Real Estate's Lost Decade

Much has been written about the “Lost Decade” in the Japanese economy. In the 90s they faced the same decisions we face today, and we appear to be making the same mistakes.

Today’s featured property is a condo being offered for 55% off its peak purchase price; a new record for Irvine. It is our first 2001 price rollback.

Asking Price: $149,900

Address: 76 Lakepines, Irvine, CA 92620


Turning Japanese — The Vapors

I think I’m turning Japanese
I really think so

Japan simultaneously inflated massive financial bubbles in real estate and stocks during the late 1980s. The slow deflation of this bubble and the general economic malaise that impacted Japan during the years that followed became known as the “Lost Decade.” The United States is facing a similar set of circumstances in the aftermath of the Great Housing Bubble. So far, we have been following the same policy actions as the Japanese did. Perhaps our officials have come to believe a Lost Decade is preferable to the next Great Depression.

Today, I want to demonstrate how easy it would be to have a similar result in our own housing market. By lowering interest rates to artificially low levels, the Federal Reserve hopes to stabilize the housing market; however, weaning the housing market off these subsidies will need to be a slow process to prevent real estate prices from taking another nosedive. Gradually increasing interest rates back to long-term norms will result in an erosion of buying power that prevents price appreciation. I want to be clear about the implications of this; we are not looking at a decade to get back to peak prices, we are looking at a decade of stagnate prices at the bottom. Real estate will not reach peak prices until 2032.

The Lost Decade

The chart above shows median home prices in Irvine stabilizing at
$450,000 in 2010 as interest rates bottom at 4.5%. To calculate a median home price, I needed to make assumptions about incomes, allowable debt-to-income ratios and interest rates.

The example above uses the most recent Irvine Median Household Income Data. At the end of 2007, the median household income in Irvine was $91,101. Due to the recession, I have assumed this will also be the median household income at the end of 2009. It might be higher; it might be lower. The historic rate of income growth between 1980 and 2007 is 3.6%. I assume that median household income will again increase at this rate starting in 2010. By 2019, this figure reaches $129,500.

The recent bailout legislation passed by Congress is a combination of workouts and government buy-downs to get borrowers debt-to-income ratios down to 31%. Previous bailouts failed because they only got the borrowers debt-to-income ratios down to 38%. The FHA has long term records showing 31% is as high as this ratio can go without significant increases in defaults. I have assumed debt-to-income ratios will be limited to 31% going forward. Also, I have assumed 30-year fixed-rate conventional financing; exotic financing will not be coming back any time soon.

The Federal Reserve’s policy of “quantitative easing” (aka printing money), is an attempt to drive down long-term interest rates like those for home mortgages. If the FED is successful–and for the short term they probably will be–mortgage interest rates could drop as low as 4.5%. The average interest rate since the early 1970s when the GSEs started keeping records is 8% (7.99% actually). I further assumed interest rates will rise once this economic crisis is over from an unprecedented 4.5% to the long term average of 8%.

I used Microsoft Excels handy solver tool to calculate the interest rate required to keep prices stable while incomes grew. The interest rate chart above shows interest rates going up about 35 basis points a year for 10 years. This puts interest rates back to historic norms of 8%. If interest rates can be eased upward at this controlled rate, and if incomes rise again at their historic 3.6%, prices will stabilize at $450,000 in 2009, and they will stay there for 10 years. After 2019, incomes have caught up with 8% interest rates, and prices begin to appreciate at 3.6% a year to match income growth.

In my opinion, this is a realistic outcome. Eventually interest rates have to go back up. When this crisis is over, the money the FED is printing will cause inflation to return. The Federal Reserve will need to raise interest rates to control inflation. If they do this too quickly, it would take the floor out from under home prices, and despite a high level of general price inflation in the economy, house prices would resume their descent.

When you look at these charts collectively, it suggests the Federal Reserve may allow inflation at levels higher than what is normally desirable for several years after this crisis is over. This will help the Federal Government inflate away much of the debt it is taking on with its stimulus spending, and it will keep a floor under asset prices, particularly housing. Note that asset prices will not be increasing. The consumer price index may increase significantly, but house prices will not budge. Also when you consider the impact of the long-term foreclosure crisis in real estate due to the resetting of adjustable rate mortgages, the FED has incentive to keep rates as low as possible for as long as possible, and house prices have resistance to upward movement.

It is difficult to be bullish with these market conditions. How exactly
would prices go up? Will interest rates stay at 4.5% permanently?

  • People can only increase their bids if lenders give
    them the opportunity. Rising incomes provides the ability to bid prices
    higher, but only at the rate of rising incomes. The long-term average
    is 3.6 %, not exactly rampant appreciation.
  • Another way people can
    raise bids is if they increase their debt-to-income ratio, and lenders
    must allow this in their underwriting. With the history of defaults
    with DTIs over 31%, it doesn’t seem likely that lenders will be
    relaxing this parameter any time soon.
  • Another way buyers can raise
    their bids is through using exotic financing; we all know how that
    turned out last time. I don’t see Option ARMs going to Subprime borrowers without verified income happening again, do you?
  • The final way people can raise their bids is to
    settle for less. Personally, I will not buy a tiny 1/1 condo like today’s
    featured property when I can rent a nice 3/2 SFD.

If my assumptions are correct, and if events unfold as I have outlined, prices will bottom over the next couple of years, and they will stay there for a decade while both incomes and interest rates slowly increase. The “Lost Decade” that the Japanese experienced is not just realistic, it is perhaps a best-case outcome.


Asking Price: $149,900IrvineRenter

Income Requirement: $37,475

Downpayment Needed: $29,980

Monthly Equity Burn: $1,249

Purchase Price: $322,000

Purchase Date: 7/12/2005

Address: 76 Lakepines, Irvine, CA 92620

Beds: 1
Baths: 1
Sq. Ft.: 932
$/Sq. Ft.: $161
Lot Size: 763

Sq. Ft.

Property Type: Condominium
Style: Townhouse
Year Built: 1977
Stories: 2
Floor: 1
View: Creek/Stream
Area: Northwood
County: Orange
MLS#: P658271
Source: SoCalMLS
Status: Active
On Redfin: 173 days

Unsold in 90+ days

Beautiful 1 Bdrm Loft Townhome Over-Looking Bubbling Brook. Stand Alone
Fireplace in the Living Room; Breakfast Bar and Separate Dining Area.
Assigned Carport Parking. Walk-In Master Bdroom Closet. Spacious Back
Patio. Full-Size Washer/Dryer Hookups.

Check out the listing price history:

Date Event Price
Mar 19, 2009 Price Changed $149,900
Feb 01, 2009 Price Changed $215,000
Nov 07, 2008 Price Changed $229,900
Sep 29, 2008 Listed $265,000
Jul 12, 2005 Sold $332,000
May 23, 2001 Sold $163,000
Dec 03, 1996 Sold $89,000
Sep 14, 1989 Sold $116,000

This property was purchased for $332,000 on 7/12/2005. This is a full year before the peak, so this property might have appraised for around $360,000 in the summer of 2006. The owner used a $265,600 first mortgage, a $66,400 second mortgage, and a $0 downpayment.

This property is listed at 55% off its 2005 purchase price, and it is below its 2001 sales price.

If this property sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $191,094.


Our housing market is starting to look like a Wal-Mart.


I’ve got your picture of me and you
You wrote “I love you” I wrote “me too”
I sit there staring and there’s nothing else to do
Oh it’s in color Your hair is brown
Your eyes are hazel And soft as clouds
I often kiss you when there’s no one else around

I’ve got your picture, I’ve got your picture
I’d like a million of you all round my cell
I want a doctor to take your picture
So I can look at you from inside as well
You’ve got me turning up and turning down
And turning in and turning ’round

I’m turning Japanese
I think I’m turning Japanese
I really think so
Turning Japanese
I think I’m turning Japanese
I really think so
I’m turning Japanese
I think I’m turning Japanese
I really think so
Turning Japanese
I think I’m turning Japanese
I really think so

Turning Japanese — The Vapors

69 thoughts on “Real Estate's Lost Decade

  1. AbroadThankGod

    I’ll be nearing retirement in 2032. Good to know that a lifetime of hard work will be rewarded by no housing appreciation and savings devouring inflation. But I’m sure Social Security will be solvent and able to cover my basic needs, right? Good job, America!

    “In a Democracy, the people get the government they deserve” – Alexis de Tocqueville

  2. mav

    Nice post, your interest rate analysis is a great way to look at the issue. I think this is the most likely scenario. Whether it is a best case scenrio is debatable. For the solvently challenged banks this would be close to a best case scenario. For the average American I am not sure it is the best case scenario.

    One piece not factored into this analysis is how bad deflation could reset the baseline in the short term (the next 1 to 3 years). Credit contraction from the boom years, unemployment, and income deflation will reset the global economic baseline before inflation can get started again.

    The idea that printing money in conjunction with credit contraction would lead to inflation is as insane as thinking a pork sausage factory could increase capacity by increasing the number of pigs and shutting down a third of the production line. You can not get inflation until the demand baselines and investment / productivity increases. Inventory (money supply or the pigs) does not lead to productivity. Simply put there is already too much debt and too many insolvent consumers and corporations. Hyperinflation for the US is a fantasy in this climate. Hyperinflation was a reality earlier this decade at 30-50 X leverage multiples. The entire global economy is in this together, money supply is relative. The demand for our money supply versus the demand for foreign money supply is also relative.

    1. IrvineRenter

      We certainly will not see inflation until this crisis has past. They can print as much money as they want, and it will pile up in bank vaults until asset prices decline to the point that they make sense from a cashflow basis. The risk of inflation comes once the economy picks up, probably in 2010. The FED is giving away money. Once real interest rates turn negative, borrowing will pick up because the FED will be paying people to borrow (if interest rates are zero and inflation is 2%, you make 2% by borrowing and doing nothing). Once negative real interest rates spur borrowing, there is no telling what this will do to credit expansion and inflation. I do know this is Bernanke’s goal because he wrote about this extensively as an academic.

      1. mav

        We would need to get back to 2001-2006 credit expansion for Bernanke to be anywhere close to “sucessful”. Is this possible given the debt damage accumulated from 2001-2006? Perhaps the better question is whether such policy would be a sustainable solution; would it just lead to a deeper debt deflationary crash?

        1. IrvineRenter

          Those are answers I do not have. I doubt anyone running our economy knows either. Increasing debt is the only tool the FED has; it can only loan money.

          1. mav

            You are right, nobody knows, but the hope is that they can reflate… the question is: reflate to what, and for how long? Geithner’s plan is another insane leverage debacle at the tax payers expense. My guess is the goal is to reflate long enough to let the few remaining rats jump off the sinking ship.

      2. MalibuRenter

        Real interest rates are negative right now at the Federal Reserve window. Borrow at 0% and inflation is around 1% annually. Because of frictional costs, banks won’t get rich off of this spread.

        Of course, the real money is working the spread. For example borrowing at zero and lending at 25% for credit card customers who have a 6% default rate.

        1. Chuck Ponzi


          Spreads are insane right now. Banks can borrow at 0% and lend at 6-7% in jumbos right now.

          Multiply that through reserve leverage (up to 9 to 12 times) and you’ve got 60, 70, 80% returns on deposits PER YEAR!

          I think they can handle a default rate of 6 or 8 percent on that kind of kindling.

          if I could I’d be starting a bank right now. It’s free money they’re giving away. And I’m not kidding.

          Chuck Ponzi

      3. AZDavidPhx

        I am highly skeptical of the viability of those income numbers.

        Assuming that we believe they are true and accept that everyone in Irvine got an across the board 6K pay raise between 2005 and 2007; as the recession did not officially begin until December 2007 – that 2007 number most likely captures the peak of the bubble incomes.

        Now that California has the highest unemployment rate in the nation – it seems highly unlikely that Irvine is going to be able to maintain the status quo if it is home to many people whose incomes were dependent on the wealth created by the economic bubble.

      4. Hard Numbers


        I think the term you are searching for is “stagflation,” for the economic scenario akin to zero interest rates (stagnation) mixed with inflation. No?

        By the way, are there any particular Irvine-centric websites you would recommend for locating a new place to _rent_ not buy?

        -Hard Numbers

      5. Dan

        Correct me if I’m wrong, but if interest rates are zero and inflation is 2%, you lose 2% if you borrow and do nothing. If a widget costs me $100 today, and costs me $102 tomorrow, my $100 is worth less tomorrow than today.

        However, if I borrow money for free and there is 2% DEFLATION, I become richer by doing nothing.

  3. Jeff H

    Hello IR,
    An update on rents. We live in a large Irvine Company complex in the 92606 zip code. We lease a 2 bdr, 2.5 bath town home. Our lease is up for renewal and the IAC provided a term sheet this weekend.

    Our monthly lease payment was reduced by 6.5%. This takes next year’s payment to $50 below what we paid when we moved there in 2006. They are offering 12 – 18 month lease options. If you choose an 18 month, they will enter your name in a drawing for up to 3 free months rent. 10 lucky winners IAC-wide.

    We appreciate the Irvine Co doing their homework and taking an educated guess at what it would cost us to move. We could probably get more space and a SFR for a few hundred bucks more a month. However, by the time one throws in moving expenses and the hassle of vetting the owner, we will most likely stay put.

    If we need more space or a move, our contract allows us to break the lease for one month’s rent. We will cross that bridge when we come to it.

    1. Perspective

      That is interesting news. Since we’re in a “time of blame,” I’ll assign mine. IAC had a BIG hand in our decision to purchase. We lived in Villa Siena for 3 years and each year they tried to squeeze 6-7% more out of us, even though there were vacant apts everywhere.

      In hindsight, it was foolish to let them get to me like that; but it definitely played a big role in our decision to start looking at the new developments.

      So I blame you, Irvine Co., for our underwater position! >:-(

    2. mike in irvine

      You are lucky, they decreased our rent by 2.3% and acted like they were doing us a big favor. Should have done my homework or atleast posted on this forum before renewing my lease.

    3. tlc8386

      offer IAC less and see what you get–when I lived in Newport Coast I offered them less and told them NO on two tries at increasing–from 3k to 3400—

      I finally found a house–much larger with pool for 3k–

      Moving you rent a truck–call a company for larger only pieces —

      private owner can be a lot easier as well–our landlord turned out to be great—he is happy we keep on paying—!!!!! and no rent increase going on two years now.

      I am debating on buying at all especially with this latest info–better to put money back into stocks for gains vs. housing–imo —-

  4. IrvineRenter

    The guy who bought this LA property last March cannot be too happy: 901 ISABEL St., LOS ANGELES, CA 90065

    Paid $1,049,089
    Asking $499,900

    This listing was emailed to me with the note “thought you’d enjoy some genuine, bona fide knife-catcher schadenfreude.”

    Yes, I do.

    1. george8


      Is today’s featured property a short sale or REO? I could not find it from the reading.

      Is it in a good location? It looks like a very low ball pricing to get bidding war going?

      1. IrvineRenter

        It is REO. It is possible they were looking for a bidding war, but with 173 days on the market, they are most likely just trying to get rid of this POS.

        1. Geotpf

          If it’s an REO and the last sale is a non round figure (that is, $1,049,089 instead of $1,049,000-not ending in an even thousand dollars), chances are the last “sale” isn’t really a sale at all-it’s the bank foreclosing on the property, and the price is what they were owned. Of course, I’m sure the bank is pissed for losing over 50% of their investment, but this is a different situation than a knife catching flipper.

          1. IrvineRenter

            The property in the link appears to be a short sale. The featured property of this post is REO.

          2. Geotpf

            The first line in the description of the Isabel house:

            “REO-Bank foreclosure.”

            It’s not a short sale.

  5. MalibuRenter

    I doubt the Federal Govt will be able to set mortgage interest rates where they want in the long term. They are even having trouble doing it now. Historically, they didn’t even try. There was a period in the early 2000s when mortgage interest rates were unchanged and short term interest rates moved by 500 basis points.

    It might be that the Fed Govt develops new tools or techniques for setting interest rates. Of course, if the Fed Govt is the only major source of mortgage funding (via Fannie, Freddie, FHA, and whatever banks the FDIC controls) it might directly set mortgage rates.

    1. nowwaat

      The bond market rallied because the plan is to take toxin assets off banks’ books even though increased money supply means inflation in the longer term. Soon, somebody will see inflation on the horizon and bond rates on the secondary market will go up. The secondary market is something the Fed can do very little about. If inflation is on the horizon, rates will go up whether the Fed likes it or not.

  6. OCRefugee

    There’s going to be a flood of comments about today’s property along he likes of “its’ ugly”, “tacky”, “I wouldn’t live there”, “I wouldn’t pay 50K for that”, etc..,

    I’d probably agree with most of them.

    But for the first time in 6 or 7 years, a 20something professional can afford to buy a place to live in. This is a good thing. Orange County has turned into something like Manhattan where recent and not so recent college grads had to spend a ridiculous amount of money on rent and like Manhattan, when they got a little older and got tired of sharing an IAC apartment or renting a cramped studio at the beach with no parking, there was nowhere for them to go to buy.

    This is also getting near a price, where if you’re going to be in it for 5 years, it’s preferable to an apartment. You may make a little appreciation (not 15% a year, just an old fashioned 2% a year), build some equity, and also get a tax break on the interest on the mortgage.

    I wouldn’t live in this complex now, but I had friends who owned or rented these when I was in my 20s and 30s, they were fine for younger singles and couples.

    1. Irvinite

      Some perspective.

      Live and work in Irvine (4 Years)

      27, lived in an IAC and local attached SFR.

      I was about to buy something in OC. I was looking at subsidized housing in Aliso (167k)

      All of the above was true until I was let go last week. Now I am leaving OC, and most likely US for friendlier shores.

      What a relief, I wouldn’t want to be trapped in this mess for the next 30 years.

      (Australia, Singapore?)

      1. george8

        What makes you think you can find a job you like and pays well in Australia or Singapore?

        1. Dave

          Singapore has been placing ads in one of the papers (LA Times or OC Register, can’t remember) in the past few months encouraging people to consider immigrating there.

    2. IrvineRenter

      This is approaching a price where it is not an appreciation deal, but a cashflow deal. If you buy the property, live in it for 5 years, save your money, then go buy a property with the saved money as a downpayment, you can keep this one as a rental. No selling for appreciation or borrowing your equity is required when prices are at cashflow levels.

  7. badtime

    great analysis. since most of the readers here will be living in the states for next couple of decades most likely, any better solutions to resolve the problem? as a future buyer, i would like the prices to roll back to 2000 level overnight and everything will be best for me. but those current owners who are trapped certainly wouldn’t agree.

  8. SocalianInIowa

    So, do I gather from these numbers that the 4.5% 15-year refi my wife is talking me into is OMFG low, or is there a good chance we can hold off another year for some Japanese numbers?

    1. IrvineRenter

      That rate is crazy low. It is unprecedented. It is very difficult to forecast interest rates, but when it takes unprecedented action by the FED to lower rates to never-before-seen levels, you have to suspect they will go higher before they go much lower.

      1. tonyE

        We just got our doc papers drawn on friday. Should sign on our refi anytime this week. Jumbo conforming, $480K at 5 3/8ths. One and 1/8 points. LTV is less than 50 as appraised this month (three houses sold, one of them next door).

        I don’t remember rates this low since ’76 when my parents bought their house.

        OTOH, lending standards are tighter than normal. They wanted to put us in an escrow account, which we refused, so we had to pay an extra 1/8 of a point.

        1. Gremlin2000

          Signed my refi papers a couple of weeks ago @ 4.375 fixed 30yrs. Paid 2.375 points to buy down this rate for a 320K loan that I got 60k cash out. My payment only went up $50.00 per month.
          They didn’t ask for impounds, wonder why they would ask you to.

          Also, it was a stated income loan, reduced documentation. I’ve owned my tiny business for twelve years now. All done through BofA. mmmm…

  9. phil

    IR, regarding your comment about how prices can go up: What about people saving money and using that to increase what they can pay? Sure, Americans are not known for saving money (especially in light of recent job losses), but it still counts as a way to buy more in the future.

    1. IrvineRenter

      That is a possibility, but when you look at the Japanese experience, it did not help. They really are a culture of savers, and yet their housing market lost 2/3 of its value over a 15 year period.

      Most Californian’s idea of saving is not borrowing against their appreciation. Increases in housing values is the primary mechanism of “saving” here. Given how deeply embedded this pathology is in our culture, I do not see savings as being a realistic boost to housing prices.

  10. AZDavidPhx

    Spring is here!!!! Fence sitters with cash needed for knife-catching fiesta!!

    Break out the pom poms and let’s get this bubble blowing! Who is down for a money-burning party?!

    Spring Sale: Home Sellers May Flood the Market Soon

    A combination of lower interest rates and government efforts to free up credit could result in a flood of homes being put up for sale in the coming weeks.

    We’re seeing a lot of activity with (sellers) starting to kick tires again,” says Alan Rosenbaum, president of GuardHill Financial, a mortgage advisory firm, in New York. “We try to show them the affordability factor. Rather than waiting for rock bottom, the intelligent ones are moving into the marketplace and seeing what’s available.

    While great for potential buyers, the added glut of housing could push prices even lower, further depressing the market. At the same time, it could actually jump-start housing by bringing more home-buyers into the market.

    With stimulating the real estate market a principal goal of Washington policymakers, the temptation for buyers and sellers to jump into the market could be irresistible, especially if interest rates stay low.

    The past week indeed has shown some glimmers of hope for real estate.

    Mortgage rates tumbled after the Federal Reserve on Wednesday announced plans to buy up mortgage debt in a move hoped to instill confidence that banks issuing home loans will have somewhere to sell them.

    Earlier in the week, building permits and housing starts for February were far above analyst estimates, another sign that some confidence is returning to the housing markets even as home prices drop and sales continue to lag.

    Pento, who says he has seen a spate of new “for sale” signs in his Monmouth County, N.J., neighborhood, thinks the combination of news has inspired some false hope that housing is ready for a quick turnaround.

    Signs of Spring

    Yet the anecdotal signs are increasing that some are pinning their hopes of an economic rebound on the various measures taken to help housing.

    Rosenbaum says financing can be had, but there are more restrictions than in the past and buyers and refinancers need to explore as many options as possible when looking for money.

    Should sellers and buyers match, the sellers believe this is an optimal time to trade up and get more value for their money at a time when housing prices are severely depressed.

    A lot of people would like to see what they can really get in today’s market,” Rosenbaum says. “If they can get a reasonable bid, they want to jump in the marketplace. They want to buy something they’ve been looking to buy for a couple of years.”

    But Will Homes Sell?

    When you start to see the excitement come back into the market, you’re going to see the absorption rate really narrow and existing home sales pick up,” Rosenbaum says. “But only if they can continue to get banks lending.”

    Banks are still faced with capital ratio problems and likely will continue to demand higher credit scores and substantial down payments, making it difficult for first-time buyers to get into the market.

    1. MalibuRenter

      This is the common real estate belief that if only banks would lend things would be better.

      I think the “trading up” concept is toast in bubble markets. There are only a few people who can trade up. 1. Renters with cash. I call these leapfrog buyers. They get to skip several rungs on the housing ladder if they have been saving money and still have a job. 2. People who bought 2002 or prior that didn’t do cashout refis or helocs. They can just barely recover their money on their current home. However, for the same payment they can get something nicer. These people should act fast, or they will be trapped underwater in their current house. Instead, they have the opportunity to be trapped underwater in a nicer new house, perhaps at a lower payment. 3. People who just got married. They have better combined ability to pay, and will often want a bigger house.

      1. AZDavidPhx

        This is the common real estate belief that if only banks would lend things would be better.

        Precisely. Once we get these banks to “start lending” again.

        I hear that phrase and it strikes me like finger- nails across the chalkboard. The banks are lending! To people with jobs and down payments!

        Whenever these cheerleaders start popping off about the lending, you know it is just a code word for financial voodoo and a plea for the banks to return to the days of creative financing lending with reckless abandon.

        1. Chuck in Newport

          David is so right- -lending is there for people with 20 percent down, a stable job, and no debt, like all of us renters who have been saving and staying on the frugal path (i.e., not-overly-consumptive). On my 150K salary, I could qualify for 5.125, 30 year fixed, at 700K+ recently. Not that I want to borrow that much. But it’s there. The problem is not that lending isn’t available, it’s that crazy WTF loans are not as prevalent, if at all. Which is a very good thing, for everyone involved. There’s no way to return to sanity with those crazy no-doc ARMs. The NAR is pleading for those to come back. As inventory swells with reluctant sellers dipping their toes in the water this spring, it’s either status quo (i.e., few sales in upper levels) or lower prices.

      2. nowwaat

        Yes, as I have said here before, many people (including some of our politicians) prefer the bubble over reality. What have we learned from this crisis?

  11. newbie2008

    The Japanese had a cultural impartitative to keep things as is: Employment, housing, etc. Traditionally, the US lets the market work run its course. This time the govt. is try the Japanese approach with the media cheerleading all the way. Almost any stockmarket uptick is claimed as a victory and only positiive news are presented. It’s looks as if the game is to keep the bubble inflating and have the bubble pop on someone else’s watch and/or claim recovery on your watch. Looks like a lost generation is coming to the USA.

    1. AZDavidPhx

      Exactly right. The stock market plummets to 1997 levels and the next day it goes up a few points and the media starts breaking out the party hats and cheering as though everything is great and we are on our way back.

      In the meantime, our country is in massive debt while running a trade deficit!

      We have a service sector that is over-saturated with workers in real-estate, finance, business, and law and rather than re-allocate those workers to other areas like building cheese-burgers or hammers, we just throw money into these pits of consumption in the name of employment so some trouser-stain can keep his big house and feel good about himself.

      We have a next-to-nothing manufacturing base and companies are still outsourcing scores of jobs to countries overseas. Oh but the stock market went up a few points, YAY!!!!! Print some more money keep the circle jerk going! Pay no attention to that man behind the curtain.

      1. Freetrader


        You make a few good points but your prescription for economic revitalization is way off. The US has a strong service sector because it is simply the most advanced economy. Arguably some of the ‘finance’ professionals, especially those who sell real estate, have been misallocated during the bubble, but the idea that the path to prosperity is paved with low end manufacturing jobs is false.

        I don’t think that your comment re: the US ‘trade’ deficit is particularly relevant, in any case the trade deficit is currently the smallest it has been in 25 years or so — a sign of lagging economic activity. By the way, the world’s biggest exporter is — you guessed it — the US, by a factor of three or four over #2 China. The countries that are in real trouble right now are the ones that historically have trade surpluses. Why? Because they depend on other countries (i.e., US) to buy their goods, and have insufficient internal demand to support their economies. As a result, their future is not in their own hands.

  12. dpstrand

    Some extended family friends (friends of my parents) just got a loan for a new $450k home in Riverside, while keeping their existing home as a rental. Their overall DTI is 56% and they only put 3% down. I am shocked, I didn’t think these loans we’re still being made, but I guess they are.

    1. Geotpf

      They almost certainly have an FHA loan. In Riverside County, the current max size for a FHA loan appears to be a half a million dollars.

      1. ockurt


        Why is the max size for a FHA loan in Riverside $500k? Is is based on median home prices in the area?

        We just got pre-approval for an FHA at $625k but we are in OC.

    2. nowwaat

      I think Fannie Mae still allows a little over 50% debt to income ratio depending on the strangth of the credit and other criteria. These loans are offered by most of the traditional banks – Wells Fargo, Bank of America…etc. I know because I applied and qualified at more than 50% recently, although I have not bought. When I hear about keeping credit going to housing buyers, I’m thinking is that really an issue if you have decent credit and a decent down payment? I think not but someone would have me believe it is.

      1. ockurt

        I agree. I recently read an article (LA Times) I think that talked about who qualifies for a loan nowadays.

        Underwriters tend to look at several factors, credit history being one of them. Obviously, your ability to repay the loan is important and having a good income with a stable work history gets you points too. They also look at your age and the potential you have in your profession as well.

        Down payment is fairly important, although you don’t really need 20% down with the FHA.

        In summary, they look at the big picture to determine the risk you pose to them.

  13. Chuck in Newport

    dpstrand, that kind of lending will only perpetuate the problem. Shame on that lender.

    1. Perks

      Dpstrand– A friend of mine also got a 2nd house out in Corona using 3.5% down FHA. I know his salary and can’t see how someone would lend him the money. Then while talking to a mortgage/loan officer friend of mine, he told me the only loans he sees right now are FHA with 3% down. He hasn’t done a conventional loan with 20% down in as he puts it “I can’t even remeber”.

      BTW–they are using up to 51%DTI still on FHA loans he said. Crazy.

  14. CK

    Outstanding analysis. Thank you for your time and effort. As noted to you in person a couple of weeks ago, I’ve been following your observations for over 2 years now, and so far you have been right on. Recently I locked into a two year lease on a SFR, ending Dec 31, 2010 — with the lease end date based largely on your predictions.

    Considering that, coming into work on a Monday morning and reading such a coherent and logical analysis — tied to the statement “the chart above shows median home prices in Irvine stabilizing at $450,000 in 2010 as interest rates bottom at 4.5%” absolutely makes my day, week, and year!!

  15. cara

    as posted on calculated risk, but definitely of interest here an article on “investors” buying up REO’s for the rental income. At the very end comes this quote:

    “Maker, who sold 354 repos last year, said, “There’s a lot of people with money, but it’s not the old people we used to see. It’s not the pros. It’s new money coming in.” ”

    and there’s this one:

    “There is some cash flow with 20 percent down,” he said. “It seems like an ideal time to start investing and taking a chance.”

    This tells me that this is not the smart money that knows from cash-flow, and can tell a real deal, but a lot of newbies, who won’t be cash-flow positive when rents continue to slide. But still it is a sign of an approaching support level for the bottom of the market.

  16. Vik


    So are you saying that basically even if prices drop to levels that look good for investment, potential investors should look at cashflow only and basically accept the fact that even while inflation goes up, the property prices will not, which will mean that the value of the properties will in reality be going down?

    “Note that asset prices will not be increasing. The consumer price index may increase significantly, but house prices will not budge”

    1. IrvineRenter

      Yes, that is exactly what I am saying. True cashflow investors rarely look at appreciation. To a cashflow investor, it a house appreciates via inflation enough to get their money back (with the same buying power) then that is a bonus. Since these properties will not likely appreciate to match inflation, a higher cash-on-cash return is required to compensate.

      Right now, rental houses should be evaluated just like bonds. When you buy a $1,000 bond at par value, it will pay a periodic interest payment, and at the end of the term, it will give you your $1,000 back. The $1,000 at the back end is not as valuable as $1,000 today because of inflation. Investors should use discounted cashflow analysis to determine its current value.

      Ordinarily you do not have to do such a sophisticated analysis with a rental property because appreciation will offset the loss in value of your money when you cash out. Now, that is not the case.

  17. Jason

    So when do I buy? In 2010 when rates are still stupid low? Or do I wait a few years, saving money, investing, etc.

    1. IrvineRenter

      Once prices get down to where it is cheaper to own than to rent, it really doesn’t matter much; you save on the montly cost. If you want to be able to refinance later into a lower payment, you will need to wait for interest rates to go up. This may not happen for quite a while.

  18. freedomCM


    How does this $150k 1/1/1c cashflow? $300 hoa plus any special assessments.

    no way you could rent this place for $1800.

    Also, I agree with AZDavid, incomes are going down. You need to redo the chart showing a 5% drop in incomes for each 2008, 2009, followed by maybe 2% increase after that.

    A lot of people are making zero, a lot of people have half the income due to laid off spouses. it adds up.

  19. tlc8386

    The problem with Irvine is it offers us little choice either a one million dollar house with little lot, huge HOA fee along with mello roos. There is very little room to see any price appreciation.
    What Irvine needs is a new type of housing. The GREAT PARK could have been GREEN new housing with little fees, affordable housing. Instead of lots of wasted space we could of put in gardens with real food items. Orange tree lined streets with other fruit tress for how much water we spend wasted on plants that only produce oxygen.

    There is so much The Great Park could of been for Irvine but all the managers saw was more fees for their tax base.

    So ironic here in CA we have no green housing. Yet we tell the rest of the county how to live.

  20. Redfox

    A good try, but the future in unknowable. You state-

    “I further assumed interest rates will rise once this economic crisis is over from an unprecedented 4.5% to the long term average of 8%.”

    You are making a direct correlation between US GDP growth, unemployment, etc to interest rates. Your analysis would have more merit if

    1. the USA were an isolated economic system.

    2. the USA were not a debtor nations which necessitates the constant influx of foreign capital to fund the budget deficit.

    It is the case that we may need to raise interest rates far above 8% just to keep foreigners interested in our treasuries. THERE IS NO NEED THAT SUCH A RISE WILL ACCOMPANY A RECOVERY. RATHER A US DEFAULT WILL TRIGGER THE SAME EVENT.

    In which case US households will not be buying much of anything….

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