Take or leave it or just don’t even bother.
Caught in a craze it’s just a phase
or will this be around forever.
Don’t you know it’s going too fast
Racing so hard you know it won’t last.
Don’t you know what can’t you see,
Slow it sown, read the sign so you know just where you’re going.
Stop right now, thank you very much,
Stop — Spice Girls
Another song about the housing bubble… or is it romance… or was there a difference? Everyone got crazy about real estate thinking the rally would last forever. Prices were going up so fast people ignored the signs, and now the music has stopped. Do you have a chair?
Finding comparable properties for sale and for rent provides a good way to check neighborhood fundamental values. Today, I am featuring a for sale property a few doors down from a rental of similar size and configuration.
Income Requirement: $183,750
Downpayment Needed: $147,000
Monthly Equity Burn: $6,125
Purchase Price: $177,500
Purchase Date: 7/22/1986
Address: 15 Spicewood Way, Irvine, CA 92612
|Lot Size:||3,040 Sq. Ft.|
|Type:||Single Family Residence|
|View(s):||Park or Green Belt|
|On Redfin:||19 days|
Spacious Julliard Model. Wow!3 Bedrooms each with its own bathroom. One bedroom and bathroom downstairs. This home boasts a sunroom, cozy fireplace, catherdral ceilings, skylight and track lights in Living Room. 2 Large private enclosed patios to entertain your guests. Newer windows in all the rooms. Recessed lighting in Kitchen. Cook to your hearts delight on the 5 plate range. Tile entry way and formal dining room. One wall fully mirrored. Near acclaimed schools, shopping, University and excellent community amenities. Very QUIET! NO MELLO ROOS! LOW TAX RATE! This home is built for entaining. A Must see! Bonus Room was converted to master bedroom
How many people would remember a model design from 1968?
No pictures of the kitchen, so I am suspect of its quality.
So how much would a property like this rent for? Try $2,500.
$2500 / 3br – PRESIDENT’S WEEKEND SPECIAL- BEST VALUE IN IRVINE!
IMO, this rental is a very good deal. It is just over $1 / SF per month. If this is a valid market rent, then how much is the featured listing really worth?
$2,500 * 160 = $400,000. Hmmm…
Should I pay $735,000, or should I wait for the price to drop to $400,000? That is a tough one. I think I will wait…
I actually like this place. The lighting is nice. It appears spacious. The price is ridiculous, especially when you compare it to what actual rents are going for.
The missing kitchen pics were also a red flag for me. I am guessing it doesnt look updated and/or needs work.
This thread really underlines how far rents and mortgage payments are. You’re not just talking a couple of hundred dollars difference. It is hundreds of thousands of dollars difference which will take time to wear down to where it should be for an average family with an average income and an average downpayment.
Did you guys see that that Uni monstrosity is taken off the market and being refinanced? The story in the register claimed that the Investors took the McMansion off the market:
Looks like a new round of lending standard tightening is about to begin. This will drive home prices down another notch, fast.
KKR’s leverage fund is failing to rollover its commercial paper for the second time. After the first failure to rollover its short term debt, several hundred million dollars were injected, in an attempt to buy some time, and to hope thing will get better. It did not. Now, they are finally ready to face a restructure. This will no doubt lead to liquidations, which will lead to further write down for the parties involved.
If KKR is having problems, what about the large number of lesser names out there? More hidden lose everywhere. More write downs seem like an easy bet.
So many lenders are still reeling from the first wave of write down, a second hit on their capital base will leave many crippled and honker down to a survival mode. Risks won’t be welcomed, lending will be restricted. The Fed can print money all they want, but no cheap money is cheap enough to invest/lend for a lose. The only way for investors/lenders to behave “normally” again, is to clear the mine field first. Let the loses surface and be recognized.
The first large bank to say “No Mas”.
Feb. 20 (Bloomberg) — Standard Chartered Plc abandoned a plan to bail out its $7.15 billion Whistlejacket Capital Ltd. structured investment vehicle, the largest bank-run SIV to collapse, because of “continuing deterioration” in markets.
“No Mello Roos” will be a popular selling point as this thing wears on, imo.
I think the poll is too simplistic.
My opinion on bottom GRM is that it varies by type of property and location.
Apartment like dwellings in a less desirable location: GRM under 160
Apartment like dwellings in a desirable location (such as Irvine): GRM around 160 (150 – 170)
SFRs in less desirable locations: GRM 140 – 180
SFRs in more desirable locations (like Irvine): 180 – 200
Beach RE: GRMs over 220
What I find most interesting about your blog is that you focus only on Irvine. But Irvine is just a small part of the OC. People who work in Irvine have more affordable housing not far away. By “more affordable” I’m not suggesting the surrounding areas are close to a bottom…….. but people seem to value the central location of Irvine and the schools. You can live in a nice area that is a 15 minute drive away from Irvine.
Just gonna add my two cents to your estimated timeline for foreclosures you published not too long ago, IR. The wife and I are interested in this foreclosed property here in TN. Auction was held January 31. Property was relisted February 19. But get this, the new asking price is less than what the property sold for back in 1998!!!
I think you are exactly right. Occasionally I will see a few optimists claim that credit will loosen up again soon. I don’t see any way this can happen. We are still in an environment where the risks and the losses are unknown from the lender’s past behavior. Until lenders know exactly how much they lost and why they lost it, there is no way they will start to take on additional risks. If they do take on more risk, they will likely go bankrupt. I imagine many lenders are already the “walking dead.” When the scope and scale of their losses are finally revealed, bankruptcy will be their only option. In short, credit will tighten further, much further…
661 square feet of yard. Is that the “premium” for which homeowners should be glad to pay?
Kitchen aside (and I agree, if it’s not in the pictures, there’s a reason), this is decent house. I personally like the style (which is meaninglessly subjective) but the home itself seems ok.
But there is, almost literally, no land around the home. It’s as jammed up against its neighbors as if it had common walls. So what’s the difference?
Once again, the only justification for this price, to me a clear WTF, is that “Irvine is different.”
Apparently it is.
One other thing, regarding the poll, there wasn’t an option I could really support. I think prices will sink to the point where a small amount of money can be made in rentals. Then we’ll see people start buying again (and investors buying again).
From my inbox today:
Individuals with ARM’s due to “reset” within 4 months, Requesting Contact by a Lon Officer for a Fixed Rate Mortgage.
My name is James Palmer with Survey Resource Center. We are a National Lead Company that has been in business since July of 1998. As well as members of the better business bureau.
We do direct mailing campaigns across the Nation, and we Just Completed one in your area. We target individuals that are in Adjustable Rate Mortgage, that are due to “reset” within the next 4 months and have requested contact by a Loan officer about a Fixed Rate Mortgage.
Here is the criteria they have to meet:
They must have a 640 FICO or better, 15K or more in revolving credit and no more than an 80% LTV.
These are three important questions that we ask:
1.) Do you have an adjustable rate mortgage? YES
2.) When is your adjustable rate mortgage due to reset? They had to answer within the next 4 months.
3.) Would you like to be contacted by a loan officer about a fixed rate mortgage? YES
We scrub these against the national do-not call list. Which you will receive a SAN# stating we did so.
We also back these up with a 3 way guarantee.
There is a 100% connect rate on the names, numbers and addresses.
They are Exclusive. (They will not be resold)
Also you have a 90 day money back guarantee. Stating if you do not earn $4,000 in commissions for 100 names then we refund 100% of your purchase price.
I can give you the availability that we have by county.
(*Seniors Requesting Contact for Reverse Mortgages also available*)
Just let me know how many prospects could you comfortably handle in a 90 day period and we can get the ball rolling.
National Sales Rep.
Survey Resource Center
Direct: (800) 370-7330 ext. 8511
“What I find most interesting about your blog is that you focus only on Irvine. But Irvine is just a small part of the OC. People who work in Irvine have more affordable housing not far away. By “more affordable” I’m not suggesting the surrounding areas are close to a bottom…….. but people seem to value the central location of Irvine and the schools. You can live in a nice area that is a 15 minute drive away from Irvine.”
Maybe because this blog is titled, “IRVINE HOUSING BLOG”? 😉
Irvine is one of the oldest master planned communities. It has nationally recognized schools. The government division is responsive and reliable. The standards are high as far as conduct and order. An advisory board for people with disabilities. An advisory board for senior citizens. Well-organized catastrophic disaster plan. World class swimming programs. Always rates extremely high as a “safest city” winner. Highest standards in “universal housing” awareness and practical application. The list is huge. See the city website for a broader vision of what is available.
Irvine stands out. It is organized and responsive.
Some of us are not interested in living in other cities such as Tustin, Santa Ana, Costa Mesa, El Toro etc….
I agree with your analysis up to a point. Keep in mind the GRM already takes into account the premium because these premiums will be reflected in rents. If the GRM were uniform over the entire market, you would still see premiums reflected in the pricing. That said, I do think GRMs will fall below breakeven for apartment like properties.
The real reason I wrote this poll was to get a handle on consumer sentiment and the degree of kool aid intoxication still in the market. The market has always bottomed out before when it actually becomes cheaper to own than to rent. In all likelihood, it will do so again. IMO, the best case scenario would be a bottoming out at breakeven rental value. Although it is possible “it is different this time” and prices will bottom out above rental breakeven, IMO, the belief this will happen is residual kool aid intoxication from the breathtaking rally we all just witnessed. This belief will probably scare some people into buying in the first bear rally. Knife catchers buy too early because they believe the market will bottom out early and they don’t want to be “priced out forever.”
BTW, If you all are not already reading the South OC Tracker, I highly suggest you do so. The writing is good, and the carnage is spectacular.
Below is a link to a great post on the boom and bust cycles in OC:
I wonder what kind of financing is available for investment/renovation project like this? I guess it must be some king of shorter term construction loan.
3 bedrooms with their own bathroom and no half bath means guests better take a leak before visiting. Who do they think they are fooling? I bet you the bath downstairs is not attached but shared.
Understood, it’s the IHB ! and I’m a huge fan of this blog.
My point was more the question:
How does ignoring affordability within 15 – 20 minutes of irvine impact the analysis?
granted these neighborhoods are still far away from the bottom
I think inflation and supply vs. demand are priced into the bottom GRMs
“Some of us are not interested in living in other cities such as Tustin, Santa Ana, Costa Mesa, El Toro etc….”
This is exactly why I think there could be a premium in GRM in Irvine…. above and beyond the rent premium.
IR’s absolute value estimate of $400k based on rental value translates to $169/sq ft.
This week, some of houses that i had my eye on are either in escrow, pending sale or off the market. Is this the false bounce that IR was talking about or the market is getting better.
As far as i have see a couple of those houses were reduced by 2-3% and they had offers within a week. If feel that the housing fundamentals are still the same, if not worse, but people waiting on the sidelines think its a good time to buy. Maybe i am the one drinking kool aid, while i wait for 2003 prices. 🙂
The seller forgot to add, “Bring an extra $230,000 to the deal so you can update this from the Brady Bunch era.” Painted brick fireplace. Yuck. Faux everything. Double Yuck.
Let’s see — complete bath and kitchen remodel, unpermitted “sun room” teardown and rebuilt, old pitted aluminum window frames, rip mirrors off wall and skim coat walls, recessed lighting, new flooring, travertine the fireplace, pigtail out all the aluminum wiring to copper, new doors, paint, do something with that horrible staircase. Most likely needs a new roof. Hmmm….$230,000 seems a bit low for all that.
And, ta da, you have another million dollar plus (1968 updated) tract home with zero lot.
“Will house prices fall to breakeven comparative rents?”
Markets overshoot … always.
I think we’re going to see a time (assuming you can pony up the down payment), when it will cost less (tax benefits included) to own versus rent. I wouldn’t be surprised to see the cost to buy (tax benefits included) in some areas (IRVINE) reach .80-.90 cents on the dollar vs. renting.
It’s no different this time.
I wholeheartedly agree with you about certain areas of Irvine commanding a premium.
Today’s example is not one of them. IMO, the prices on older, outdated homes should drop through the floor. $750K for this relic is utterly ridiculous.
I rented a house for above ownership cost in Malibu in the mid 1990s. Really wished later I had bought that house. Ocean view, 3br, sold for $342,000. 1995. Rent was $2700.
I had to go with breakeven in your poll even though I think purchase prices will actually fall below rents, just not much more below.
Do you know what’s going on with all the apartment construction on Jamboree, east of 405? I have seen 5 large sites that are either under construction or just finished. There are 2 on Main, the one fronting Jamboree was just completed and the other just a block down across the street. A third is on Murphy across the street from the post office that touts “affordable housing”. Finally 2 more are on Jamboree at Alton.
These are all 4 story, high density buildings that look more urban than the typical Irvine style. My guess is that they will add at least 1500 more units to the area and this isn’t taking into account the Lenar project west of 405. With the slowing economy, is there really that much demand for high density housing units in the area? Do you have the scoop on these?
The premium in Irvine shows up as a rent premium. Buy vs. rent is a financial decision, and the GRMs in Irvine will be similar, with both rents and prices somewhat higher.
The mello roos is built in to any current development, but I agree that it will be a negotiating point; i.e. the higher the mello roos, the more buyers will demand a lower price as compared to a similar property with no mello roos.
Probably remodeling would be a bad choice. Old stuff becomes unfashionable, then later becomes quaint and historical. Mid-century modern is becoming quite chic now after several decades of being derided. That Brady Bunch stuff will probably be trendoid and valued in another decade or two while the travertine and paint treatments become derided old-fogey stuff.
I agree with FairEconomist about the basic style here. Look at the huge fad for Eichler houses. But the wiring, plumbing? Almost certainly they will need major work. And looking closely at the pictures, I suspect that this house has absolutely NO insulation, or a very low grade thereof. And it can get cold and damp in Irvine. And on hot days, and there are those, the AC will cost you a fortune. Windows may be single-pane, too.
Exactly. Nobody cared about the extra fees charged at the check-out counter during the bubble because nobody had to pay the bill. Now it will be another story. The word “budgeting” will enter new homeowners’ vocabulary in the near future.
The units on the N/E corner of Jamboree & Main took three years to complete. The framing was exposed for more than a year!
It’s a great area in which to live and the Irvine Co. charges $1,700+ for 800 sq ft in the area.
You guys are funny– you blast the listings with remodeled kitchens and pictures, and then you blast the listings that don’t mention the kitchens…:)
I often wonder what the Irvine company is thinking with all these new complexes. The new one by the Spectrum is less than 25% occupied and they are still building! In fact they ar doubling the amount of units that are already available.
How low will prices go vs rent? Who knows, but I can see the day coming when real estate will be looked at as the ugly duckling of investments. People will say “are you crazy, why would I buy a home? Real estate is radioactive.”
IMHO the difference in GRM’s that you proposed are due to expectations of how long somebody will want to live in the dwelling. Remember there are large transaction costs in housing. People believe that they will live in desirable neighborhoods longer and therefore it is rational to pay a higher GRM. I’m not saying that they explicitly do the analysis, just that they are willing to pay more to own in a desirable neighborhood because they are making a long term commitment to the area and want to reduce the risk of being forced out (e.g. because of inflation).
Another way to look at it is that if you are buying a condo with the idea of selling it in a few years, then you are going to take into account the transaction costs. If you are buying a house in a neighborhood that you want to live in for the rest of your life, then you are not going to take into account the transaction costs.
The floor on the GRM occurs when someone is willing to be a slum lord and make a long term investment in an undesirable neighborhood 😉
“How does ignoring affordability within 15 – 20 minutes of irvine impact the analysis?”
If you have kids and want the best schools and school system, you’ll move to irvine so you won’t have to PAY for your kid/s education.
If you don’t want to PAY for a security system and all those burgular-stopping iron things in the windows and on the doors you’ll be happy with all the bored Irvine PD cruisers that are dying to actually bust real crime. If you don’t want to PAY for grafitti and scratchitti removal from your buildings and vehicles, you’ll appreciate the safety/security factor in Irvine.
Don’t want to drive 20 miles to make sure your kids can do weekly sports activities with neighbors? Irvine has it.
You want accessible parking and accessible businesses and accessible housing and accessible schools without having to file ADA complaints several times a year? Come to Irvine where that is all taken care of.
The biggest downside that I can see is that if you have teen agers and especially boys (car drivers) ages 16-23. The cops target them b/c, let’s face it, that particular age group is usually up to “something” and the cops will stop them, sit them on the curbs, write up curfew tickets etc… way more than other neighboring cities.
Surfing in Newport…. well said.
Buying in general is a long term decision.
People may rent for a while in a less desirable area to save a couple hundred in rent.
I believe the premium between desirable and less desirable locations is greater for purchasing (less for renting).
The GRM for a desirable area will price in the long term nature of the decision, inflation protection, and supply vs. demand for that area.
Based on comments here it would appear that the demand for Irvine RE is much greater than the areas 15-20 minutes. Rent is different due to this desirability. GRMs factor in more than just 1 year IMO.
realtor speek good english too much pleaze translaite:
is “catherdral ceiling” the kind of ceiling a patient sees when they’re getting a catheter inserted during a medical procedure????
or is it a more poetic image like
“I feel as if I just had a catheter inserted when I looked at the ceiling and thought “this place is friggin’ overpriced” ?
Irvine has excellent schools, but not necessarily the best in the area. I don’t need bars on my windows in Fullerton, and my kid’s schools–Laguna Road Elementary, Parks Jr. High, and Troy HS, would compare favorably to any of their counterparts in Irvine.
supply vs. demand is already priced into the rents, so that doesn’t impact GRM. Inflation protection is the same as the yield spread between 10 year treasury index bonds and regular 10 year bonds, so there is a good guesstimate….however, that yield spread is built into the mortgage rates so if you buy with a fixed rate mortgage, any inflation protection is cancelled out by higher interest rates.
That said, I think that the normal GRM is not completely captured in a rent vs. buy calculation. Those intangibles of home ownership (freedom to do what you want, freedom from being kicked out) become more important when you are considering a long term investment….but then again, in a falling market those intangibles tend to be worth a lot less and may even be negatives (equity deterioration).
Does the system the real estate agents use require them to type in a tiny box? Can they not see what they are typing? Why are there so many really obvious spelling errors?
This blog comment is spell checked while I type. I could still type “to” for “too”, but catherdral??
but don’t forget the HOA’s.
found on the bluemove blog:
“Cook to your hearts delight…”
Um, people only have ONE heart.
Or did you mean “heart’s”?
Did any of you catch the local morning news today? Both NBC and Channel 5 carried a story about “recession in So Cal”. Out of all the counties in our region- only the OC was in an “official” recession. Even the IE is deemed OK for now. Reasons cited were loss of jobs in the RE and Financial areas as well as declining home values.
thanks for the example
but I would point out that interest rates in 1994-1995 were around 9%
@ 9 % interest rate the GRM goes down to about 120
so 2700 * 120 = $324,000
so technically it was still cheaper to rent than own in that example….. however not by much
it still would have been a good decision to buy IMO
“…however, that yield spread is built into the mortgage rates so if you buy with a fixed rate mortgage, any inflation protection is cancelled out by higher interest rates.”
The inflation expectations are built into them mortgage rate. If actual inflation accrues above this, expected inflation will benefit the owner. Conversely any accruals below expected inflation will hurt. Though in the second example, nominal interest rates will most likely fall (at the least the inflation component), as inflation expectations would fall as the market prices in “under-accruals” (I just made that term up), on actual versus expected inflation.
Homeowners are both long inflation, on the home, while simultaneously holding a put option on interest rates. Read: They are immunized from inflationary driven rate increases, real inflation in housing costs, and will also benefit from decreases in inflation because of lower borrowing costs.
There are good schools and good neighborhoods in all cities. However, Irvine tends to be pretty uniform throughout. If you live in Irvine you’ll be going to a decent school.
In Santa Ana there are schools that are not as bad as most, but city leaders and even board of education members send their kids to private schools or even Irvine schools.
You can live in a “safe” part of Santa Ana – like in the mayor’s neighborhood where the streets are paved and the cops are aplenty. You can also pay over $500/sq foot for a home there.
Most cities are not even close to being “universally accessible” like Irvine. This means a stroller, granny behind a walker or a family/friend who is in a power chair can access businesses, streets, parking and homes
From cradle to grave, Irvine is organized. Irvine is not for everyone. But for those of us who love the idea that everyone is included and encouraged to participate in the community, Irvine is a good choice.
That, in a nutshell, describes the many unhappy, negative, pessimistic personalities that frequent this site. Nothing is ever “good enough.” Nothing is ever “worth its price.” Everyone else is stupid, and only “I and and few others really know what’s coming.”
It’s not a pleasurable way to live, IMO, but I appreciate hearing their opinions…
They might be thinking that University High is still the only game in town as faras academic standards. But clearly Beckman and Northwood are much newer and have attracted quality teaching staff and programs.
The price is absolutely out of line. Good luck with getting that kind of money.
Relax, Mark. I think you are reading more into my comment than was intended. I was joking…there is obviously a reasonable compromise between the extremes.
It a catharsis ceiling… as soon as they sell the house they will feel much better.
However, this place seems to have been owned for a long time so the owners have a ton of equity.
Is there a HELOC or 2nd mortgage on this property?
I’m very relaxed, but thanks for your counsel. However humorous your intent, your comment was accurate.
And, what, bond investors don’t want the same inflation protection? To assume that you know more than the financial markets is no better than drinking the kool-aid. You need to distinguish between expectations and what will actually occur. Just because the bond markets think that inflation will increase in the future doesn’t mean that it will. So when you look at historical data there are fluctuations in the real interest rates, but picking a time when real interest rates are low is no easier than timing any other market.
Have you actually run the calculation? When I did the calculation and kept ALL the real rates of the return the same the GRM result doesn’t change. Higher interest rates => more inflation => owning is better than renting. But Higher interest rates => owning is more expensive and investments earn more. So as long as the real interest rate stays the same, there is no change. That is why GRM’s are stable over time. That is why housing prices as a percentage of income are also stable over time.
#1 realtor lie? Nows a great time to buy while interest rates are low. If housing cost was forced down to the builders cost, that would be true. (Okay, it would also be true if only you got that low interest rate.) But, when’s the last time that has happened? Considering a mortgage has a put option, it would seem that the best time to buy is when interest rates are high. Pay less for the house, pay less in taxes, AND more likely to refinance to a lower house payment in the future.
“No Mello Roos” has always been very popular with me!
Surfing in Newport,
Unless I am missing something…. all of the analysis on this site compares payments to rent for the GRM. (to see if owning is equivalent to renting)
I think you are taking it one step further using only real rates, which I have no problem with…. but I did that analysis in the spirit of the analysis on this site.
Sounds like the cage has very nice gilding indeed.
“Everyone else is stupid, and only “I and and few others really know what’s coming.””
Hasn’t this particular failing of the IHB community turned out to be true?
So far so good on this count. I can’t argue with the forecasting results to date. That doesn’t explain the level of anger with which the mocking of Kool Aid drinkers frequently occurs. It’s the attitude that accompanies many comments that’s surprising.
I think the commenters here vary widely in attitudes and tone, as evidenced by some of the debates that have occurred here recently. Certainly some folks get a peculiar joy from critizing other’s personal situations, but by and large the conversation is a sophisticated one about the financial, economic and legal implications of the housing bubble.
Go read the comments on Lasner’s OC Register blog or LA Land and you will see that IHB has created a unique community where the commenters add to the discussion, not distract from it. You are painting with too broad a brush.
Thought aluminum wiring was a 70’s thing. Did they use that in ’68?
I agree with your last statement completely. Once that’s the consensus it may not be a bad time to buy.
I keep missing the damn bubbles; I was still in college when the internet bubble took off, didn’t have the scratch to safely buy a house before the housing bubble went nuclear… maybe all the fed and gov’t nonsense will delay the next one so I can commit my fair share of fraud.
We will get to breakeven-with-rent because the lenders will insist upon it. Expect credit to get considerably tighter over the coming year.
Bank United will not be the last lender to blacklist 190 developments.
Expect bank failures that will further narrow the pool of lenders.
We really COULD bottom out below breakeven, for investors will want their properties to be profitable. But we will certainly go to rent-parity.
You’re right, although I never said “all commenters” (I said “many”). I can’t even read those comments on Lasner’s blog because they’re so annoying and add absolutely no value.
True, home prices drop in a high interest environment and viceversa. Thus it’s best to get an adjustable when rates are historically high and then plan on refinancing to a fixed when rates are historically low.
However, we’re now going into a deflationary period when home prices are dropping in a historically low interest rate, and getting lower. So, if you got good credit and enough cash to afford the mortgage (40% equity), it makes sense to buy into the drop.
And with sellers like these that should have plenty of equity ( assuming no HELOC or 2nd surprise ) you could work a deal where they sellers finance your 2nd mortgage. After all, they will still walk with money. Then at some point in the future, when rates drop, you can refi. Again, assuming you had enough cash to absorb the equity drain.
It sounds crazy, but if you can get the sellers to take share some of the risk then deals like this ( OK, nicer homes ) might work fine.
In essence, sellers with plenty of equity shared the risk of equity loss with you. Short term they make the sale and take a bit more cash than otherwise. Long term, worst case they lose money they would have never gotten, best case they get their money.
Buyer gets in with less money and less risk.
I am afraid you miss the point, again. I am distinguishing between market views and reality. And where inflation is concerned, the views and the reality have been and probably will be again, widely divergent.
Nominal yields are composed of the real rates, and the current market view on inflation. It is a near certainty that actual inflation print will deviate from the current market view. The point is that whether inflation rates rise or fall, home owners benefit.
Because they own an option on inflation to the upside in terms of the value of their home (inflation hedge), and an option on interest rates (put option embedded in mortgage loans). Using the Black Scholes option pricing model it is clear that increasing volatility, increases the value of the long option holder, ceteris peribus.
So your point that any inflation hedging benefit of homeownership is cancelled out by the inflation expectation built into the mortgage rate is well… total bullshit. The only thing that is built into the current rate is the current market estimate of future inflation. I think it is plain based on the simply model outlined above that homeowners will benefit in both reflationary and disinflationary periods.
FYI. Bond Investors (ex TIPS) are explicitly short inflation.
deflationary? That’s not what the bond markets see. Interest rates are raising. Housing is deflating, but that isn’t the only input to inflation and interest rates…otherwise they would be zero right now.
With respect to 2nd mortgage deals. Why would only I get that deal? Wouldn’t everyone get the deal and therefore the house would be priced accordingly. Kool-aid comes in many flavors, the sweetest being the “I’m unique, so it’s a deal for me and no one else”. CEO’s that buy other companies are the biggest drinkers of this flavor of kool-aid.
Remember the 70s! Rising inflation paired with rising home prices?
According to Surfer’s simplistic real rate formula this should not be possible, but it happened.
Expect bank failures that will further narrow the pool of lenders.
Sure. Maybe at the margin, with smaller banks. The top ten or so banks are bascially too big to fail. The feds will accomodate a bail out one way or another. I wouldn’t expect cheap credit and I wouldn’t expect bank stocks to do well, but I really wouldn’t expect the failure of a major bank.
Hello IR – quick question or thought for the board to ponder:
what will happen to RE values if we have significant inflation on the horizon? It appears to be happening now and many of the global forces that brought cheap goods and deflation to the US in the past seem to be now reversing themselves. The US currency continues to weaken against most or all major currencies – commodity prices are rising like crazy ($100 oil and $4 / gallon milk) – and finally the fed themselves revealed today in their minutes that rates were likely to be reversed quickly if needed or once this credit crisis has abated some.
Does this not mean that we are likely in for much higher rates in the not too distant future? And, if so do we realize what a decade of rising rates would do to home values in OC? I’m just thinking that we may be in for a very long term problem with housing in OC (declining problems) just like was endured in Japan. somebody please make a logical case that rates will stay at near 40 yr lows for any conceivable period of time.
Can someone explain the math behind this?
$2,500 * 160 = $400,000.
I’m curious where the 160 multiplier is coming from. Thanks!
This is a nice house that needs some work. I will never get down to 400k, no way. I’ll buy it as is for 500k.
I am with you on that one. I believe we are in for a long term (decade long) increase in interest rates starting early next year. Bernanke will lower rates in the short term to stop the recession from becoming a depression, but at some point, interest rates will have to rise to stop the ravages of inflation. This recession will be unique because it will see asset deflation with consumer price inflation. We have kept interest rates too low for too long, and it has made many asset classes overvalued, in particular housing. The impact of gradually increasing interest rates over the long term on housing will be minimal price appreciation after the housing market bottoms out. Nobody will be buying real estate with dreams of rapid appreciation after a huge drop and no meaningful recovery. IMO, prices will drop to rental parity or a little below and stay there for several years. If you remove the thought of gains through appreciation, all you are left with is a comparative savings versus rental.
Check out this post:
Read this post, it will answer all your questions.
What will be the low price on this one. I want it!
Thanks! Much appreciated.
I don’t think I was saying that. Real rates are the nominal interest rate minus inflation. I also remember interest rates being very high in the seventies. I would have to do some research to see if the real interest rates were lower or higher than normal. That’s what would determine if housing prices rise faster or lower than inflation. Note, that this difference between inflation and housing prices would be temporary because eventually they have to match. Otherwise nobody could afford to buy.
Thank you IR… We clearly agree on the larger global or local framework for pricing of RE in Irvine / OC / SoCal. People need to consider these potential or likely events when making large decisions like a RE commitment (30 yrs fixed).
A home purchase has always been and should be a value exchange. We have clearly lived during a period of an extreme deviation in fundamental equilibrium between costs and benefits. The reasons have been well described here but, I’m still amazed by how many people don’t have anything approaching a real understanding of the global / macroeconomic forces which shape the very real outcomes of their decisions. I’m reminded again of the need for serious personal finance instruction which includes a review of macroeconomic forces. The opportunity for you to write a book(s) for our future citizens is there, and the need has never been greater. You should consider the challenge and the opportunity. My father teaches this for 5th grade Indiana school kids as part of a Rotary effort. It’s needed here more than anywhere….
I know you have dicussed it before but, we really do have a cultural pathology at work here in SoCal. I love this place and I’m going to figure out how to make a differnce moving forward.
AND, you can get rich in the process and DESERVE IT! You need to share your perspective and gifts in a wider arena. JMHO…
I like that one too. Nice end lots on both units. The price on the second one is ludicrous.
“Note, that this difference between inflation and housing prices would be temporary because eventually they have to match. Otherwise nobody could afford to buy.”
You are assuming there is no exogenous changes, and that each housing market is a closed system. In reality the demographics of an area can and do change and can support permanent Home Price Appreciation rates in excess of inflation.
“I also remember interest rates being very high in the seventies.”
Interests rate were not high in the 70s. They were rising in the 70s, peaking in 81, and staying high throughout the 80s. In fact rates during the 70 seem very comparable to current rates.
Actually it appears that the real rate of interest was actually negative over large periods of the 70s.
I thought bond investors always demanded a rate of return in excess of inflation. Only an idiot would buy a bond that didn’t beat inflation… Oh yeah, there is difference between expected and realized inflation!
Wrong Wrong Wrong.
Interest rates in the 70s were comparable to current rates, though rising over the course of the decade and reaching a peak in 81.
Inflation accruals outpaced the nominal rates for much of the 70s. Yes, bond investors earned a negative real return on their investments. But, but, how could that happen you cry! Because there is a difference between expected and realized inflation.
Home Price Appreciation can and has outpaced inflation over extended periods of time. But, but, How can that BE you cry! Because the demographics of areas shift over time. If there is a build out of high paying jobs in a local area, the homes in that area will be support by greater fundamentals. This increase can, and has in many areas outpaced inflation. (Ahem every heard of New York or San Francisco).
C’mon man! Think!
Agreed on the functional stuff. Out of curiosity, though, why do you need to replace aluminum wiring?
I am seeking an update on construction cost, related to the inflation of commodities.
The article below references a number items used in home construction, however it is dated. Does anyone have an easy way of tracking individual commodities prices?
I think they call that ‘karma’.
Blake: You got leads. Mitch & Murray paid good money. Get their names to sell them. You can’t close the leads you’re given, you can’t close sh*t, *you are* sh*t, hit the bricks pal, and beat it, ’cause you are going *out*.
Shelley Levene: The leads are weak.
Blake: “The leads are weak.” The f*cking leads are weak? You’re weak. I’ve been in this business fifteen years…
Dave Moss: What’s your name?
Blake: F*ck you. That’s my name.
Blake: You know why, mister? ‘Cause you drove a Hyundai to get here tonight, I drove an eighty thousand dollar BMW. *That’s* my name.
Don’t worry about timing the market.
Market bottoms are only visible in hindsight. Homes are not commodities — while “housing” may be at a low, doesn’t mean the home you want or neighborhood you want to live in will be.
Interest rates go up and down and may not track with the cost of real estate. So even if you get a low purchase price, you might not get the lowest cost loan. And vice versa.
And your life’s changes are always a larger influence than the short-term market fluctuations. Babies, job loss, etc.
Aluminum wires tend to catch fire.
“Consumer Product Safety Commission research shows that “homes wired with aluminum wire manufactured before 1972 are 55 times more likely to have one or more connections reach “Fire Hazard Conditions” than are homes wired with copper.”
…but do you need it?
also it seems they didn’t bother to wait until the gardener left before they took the pictures.
So cap works, how are you going to make money off this analysis?
Mike, go to a few open houses and what do the agents say?
“You better buy now while interest rates are low. Interest rates are going up.” And people buy that crap. Ya know why? Cause it’s half true. The truth is interest rates will go up. The ten year is going up, and mortgage rates have even gone up a bit. And they will probably continue to go up. But, that is the only part that is true.
The lie is, “You better buy now …” Maybe you should, maybe you shouldn’t. Prices are trending down and show no sign of reversing. And what do you think prices will do as interest rates go up? And the buyers use the rational, “We are in it for the long term, so it doesn’t matter to us if our home is worth less in a year or two.”
Aluminium wiring can be as good electrically as copper. The two best known problems are: (1) aluminium wire must be considerably thicker for the same current and (2) aluminium is much less forgiving of mistakes at connections.
The latter property is at issue here – an improperly made connection can be fine at first but have a ‘safe load’ which decreases over time, untill ordinary use makes it overheat and cause a fire. Wikipedia has more info.
I would not automatically reccomend replacement of aluminium wiring – the hazard applies only to connections, which can be inspected, and repaired as needed, with minimal wall disruption. But it may be difficult to ensure that all connections have been located and inspected.
Please note that I am not a licensed electrician, and that you should obtain an expert opinion on your options if you purchase a property with aluminium wiring and are concerned about its safety.
The BLS’s PPI breaks out some commodity data; you might be able to use the categories:
Materials and components for construction
#2 diesel fuel
Metals and metal products
Construction machinery and equipment
It’s not very detailed, but it was easy to find and will output tables and graphs.
You might also try doing google image search on ” price”, for example “cement price” got me this graph.
It won’t cost anything to air condition this place, because it doesn’t have air conditioning!
More BLS data: It turns out I was looking at the “most popular series” from the PPI last time. There’s a much more comprehensive series set available through:
Good luck finding which ones are useful to you, though.
It’s a beauty, and it’s been discounted $184,000 just since November. Aren’t you glad you didn’t buy it in November?
Following this steeply declining price trend, by July the asking price will be $1.4 mil. By November, it’ll be $1.2 mil.
Interesting marketing plan here! Reminds me of when Macy’s Outlet at Crystal Court closed. Each week, the discount was an additional 5%, until finally the last week everything was 95% off. And there were still beautiful clothes left to buy there at the end! I bought a Ralph Lauren jacket for $13.
Pardon my girly department store analogy, but to me, shopping is shopping.
Awgee, that IS THE question.
1) Long Commodities
2) Long TIPS when real yields break past 2.5% (underweight TIPS)
3) Long EM equity especially those areas that have high real rates of interest and significant GDP output gap.
4) Make sure I am long housing when rates are at or within 50 bps of 4.5% on a 30-year fixed. If inflation returns, having locked in a low rate will be WONDERFUL.
Sounds like you have a plan. Good luck and I hope it works out.
You supply short term rates to back up your points. But what matters in housing are the long term rates. Short term rates can be set by government policies, long term rates reflect market realities. Why do you think that Mortgage rates are going up at the same time that the fed is lowering the fed rates? Because the market is betting that the feds actions will cause inflation.
My original post was about GRM and that GRM is only impacted by real interest rates. Maybe I should have been more specific: only impacted by long term bond yields.
Demographics will change both rents and housing prices, so again, that is not an issue. They also track housing vs. household income, and that stays fairly level.
Long term rates are 30 year rates. Mortgage rates are intermediate at 10 years. Again long term reflects reflect market expectations, only in hindsight is reality clear. Look at 80s after 82. Nominal rates on bonds persisted in the 8-10% range while inflation continued to fall. The market priced in inflation expectations that were never realized (much to the benefit of bond holders).
Now today, the market is pricing in somewhat higher inflation. At least beyond Fed targets. The question is, WILL ACTUAL INFLATION BEAT EXPECTATIONS??? And, if it does, how do you want to be positioned? Answers: Probably Yes, and long homeownership.
The statement that one would rather buy at a high rate so you can refinance at a lower rate later is predicated on one very critical assumption. THAT RATES WILL COME BACK DOWN!!! Are you kidding me. Do you actually believe that the war against inflation is won and that any rise in inflation will be shortly resolved. Again, look at the 70s. If you bought a house with a 9.00% loan in 1974 is took 13 YEARS before rates got to that level again.
There is no guarantee that rates will fall. In fact, given demographic trends, the twin deficits, slowing long-term US GDP growth, etc. etc. It is far more likely that we will see higher inflation.
Mortgage spreads have widened for many reasons, the majority of which are wholly unrelated to inflation, and more reflective of forced selling of money good asset and an increase in swap spreads. These issues will resolve.
You attempted to make a establish a link between GRM and fundamental values (This is straight forward), while also making the case that interest rates do not matter because rates capture the inflation rate offsetting the inflation correlation benefits of housing (This is quite a bit more complex).
No one hopes it’ll work out more than me!
Based on prior exchanges, I think my plan is somewhat similar to you own.
I made the statement about buying when rates are “historically” high because at that point homes are cheap.
BTW, I finally got to the point of Greenspan’s book where he addresses foreign investment in the US during the last ten years. If you follow his reasoning, then the RE bubble was created by the easy money created by too much foreign capital being dumped on our doorsteps.