Open Thread 7-11-2009

If you want to see single-family detached homes trading below rental parity, you do not have to go far. This one in Tustin is just north of the District.

14802 Devonshire Ave   Tustin, CA 92780  pool

Asking Price: $449,900

Address: 14802 Devonshire Ave Tustin, CA 92780

But I’m a substitute for another guy
I look pretty tall but my heels are high
The simple things you see are all complicated
I look pretty young, but I’m just back-dated, yeah

Substitute — The Who

All methods of real estate valuation are based on the principal of substitution. A rational buyer — not that we have many of those — will not pay more for a property than a comparable property; instead, the buyer will “substitute” a comparable property for the one they truly desired.

For instance, this property (4592 Abbotswood Cir Irvine,
CA 92604
) being offered for $585,000, and this property (14862 RATTAN St Irvine,
CA 92604
) being offered for $580,000 are comparable in many ways to today’s featured property. Buyers looking to purchase in Irvine would probably prefer one of these two properties to today’s featured property because they are in Irvine; however, someone looking for properties of this type may substitute today’s featured property and save 25%.

Are the two Irvine properties really worth 25% more? Rental comps suggest there is a premium for the Irvine properties, but it closer to 5% than 25%.

This substitution effect is very real; in fact, it was a reader of this blog that contacted me to analyze today’s featured property. I was quite surprised to find it was trading 10% below rental parity.

The substitution effect is what causes people to commute from Corona or Rancho Santa Margarita or simply cross the city boundary into Tustin. It is the substitution effect that is going to drag down prices in Irvine.

There will always be a premium to live in Irvine. This premium is reflected in the high local rents (which someone will remind me are falling). This rental premium translates into a home price premium. The problem now is that this home price premium is still way too high relative to rents. That will change.

14802 Devonshire Ave   Tustin, CA 92780  pool

Asking Price: $449,900

Income Requirement: $112,475

Downpayment Needed: $89,980

Purchase Price: about $50,000

Purchase Date: A long time ago

Address: 14802 Devonshire Ave Tustin, CA 92780

Beds: 4
Baths: 2
Sq. Ft.: 1,684
$/Sq. Ft.: $267
Lot Size: 6,000

Sq. Ft.

Property Type: Single Family Residence
Style: Other
Stories: 1
Year Built: 1968
Community: Tustin
County: Orange
MLS#: P693447
Source: SoCalMLS
Status: Active
On Redfin: 9 days

Tustin Meadows: Diamond In The Rough! This is the 4 bedroom, 2 bath,
2-car garage with built-in pool that needs your touch for remodeling
and best of all it is Priced To Sell. It has 1,684 square feet to make
your own. Brief walk to Centennial Park and the new Clubhouse being

For a detailed analysis of this property including sales comps and rental comps to establish rental parity, please click on this PDF file

(IHB_Brokers Opinion_of_Value_14802_Devonshire_Ave_Tustin,_CA_92780.pdf)

69 thoughts on “Open Thread 7-11-2009

  1. granite

    “The problem now is that this home price premium is still way to high relative to rents. That will change.”

    Every week I get real estate flyers at the doorstep of my rented Irvine house. The smiling (smirking really) agent couple tell me they have sold 4 MORE houses at nearly peak prices in my Northwood community. And yet the rent I am paying justifies a price nearly 1/3 less. Gravity is a weak force but in the end it always wins.

  2. Abbotsford Real Estate

    I just wanted to say, from one realtor to another, fantastic website with a lot of valuable information. The spreadsheet of information is a great idea.

    Also a beautiful home that your sellers have. I do have two questions.

    Is the pool fresh or salt water?

    Where you mention income requirements, how is that number calculated?

    1. IrvineRenter

      I don’t know about the pool. Most pools put in over the last several years have been salt water as it is easier to maintain. This property is 40 years old, so there is no telling when the pool was installed.

      I calculate the income requirement at 25% of the selling price (4 times income). Historically, that is where prices bottom in Irvine. Nationally, this number is around 2.8 times income.

      1. alan

        Regarding the pool…

        Pools are a turnoff to some buyers, for instance people with small children may consider them too risky. Pools also add to your monthly cost, this was not factored into your spreadsheets, but figure an additional $100-$150/month to maintain a pool.

  3. mav

    This is a great analysis post. I personally would not include a 4% lost income to down payment. These days most investments are about as risky as dumping money into a house, t-bills might be the most risky investment right now. I assume you are getting 4% from a 10 year t-bill.

    I imagine most people with large cash reserves are getting far less than 4% if they are the conservative type and do analysis like this. IR, are you getting 4%?

    1. mav

      follow-up: if you are buying a house with the goal of rental parity, I would definitely take out this 4% lost income to down payment. The house would be a far less risky investment than just about any investment out there right now, IMHO.

      1. IrvineRenter

        I like looking at point-in-time snapshots rather than long-term projections because long-term projections are easy to manipulate by changing growth rates. Almost everyone puts in rates of appreciation greater than what is possible to justify a home purchase decision. People buy for emotional reasons, and the financial analysis is often logical rationalization for an emotional decision already made. If a financial analysis is too complex, it is too easy to manipulate, and people will either consciously or subconsciously.

        That being said, there are drawbacks to the point-in-time analysis. The biggest drawback is the impact of interest rates on the purchase decision. Right now comparable rents on this property are around $2,400 (actual MLS rental data); rental parity is at $515,000 for a GRM of 215. That is a very high GRM caused by very low interest rates (and a lack of HOA and Mello Roos). Will 5% interest rates be around forever? Not likely.

        To your question: I am not netting 4% after taxes on my savings; I don’t think anyone is. To do an accurate point-in-time analysis, I should probably put 1% or less as the lost income on a downpayment; however, will this be the case during the full term of ownership? You can lock in the 5% interest rate, but the rate of return on your savings is going to change. I think it is reasonable to put in an after-tax net that is conservative by historic norms in this instance. Others may disagree.

        1. mav

          I agree with everything you are saying. However I think the analysis would be more accurate if you captured a risk of unemployment increasing further, incomes decreasing, and rents decreasing further. Perhaps the cost of that risk would be close to 4%. If you don’t want to do a point in time analysis then you should some how account for rents increasing longer term. Personally I sold off all of my equities near peak in 2007 and kept it all in cash. Right now I would rather keep that peak equity value at a 1% rate and let incomes/jobs/rents stabilize before I buy.

          To nit pick further on your analysis, your 6 months income cash reserve is before taxes. Personally I would estimate emergency cash reserve requirements based on expenses and I would use a yearly expense basis. Depending on your income and expenses… your income might be 200% or 400% of yearly expenses.

  4. lawyerliz

    Ok, this price is better, but just how many, what percentage of people have this income and 20% down?

    I haven’t been here much, but has that predictive
    chart of doom showing prices going down been posted later–especially with comparison with reality. Last time I remember seeing it the chart wasn’t doomy enough.

    1. IrvineRenter

      In Irvine the number of people putting more than 20% down is quite high, although the number is falling. The long-term problem here is the lack of a move-up market. Once the people with cash have spent themselves, there is nobody to take their place. In an appreciating market, people at the bottom would have accumulated equity to bring 20% down to the next purchase. In a depreciating market, those buyers do not exist.

      1. MalibuRenter

        I have a different view.

        The number of people with 20% down will keep rising. That’s because the prices will keep dropping. 20% of $1 million is 40% of $500k. Lots more first time buyers will have 20%. In Irvine 20% might only be $60k on a lot of homes at the bottom. In the San Fernando Valley, 20% might be $30k.

        In Palmdale and Merced, 20% might be below your daily withdrawal limit at the ATM.

        1. TheDarkAvenger

          You could’ve just as well have said Bakersfield, I was looking around there because of a job possibility for my wife.

          I found a place in a cul-de-sac that was built in 2006 and it was listed at 89K. Around here, that’s cheap.

    2. SanJoseRenter

      I’m with liz on this.

      $449k doesn’t sound like an expensive house in
      California, but looking at those cold, hard numbers
      sure makes me feel otherwise.

  5. babymaradona1

    Great article. I keep hearing that there is a big wave of foreclosures coming this summer and we are already well into July. Has the wave hit yet? I took a look at this featured property and noticed that this is an REO. So is this evidence that the wave is here or is the bulk of it yet to come?

    1. IrvineRenter

      The bulk of the foreclosures are yet to come. I am seeing more and more of the shadow inventory hitting the market. I have profiled a number of properties recently that have been REO for 9 months or more that are just now hitting the market. That is the beginning of the clearing process. Plus, default rates are still very high and escalating due to the bad economy. The real foreclosure problem is ahead of us, not behind us.

      1. MalibuRenter

        Sounds like a glacier metaphor. Crushing weight, slowly scouring the landscape.

        Eventually it recedes, and new meadows grow.

    2. Walter

      Conditions: Probate
      Conditions: Subject to Court Approval

      The REO are just trickling on to the market. While no one can predict what the banks will do, I would expect to see the flow of REOs to pick up over the next 6 – 8 months. Unless the government passes more measures to save us.

      1. Dan in FL

        Probate is not REO, and is usually not subject to court approval. If the information is accurate, then the previous owner passed away, and this is being sold by their estate.

        1. Walter

          Conditions: Subject to Court Approval is probably boilerplate in case the accepted offer is below the listed price.

  6. IR_Fan

    Hey IR,
    I have been an avid reader since moving to irvine in March for a job. I believe that your rent vs own calculator is one of the most sophisticated around and captures many of the costs of ownership.

    However, I was thinking long and hard about the calculation and I believe that home prices have embedded options in them which your calculator does not seem to capture.

    Here is what I mean.

    1) Buying a home with a first loan in California is somewhat similar to having a “put option.” Yes, yes, I know. There are credit consequences to utilizing this put (credit score) and so forth but nonetheless, it is a valuable “option.” As you may know, basically a put is valued by looking at the duration, volatility and how close to the “strike” price the option is. Well, in the case of an “interest only” loan, the put is 20% out of the money because of your down payment. But in a regular mortgage, the put will become further and further out of the money (barring declining prices) because of the principal within each payment. Whatever the case might be, it is hard to argue that this put option has zero value.

    2) Rent is really a spot price. Buying is locking in a fixed price hedge against unforeseen inflation. Rent can at most lock in a 1 or 2 year period (most normal contracts). Buying locks in a 30 year period. That is not to say that prices always go up during an given period, over any 30 year period, I think most circumstances would find that prices have increased. (yes I know japan is down 70% since its peak and will never get back there, but that is why the put option in #1 is so valuable.)

    3) Leverage. Yes, I know that in today’s market, leverage is a dirty word. But the power of buying real estate is that it allows a level of leverage that virtual no other “investment” vehicle offers to normal consumers. In an environment where prices are increasing over a time (long time), then having debt and leverage greatly amplifies the benefits of ownership.

    4) (nitpicking) Rental costs do not calculate the cost of moving every year (At least I didn’t see it.) I know this cost very well because I am a renter and have moved virtually every year since I have been back in the States.

    Now having said all that, I completely agree with your general analysis that Irvine is significantly overpriced…but I am not sure that the rent vs buy calculator properly captures all the “benefits” of ownership from a financial perspective.


    1. IrvineRenter

      I love your screen name….

      I don’t know how long you have been reading the blog, but I have a few posts for you to check out:

      Investment Value of Residential Real Estate addresses the issue of fixed rate mortgages versus escalating rents and uses discount cashflow analysis to determine a value.

      Mortgages as Options describes the phenomenon you outline in #1 above. You mention that it is hard to argue that the “put” is worthless, but I would argue that a “put” option of residential real estate that is 20% out-of-the-money is nearly worthless. The odds of being able to exercise this put are pretty low (except in the case of a massive housing bubble), and since exercising this option has negative consequences, the price needs to be significantly in-the-money before people will do it.

      Houses Should Not Be a Commodity describes the problems created when houses become viewed as a commodity as represented by the analysis in your astute observation. Unfortunately, that seems to be where we are headed as a society.

      I did not include any costs for moving because there is no way to know how often people do. I used to move every year, but I am in a below-market rental right now, and I will probably be here until I buy. If you find a stable landlord who does not want to experience vacancy loss, they will keep you in the property by keeping the rent low and raising it infrequently. I have not had a rental increase, and I am in my 3rd year.

    2. Matthew

      1) Thats one hell of an expensive put option if you lose 20% of what you put down. If you put down very little – it may make sense to plan on walking away if things get bad. I don’t know about others, but I am certainly not willing to gamble 20% of my housing value.

      2) True, rents can go up. In times of high inflations/incomes increasing over time, it makes perfect sense to buy as the housing payment is less in real terms overtime. But, buying is also a gamble against unforeseen deflation. We had 70 years of inflation – and credit is collapsing. Rents are going down.

      3) Leverage? Who wants leverage on a depreciating asset? Land goes up or down in value, improvements go down always. Whichever wins depends on incomes/jobs in the area.

      4) Moving costs are offset by the equally high moving costs+realtor commissions+closing costs. The average home owner used to stay in their home 7 years around here. With careful planning, you could likely move ever 3-5 years and be far ahead in this category.

      No matter what you do, you’re gambling. Through careful planning and thought you can minimize or hedge your risk, but in the end – there are odds you could get hurt.

      I think the thing rent/buy calculators don’t accomplish is the sense of ownership. There’s uncalculated value in being responsible for your structure and your land that gives you freedom to do whatever you wish that you can not get with renting. If you want a slate bathroom, you can install it. If you want a pink kitchen, and gold plated doorknobs, you can install it.

    3. Paul P.

      Very well said on the move-cost. I-too have been bumped from one rent to another (various reasons) and so far average move-amortization $1K/month.

      In my current place, $2K/month (if I stay a year) but looks like 2+ years OK here (back to $100/month).

      However, owning introduces “lost opportunity cost” which can be substantial.

      Renting therefore has a “opportunity benefit value” because (almost) wherever the benefit, moving not-an-issue.

      I just moved from Irvine to Inyokern “epicenter of dirt-bike universe”. Physical rent better in all possible ways (new/big etc) while net-rent (inc utilities etc) dropped from Irvine $2400/mo to Inyokern $1200/month. Of course, no IMAX etc here 🙂


      1. former californian

        Inyokern? My god man. As a former Ridgecrest resident, all I can say is enjoy your time on the martian surface. I hope you like wide open spaces!

  7. NewportSkipper

    Irvinerenter, I looked at your analysis post “Investment Value of Residential Real Estate” and I think you made serious some serious errors. Your net present value calcuations can’t be right.

    You say NPV (year 5) of $30,282 profit is $6,070, but I think its NPV is $20,609

    (If you invested $6,070 today at 8% and held for 5 years, you would collect $8,918 (compounded annually) or $9,043 (compounded monthly). Your example implies you would collect $30,282).

    You say NPV (year 18) of $211,194 profit is $18,391 but I think it is $52,851

    You say NPV (year 30) of $500,120 profit is $9,327 but I think it is $49,700.

    I think its also unfair to toss away the first 8% in return as if its meaningless. That is a very good return. Once you add the 8% throwaway return to the true NPV return, and then add the value of not having to pay rent all those years, your measly return becomes much more substantial. What am I missing?

    1. IrvineRenter

      “I think its also unfair to toss away the first 8% in return as if its meaningless. That is a very good return. Once you add the 8% throwaway return to the true NPV return, and then add the value of not having to pay rent all those years, your measly return becomes much more substantial. What am I missing?”

      I have no idea what you are talking about. Sorry.

      1. You can’t add an 8% return to a NPV calculation. The return would be part of calculating the NPV. You can increase the discount rate to arrive at a new NPV if you have different assumptions.

      2. You can’t just add in the costs of not paying rent. You are incurring a cost for housing whether you rent or you own.

      1. NewportSkipper

        You are saying that you can’t count the hundreds of thousands of dollars in profit, because you have to wait to see it, so you work backwards to assign a value of that income stream in today’s dollars. That’s correct, except for your NPV errors. However, when someone looks at buying an annuity with an 8% yeild, they don’t say that it “returns” 0%, it returns 8%. Therefore, the amount of return after NPV can be added to the 8% to arrive at the true return. And your statement that you are incurring housing cost when you own is flat out incorrect. If you do not have a mortgage, your costs are negligable. Your entire premise in the chart is a cash purchase (regardless of your attempt at plugging in $160,000), because you are looking at different ways to deploy $200,000. The value of housing that the home provides is indeed added to your return. How could you possibly think otherwise?

        1. NewportSkipper

          I misspoke here. The $200,000 home purchase yields 4.5% plus the housing dividend. It doesn’t need to be any more complicated than that. If investors can do better, great, but that isn’t a given, and neither is it a given that a home can’t beat a 4.5% yield.

        1. no_vaseline

          no. He’s saying you don’t know what the hell you are talking about in a nice way.

  8. Christina K

    This Tustin house is not comparable to Abbotswood & Rattan in Irvine in at least one regard: schools. Devonshire goes to Nelson Elementary, which might be okay, but the assigned middle school is Currie (rating: 3), and Tustin High’s rating is only a 6. With Abbotswood & Rattan, your kids would go to Greentree (rating: 10). People without kids might not care about that (although they should), but obviously people with kids will…hence the “Irvine premium.”

  9. No_Such_Reality

    So are estimating rent at $2500, $2000 or what for a small 4 bed ‘diamond in the rough’ with no pictures of the inside.

    We’re talking monthly float of $2500, an additional $166,000 to get into it and how much additional to “remodel” the ‘diamond in the rough’?

    As a minor nit, $166,000 is basically 5 years of $3000 a month rent payments.

    We can spin tax savings, lost investments, hidden principle and basically get whatever result we want. I know, I’ve driven myself nuts looking at all the intangible numbers. In the end, the best number is just a straight up PITA on calculated against the full purchase price. For this one, at 5.25% with insurance and HOA comes in at, $2997.29.

    That’s potentially a push, probably a slight over rental value for a ‘diamond in the rough’ needing probably $200,000 to move in and condition.

    It’s also interesting to note how susceptible to interest rate the purchase price. A half point swing on the 5.25% estimate pushes the full value PITA to $3138.

  10. NewportSkipper

    Irvinerenter, here are the true returns, based upon correct NPV calcuations, and tossing out the first 8%:

    Return %

    My apologies if I am off-base, but I’m pretty sure I’m right. I hope you didn’t put that chart in your book!

      1. NewportSkipper

        Irvinerenter, I tried to follow your spreadsheet, but its impossible. You are making this way too hard. In the upper right corner of your ss you have a column where the NPV of savings over rent is greater that the savings over rent! Also, are your % return against home purchase amount cumulative? They should be, if you are trying to make any kind of statement. This is not that hard. If a house appreciates at 4.5%. The return is 4.5% (minus expenses). If that is greater than inflation you are ahead. If it isn’t, you aren’t. If you want to compare housing against any other asset class, you just compare returns between the classes. No NPV of the stream of whatever, discounted at the rate of an alternative whatever. That’s ludicrous. In your upper left hand example, you show it would cost $2,857,547 to rent that $700,000. In the same example you show an owner paying back $1,575,000 ($52,500 x 30). I can’t tell if that includes principal because your ss is missing the formula. Needless to say, owning is significantly better, not counting any other type of benefit it generates. Back to your NPV of appreciation: the example from your article took a half-million dollar gain and turned it into less than $10,000 in the here and now. That is a very serious error, there is no formula in the world that can make that make sense.

  11. NewportSkipper

    Irvinerenter, I read more of that post, and all I can say is methinks you are a bit on the intectually dishonest side! Later in the post you use an example where the discount rate is 8% (aka prevailing rates), but in the same section assume rental increases of only 3.5%. Under what circumstances would that occur? You’re not going to see 3.5% rental increases when inflation supports 8% returns. Ain’t gonna happen!

    1. IrvineRenter

      I am not sure where to start with your comments, so I will start here.

      8% cap rates (returns) on rental real estate during periods of 3.5% inflation is the norm. If there was not at least 4.5% real return on the investment, why would anyone do it? Perhaps I am not understanding you, or perhaps I tuned out when you accused me of being intellectually dishonest. I don’t know.

      1. NewportSkipper

        Cap rates on investment properties (typically condos and apartments) don’t reflect inflation, mortgage rates or anything else in the broader economy. You are saying you can have mortgage rates (since you admit that’s where your 8% assumption comes from in the post) be sustained at 8% over 30 years, yet appreciation is sustained at 4.5% over 30 years. There would seem to be a fatal flaw in your thinking.

        1. newbie2008

          Assumed RE appreciation is no longer assumed or should it be assumed. Declining rents and house prices in the middle to high end seems to be coming. The lower and in-land regions have already been hit. Now wave is moving toward the coast in increasing amplitudes.

          1. Booom

            If you refuse to entertain the possibility that mid to high end will appreciate in the short-term, you’ve lost all credibility.

          2. NewportSkipper

            Boy, a bunch of huffy people here today! Why is this debate so off-limits? I don’t get it. And to answer the complaint: yes, there is some depreciation possible right now. So what, this is a conversatation about theory and long term realities of this investment choice. Take a chill pill, will ya? Geeze.

          3. Eat that!

            Not just possible but certain and unavoidable. Equity and credit destruction has already occurred on a scale large enough to make it a certainty.

          4. newbie2008

            Your assumptions of appreciation are not off limits. It’s just the odds that RE will appreciate and not depreciate bases on the credit crunch, job loss, state economy, rents, and what other factors to consider. Continued low mortgage interest with high inflation can make pseudo appreciation in RE.

            I like IR’s analysis but think he’s too optimistic. Almost all RE agent’s analysis are hyper optimistic and unrealistic. Even my very conservative projections for the mid-west have given my very little profit in RE after all the unexpected expenses (I estimated too low expense, but much higher than those on this board). Maybe expenses are lower in OC, CA with the mild weather.

          5. Kyle

            Newbie2008, what part of the Midwest? I’m a recent Midwest transplant, and would love to hear your thoughts on housing market trends around here.

          6. newbie2008

            I’m from Columbia, MO. A college town with a large state unversity and two private colleges. It’s resistant to the decline, but not immune. It still feels the effects of the declining tax revenue, job losses and other negative aspects of the economy. The prices never skyrocketed, maybe 3% per year. Was more expense than L.A. in the 1950’s.

            OC price are way out of line with local pay scales. The older houses in Irvine are worse in quality than the home built poor people’s construction. The newer construction 2000 to current, is like the current high end but smaller in size. There are currently stricter codes out in CA. I’m an IR fan. I think CA is in for a world of hurt.

        2. IrvineRenter


          I have neither the time nor inclination to complete your training in real estate finance. It is apparent that you have come here to reinforce a preconceived notion you have about the financial benefits of ownership being far greater than renting. So be it. It also seems important to you to convince others that you are right and I am wrong. Good luck with that. You have not come here to learn anything, so I do not have much to offer you. I have no desire to debate with you.

          If my thinking were fatally flawed, it seems likely that one of the 4,000 to 5,000 people a day who read this blog would have pointed it out by now in a convincing way that me and others could understand.

          The bottom line is that owning is only better the renting if ownership is long term, and only when the purchase price is within 10% of cashflow value (rental parity). Otherwise the transaction costs eat up any profits, or there is a high likelihood of price declines generating real losses. Many people who have lost everything and ended up in foreclosure have faced this reality.

          1. Ellery

            I could point out some flaws…but it would be heady, esoteric economic type stuff and would make you look like a damn optimist!


  12. newbie2008

    Still at $267 sf for diamond in the rough.
    RE talk:
    Diamond in the Rough = Needs lots of deferred repairs.

    The pools can be a plus or minus. May get some extra $ for the unit, but it limits the possible pool of tenants. It’s also expense to maintain. Diamond in the rough, needs new pumping system and water proofing?

    For a rental, it has a plus of access to I-5 and I-405. But I see declining rents for the next couple of years. $2000 for renting 1600sf? Even Irvine rentals are proposing rent reduction to lessen move out. I’m at at a new rate of $1.10/sq in TR but on multiple split levels. Neighbor was also rent at same rate for 3 years, but though it was too expense so she moved. HUD and section 8 have some very high rent rates allowed. They count by bedroom and not by sf.

    1. Dan in FL

      We currently rent for around $1/sqft/month, so similar to what you’re seeing Newbie.

      Selling prices are anywhere between $70 – $120 per sqft here, tho.

      So somehow our communities are close on rental prices, but you have double the purchase pricing? And I still think our properties are overpriced.

      Just another example of how out of whack things are.

      1. newbie2008

        Dan in FL,
        You may have higher expenses in FL for hurricane insurance, dry or wet rot, etc.

        IMHO CA RE hype prices appear to have been fueled by many factors: 1. gold rush mentality, 2. in-flux of people, 3. land use restrictions, 4. creative financing (near fraud to actual fraud lending), 5. hyper marketing, 5. GSE to support #4, and 6. Prop. 13. I see large weakening of 1-4, and continued #5 & #6. Prop. 13 keeps RE off the market for those that have moved and then rent the RE out based a prior low RE tax.

        1. newbie2008

          #4 is creative financing (near fraud to actural fraud lending/borrowing).

          It similar to Whitewater Development and S&L bailout but on a grander scale. Follow the leader.

  13. NickelDime

    IR, will you track actual selling price on this in a follow up?

    Given the anecdotes in my circle, my hunch is it closes at least 10% over the list price.

    Not defending, just prognosticating based on the fact that the 8 buyers I know are all looking in this range, and every one has been outbid.

    1. Ellery

      What kind of circle do you run in?

      Does anybody else here know *eight* individuals that are bidding on homes?

  14. Observer

    Irvine Renter’s NPV calc is correct. Here is another way to calculate the appreciation value for year 30:
    Year Payment
    0 $(24,000)
    1 $-
    2 $-
    3 $-
    4 $-
    5 $-
    6 $-
    7 $-
    8 $-
    9 $-
    10 $-
    11 $-
    12 $-
    13 $-
    14 $-
    15 $-
    16 $-
    17 $-
    18 $-
    19 $-
    20 $-
    21 $-
    22 $-
    23 $-
    24 $-
    25 $-
    26 $-
    27 $-
    28 $-
    29 $-
    30 $524,120

    NPV @8% $26,005

    The NPV is still higher than the 24K to pay in year 0, but not a lot. It all depends on the discount rate being used.

  15. NickelDime

    We made quite a few friends going thru the sell/rent/buy process over the past few years, culminating in a buy in LA.

    I’m in my early thirties with young kids, came from OC and am now north of LA in the SFV. Add family, work and friends … getting to eight wasn’t so hard.

    The SFV market is a bit ahead of Irvine as the corrections are more pronounced.

    Here’s a great article that sums it up nicely from the LA times:

    Bottom line is this: anything that’s ripe for a traditional conforming loan ($417k loan amount) in a half-decent area is moving. Quickly.

    IR stated as much in a post earlier this week, referencing the point that stuff over $500k just sits.

    I’m merely curious as to the closing price on this subject as I’m guessing the outcome will be higher than list. Incidentally, that’s a GOOD thing. Banks will release their shadow inventory accordingly, which will crescendo with capitulation…..

    1. Ellery


      Reading the bullshit fluff piece that was basically penned by realtors makes me realize that you are either a realtor yourself…or an economic idiot.

      1. NickelDime

        The LA Times ran one of the better bubble blogs (until Peter Viles left). You are uninformed and have nothing to backup your positions except name calling.

        You’re talking to one of the biggest bears here. Re-read my statements.

  16. tonye

    This home is eerily like my brother in law’s late mother in law’s house.

    As it is, homes like these may come on the market as a result of an inheritance (like the home next door to me last year).

    When these homes get transfer to the “new” owners there may not be much pressure to sell because they are usually paid off. Sometimes the kids _want_ to sell and the house will go on the market. Other times, like my brother-in-law’s wife, only one kid controls the inheritance and they may be happy to rent the place and collect the money. There can be emotional attachment to the play you grew up.

    So, this home looks like it’s not an REO by any means and the “new” owners may not be too hurried financially to get rid of it, so they can sell it or rent it out at just about any price since most prices will be a financial windfall anyhow.

    Sometimes comps can be land mines, eh?

    1. Eat that!

      “his home is eerily like my brother in law’s late mother in law’s house”

      Isn’t that YOUR mother?

      A guy marries your sister = brother in law = your mother is now his mother in law

    2. newbie2008

      Inheritance can be very messy. Some want to sell and others don’t. RE sale may need to be approved by the court. Family buyout may be asked be be reversed if the property or business goes up in value. I don’t agree, but I’ve seen lots of families fight over inheritances and prior buy outs. Best to have the people take care of these things before they exit. I know people trying to avoid sell to family even at a lower open market offer price.

      There are dark colored spots in the pools wall? Sign of pool trouble?

  17. lawyerliz

    Gee, about a year and a half ago, I posted that
    the prices will be the 417k loan amount plus a down payment. There you go. What happens if the
    417 is lowered? Prices go down.

    1. no_vaseline

      What happens if people have to qualify for loans based on income? Prices go down.

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