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.
Asking Price: $449,900
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.
Asking Price: $449,900
Income Requirement: $112,475
Downpayment Needed: $89,980
Purchase Price: about $50,000
Purchase Date: A long time ago
|Property Type:||Single Family Residence|
|On Redfin:||9 days|
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