What if Prices Dropped to Fundamental Values?

We have speculated a great deal on this board about the future of home prices in our area. The arguments all boil down to a simple conjecture: will prices fall to back to their fundamental values, or are prices going to remain permanently detached and inflated? I make no attempt to answer that question here. The chart link below is a graphical representation of what it would look like if home prices fall back to their fundamental valuations in Orange County.

Orange County Median Price Projections

Below is a link to the excel file I used. It is a bit messy, but experienced users can probably navigate it.

Orange County Median Price Projections Worksheet

BTW, I was thinking about the current state of the market, and Wile E. Coyote came to mind: An allegory for our times. The greedy FB’s chasing their fortunes leading to their destruction. I found it particularly poignant the moment of realization when Wile E discovers he has a serious problem.

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49 thoughts on “What if Prices Dropped to Fundamental Values?

  1. IrvineRenter

    SoCalwatcher,

    You should be able to expand the size of the image to read it better after it is opened. I was able to do this in both internet explorer and firefox. In fact, the image is probably a bit to large, but I wanted to keep the text as readable as possible. I also posted the file in the forum. You can try there, perhaps you will have more success.

  2. Irvine123

    IrvineRenter,

    Assuming I am reading your chart right: you are saying in Jan 2001 the media housing price is 230K, and the “fundamental value” in Jan 2014 should be $298K. This gives an average annual appreciation rate of 1.99% within the 13 years.

    Historically, real estate assets always to min, even in mid west, etc can beat inflation by several points, especially if we can all agree that Jan 2001 real estate value can be considered at “fundamental value” in your language.

    Would you share with us why you think 1.99% is the right appreciation rate?

    I hope I read you chart right.

  3. IrvineRenter

    Irvine123,

    I used a 3% rate of appreciation in wages/rents compounded quarterly. I played around with the rates to find the one that most closely matched the historic data points for income I had from 2001 and 2006. Another measure to check would be the average rental rates I projected from these income levels. I have shown the rental rate used in the fundamental value calculations and its relationship to income on the chart.

    Also, I would note that prices were above fundamental valuations in 2001, just not as bad as they are today. They were at or near their proper valuations from 1995-1999.

    P.S. I went back and checked the worksheet, and I found a rounding problem that was making the rate of appreciation too low. I have corrected the error. Thank you for catching that one. The chart and worksheets are updated.

  4. Nani Mouse

    I’d be curious if your model works for a longer period of time, say from 1985.

    That way you can see what happens during the lean years of 1990-1995 as well as some of the up years.

    Also, what are you using for your data sources? I’ve seen all kinds of median housing numbers for OC and it’s hard to tell which is reliable.

    Here’s one set of numbers for OC real estate that I’ve seen.

    http://www.ocalmanac.com/Economy/ec37.htm

    It’s from the California Association of Realtors so I’m not sure about it’s accuracy. I haven’t plugged them into your spreadsheet so it may be all relative…or not!

  5. Chuck Ponzi

    Irvine 123,

    It is mathematically impossible for housing prices to long-term exceed inflation. If you go back pre-1965, you’ll see that for about 40 previous years it did not even match inflation.

    I did a post some time ago about this called:

    Trees Cannot Grow to the Sky

    those who fail to study history are doomed to repeat it.

    Chuck Ponzi.

  6. IrvineResident

    IrvineRenter,

    Thanks for the graph, nice job.

    The most recent bubble is surely different from past ones In 2003 we were already in bubble area which was comparable in magnitude with the past bubbles. I think those forces that pushed prices higher from 2003 to 2005 (second super bubble), will bring the price down quicker than previous bubble. and then we may see gradual depreciation towards fundemental value.

  7. IrvineMom

    I am not sure about the graph. Many people bought in the last housing boom (1996-2000) for about 1/3 of the price now. These people can either sell old and buy new home with no problem, assuming their income stays flat. Or they can take the equity out, buy new one, and rent the old one for possitive cash flow. Does this scenario fit most of folks in this forum?

  8. Louise

    I think it looks like prices goes down faster than in your graph. At least in Valencia, Ca. We rent now, and have been looking at houses for a year. The house we rent now (new construction), was listed for $675000 a year ago , and similar houses sell now for $500000- $575000. I am so glad we didn’t buy. I check my zipcode (91354) on realty trac regularly, and pre-foreclosure have doubled since august 06 and bank owned houses have gone from 30 in august-06 to 146 today, many of them are located in my area (tesoro del valle).
    I guess I am one of the many people that really, really wants a house, but cannot afford right now. Well, I think we wait a little longer to see what happens!
    Anybody that has any suggestions or information about the Valencia area?

  9. Neil

    Irvine Renter,

    Thank you for your analysis. I’ve just sent a link to this article to a friend who wants to buy into OC. Your analysis is conservative and smart.

    I personally am even more bearish on OC real estate. I do not believe 2007 prices will hold as well as you predicted due to the sub-prime collapse and resulting OC job losses as well as inability of OC “debt owners” to refi out of their problems. I foresee quite an issue in August onward due to REO’s hitting the market.

    But I am shooting more from the hip. I do not believe this will go as past recessions as the last time we had a significant recession the majority of the laid off population had years of savings and could thus sit for years.

    I have to agree with Chuck Ponzi. To paraphrase, the sheeple are about to get a history lesson.

    Notice I only disagree on timeframe, not trend. ๐Ÿ™‚ I really like this analysis. Thank you for posting.

    Got popcorn?
    Neil

  10. Amateur

    Louise

    My advice is to wait….. everything being said on this blog will be emulated in Valencia as well. I lived in Valencia for 18 years – 2001 prices for similar homes were 40% to 50% less than current asking.

    Btw – Tesoro Del Valle are very subpar KB Homes – built on compacted earth. Those homes were not there in the 94 quake – all homes built on compacted earth in Valencia were damaged. When you do buy, make sure you buy a home on a solid lot (also, Tesoro is within 1/2 mile of a local fault zone).

  11. Peter

    While I agree wait for a couple of years (may be two) is a good idea, but I just can’t image the prices will gone down so much. I think the real inflation rates should be around 3.5% and the avg prices for 2001 is much higher than $230K. Also, the new homes in Portola Springs and
    Columbia Gloves already depreciated around 15% (include rebate and all kinds of discount).

  12. IrvineRenter

    Peter,

    Thank you for your reply.

    You stated, “but I just canโ€™t image the prices will gone down so much.” That is exactly the reason for this post. This bubble is so large, and the detachment from fundamental valuations is so great that it is very difficult to grasp it.

    “I think the real inflation rates should be around 3.5%”
    When you plug that number into the spreadsheet, it raises the fundamental value in year 2014 from $336,000 to $359,000. Prices are still hugely overvalued, it just makes the bottom a bit higher.

    “and the avg prices for 2001 is much higher than $230K”
    If the fundamental value is approximately 4 times income, then $230,000 is the right number for 2001. The actual median was $276,000. I would need to go back to about 1999 to get back to a 4 times income match. It was actually less than 4 at the prior bottom in 1997.

    As for the dropping prices in the new communities, this is a great start, but it hasn’t changed the median much yet. If prices are going to drop down to fundamental valuations, they have a long way to go.

  13. IrvineRenter

    Neil,

    I am seeing the same factors in the market you are. I just don’t think it can happen as fast as you are hoping. Real Estate market psychology changes slowly, and it takes a while for new comps to impact asking prices and ultimately sales prices. IMO, for this to even be resolved in 5 years is going to take a few bouts of panic selling.

    Random Toad

    “Your long-term forecast appreciation is just pure speculation.” Yes, the chart was intended to show what would be required in order to bring prices down to fundamental valuations. I wasn’t saying either it will or it won’t, I just wanted to show what it might look like if it did.

    hbb,

    That is great data. If you don’t mind, I may use it at some point.

  14. gn

    Compared to the last bubble, the current bubble was inflated by more money from Wall Street. This is why the current bubble is much larger than the last bubble.

    On one hand, Wall Street can quickly feed a tremendous amount of money into a market. On the other hand, it can quickly remove the money (It can be very “nice” & very “cruel”).

    A house has 2 aspects: a shelter & an asset. It used to be that, the “shelter aspect” is more dominant than the “asset aspect” (that is, a home is primarily a shelter). Because Wall Street is involved in the current housing bubble, homes are increasingly viewed more as an asset than as a shelter.

    Since Wall Street is starting to remove the money, I suspect that the price drop in the next 2 years will be fast and furious. This time around, the market may reach the bottom faster than the last time.

    IrvineRenter, any thought ?

  15. IrvineRenter

    gn,

    I think it is certainly possible, but when I run the projections (like in the spreadsheet for this thread) I just can’t get myself to put in YOY declines in excess of 20% and feel comfortable with it. That rate of decline is unprecedented in a real estate market. With stocks or other more liquid assets with much shorter sales periods (houses take a relatively long time to sell), it is easier to see very fast market price adjustments. There is so much about this bubble that is unprecedented, perhaps we could see a faster decline. When you look at the rate of decline in the previous bubble, there really was no period where panic selling took over. IMO, it would take a true market panic to make a real estate market decline more than 20% in a single year. Maybe it really will be different this time.

  16. gn

    >> will prices fall to back to their fundamental values

    IMO, definitely yes. Here’s why: In a free market, whenever there is excesses, there will be a correction. The correction may be delayed, but it always come. Otherwise, the free market doesn’t work. And we know that the free market system in the U.S. has been working for the last 200 years.

    Since home prices have been going up for so long, most people have a hard time believing that prices can fall %40 or more. But that is just human psychology. In the end, the realities of the market will always trump the psychology.

    Now, there is more. There is an old adage:

    “Excessive things correct themselves excessively.”

    Because the correction itself is “excessive”, prices will fall to a level that is below their fundamental values.

    Adages are created/formed after people observed many occurrences that follow the same pattern. So, they tend to be correct. As the French like to say:

    “The more things change, the more they stay the same.”

  17. Anon

    I did a similar analysis using OHFEO data from 1975-2005. For the US as a whole, housing appreciated by 1% real (i.e., above inflation) for the period 1975-2000, and then at twice that rate if you include the 2000-2005 bubble.

    But, the long-term appreciation has been higher in several areas, including SoCal. I think you should assume appreciation of 3% real, which would be more like 6.5% nominal.

    You still get an ugly crash, just not quite as bad as your estimate.

  18. IrvineRenter

    Anon,

    Notice what else has been occurring as Southern California has experienced appreciation at 3% above inflation: our price/income ratio has gone up from near 3 in the 1950’s to between 4 and 6 at market bottoms, and the lowest 20%-30% of wage earners cannot afford a house. Trees have been slowly growing to the sky. As a society we have accepted that putting 50% of your income toward a housing payment is “normal,” and that higher and higher percentages of the poor are permanently priced out of the home market. Maybe what gn said above will come to pass, and this crash will bring prices all the way down to a price/income ratio of 3 and housing will be affordable to all again (at least those who have 20% downpayments and use conventional financing). We are entering uncharted waters, if the chart on this thread is a map, “here there be dragons.”

  19. red

    Let’s not get too carried away. First of all we probably should not really make economic prediction more than one year ahead. As IrvineRenter said, this is just an “what if” analysis. It makes an interesting game for bubble sitters but IMO we should not read too much into it.

    So far all we know is we have problem with subprime borrowers which is a small percentage of all borrowers. Lending standard is tightening but shouldn’t effect the prime borrowers. Borrowing cost is still relatively cheap.

    Recent news probably make potential buyers more cautious but they are still right there on the fence ready to jump.

    Most buyers are not “true” bubble sitters waiting for fundamental to return, they are just worry that price will drop further. But once the price hit 2003-2004 level in the next couple of years, I think buyers will start buying again.

    In this current downturn, I think the market psychology and buying power will determine the bottom – not necessarily your idea of what the ‘fundamental’ should be.

  20. ocbubble

    red,
    my co-work bought a house for 2004 price 2 months ago.
    there is no more buyer left willing to pay whatever to own a shoebix in oc.

  21. gn

    red,

    >> Borrowing cost is still relatively cheap

    The mortgage payments are out of line with incomes. And mortgage payments already have interest rates factored in. This means that, even with the current low rates, home prices are out of line with incomes. So, it’s NOT the borrowing cost.

    Money from Wall Street gave speculators the buying power to buy houses. In the last few years, demand from speculators have driven prices up. Builders have been building houses to meet this speculative demand (which is an artificial demand).

    Also, Wall Street money allows renters (who do not make enough money) to buy houses. I’m sorry to say this, but, the reality is that not everyone can afford a house. Wall Street money allows EVERYONE to buy. This also creates an artificial demand. Again, builders have been building homes to meet this demand.

    The problem with artificial demand is: it can disappear quickly. Speculators need to “unload” their holdings to realize gains or avoid loss. “Fragile homeowners” (financially weak owners) have difficulties handling the ballooning mortgage payments.

    All of this results in a surplus of homes. I know, it’s hard to believe that there is a surplus. It’s because the surplus is being distributed among a large number of speculators & “fragile homeowners”. This creates a perception that there is no surplus.

    This surplus is being “released” into the market in various ways:
    1. Vacant homes for sale in the MLS listing.
    2. Foreclosures.

    It’s true that there are “fence sitters” waiting to buy homes. But I think the number of “fence sitters” is much smaller than the number of surplus houses. All bubbles result in large surpluses.

    >>I think the market psychology and buying power will determine the bottom

    It’s interesting that you mention psychology. Spychology (like the pendulum) tends to swing from one end to the other. In the late 80s, most people are bullish on housing. By the mi 90s, most people were very bearish on housing.

    Regarding buying powers, prices will have to fall 40% to be in line with buying power (income levels).

  22. neal

    Well, I share your sentiment but I think you failed to consider 2 of the MOST important factors here:

    1. Interest Rates – a signifcant reason (and justification) for the higher prices is interest rates. Because of low rates, a higher price is affordable off the same say $2000 per month. Sadly, no one can control for this (which is probably why you left it out) but it is probably the single biggest wild car in determining where this all goes.

    2. Economy – Previously most housing bubbles were in sync with the US economy; jobs make more money and housing demand goes up. This is an anomoly of course engineered byt the fed, but it turns these rules on their head and makes historical models nearly impossible to compare. As the housing market is cooling, the economy looks pretty darn good right now. If it takes off again, there’s no way prices are going down much.

    3. California – California does NOT have a history of following the national inflation rate of 3%. California prices increase at a far faster pace overall than the rest of the nation.3% assumption is just rediculous!

    So, again – I share your opinion that we’re in for a little bit of pain moving forward but you have to look at this holistic picture, otherwise there’s no point in making predictions. ๐Ÿ˜‰ If I had to guess, I’d say 15-20% overall drop in housing values over the next 2-3 years max. Beyond that – it all depends on what happens in the economy and the interest rates market (aka International bonds).

  23. neal

    Oops – I meant 3 factors. (post above)

    Also for what its worth, I’m like you … waiting on the sidelines because I know there’s a drop coming (sadly). I just don’t agree it will be as bad as you think. I *hope* you’re right … but I just don’t see it.

    N

  24. MarkusArelius

    The 4 bed, 2.5 bath single family home that I’m renting in Lake Forest was purchased by the owner for $240,000 in 1993.

    Yeah, that’s right. $240,000 dollars.

    No major mods to the house since that time either. It’s pretty much your run-of-the-mill, vanilla OC cement shitbox without a basement.

    Now the Zillow Zestimate for this house hovers precariously at $673,400, but down from over $710K back in November 2006.

    A house down the street from us, also a 4 bed room 2.5 bath, is currently in pre-foreclosure and now on the market for $690,000.

    These current value levels would have one believe that the $240K home grew in value by 280%.

    Did incomes grow by 280% between 1993 and 2006?

    Don’t think so.

    Sooner or later, the fundamentals will kick in and drag down home prices.

    Will the correction be enough to demonstrate greater affordability in Lake Forest, CAR where the median income is around $75,000 per annum?

    Probably not.

  25. Dean

    This is a good model, but I am slightly less bear-ish than you.

    First, looking at your earlier posts, it seems that 2001 was the year that the market price/income metirs crossed the long-term trend line. That would suggest that the correct multiple is closer to 200 times monthly rent than 180.

    Second, I agree with neal above that growth in Southern California has tended to out-pace the nation as a whole. That growth seems likely to continue over the long-run. If the economic growth translates to wage growth, that would have an effect on rents. Again, this is more of a tweak of the model to, say, 3.5%.

    Third, the early ’90s real estate crash was caused by a massive realignment of the jobs picture in Orange County. The regional economy is more diversified.

    Fourth, I completely agree that the exotic mortgages that acted as magnifying effect on price appreciation during the up cycle will probably do exactly the opposite effect as the market turns down. However, while these mortgages are prevelent, they do not constitute the majority of even new mortgages. Sure, 30 plus percent is large and worrisome, but that still leaves the majority of new home-owners uneffected by negative price moves. If prices go off 15-20%, then they just stop trading up.

    Fifth, interest rates remain low enough that a fair number of even folks with truly bad loans can still re-fi into a 30-year fixed loan at a decent rate. That would effect their disposable income, but not put them in a crisis that forced them to sell.

    After tweaking your model, it seems that prices would need to fall 30-35% to return to fundemental values, not 50%. Considering the factors above, it seems likely that once prices started falling by significant margin that the pool of sellers would start to dry up. Only folks that absolutely were forced to sell would consider it, which would look more like a long, slow leak than a collapse.

  26. Dean

    Also, 160 is a very low multiple.

    Assuming a 30 year fixed mortgage and no capital gains, you should assume a minimum of 167. Looking at the Amortization Table for a 6% loan, you would pay $215,000 for every $100,000 you borrow. So, you are in essence saving 46.5% of your ‘rent’ payments over 30 years. That works out to 167 months.

    That number is lower at the more traditional interest rate of 7%. It is closer to 150. So, a change of 1% in the interest rate works out to about an 11% price move in the market price.

    Over the past 30 years, Orange County has valued housing at a muliple of closer to 200. The lowered interest rates of the ’01-’06 period would cause you to expect the multiple to rise to 222.

  27. Neil2

    Iโ€™m reading โ€œThe Great Crash 1929? right now.

    โ€œIn 1925 bank clearings in Miami were $1,066,528,000; by 1928 they were down to $143,364,000. Farmers who sold their land at a handsome price and had condemned themselves as it later sold for double, triple, quadruple the original price, now on occasion got it back through a whole chain of subsequent defaults. Sometimes it was equipped with eloquently named streets and with sidewalks, streetlamps, and taxes and assessments amounting to several times its current value.โ€

    Howโ€™s that for historical analysis.

  28. Nani Mouse

    Interestingly enough, when I did a simple linear regression using the median prices of houses actually sold in the Western region from 1975-2006, I end up with $324,000 as the “predicted” price in 2014. Pretty close to the future valuation figure of $336K for 2014 in the above chart.

    The data I used came from a site that claimed the housing sales information was from the US Census Bureau. It included more than just OC so I was surprised that the number came so close to the one in the graph.

    I’d be interested in applying the linear regression to DataQuick numbers.

    Does any know if that historical information is posted on a site?

  29. gn

    If you look at the factors that cause home prices to go up dramatically in the last few years:

    1. The loose credit standards/credit bubble
    2. Low interest rates
    3. The economy/job market

    The loose credit standards account for 80% of the price appreciation. All of the other factors account for the remaining 20%. Now, the real estate industry will tell you the opposite. And most people believe the real estate industry. Here’s why:

    – It is intuitively obvious to most people that low interest rates make houses more affordable & causes prices to go up.
    – The same with a strong job market
    – Where as, the role of the credit bubble in the housing market is less intuitively obvious.

    This is why it is difficult for Red & a few others in this blog to understand the enormous downside potentials of home prices.

    IrvineRenter once remarked that the magnitude of this problem scared him. Well, it scared me to. That’s because we both understand the role of the credit bubble in driving up home prices.

    Knowledge is power !

  30. asuwest

    Thx, IrvineRenter. I’d run the numbers previously using a bit different and far more crude method—old median (96) + inflation, then adjust for delta on interest rates. Came out about where your numbers are.

    While the exact # is unknowable, the direction is not. Forecast: PAIN, much PAIN. Unfortunately, there will be a lot of collateral damage.

  31. Edyang

    Question: can you please elaborate further on the rental value baseline?

    Are those figures taken from a public source or extrapolated from somewhere?

    Thanks,

    Ed

  32. Edyang

    Sorry, I meant the “fundamental values”, the baseline with the triangles.

    It looks like it’s just multiplied by 160. What is the 160? And why 160?

    Thanks,

    Ed

  33. IrvineRenter

    asuwest,

    That sounds like a good analysis. 1995-1999 was probably the last period when the market was near, at or below its fundamental valuations. The only caveat being that you would need to use wage inflation numbers instead of the general rate of inflation because rents will almost always match wage inflation. Wage inflation tends to be about 0.7% higher than the general rate of inflation, which is also probably why the historic rate of appreciation in housing nationwide is less than 1% over inflation.

    Edyang,

    In my previous post on How “Inflated are House Prices?” I discussed using median wage information to determine fundamental valuations. In short, if you take the median wage * .667 to arrive at an after-tax take-home pay, then multiply by 45% to simulate the percentage of disposable income people are putting toward housing, then divide by 12, you will arrive at a comparative monthly rental rate. This number mulitiplied by 160 will give you a good approximation of the fundamental valuation of a median priced home (or at least what it should be). I suggest you read the previous post for more information.

  34. Bkshopr

    I have been following all your posts for quite sometime. I think your price dropping theory is way too unrealistic. The income that are charted are income reported to the IRS. Most of the the population in Irvine are Asian about 40%. The graph predictions do not apply to Asians.

    Hot Asian market are often over-inflated than most other non-Asian location. For examples, In San Gabriel Valley, the home price in Monterey Park, the poor section of El Monte and Rosemead are way over inflated due to the Asian buyers.

    One can not predict the wealth of Asians. Their house spending budget are disproportionate to their income earned. Asian will do anything to have their kids attend a good school at any price. Many older Asian are extremely frugal and they spend less than 20% of their earnings. No vacations, no hanging around at a bar, no ski trips, no fancy four Seasons hotels, no Nordstrom at full price, no shopping at Gelson’s and no high maintainance vehicles. Many also cook at home instead of eating out.

    Frugality and coupon shopping at the stores and frequent trips to South Coast Plaza to find sales or shopping at the Cabazon outlets are just some of their ways to get the best brands at a bargain. Lexus, Honda, and Toyota are vehicles that Asians drive. These cars have excellent maintanance records.

    When It come to buying a home no one really can predict the bags of cash that Asian buyers bring to the purchase. Many older grandparents give their children huge downpayment to purchase their homes so their grand kids can attend the local top rated school to becoming a scholar and a musical prodigy. Purchasing a home in Irvine at any cost has made the Irvine Company very wealthy. During the last recession the Asians were the primary buyers at Westpark and Tustin Ranch. The momentum of the Asians expansion also rejuvenated the older and tired strip retail centers in Irvine as well as inflating the affordability of homes.

    While the rest of us are waiting for the price to tumble the Asian buyers are coming out in flocks with the cash that they hid under the mattress.

    The Irvine Company does not need to sell land and build houses to sustain its cash flow. While its competitor land owners and builders like Lennar is desperately unloading its inventory at Columbus and risking everything to going “urban” to keep their public shareholders interested and happy. The Irvine Company is just too diversified and recession proof. It is also private. During this slow time it will just focus on its other specialties like retails, office expansions, Pelican resort Villas and hotel constructions, Island Hotel, collecting trophy high rises in San Diego, West LA, and the Silicon Valley and most importantly building more Irvine Apartment Communities to capture more of your and my hard earned rent money while we are still waiting for the price to drop. Do not try to job transfer to San Diego or San Jose, Irvine Apartment Communities are ther too to collect your money.

    I think The Irvine Company will just let the land sit vacant and wait for the favorable climate to build again. The land is still perfectly good the next time around. I also think the design of the upcoming homes will be designed especially to target the Asian buyers like having good Feng Shui and good Wok “chi”.

  35. Joe Cactus

    Oh boy. I don’t think I’ve seen so many stereotypes packed into a single post in a while. It’s unbelievable to see such sheer ignorance and blatant racism. Blaming the current housing woes on a single racial group is most uncalled for.

  36. red

    crucialtaunt – I know I am not in “despair” right now so you maybe right about “bull trap” :)-

    Nice chart BTW. I am not agreeing that the blow off downturn will look as drastic. But I certainly agree that 2002 looks like a “bear trap”.

  37. acpme

    i dont think bkshopper is trying to be racist. if anything it sounds like he is asian himself. and i dont think he was blaming the bubble on anyone as much as trying to explain some of the reasons for the growth in places like san gabriel valley and irvine.

    as an asian-american who grew up in oc i would say i agree with much of what he said. actually for a second i thought my mom was on this blog posting comments. but to echo his sentiments, when i hear relatives in asia discuss immigrating to the states, they always mention two things — san marino high and uni high.

    having said that, i probably disagree that one small demographic group can effect the housing bubble THAT much effect on the whole housing bubble.

  38. Joe Cactus

    I think that the problem is going from anecdotal evidence to broad generalization – whatever the setting is. For all I care the posting by bkshopper was meant to shed a positive light onto the Asian population as a whole – e.g. how they save more money, care more about financial choices, strive for a better education among other things. Regardless of intention, it’s still a stereotype and as such we should try and refrain from describing groups of people in that way.

    I’m not trying to be all P.C. about things – tt’s just that even positive stereotypes have negative connotations (for those not included in the group or to those in the group not conforming to it).

    Let’s also remember that the Asian continent is a large land mass and that Asian immigrants in Irvine only represent a tiny fraction of it. I doubt you had Uzbeks or Turkmen in mind when referring to Asians.

  39. Bkshopr

    Acpme,

    Thank you for the post. I am indeed Asian. You read my mind correctly. I am only trying to explain that the price will not drop dramatically due to the demands still exist in Irvine. I would like to let Joe know that Asian population in Irvine excluding Asia Minor citizens is over 33%.

    I have been involved with many marketing research and focus group studies specializing in Asian homebuyers. They will take advantage of this down turned market opportunity to purchase a home. Not so much in the reduced price but to pick a good feng shui lot and floorplan that during the heated market was not permissible.

    I helped the 99 Ranch market and Sam Woo tapped into the wealth of the affluent Asian market here in Irvine during the last recession. I have been involved with positioning designs to capture the interest of Asians over the last 15 years. I also specialized in branding other areas like Crystal Cove and Shady Canyon. I study the psychology of home shoppers.

    One of the most important thing inaddition to the theoretical statistical approach is the gut feeling of emotion. People take risk and buy due to emotion. Aldea was considered very expensive when it was released during 9-11. The country was in shocked and tech market crashed. The price tag was $285k for a 1,040 sf shack. I have many friends who took the risk and bought them driven by emotion and they laughed all the way to the bank. I also have friends who are chart and graph specialist who did not buy. They cried all the way to the bank.

    Asians do not drive the home price up. The sellers increase the selling price knowing the Asian population will only buy in certain areas of high demands. Asians cluster around excellent schools and good Asian cusines and markets. The Irvine Company knows that. Land is going for about 4-1/2 Millions per acre and home prices are based on the density per acre. For examples, Decada is about 10 homes per acre then you do the math. The raw unimproved land is $450,000 per home and add the cost of infrastruture, construction at $120/ft and some profit to a total of $200,000. The plan one is just about there at $650k

    Another project like Paloma is around 8 homes per acre then the raw land per home is at $562,500. add $200,000 and put the price around $762k

    New home shopping in Irvine is like shopping at Target. You are not going to find a better deal by going to another target or builder. The prices are fixed and it is set by the coporate. The home builders in Irvine do not have a say in what the price will be. I am sure many of you have tried to ask the model home hostess and the answer is always the same. “I don’t know !”

    The home prices is set by ONE entity here in Irvine just like Target. One may find some desperate home sellers willing to take a loss due to incident like divorce, job relacation and etc. But generally the resale pricing will always be relative to new home prices. Will the Irvine Company be deperate enough to sell cheap land? You and I pretty much know the answer.

    The pricing will decrease over other vicinities in So Cal but it will not happening here in Irvine. Irvine is too insulated from the negative factors that plague other communities such as builders are desperate to unload their standing inventories to sustain a cash flow.

    Asians will not buy a house that is cheap due to a divorce, loss of a business, foreclosure, and especially death. A house that has negative feng shui has been the cause of the mis-fortune to the inhabitants. Those who live in the subject properties will always inherit the bad spirit.

    Asian American or immigrants are taught by their parents or relative that one must own their own home. If one can not afford it then the relatives will help with the down payment. Much of the money is a gift to the children or even considered as a loan without interest with a indefinite time for payback. There is much to learn about this culture and I have done very well knowing this “ancient chinese secret”.

  40. IrvineMom

    Bkshopr – Very well put. Homes are selling quite well in area of Irvine such as Northpark. Definitely appreciating since 2006.
    Could you please let me know how I can get in the “focus” group? Thank you. I think I am the typical Irvine buyer.

  41. bkshopr

    IrvineMom,

    I am a single parent just like yourself. 6 years after my divorce I finally remarried. I was a homeowner in Northpark and was instrumental in a part of a team that created the branding over Northpark. Most communities before then that has the guard gated entries have been only in very expensive custom communities like Pelican Hills and Pelican Pointe.

    Commoners like us also have the champagne taste with beer budget. The idea of Northpark was to create a communities that was big enough to share the cost of 3 guards and community maintainance. The total association cost is around $250 per month for the “rich people” feel.

    Learning the lesson from Northwood Pointe. There were enough residences to make the association due cheap enough.

    The community loop street in Northpark was designed to be much smaller loop so the perception when one driving around it one would perceives the neighborhood lies mostly within the loop but in fact the neighborhoods that tee off from the loop road is much bigger. The whole point is to make a neighborhood looks smaller.

    I now live in a community in OC that looks like a little Pasadena with homes built in the 20’s. I gave up on the good school and perfectly planned neighboods.

    I casestudied the Paloma project that you like especially the 1 story home. I am now involved with 4 upcoming spectacular projects in Irvine. I am looking for opportunities to play the density game to reduce the home prices. I am helping Brookfield with a future project.

    Go to Irvine Home Finding Center and register. Marketing firm will often go there to find participants. Make sure that you are interested in the starter homes.

    Good Luck in your Search and I really enjoyed your posts.

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