It’s time you made a stand

For a fee, I’m happy to be

Your back door man, hey

Dirty deeds done dirt cheap

Dirty deeds done dirt cheap

Dirty deeds done dirt cheap

Dirty deeds and they’re done dirt cheap, yeah

Dirty deeds and they’re done dirt cheap

Dirty Deeds Done Dirt Cheap — AC/DC




Affordability is a measure of people’s ability to raise money to obtain real estate. It is often represented as an index that compares the cost to finance a median house price (50% above and 50% below) to the percentage of the general population with the income to support this house price. For instance, in Orange County California in 2006, only 2.4% of the population earned enough money to afford a median priced home. When affordability drops below 50%, there is a problem in housing; when it drops to 2.4% there is either a severe shortage of housing, or a housing price bubble; most often, it is the latter.

The simplest way to envision affordability is through simple supply and demand diagrams like those found in introductory economics textbooks. Affordability is the the demand curve. There are a small number of buyers who can afford very high prices, and many buyers who can afford very low prices. There is a limit to how high buyers can push prices. This limit is usually determined by lenders who provide the bulk of the money for a real estate transaction. During the Great Housing Bubble, these limits were nearly eliminated. In terms of the demand curve, the loose credit standards and low interest rates shifted the demand curve dramatically to the right. Thus many more people were enabled to buy and they were able to do so at much higher prices. Once prices started to rise, they were bid up to levels were affordability was at record lows by historical measures.

Demand Curve

The supply curve is the opposite of the demand curve: sellers will make very few units available at low prices, and sellers will make a great many available at higher prices. Wherever these two curves meet is where supply and demand are in balance and market transactions are taking place. In the initial stages of a market rally both transaction volumes and prices are increasing rapidly. In the Great Housing Bubble, this was caused by a dramatic expansion of lending and credit. As a price rally matures sellers become reluctant to sell because the asset they own is going up in value quickly, and they don’t want to miss the opportunity to profit. This limits the supply on the market. In terms of the supply and demand diagram, this shifts the supply curve to the left which pushes the balance between supply and demand to a higher price point. The combination of the demand curve shifting to the right from the increased liquidity of the lending environment coupled with the supply curve shifting to the left because of seller reluctance, the intersection of these two lines moves prices dramatically higher. However, once these two forces come into balance, their intersection is at a point of low transaction volume. There are fewer buyers who can afford the higher prices, so transaction volumes begin to fall.

Supply and Demand

The first sign of a troubled real estate market is a dramatic reduction in volume known as buyer exhaustion. There are simply not enough buyers able or willing to push prices any higher even at the lower transaction volumes. In a residential real estate market, this phenomenon is particularly pronounced at the entry level. The imbalance between supply and demand first becomes apparent at the bottom of the affordability scale with entry-level buyers because these buyers are not bringing the profits from a previous sale with them to the next property. Affordability is less of a problem for existing homeowners in the move-up market due to this equity transfer.

Sub Prime Move Up Chain

The real estate market can be visualized as a massive pyramid. There are very few multi-million dollar properties at the top of the pyramid, and a large number of relatively inexpensive entry-level properties forming the base. Like any structure, if the foundation is weakened, the structure may collapse. In the same way, housing markets collapse from the bottom up due to problems with affordability.

The foundation of a residential real estate market is the entry-level buyer. Entry-level buyers are generally young people starting to form new households. When a homeowner wants to sell their house and move up to a nicer one, someone needs to buy their house. If you follow this chain of move-ups backward, eventually you come to an entry level buyer. If there are no entry level buyers pushing the sequence of move ups, the entire real estate market ceases to function. The entry level market was initially boosted the moment 100% financing became available because many more people were enabled to purchase; however, it was imperiled at the same time because of the change in savings incentives. This market was subsequently destroyed the moment 100% financing was eliminated because few entry-level buyers had a downpayment and very few people were in the process of saving to get one. In the past, people would rent and save money until they had the requisite downpayment to acquire a house. The barrier to home ownership was not the ability to make payments; it was having the necessary downpayment money. When downpayment requirements go up, the number of people capable of buying a house declines dramatically, particularly for entry-level buyers who must save this money rather than transfer it from a previous sale. Since few potential entry-level buyers were saving money during the rally, sales volumes suffered dramatically in the wake of the bursting real estate bubble.

The way real estate markets collapse from the bottom up due to affordability has some unique issues for reporting on the declines. The most widely reported measure for real estate prices is the median sales price. This is the price level where 50% of the transactions occurred above and 50% occurred below. This measure has weaknesses, but over time it does a reasonable job of documenting overall prices and trends in the marketplace. One of the problems with a median as a measure of house prices is a lag between when a top or a bottom actually occurs and when this top or bottom is reflected in the index. During the beginning of a market decline, the lower end of the market has a more dramatic drop in volume than the top of the market. This causes the median to stay at artificially high levels not reflective of pricing of individual properties in the market. In other words, for a time things look better than they are. At the beginning of a market rally, transaction volume picks up at the bottom of the market at first restarting the chain of move ups. During this time, the prices of individual properties can be moving higher, but since the heavy transaction volume is at the low end, the median will actually move lower.

Affordability is the ultimate limit of any asset bubble. If prices are so high that no buyer can afford them, there are no transactions and thereby no market. The fear of many buyers in a financial mania is that prices will remain elevated to the absolute limit of affordability permanently. People who have this fear will put every available resource into getting a house before this happens. This becomes a self-fulfilling prophecy as prices get bid higher and higher by fearful buyers. If prices were to remain at the upper limit of affordability for a long period of time, the rate of price increase would slow dramatically until it only matched the rate of wage growth and inflation. If prices are not rising in excess of inflation, there is little financial incentive to buy because when affordability is very low, it is much less expensive to rent, and the extra money going toward a housing payment is not generating a financial return. If there is no financial incentive to pay more than the cost of rent, people stop buying, and prices fall back to levels where they are affordable again.


124 thoughts on “Affordability

  1. djd

    It is often represented as an index that compares the cost to finance a median house price (50% above and 50% below) to the percentage of the general population with the income to support this house price. … When affordability drops below 50%, there is a problem in housing …

    Are you using “house” as a generic term for all types of dwelling? Certainly not everybody should be in SFH.

    And persistent rental units will screw up that calculation since during a price rise, the landlord is insulated from increased financing cost. Thus they could be making an acceptable profit despite having a rent lower than that required to support a comparable property newly purchased. Only in times when rental demand is unusually strong WRT purchase demand (as during a price decline) should we expect total cost to go towards parity – although it will probably overshoot.

    So, I would expect that affordability could be sustained at slightly less than 50% in a generally healthy market. I’d guess at ≈45%.

    Perhaps my analysis is faulty. I really would like to know if so. Better to make my mistakes here than to catch a falling knife, no?

  2. AZDavidPhx

    This is a very good post.

    I’ve been saying from the beginning that it all comes back to the entry level buyer.

    Right now all of the people doing the buying in the current market are mostly pre 2002 buyers who are “trading up” while they still have some bubble equity left on a previous home. The people selling are most likely trading down or cashing out. There is no first time buyer in this equation.

    Most transactions going on right now are dependent on current debtors basically exchanging properties with each other as the first time buyer is still priced out.

    You cannot sustain these prices without a large number of first time buyers with access to what mortgage hustlers refer to as creative financing “products”.

    The people who are “trading up” in the current market are going to see all of their bubble profit evaporate by the time all is said and done and the market correction has completed. Some will even go underwater.

    The pool of people buying right now is going to dry up eventually. It’s only a matter of time. At this time in one year, we’ll be reading NEWS articles about Joe Blow Dumbass who couldn’t resist the 2007 bargains and bought a house at 30% off peak and is now underwater and worried about losing his shirt and his “American Dream”.

    The market has to re-absorb a lot of money that was raped from it over the past 8 years. I’m glad that we have this group of people willing to throw their money away in the name of market correction so that I don’t have to.

  3. awgee

    Wow, reality is a tough nut to swallow, eh? Everyone wants to say prices will go to this or that or whatever and they have their reasons.

  4. awgee

    Darn, you can’t edit these comments can you?
    IR, Thanks for doing the research and having the guts to tell it like it is.

  5. William Jones

    There is a difference between affordability and eligibility.

    Let’s assume that 0% down financing is common. Calculating affordability is a simple income calculation.

    Now let’s say 0% down financing disappears and a buyer needs to have either 10% or 20% down. Calculating affordability is not simply an income calculation. You also must consider how many people have that 10% or 20% of the price of a home saved up.

    I wonder if the figures that are thrown around for affordability reflect this.

  6. IrvineRenter

    “Are you using “house” as a generic term for all types of dwelling?”

    The effect you described of long-term rentals having lower rates is true; however, when evaluating current rental rates, one would use recent comparable rentals just like an appraiser uses recent comparable sales.

    Affordability in California has historically been lower than 50%, even at the bottom of price declines. I don’t think we will see 50% affordability in Irvine. We do not have enough workforce housing in California, and the McMansion craze during the bubble did not help this situation any. This relegates the bottom 1/3 of our population to rentals, and it keeps measures of affordability at below 40%.

  7. tonye

    AC/DC is one of my little secret delights. A simple band, nothing musically complex, but a hell of a lot of fun.

  8. Hmmmm

    I find it interesting all of the cost of rent vs cost to own comments. I have to admit that rental costs never once factored into my thoughts about real estate. I think my perspective is different.

    My history of living out of my parents home…

    College (dorm, then sorority house) All group living
    After graduation… Group living. CHEAP rent For almost 8 years
    Married (1994) bought a town home that was affordable with two person income and 20% down etc. No thought of rental prices. It was the thing you did when you got married at 30.
    Now have family of five in a 2 bedroom house…explored other bigger REAL houses (SF) but were shocked and horrified at costs. Still haven’t moved up.

    We bought some land for a mountain cabin to allow our boys to run wild and play. We made this decision rather than encumber ourselves with a larger house that we did not want to pay outrageous prices for ($700 k or so)

    At no point in this process have we been comparing rental prices vs our cost to own. We wouldn’t move to a rental at this point with a family unless a disaster struck. It is just peer pressure I guess. Our ability to buy a larger house will be based solely on our ability and comfort level with the price at a traditional 30 year fixed loan. As we have taken a large hit in the “equity” area and would need about $100k to put down on a move up, we are perfectly fine where we are.

    Could we use more room? Sure who couldn’t, but not if it means doubling our taxes, utilities etc.

    I don’t even understand the need to move all of the time unless you are in the military. Or job transfers I guess…

  9. Mr Vincent

    “The foundation of a residential real estate market is the entry-level buyer.”

    Take a look at the MLS for any city you are interested in and you will see the most distressed properties are at the entry level. The number of foreclosures and short sales in this segment is huge right now.

    And this has only just started. I see more and more short sales and foreclosures in the mid level market.

    The average entry level home based on incomes should be around 150 to 200k. Not 400 to 500k. The crash will continue until the prices come back in balance with incomes. This tells me that the Ipop homes in the 700 to 900k range will come down to the 400 to 600k range.

    Slightly off topic:
    I am thinking that the suburbs will suffer even worse in the next few years as fuel prices keep rising. This will continue until we move away from burning fossil based fuels and find some alternative. When you do buy, try to buy a home as close to your work as possible. I would also suggest that you try to find a home that is walking distance to your grocery shopping etc as well. We have had many easy decades of just hopping into the car when we needed something which is coming to an end.

    There is a lot of news right now in regards to peak oil, global warming etc. So far, the best show I have seen on this is a show called Crude which aired on the History Channel. I suggest you try to watch it before you buy your next house or car.

  10. George8

    Very responsible thinking and behavior – first sign of lowering of standard of living. In terms of housing, it is less sf per person, and more minutes to commute, etc.

  11. CapitalismWorks

    IR, you forgot to add the following choice

    1) accelarting inflation driven by global demand coupled with a complicit Federal Reserve appears to a make Real Assets desirable. If I can find a place I would want to live for a few years at a payment I can afford any premium paid over renting I will consider inflation insurance.

  12. Mr Vincent

    “I have to admit that rental costs never once factored into my thoughts about real estate.”

    The rental costs relative to owning are mostly used during an academic discussion of real estate. True, most people dont think about things like this before buying and that is perfectly fine.

    The rental costs was one of the variables that was used to prove that we were in a housing bubble.

  13. Mr Vincent

    “..a complicit Federal Reserve appears to a make Real Assets desirable”

    Whats happening is that the only thing that the fed is inflating right now is commodities. Not real estate.

    I am finding it ironic that the fed may actually be making things worse for real estate. By inflating everything else, even cheap real estate seems expensive.

    I do see lower rates helping the refinance segment however.

  14. 7

    >…By inflating everything else, even cheap real estate seems expensive.

    I don’t understand your comment with my high school economic education. If building material is more expensive due to inflation, won’t a cheap house seems even cheap if you considering how much it would take to build it from scratch?

  15. Surfing in Newport

    You bring up a good point. Unlike the stock market where there are usually discussions about P/E ratios and other indices of performance, you really don’t see people doing that for housing that they are purchasing for themselves. You might see it (a GRM like calculation) a little more often for condo’s because they may be thinking that they will buy and live in it for a little while and then move up and rent the condo out. So, part of the purchase decision is related to whether or not rents will result in a positive cash flow.

    When I bought my first house, I did pretty much the same thing as you. Picked the neighborhoods I wanted to live in and then shopped for something I liked and could afford. But realize that the neighborhood that you pick is usually based on your income, so indirectly you are selecting the range of housing prices you want. What happens if you can’t afford a house? Do you rent in that neighborhood or do you buy something less expensive in a different neighborhood? Doesn’t really matter, both impact the demand for housing and rentals and therefore the GRM. So while we talk about GRM’s from a financial calculation standpoint; what’s really important are the historical GRM’s.

    It’s actually quite interesting that historical and rational GRM’s are about the same. It says a lot for American intuition of what is a good buy and what is not under normal (i.e. not bubble mentality) conditions. When the GRM’s deviate from historical norms, then it becomes important to understand why. What is driving that deviation. Is it speculation or is it fundamental change? A fundamental change would for example be a neighborhood that is going through a tear down and rebuild stage. In our area that was happening in Newport Beach and Costa Mesa neighborhoods. So in that case, the land value will exceed the rental value of the dwelling. Another fundamental change would be changes in the real interest rates (and not nominal interest rates).

  16. Surfing in Newport

    The important part is who will pay for that increase? The landowners or the buyer? I would say that in our area it will be the landowner that pays for that increase in cost.

  17. IrvineRenter

    Yes, prices have a long way to fall in OC before residual land values go negative. Riverside county is another story as residuals are negative over most of the county for residential real estate.


    When construction cost of a house falls below market pricing, new construction stops until prices go back up to where a builder can make a profit. Right now in OC, prices are much, much higher than the cost of construction, so the excess ends up in land value. As prices fall, it is the landowner who loses out.

  18. caliguy2699

    “Picked the neighborhoods I wanted to live in and then shopped for something I liked and could afford.”

    That would have been nice, but sadly the bubble changed all that. What pushed me over the edge is when we went out a couple years ago to look around and realized that even though we made about $100k a year we couldn’t even afford a 1-bedroom place with a conservative mortgage…or a bigger place in areas we didn’t even want to live in.

  19. rkp

    I don’t like today’s poll as it leaves out a very reasonable no. I will buy when it gets closer to equivalent rent but not necessarily the same. There are a couple reasons for this:

    1) Selection – we want to pick an ideal house and location and if its very close to the 160 GRM, we will jump on it.

    2) Timing – we want to have kids soon and would like to be in a house before we have them. I am not going to throw away all my money for this but I am willing to buy with fully understanding that it will drop further.

  20. Surfing in Newport

    Which reminds me of the time we went and looked for houses a few years ago. Looked at a house they wanted ~1M for. After we looked at the house we cruised the neighborhood to see what else was selling. What we found was a similar house renting for less than 3K. Needless to say, we didn’t buy, but I think the house did eventually sell.

  21. Stilldoubtful

    Affordability –

    Finally that is what I have been wondering all along for the last 5 years –

    When someone buys a normal tract 800k house, they have to be making payments around 5,000 a month after the taxes are written off.

    That includes all the crap that goes with the house – mortgage, property taxes, hoa, maintenance etc.

    People ofcourse found ways to lower their payments with interest only loans (in my opinion – this is just renting) and they said they will pay 5-7 years later (won’t happen, because expenses will always go up – kids, etc.) Even with the ‘fancy’ loans, it will be minimum 5,000 a month.

    So to make a 5000 payment or 60,000 a year, you need to make 80k a year after taxes to pay for this house.

    Living life (for wife and I) is average 4,000 a month (credit cards, cars, trips etc.) I think that’s a fair average for everybody.

    So 9,000 a month just to pay the monthly expenses without getting ahead

    9 * 12 = 108,000

    To pay 108,000 you need to make 150k before payroll taxes.

    Tell me how many people make atleast 150k a year.

    Not very many.

    So people don’t kid yourselves, now that banks will only loan to quality individuals and homes – prices will come down because many people will not want to pay 80k a year from their salaries. People were willing to do this for the last 5 years because prices kept going up and homes became a piggy bank. The HELOC’s amounts people did were amazing.

    I know everyone here will say we make for than 150k a year. We are in the minority, most people make less than that and with the recession coming, jobs will go and prices will fall and fall.

    Just my two cents.

    Wait, till it becomes affordable and you can breathe and not be stressed all the time about money. Don’t want to live like that.

  22. Mr Vincent

    “The HELOC’s amounts people did were amazing.”

    Yep, many who did not buy an overpriced home found a way to get deeper in debt.

    Financial storm clouds are thickening and the final shoe to drop will be the unemployment situation. If this gets worse then its time to duck and cover.

  23. Alan

    I agree, I for one don’t understand how our service economy sustains itself. I know some people think it’s good we have a service economy but I still think we would be better off if we actually made stuff.

    Looking at OC employment base, I see huge risks. 15% of jobs were in the real-estate-industrial complex which is tanking. 10% are in state and local government which is just starting to get the winds of lower budgets and layoff’s (see school district budgets). Auto sales are declining, tracking home sales. Retail sales are way off, stores are starting to close (e.g. sharper image BK, sears sales has fallen every quarter for the last 11 quarters). Discretionary health care (glasses, Lasix, plastic hooters, botox) has got to start falling if it hasn’t fallen off already. This will tapper down to the professional level.. accountants, architects, lawyers.

    Looks to me like OC is a house of cards waiting to come down over the nest 2 years.

  24. tenmagnet

    Hey Ipop,

    Thanks for taking the time to put that together and post it up.
    I found quite helpful in terms of analyzing my own situation.
    My question is regarding jumbo loans.
    An agent told me yesterday, there’s no need for a jumbo loan now that they’ve raised the conforming limit to $729K.
    Wouldn’t that provide a much better rate than a jumbo?

  25. ipoplaya

    Smoke and mirrors Alan, that’s how us service companies stay in business…

    Actually, business trends toward outsourcing will likely only continue and the service economy will in part be sustained by that. Nowadays, companies can and do outsource almost anything. We are looking at acquiring a competitor company and they are almost completely virtual. No leases, no accountants, no HR people, no nothing. Everything is outsourced… They get more for their dollar and have ultimate flexibility. Companies don’t even need to have employees any longer, they can just co-employ staff via a professional employment organization and reap the benefits of those economies of scale.

    Heck, we are an IT consulting company and we outsource our own darn IT!

  26. houseonlegs

    I think the mortgage interest on the first one should be 52,000.
    800,000 x 6.5% = 52,000.

    But still a good way to show how much the rate does matter. The downside is when you buy high with a low rate, you can never refi your principle if your value declines, but you can always refi your rate. Also, you pay property taxes on the higher purchase price.

  27. ipoplaya

    If you believe most here, the change in conforming limit will only lead to higher mortgage rates overall.

    Personally, I won’t believe anything until I see it offered at a lender. The lender I will use is offering 30-year fixed rates of 5.875 for amounts below $417K and 6.875% for amounts above $417K today.

  28. momopi

    Only in Irvine (or South OC) would people create “affordability” charts based on $1 million and $750k purchase price. >_>

  29. IrvineRenter

    Personally, I would rather service a smaller debt at a higher interest rate because if interest rates drop, I will be able to refinance and save. If interest rates go up, and if an interest-only product is used as in your example (something I would never do,) then the large debt load is going to be a payment buster.

  30. Stilldoubtful

    That is what I was exactly thinking.

    Per ipoplaya’s example –

    I would rather buy a home at 750k 2 years from now at 8.5% interest , than 1 million today at 6.5%

    Rates will usually come down in the next 10 years and you will be carrying a smaller debt load.

    Also the less you borrow, banks will probably give you lower rates.

    btw- i am usually pretty positive and I am itching to buy a home. I think we will be saying 750k is wtf price in 2 years.

    People like to think 25% is a good drop, not when 450k homes (2001-2 prices) went to 1 million.

    I think 2-3 years from now (even with inflation) homes will be back to 600k for a house that was at 1 million.

  31. Alan

    iPoop, you resident bull you. You still try to justify buying more house than you should. (must be the need to conform with Irvine’s materialistic culture)

    Fiancial planners will tell you not to budget more than 30-35% of your after-tax income on housing. Assuming you are one of the blessed who makes $200k/yr, I’ll bet your state and fed tax liablity is about $45k which leaves $165k/yr or $13k/month.

    This means that your total spending shouldn’t exceed $3,900-$4,500/month. Property taxes (2.2%) alone on a million dollar house are $1,800/month or 40% of your budget. I always look at the fully amortized loan because the principal payment and the tax savings will balance out from a monthly budget standpoint. $750k at 6.5% fully amortized, 30 year fixed will run you $4,700/month, again this is more than your total budget should be.

    Realistically, you should be looking at a $600k house if you make $200k/yr. With 20% down your fully amortized payment at 6.5% would be $3,000/month, taxes $1,100/month which puts you at $4,100/month before insurance/maintenance/etc.

    3x income is considered the affordability limit in normal markets.

    Shure everyone always wants more but greed is what got us into this mess.

  32. ipoplaya

    I would as well IR, especially given my track record re: gambling with interest rates. When I refi my current loan, and if I stay in my place until 2010, I’ll have nine years of owning with an average mortgage rate of 4.275%.

    I’m not trying to say “buy today”. I just want people to realize that a 25% price drop might not have nearly the impact on their future monthly housing spend they imagine it could have… A couple of years from now significant inflation is very possible. A couple of years from now could feature very skittish lenders and investors that demand a much bigger risk premium to lend. I’d think a nearly 40% drop in home prices over three years could lead to that.

    While monthly afforability will get better, large scale price drops in home prices may only yield an improvement/savings in the low hundreds of dollars per month. It may not be a magic pill.

  33. ipoplaya

    Yeah, I do relish my resident bull status. It’s good to have a bull on board… Stimulates discussion.

    Just an FYI, on the house featured yesterday, if the price was $1M, the property taxes would be around $12.5K per year. Yes, a little over $1K per month. It would take 36 years at 2% roll value growth for the property taxes to become $1800/month on that property. Of course by then, the MRs would be good, so it would take perhaps 45 years to have $1800/month prop taxes on that property.

    Your 2.2% is a bit of a fantasy my friend. Even at places with the highest mello roos (VoC), a million dollar place will have a tax load of approximately 1.8%. It would get to be 2.2% of purchase price after 17 years of 2% roll value growth though…

  34. Stilldoubtful

    Orange County has always been 4 – 6x income of what you should buy.

    We got up to 10x incomes.

    So a 100k income family could afford 500k, it would be a stretch but they could so it.

  35. Surfing in Newport

    Your calculations are correct with respect to the payment part of whether or not it makes sense to buy a house. As I have argued previously, the GRM fundamental only changes if real interest rates change. While the initial payment in your scenario is not that much different, the fact that the fixed rate mortgage rate is higher implies that the market expects more inflation. Because of this people will tend to live with the higher payment now because relative to income it will be going down faster.

    What you are betting is that interest rates are going to go up, but housing appreciation will somehow be significantly less than inflation. This is happening now because of the credit crunch, but I don’t think I’d take the bet that it’s going to get as bad as your assumption.

  36. 25w100k+

    Yeah its kind of silly to say in absolute terms that someone should spend 30% of their net on a home. That doesn’t take into account their tax savings, their lifestyle, or anything else.

    And does anyone else notice the resident bears seem a little more bitter every week? They must be upset that houses are still moving.

  37. tonye

    All we need to do is to build those fancy maglev trains to LV and Phoenix.

    Then our entry level market will be there and those kids can ride the high speed train to work in the OC. Surely it’ll take less time that driving a car from Moreno Valley on the 91 and 55.

  38. granite

    I’m with rkp as I will probably buy when we come down to close to “parity”, which I define as the 3% inflation adjusted Case-Shiller data from 1987. It went below parity in ’97 but

    1) taxes are killing me with 2 incomes
    2) the dollar is rapidly tanking right now

    It may go lower than this but I am willing to accept that. Of course this may correspond with the cost of rental anyway.

  39. tonye

    Originally (’87) I wanted to buy a house in Costa Mesa’s East Side. Very close to, almost Newport. A nice place then that had the looks of an area that was about to be torn down and renovated.

    Relatively large lots with no HOA and very close to the beach.

    Close to the restaurants in NB, close to the Beach. Around Irvine Blvd.

    Schools were OK…weather perfect.

    The wife ( we were newlyweds then ) said she didn’t like the area.

    So we bought a fixer upper in TR.

    Years later we drove through Costa Mesa’s East Side. The wife liked the place. She admitted that she had never been on that part of town and had no idea what it looked like.

    My looks could have killed.

  40. mav

    anyone who has an ARM is renting in my oppinion

    why anyone would want to take on the risk of inflation / interest rates is beyond me ?

    let the banks deal with this risk and get a fixed rate for a higher rate.

    the whole point of buying is a hedge against inflation

    with an ARM your payments are going to increase as rents increase

  41. Genius

    The oncoming energy crisis could hit us when it will hurt most. Like the housing bubble it was entirely avoidable. Instead we have a set up for the perfect financial storm; very scary stuff out there on the horizon.

    It isn’t just your commute that will get more expensive as oil prices continue to rise. If it wasn’t for that I would gladly pay $10/gal to drive on empty freeways.

  42. tonye

    Well. with virtual computing you could virtually host your company . The only thing you can’t do yet is virtually sell… but that’s may change soon.

    Virtually speaking that is.

    Maybe you should instantiate yourself in an RV park in Reno and inherit yourself into virtual consultants as needed…

  43. Alan

    4x income may be doable for iPoop who is very financially suave, but it starts to turn homeowners into slaves to their mortgage and leaves little disposable for unforeseen expenses. 5-6x incomes is not realistic. You people sure talk big like big spenders, just like the State you live in. Currently 80% of your State’s budget is locked by various propositions and only 20% does your legislature have any discretion over. Oh and your State is now $16 billion and growing in the hole. The city of Vallejo will be the first CA city to declare bankrupcy today.

    People have to learn to live within their means. Until that happens, this crisis will not end. Get over it.

  44. Alan

    When I was in college we sometimes made the opposite commute to LV for the cheap buffet breakfasts. Those maglev trains would have come in handy then. Although back then gas was well below $1.00/gallon so gas didn’t figure into the equation.

  45. skek

    IHB has made me think about this too. How is it that GRM is so closely related to housing prices when most people don’t include the comparison in their home buying decision? We didn’t — we wanted to buy, so we found the best house we could afford. Could we have rented the same neighborhood for less? Probably (this was 2001), but that wasn’t even considered.

    I don’t have an answer, but I like the suggestion that our collective intuition, over the long run, is pretty accurate. Another possibility that I’ve posed before is that people seek out neighborhoods that “feel” like places they should live, based on their age, income and family situation. Rents would reflect these factors, too. Therefore, rents don’t necessarily affect prices (or vice versa), but both prices and rents are driven by a neighborhood’s desirability, with rents discounted by the ownership premium at the time — high during the bubble, less so now. By comparing the relative costs of renting vs. owning, you are actually measuring the ownership premium and perhaps THAT’s the important historical measure?

  46. AZDavidPhx

    Wikipedia begs to differ:

    “According to a 2006 estimate, the median income for a household in the city is $84,270, and the median income for a family is $103,604”

  47. Surfing in Newport

    There must be some serious underground economy going on then. Because the median income stats are per household, not per tax return or person.

  48. AZDavidPhx

    How many people do you know who are house-poor?

    I am betting quite a few!

    You probably don’t know it though as everyone is working hard at keeping up appearances.

  49. Alan

    North Pasadena is more affordable and has the advantage of having authentic BBque joints, if you don’t mind living on the other side of the tracks.

  50. IE_Priced_Out

    Didn’t you guys hear ? In the IE, since we’re all so wealthy, home price is holding up. Yeap, yeap. I have friends, family, neighbors, coworkers telling me this. They say “for you younger people, you cant ever buy, even if you make 100k a year” hahahahaha….. muahahahah… the median income out here is like $55k…lol

  51. mark

    I agree, but I wouldn’t ask “how many people have that 10% or 20% of the price of a home saved up.” The question is, “How many people have access to 10-20% down?” That includes savings and contributions from parents/others.

  52. mark

    I agree with you mav. A major benefit to homeownership is the fixed monthly cost. You give that benefit away if you choose something other than a fixed-rate loan.

  53. mark

    FHA was given 30 days to post the MSA (metro stat areas) in the Stimulus Package. The new limits based on areas, not states, will be published very shortly. Right now lenders have no guidance.

  54. jemyr

    Or if you don’t mind your children’s bedroom getting a bullet hole through the window. (My good friend’s experience).

  55. jemyr

    I’d like to see historical rent vs buy statistics for an area like San Marino or Pacific Palisades. Something from the 70s. Does that exist?

    I wrote here way back when, thinking about buying a 1 million dollar house with no yard in a bad school district (but in a safe, normal folks area) in Pasadena. I’m so glad I didn’t buy then. Thank you guys for helping me convince my husband to wait!

    I just recently seriously considered buying a 1 million dollar house, in a safe (posh) neighborhood, with a gigantic yard, and terrible schools / (also needed major repairs). Comparatively, it was about a 200-300k savings over what I saw when I considered buying the house with no yard.

    As I said way back when, we have a ton of savings. We can “afford” a million dollar house now, in the sense we can give up our retirements and college funds for our children, and hope our incomes rise so that we can afford to start saving again.

    My family is here, my job is here, I’d prefer not to move (which is stilll the smartest answer). And I want a house, plain and simple. For coveted areas, what is the ratio? Is it still 160 times rent for San Marino, Pacific Pailsades, and Beverly Hills? Is it 4-6 times income in those places? Or does the increased savings these type of people have change the ratio?

    Any real figures?

  56. tenmagnet

    If the 4x or 5x income theory is true.
    Why is it that we’ve yet to see any significant price declines on the higher end homes in Irvine?
    Higher asking prices seem to be the norm.
    Two homes I have an interest in came to market this week both at the $1.45M mark.
    Even at 20% off list, that puts these in the $1.160M range, which is a still a considerable amount of $$$.

  57. Alan

    Houses aren’t commidities, I think IR explained in previous posts that there are resistance points that limit the rapidity of the rate of asset deflation. Or in laymans terms, people will hold their house and stop eating out, cancel the newspaper, etc before cutting the price. The high end often takes longer to deflate than the low end. From what I’ve been reading you should look for about 10%/yr thru 2012 in deflation. I think the numbers indicate we are still following those projections.

    From my experience in the last bubble, what will drive down the million dollar homes in Irvine is when the 1.7 million dollar homes in Newport come down to 1.2 Million buyers will stop buying million dollar homes in Irvine and sellars will have to lower their prices.

  58. Alan

    As I recall, San Marino really doesn’t have a rental pool to compare to, and was always considered “old money”, not a place that normal working slubs could afford.

  59. IrvineRenter

    The people with large, verifiable incomes are still being given access to exotic financing and they are able to borrow 6 or more times their income. This is propping up prices somewhat at the high end. Transaction volumes are still very low, so the support is feeble at best. When the people who leveraged themselves into these properties with liar loans and big HELOCs, the high end will implode just as the low end is doing now.

  60. Alan

    “We are looking at acquiring a competitor company and they are almost completely virtual”

    Question, what you talking about is consolidation. Is your competitor local? If so will you keep their employee’s (I would assume not).

    So wouldn’t that involve layoff’s affecting the local OC economy? e.g. you would be downsizing your competitor thru acquisition. How many people are you talking about letting go, 50? 100?

    And isn’t there an iPoop at your competitor’s company too. Maybe he has a wife who teaches too with a couple small kids. Maybe he dreams of a million dollar house just like you. Aren’t you crushing his dreams?

    How do you sleep at night?

  61. ipoplaya

    For those places ten, you can bet the household incomes are quite large.

    For example, my Woodbury friends in Villa Rosa probably gross around $250K. They paid $1.25M for their place. 5X and they aren’t saving much of anything, contributing big to anything, etc. Many of their neighbors make a good bit more than them…

    Speaking of which, 24 Sanctuary (Mille Fleurs plan 2) is back on the market. List price – $1.49M. Keep dreaming sellers!

  62. Iván

    That affordability curve is about to take a steep turn for the worse.

    As of tomorrow, Wells Fargo is reclassifying most CA counties as “Severely Distressed” and upping LTV requirements to a maximum of 75%. Anyone hoping to refinance out of the hole better have a good pile of equity, as well as anyone hoping to buy in most of CA.

  63. Surfing in Newport

    If I remember right, Harbor View Homes (nicest family neighorhood in Newport Beach – but no views and not close to the water) was selling for ~800K in 2002 and rent was ~3K. That works out to a GRM of 266. Right now the apples to apples comparison is 1.5M vs. 3,700 or a GRM of 405. In 2002, the price was probably being set by developers buying to build Mc Mansions because the house size (1700 sf) no longer matches the demographics of the neighborhood.

  64. tenmagnet

    Alan’s right, there is a lot of old money embedded in San Marino.
    The barriers to entry are extremely high.
    Particularly the area surrounding the Ritz Carlton and Huntington Library.
    imo, $1M will get you a small home, less than 2,000 square feet built in the 1920’s.
    Unfortunately, that is the low end for San Marino.

  65. ipoplaya

    Yup Al, it is consolidation. My company and their company are small. Between the two of us we probably have only around 200 or so employees, most of those are revenue-generating assets. Very little on the staff side… Highly leveraged model.

    We operate nationally and so do they, and the consolidated entity would likely represent the termination of no more than 3-5 staff, none in OC. The synergies are quite good. Their lack of backoffice (they outsource) is holding them back while the economic slowdown has created some excess capacity in my operation. They don’t really have an iPoop on the other side. They have an outsourced iPoop to a small degree…

    Actually, the combination will more likely allow me to keep all the OC staff I have now. Othewise, I’d probably have to street some people by the summer. I’m doing OC a favor by helping keep the unemployment rate down.

    I’m a CFO Al. I get paid to NOT care about crushing someone else’s dreams unless my company can profit from it. As I’m responsible the HR function, and have been for many years, I’ve learned to sleep well. It’s not personal, just business. I’ve had to terminate guys I drank with, guys I played hoops with, people with cancer, people with lots of kids, the list goes on and on. I had to whack 25 people in one week (a third of the previous company I was at) during the last recession… Sadly, you get used to it.

  66. 25w100k+

    How many people do I know are house poor? Personally not too many. Obviously there are some, otherwise there wouldn’t be so many forclosures in irvine.

    But I’d bet for ever forclosure you have someone who paid cash or a rediculously big downpayment.

    We’re seeing a lot less forclosures in the high end neighborhoods.

    My parent’s neighbor paid cash for a 4,000 sq. ft northpark home. Their other neighbor has multiple homes across the country and could retire on a whim.

    Sounds like Alan and AZ just can’t imagine a world where people are orders of magnitude more successful then all of us are. (With the exception of maybe ipo and biscuit)

    Not everyone makes 45,000 dollars around here and lives way beyond their means.

  67. Alan

    You gotta realize that the people who live in San Marino, these are the people who own multiple properties, vacation homes on the water in Newport or Balboa, Santa Fe, etc. Kinda like the Vanderbilt’s. The only person I knew who ever bought there scored big on an IPO and his monthly expenses ran north of 25k/month (including chauffeur). Then of course he got divorced and had to give up the San Marino house so he could live with his younger mistress but thats another CA story.

  68. interested

    So here’s the million dollar question…

    With so much varied expertise on this site, how do we profit from what we all see happening? We have real estate professionals, economists, CPAs, lawyers and collectively, access to a significant amount of cash. Who’s going to propose a business venture based on the collective wisdom and expertise of this community?

  69. Iblis

    “People have to learn to live within their means. Until that happens, this crisis will not end. Get over it.”

    That’s the beautiful part of democracy. We the people can just keep voting ourselves largess from the public trough.

  70. Stilldoubtful

    This is huge news, because other banks will surely follow.

    You could get a second somewhere else, but this tells me that Wells Fargo is factoring another 25% decline in home prices so they don’t get killed.

    Regardless of what the fed does, I think borrowing money is going to become more expensive as time goes on because banks are going to go through every sale with a microscope to minimize their losses.

  71. Alan


    I know wealthy people, you know wealthy people, no one is disputing the existence of wealthy people.

    What you have to look at is total inventory and numbers of available buyers. For inventory of multimillion dollar homes to be in equilibrium with the buyer pool, the inventory should only be about 4-5 months worth of sales. Even in the relatively slow season we are in now inventory of 2 million dollar homes in OC is already at nearly 20 months (per Lasner) and for the 4+ million dollar homes there is a 5 year supply. And inventories are expected to spike this summer.

    The problem is not the existance of wealthy people, there just aren’t enough of them available to soak up the stock of houses. That’s why the bears are out.

  72. Alan


    “Orange County has always been 4 – 6x income”

    No, I the game changed in 2001. Before the current decade started 3x income was considered the limit for housing. Don’t confuse recent experience with historical norms.

  73. ipoplaya

    Huge news and good news. Credit tightening will remove less worthy buyers from the demand side and help get prices down to lower levels quicker.

    Anyone sitting on 20-25% down right now should be smiling…

  74. ipoplaya

    I think the high-end implosion is coming sooner rather than later… Another $1.7M unit just hit MLS. Seems like everyday lately another $1.2-1.7M place pops on to the market. I’d guesstimate that 40-50% of new listing over the past few weeks have been in that price range. That high-end Irvine inventory is swelling.

  75. irvinerealtor


    When they bump the conforming limit to $729, they will also definitely be bumping the rates. Increased exposure necessitates the move. It will be somewhere in the middle of the two rates existing now, and unfortunately it will hurt more of the low-end would-be buyers.

    For example,
    When you get health insurance, you can pay for:

    1.) A group that requires an initial check-up to verify your baseline health, offers some selected options, copays, etc., but does not cover everything.


    2.) A group that does not exclude anyone for any reason, and covers every procedure known to man.

    Which one will cost you more?

    If you need it, option 2 is great. But if you want a better rate it might be nice to have that option one if that’s all you need.

    Bumping the conforming limit takes away that option for those who would have just barely qualified at the $417K mark. That said, the increase will be a benefit to those who were considering around the new $729 limit.

    The banks are still going to get their cheese. They will evaluate your info, plug you into their tables, and pop out a determination of how risky you are as a loan candidate. They will give you a rate accordingly, and just like in Vegas… the “house” always wins. Your new loan helps to pay for all for all of those foreclosure losses, and that’s already been factored into your rate.

  76. Irvine Soul Brother

    Yap, just keep building freeways. Encourage sprawl. Wrong. Build more downtown lofts and condos. Incentivise good, rather than bad, behavior. What a concept.

    More freeways? What is this, 1952?

  77. Genius

    Myself and others made out pretty well shorting the real estate and financial sectors. Pocket change compared to how much the fraudsters made, but my gains were all legal.

    I think vulture funds are going to be all the rage, if they aren’t already. Just make sure to leave your compassion at the door if you go that route.

    Not knowing the extent of Heli Ben’s madness is tempering my desire to invest a large amount of money in any one place.

  78. Genius

    I’ll be smiling when I have that hoop hung up in my driveway. This will definitely move me to that place faster though : )

    Anyone gonna watch the Bruins tonight?

  79. ipoplaya

    Gotta go with a telescoping backboard with break-even rim Genius, maybe on a slab next to the driveway. One simple adjustment, and you could be doing dunks! Can lower it down so the kiddies know what it feels like to jam.

    My dream, have a big enough backyard to drop a small halfcourt on… The house I was chasing in Harvard Square during the summer would have accomodated a small half court in the backyard. No NBA 3-point line but then again I can barely hit from the college distance.

  80. ipoplaya

    Break-even, sheez. I’ve been doing too much M&A related forecasting recently… Break-away of course.

  81. ipoplaya

    On Bruin and Laker nights, it has to be the Lakers. They’ve been way entertaining since Pau got there…

  82. Laura Louzader

    I’m with you on the matter of more freeways.

    It has been shown many times that more roads only increase congestion, instead of easing it. There are many theories as to why this is the result, but my empirical take is that more roads invite more driving.

    Remember, also, that roads are very expensive, in addition to dispersing the population to low-density, hard-to-service areas, and the more of them you build, the more likely the population is to disperse itself to places where you can’t so much as buy a gallon of milk without driving 2 miles or more. The result is more road mileage for fewer people- a recipe for an overbuilt infrastructure that is becoming an unaffordable public burden that rests equally upon those who don’t derive any utility from it along with those who do.

    Additionally, more road mileage equals more pipe and cable mileage, to serve fewer people per mile, who are forced to drive greater distances and more frequently to accomplish the same tasks that could be done so much more quickly and economically in a denser, more centralized area.

    Even people who are well-off and can bear the financial cost don’t enjoy driving 2 hours each direction to work, and the murderous commutes are hard on our health and well-being.

  83. Genius

    Who says I need to lower the rim to throw it down? Oh wait, I’m not 18 anymore. I can barely grab the damn rim anymore, getting old kinda sucks ; )

    I may end up chasing 1/2 acre up in north county SD, and there will definitely be at least a half court going up somewhere in proximity of my pool. I’ve been playing indoors for so long I’m not sure if my knees can take playing on pavement. One way to find out.

    And keep practicing, the college 3 gets further away next year.

  84. Major Schadenfreude

    “…unfortunately it will hurt more of the low-end would-be buyers.”

    No, it will hurt the would-be sellers. In a buyers’ market, which is what we are in now, when borrowing money becomes more expensive, it will hurt the sellers. They will need to lower their price to attract the buyers who now have access to less money (since the “cost” of money is higher).

  85. Genius

    I live on the Westside. Irvine is very cheap compared to what’s brewing up here. However, we peaked quite a bit later. I expect to see some MASSIVE declines on the fringes. For instance:

    90% of Culver City is a shithole, plain and simple. I wouldn’t live in that area of someone were paying me.

    I won’t comment on the South Bay. Check out the comments on the Manhattan Beach Confidential if you want to see some real delusions.

  86. tonye

    Did he move to Newport? ;-D

    I used to work with his guy who got divorced – both him and thw wive were Jewish from Brooklyn and in their mid 30s. The families back home hated each other, had money and paid all attorney fees.

    This guy moved from the house (no kids) in Fountain Valley to a Newport condo and got himself the cutiest vietnamese girlfriend you could imagine. I mean, this 20 and something girl was delectable.

    As his wife tried to make his life miserable he started to bring his girlfriend to divorce court.

    I mean, the families back home had a mutual vendetta and very deep pockets. This guy and his ex were the de facto proxies for the vendetta.

    Oy Vey… he kept telling me that everytime he showed up to court with this girlfriend the soon to be ex would just blow up in an most emotional outburst.

    Oh, San Marino.. yeah.. Didn’t it get bought out by Taiwanese and Hong Kong-nese years ago?

  87. tonye

    What HOA allows hoops on your front yard.

    Some of my very fascist neighbors think that’s so Santa Ana…. so I retaliate those bigots by messing around in the garage with noisy tools and blaring some good Mariachi Music. ;^D

  88. Chris_Silicon_Valley

    Folks, I know this is Irvine housing forum but, frankly, for those that are laughing all the way to the bank, I hope it’s not a US bank with USD denomination.

    Bernancrap and his cohorts are going to drive the dollar down so much that $500k home in Irvine (I’m talking about a condo with 3/2 and 1500 sq ft) sounds about right a few years from now since everything else will be priced ridiculously (i.e. loaf of bread, $10, gas, $5/gallon unlead, strawberry, $15/pound, foreclosure down tremendously, priceless).

    Sigh….sad state of nation we’re in at this point. I’m strongly contemplating increasing my Aussie dollar holding and buy more foreign currencies, Gold, Silver, etc.

  89. Surfing in Newport

    Have them drive through Harbor View in Newport Beach. Nothing in the frontyard, but there are at least 4 in the street on each block.

  90. tonye

    I live in TR. We don’t have many apartments around here. Mostly SFH and some rather pretty large “attached” homes.

  91. Zardeenah

    You don’t have to live in a “downtown” area to not drive either. Just a high density, multi-use neighborhood. By high density, I don’t mean high rise either. Just townhomes, but with shops and stuff nearby, rather than the huge townhome developments.

    I moved to San Francisco last year, and what with the density, and mixed use, and transit, we ended up selling our car. Just thinking of the subdivisions where you have to drive several miles just to get to the nearest shop or restaurant makes me shudder!

  92. zoiks

    IrvineRenter, can you explain something to me?

    You often hear about people who buy an entry-level home or condo for the purpose of supporting a future move-up. I think this is what people refer to as the “property ladder” or the “housing ladder”. But it makes no sense to me. Here’s why:

    Let’s say we are in a real estate market which appreciates about X% per year. If I purchase a condo at a price A, and it appreciates at X% per year, then after N years (at time t’), the equity is

    A’ – A = A*[(1+X/100)^N – 1]

    =~ A*N*X/100 (by the binomial theroem)

    (For the sake of argument we will simplify with the binomial theroem.) So if they now put this equity into a second, move-up home, with original price B and later price B’ (at time t’), then the percentage equity they’ll have in the new home by putting their equity into the down payment is

    A*N*X/100/(B + B*N*X/100)

    (note, B was assumed to appreciate at the same rate as A, and the binomial approximation was used for B’ as well.)

    On the other hand, had they just bought the B house first, their new equity portion after the same number of years would then be

    B*N*X/100/(B + B*N*X/100)

    If we assume the move-up house B costs twice A, then we can conclude that the buyer would have been better off buying B right away. In that case, they’d end up with twice the home equity in the same period of N years.

    So the person who bought A first sacrifices half their future equity in this case by choosing to buy an “entry-level” condo in anticipation of a future purchase of a “move-up” home. (Maybe this is called “chasing the market up”?)

    Doesn’t this blow the whole “property ladder” idea out of the water? This analysis indicates it’s smarter to just buy the house you want rather than waste your time with “move-up” condos. What do you think?

  93. brave buyer

    Solutions to current housing crisis

    Stop foreclosure:

    To stop things from getting worse, our government must

    1. Eliminate the current tax relief bill of 2007. If this cannot be done, at least amend it so it will limit the relief to homeowners able to prove income documents to support their original loan application. Government should not give away tax money and liars and flippers.
    2. Make sure it is all over media that original loan documents will be sent to some special loan fraud investigation offices for review when a home is foreclosed. Fraud will be prosecuted and income stated on loan application will be verified against tax return. (with so many people out of work in the R/E and mortgage field, finding people at minimum wage should be pretty easy). You don’t need new laws to do it, and a few prosecution over the media will make people think before they walk.

    I am sure these measures will slow many foreclosures. People are walking away not because they cannot afford the mortgage but because they have nothing to gain (from keeping the house) and nothing to lose on the house. (from the tax relief)

    Encourage investor purchase:

    With foreclosure skyrocketed, bad news piling up, lack of buyers and lenders unwilling to make loans, the only thing we can do is to bring buyers back Fixes must be fair to all tax payers, minimize government involvement/cost and also reduce risk to lender. And they must be fast and effective.

    1. Increase conforming loan limit. I don’t mean the temporary increase scheduled to start this summer. Make permanent conforming increase from $417K to $500K. The temporary increase will not work, because people know it is only temporary. Buyers know that once the temporary increase expires, they won’t find a buyer when they want to sell. In a down market like this, who will jump to a trap like that. .
    2. The current lending law discourage investor purchases. It has to change.
    • Investment alternative: Stock market is too risky.
    • Inflation fear: This fear after 9/11 has driven the last housing boom, the fear is still there
    • Returns: The market has already dropped 30% on average. This means return on investment is around 6%-10% on rentals. This will be the key to turn market around. When housing rebound from the bottom, the return on investment based on cash flow will drop but the value appreciation will balance out the effect. We may not see the huge appreciation like before, but dropping 20% off from the peak is way better than the current 30% drop (maybe 60% in a year or two if the current trend continues).
    3. Tax incentive for capital gain: Federal can issue laws stating investment home purchased in 2008 will be subject to 5% capital gain if sold in 5 year or more. Or 0 captial gain if held for over 10 years. Things like that will not cost government much because if there is no appreciation after 5 years, we will be in trouble. And when there is one more buyer in the market, there is one less vacant property for the police and city to look after. There is one less family “forced” out of their home. If the foreclosure wave does not stop in a few months, you will see many banks going under, all county, city, schools facing budget crisis. That is a cost we cannot bear.
    4. Encourage foreign buyers: Create special incentives and reduce capital gain tax for foreign buyers on real estate investment. Provide government guaranteed loans to foreign buyers with 30% down payment.
    5. Create Equity Sharing Down Payment Loan: Think of it as a convertible bond. It’s a loan to qualified buyers who has no down payment. The lender for this loan will be co-owner on title till the loan is paid off. These “Down Pay lender” do not need to pay for housing related expenses but will be entitled to a share of the profit when the home is sold. And if the homeowner fail to make 1st mortgage payment, the “down payment lender” has the right to assume the 1st mortgage and ownership of the property.

  94. CK

    AZDavidPhx says “I’ve been saying all along..” Gee, and all this time I thought what AZ did was come here to IHB and regurgitate whatever point IR made the day before, sprinkled with a few “you people from Calfornia are driving up prices in the Valley of the Dirt so I am stuck in my 1 bedroom apartment”. I guess by adding the anti-California twist we would be duped into thinking those words were his own.

    By the way, AZ — I found your real estate analysis to be particularly useful the other day when you came here pounding your chest about how nuts $500k was for 2 New Market — on the SAME DAY it went into escrow, probably for more than $500k.

    But maybe I’m wrong and AZ is the real brains behind the IHB organization? Or maybe AZ and IrvineRenter are the same person?

    On another note, love the survey response options today:

    – Possible Response #1: I see the world the ‘IR Way’
    – All other possible responses: I am a knife catching fool who is destined to burn in a miserable debtor hell and forever feel the scorn of enlightened individuals such as AZDavidPhx

  95. Expat

    I am too lazy to scroll back up to see which genius is willing to buy any place he can “afford” at a premium to renting just to hedge against inflation. This logic led to the bubble in the first place.

    Of course, the big problem is finding someplace you can afford, isn’t it? If you could afford the house in the first place, we would not be participating in this blog. The reality is that most people cannot afford houses any more. Those who are covering their mortgages are bleeding out in other ways; they have no savings, no insurance, and big debts. Sure, you can put 80% of your income into your house, but then you are screwed.

    The US has the largest glut of excess housing in history. If this were happening to wheat, televisions, or shoes, we would all be rejoicing about how we can look snappy while muching toast and watching tv for peanuts. But housing is “different”. Screw that. It’s another commodity. We should be ecstatic that at least something in our economy is declining in price. With the saving we can make on buying a new home, we can finally afford to feed our families and fill up our heating oil tanks.

  96. djd

    I’m not sure how IR would answer this, however I see the main problem being: all of the money amounts in the model scale linearly with the purchase price of the property. These include the downpayment required and the carrying costs.

    So, the move up theory is in my view predicated on: people’s real salaries increase over time (carrying cost) and they have larger amounts of available real capital (downpayment). Equity from the previous residence can help provide the latter. (Note that when I say that real salaries increase over time, I mean for individuals over the course of a career.)

    Also, please recall from the “What is Equity?” post that equity comes from multiple sources and is only partly represented by the single “appreciation” measure.

  97. djd

    “If this were happening to wheat, televisions, or shoes, …”

    If it were happening to wheat, we’d be hearing about a crisis impacting the american farmer and how additional farm price supports are urgently needed. (Fortunately, in real life we now have the subsidised conversion of corn to ethanol to absorb surplus agricultural production capacity and raise prices.)

  98. AZDavidPhx

    You are making a straw man out of my point.

    I don’t buy your argument that everyone living in Irvine is so wealthy when the census data clearly shows that the majority of your homeowners are overstretched when you compare housing prices to median income.

  99. Boston2TheBay

    Definitely – those are the folks with the real money. The entire Taiwan computer manufacturing industry is all family owned. So much f’ing money it’s sick. It started coming into San Marino in the early 80s. The locals renamed it Chan Marino. Used to be a big problem with racial fights at San Marino High when I was in school. The white kids resented the Asians for taking the academic honors/scholarships etc. BTW San Marino is so plush it’s sick. But it’s nowhere near the beach, so who cares?

  100. CK

    Let’s make a deal — I’ll lay off the caffeine for one day, if you lay off the keyboard for one day and just READ the thoughts and analysis of those who understand the local market…Let’s make that day next Monday, since I already had my coffee, and you already seem to have dropped about 10 nuggests on the Friday post.

  101. sdproffitt

    Nice graphs; long, convoluted answer to a simple, time-tested problem:
    every serious student of economics and baseline family expenditure on goods and services knows this.
    It has not changed since the days of the Roman empire, and before.
    a maximum of 25 to 30% of family income can be allocated to housing/shelter.
    These statistics have been available since they were first recorded (in this country) in the late 1800s.
    Simple example:

    If the family income is $10,000 a month ($120,000 a year), they can “afford” a mortgage (30 year) of approximately $350-$400,000.
    that means, maximally, a housing price of $450- $475,000.

    ! Wake up, America!
    housing prices are outrageously inflated due to bad loans, super easy credit, and personal greediness.
    Robert J. Shiller is correct: it is going to come down — it is only a matter of how far and how fast.


  102. k.o.


    I currently live right around that area now, and love it. Has a nice mix of people, houses, businesses, and character. But heck, I know you enjoy TR, you talk up its qualities a lot 😉

  103. JT


    You are on the wrong side of history.

    We are in the midst of a secular change from debt to saving and the housing market will not be the same in our life time.

  104. Red

    They look about even, until you go to sell the house you bought for 1 Million and the escrow officer asks you for the $250000 from your pocket to pay off the loan. Buy a house when interest rates are sky high and no one can “afford” it and you will come out great, not when rates are low and everybody confuses low monthly payments with the cost of paying off a long term loan.

  105. Red

    “it’s smarter to just buy the house you want rather than waste your time with “move-up” condos” True, particularly if you include the transaction costs of selling the condo.

    So the buyer is certainly better off buying the second house first, but most people can’t in a 20% down environment. The ladder works if the first home is costing the buyer the same as rent would; thus, the effective cost is near zero and the inflation raises the owners equity; the down payment on the larger home is now available.
    As ownership cost grossly exceeds rental cost and home appreciation exceeds income inflation, this model breaks down and the move up home becomes eternally unobtainable….

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