loss.
So yeah.. there’s a risk going with 7 year IO loan but if that is what you can afford as long as you are aware of the risk it should be ok.
If you bought in 1990, and you could afford it, the rate actualy drop in early 90s along with the housing decline. So you might end up refinancing to a lower monthyl and be just fine if you didn’t have to sell during the downturn. If you lost your job or got a divorce then yeah you’re screwed. But that’s life.
People who still believe we’ll see RE price appreciation in the near future are the same people who bought internet stocks as the went into a free fall in 2001-2003. Even as people lost much of their retirement savings, they were chasing the stocks as prices fell to near zero. I see that same mentality in RE which is why you still need to be careful. Don’t follow the other sheep off the cliff.
I guess that I have a vastly different level of confort when it comes to monthly expenditures. We currently spend 8% of our income on rent and I feel that 8% is a good number for us. Plenty left for investing for the future: kids college, retirement, etc, and we can live a good life.
I guess the difference in mentality is that some people think that their home is their investment, whereas I consider my investments my investment.. Right now a home is a depreciating liability, not an investment IMO.
There will probably be a lot of sob stories in the future as more and more baby boomers start to retire and realize that their only “investment” (home) isn’t as good as they thought.
Hi David,
Congrats on the new home! Buying a new house is like buying that new car, where everything is nice and shiny, and you know you’re the first person to ever owned it. I bought my first brand-new condo in 1990’s and the first thing I did when I got the keys, was to go in and roll around on the fresh carpet like cat. 😉 But then I had to rent it out to a stranger because I had to stay home to look after my grandpa. 🙁
I’m curious as to your decision on the purchase — tell us why you like the home, and why you choose 7 year interest-only. I’ve looked into Morgan Stanley/Dean Witter’s 10-year interest only loans (“Fixed-to-Adjustable”), but didn’t think they make sense. So I stuck to 30-year fixed mortgages.
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I see many people trying to do calculations on mortgage and living cost… generally speaking, on 30-year fixed loans, in the beginning about 90% of your monthly payment is interest and therefore tax deductible. In David’s case his loan is interest-only so wholly tax deductible, along with property tax and PMI (if any). I donno what David’s monthly payments are, but he prolly gets a nice fat cheque from IRS every year.
As for income level, I think the $100k figure is from 2000 census? Most of my friends in Irvine make over that, but they’re all mid to late 30’s so it wouldn’t be a fair comparison to young family in their mid 20’s. They also engage in various side business/investments and do no depend on a single paycheque.
I am also curious about the loan so I checked with the lender. It seems that the best option right now is probably 30-year fixed with 10-year IO option. But perhaps when David purchased the rate was different maybe the 7/1 ARM is a bit lower. I know in Nov/Dec lasy year you can save $200-300 per month on $500k loan with 7/1 ARM vs 30-year fixed with 10-year IO.
As far as the income level in Irvine, I’m guessing the newcomers have significantly higher income. But the W-2 median income is probably still around $100k if not lower.
Does anyone have some general statistics on the mean and/or median home prices in Irvine? As well as the volume of new home construction in the 1st, 2nd, 3rd, and 4th pricing quartiles?
I keep seeing the 100K household income number being thrown around and I am wondering what the volume of 100K households is in comparison to new home construction…
Eg. if there are currently 300 new homes for sale in Irvine at the 900K-1mil level, are there really 300 households (looking to buy) with the necessary AGI’s (200K+) to afford them?
Eg. if there are 600 new homes in the 600K-700K range, are there really enough households available looking to buy??? Well, you get the idea…
Someone here must have a better focus on the supply-demand model… after all, it seems reflected in the prices that we have seen coming down in the last couple months…
As for the comment from “fallen [down and] cant get up”… wow!
grewup: here is a link to a aug. ’06 oc register article…
http://tinyurl.com/yuodme
it states that 30% of oc “household” income are 100k+. not exactly the data you were looking for but it gives us a little perspective.
to all: i must applogize for my rant above… everyone has their issues and hardships in life… i wasn’t looking for anyone to pity me. i was trying to explain that a lot of places some people consider “crappy” are the only places where other people may feel they belong. and because of that… prices will always carry a premium… places like monterey park and garden grove are relatively expensive because of this (of course i do not have any facts but i know lots of families that are there because of this very reason). anyway, i’m starting to babble again… i promise to keep race outta my future posts…
grewup: here is a link to a aug. ’06 oc register article…
http://tinyurl.com/yuodme
it states that 30% of oc “household” income are 100k+. not exactly the data you were looking for but it gives us a little perspective.
fallen_cant_getup, keep ranting…love that asian perpective.
She’s a big fat liar …
A simple house (stucco or vinyl box) of ~3000 sqft will cost 120-130K to build if they build in lots of 5-10. I know, I live in one that cost $150 in move in condition.
Add permits, land costs, sewer/tap costs, and the higher $$$ fixtures … you know, I have regular cabinets … adding maple will be 1500 more, like that and your final cost is what it costs the builder.
If land cost say 1/4 mill for that 1/4 acre (add in your share of common area and street area – that means an acre costs 1 mil) … the house should be under 400K for 3,000 sqft.
Loss – no I dont think so.
Overpaying for land and subs and everythign in general cos they bought it last year … and passing on those costs to you priceless.
I also am a civil engineering graduate who has seen his grandpa build a house 1 brick at a time.
I also was planning to build a custom log home on my lot in the last few months.
These calculations are totally valid … what varies from location to location is the cost of land and permits.
Cool.
Cow_tipping.
Boy, lots of calculations. But as a CPA, David might consider something:
On 10,000 income you’re in an overall greater tax rate than 28%. FICA & Medicare take 7.52%. And Gov. Arnold gets his 7%. Oh, and the good old AMT will wipe out any deduction for property taxes (you can’t take a deduction for taxes in AMT.) Oh, and you can’t deduct Mello Roos, sorry, but that’s reported now to the IRS by the County.
Don’t know if anybody’s bitter. I’m not – own a single family in Irvine I bought in 91 and a condo I bought in 87 and paid off the 15 year loan in 2002. Owner, renter, whatever, prices are out of whack and are going to fall. Yeah, I’m going to take a hit on the equity in those two properties. Already have compared to last year. Tried to sell the condo for the last comp price last November, got zero real offers in 60 days, so my renter gets to stay. Oh, well.
But David should remember that a home is not primarily an investment — it’s where you live. So enjoy it. Lose money, make money, whatever. Who’s going to care 15 years from now? You’ll remember the Christmas tree that your kid knocked down, the dishwasher that overflowed, the kids racing toys through your kitchen. That’s what a home is about. In the short run, you’ll probably take a big hit. Join the club. In the long run, you’ll be fine. Enjoy your new home.