What was the housing market like in 1997 at the bottom of the last price crash? Will history repeat itself?

199 Pineview   Irvine, CA 92620  kitchen

Asking Price: $245,000

Address: 199 Pineview Irvine, CA 92620


This fed time outta town pie flipper
Turn cristal into a crooked I sipper
Everbody want to be fast, see the cash

Can’t Nobody Hold Me Down — Puff Daddy

Is the FED working to feed flippers? Everybody wants to get that fast money…

I have written about the bottom of the market on a number of occasions including: The Market Bottom Is Not a Price Point, The Market Bottom and Fundamentals at a Market Bottom. Today I want to take a more detailed look at the market conditions present last time and extrapolate those conditions to today.

Irvine Home Price History

What were the market conditions in 1997 at the last market bottom?

  • The market peaked in the spring of 1990 at $245,000. In early 1997, the median was $223,750. It dropped for 7 consecutive years (The data series is a bit noisy, but the lowest low was recorded at $192,750 in May of 1994).
  • There where bear rallies almost every year similar to what we are seeing now.
  • The median household income was $62,022.
  • The median home price was $223,750.
  • Mortgage interest rates were at 7.6%. Rates had been steadily falling since 1982.

If a borrower puts 20% down on a $223,750 home, they are putting $44,750 down and borrowing $179,000. The payment on $179,000 at 7.6% interest is $1,263.87. This amount represents 24.4% of the median household’s $62,022 income.

Think about that: in 1997, a family making the median household income could buy a median home with a payment that was less than 25% of their income.

One of the erroneous contentions real estate bulls have made over and over again is that the median household income could never buy a median home. That is simply nonsense.

Twenty percent down was the norm in 1997, but what about the first-time buyers who were only putting 3% down with an FHA loan? They would have put down $6,712, borrowed $217,037, and they would have had a payment of $1,532. This payment would have been 29.6% of their income. By any standard, houses were affordable in 1997.

So what would these same market conditions which prevailed in 1997 look like today?

If a family making the median household income were to put 24.4% of a $91,101 income toward a payment, they could make a payment of $1,852.39. That payment would finance $335,452. A 20% downpayment of $83,864 combined with the $335,452 loan would yeild a median home price of $419,316.

If the people in 2009 were putting the same percentage of their income toward housing as those who bought in 1997, the median home price in Irvine would be $419,316.

House prices did not go up by magic. People were utilizing crazy loan products that allowed them to borrow unbelievable sums, and they stretched beyond the limit to borrow these massive sums. The collapse of these loan products has already resulted in a huge decline in borrowing. People are still stretching to an insane degree and putting very large downpayments to keep our median at $550,000. As those with large downpayments spend themselves, and as people stop stretching to buy depreciating assets, the median will continue to fall.

Keep in mind that the $420,000 median we should be seeing is only supported by artificially low interest rates. As I described in Real Estate’s Lost Decade, if interest rates go back up to their historically stable levels of near 8%, the amounts financed drop even further.

What would happen if incomes were to remain flat and interest rates were to rise to 8% by the summer of 2011? (This probably will not happen, but it could.) Using all the same parameters and an 8% interest rate yields a median home price of $315,561.

  • If you knew the median household income went up about 50% from 1997 to 2008 ($62,000 to $91,000), wouldn’t you suspect house prices would also have gone up 50% ($223,750 to $335,625)?
  • Is it logical to think house prices can go up more than incomes?
  • How are people capable of bidding up house prices higher than their incomes would allow?
  • If lending standards retreat to 1997 standards (which they have), shouldn’t the relationship between income and price also mirror 1997 characteristics?

When I was interviewed recently at the Irvine Homes Blog (Blogger: Irvine housing market nowhere near bottom), I said that I believed the Irvine median would bottom near $375,000, particularly if interest rates rose to 7%-8%. When you look at the math, and look at the history, the crazy number that I threw out looks reasonable and even conservative.


A year in review: 1997.

2 Silveroak Irvine, CA 92620, Sold $302,500, Price: $1,039,900

3 Shadowglen Irvine, CA 92620, Sold $517,000, Price: $1,399,000

14 Crestwood Irvine, CA 92620, Sold $358,500, Price: $1,250,000

15182 Marne Cir Irvine, CA 92604, Sold $274,000, Price: $788,000

166 Oval Rd #4 Irvine, CA 92604, Sold $97,000, Price: $299,900

5 Highland Vw #8 Irvine, CA 92603, Sold $175,000, Price: $499,000

199 Pineview   Irvine, CA 92620  kitchen

Asking Price: $245,000

Income Requirement: $61,250

Downpayment Needed: $49,000

Purchase Price: $98,500

Purchase Date: 11/12/1997

Address: 199 Pineview Irvine, CA 92620

Beds: 1
Baths: 1
Sq. Ft.: 932
$/Sq. Ft.: $263
Lot Size: 763

Sq. Ft.

Property Type: Condominium
Style: Other
Stories: 2
Floor: 1
View: Lake, Pond
Year Built: 1977
Community: Northwood
County: Orange
MLS#: S579050
Source: SoCalMLS
Status: Active
On Redfin: 18 days

Affordable Resort-Style Living. Two-story townhome (no one above or
below) nestled in a tranquil environment overlooking lake, stream, and
mature trees. Premium private location, best in tract with unobstructed
views. Open floor plan with vaulted ceilings. Generous living room with
fireplace, open to cozy dining area. Large bedroom loft with full bath.
Beautiful lakeside patio. Spacious laundry/storage room with washer and
dryer hookups. Move-in condition, with brand new carpet and modern
ceramic tiles throughout. Association features pools, hot tubs, tennis
courts, and is within walking distance from shopping, parks, and

nestled and cozy… I feel all warm and tingly…

This property was purchased on 11/12/1997 for $98,500. The owner used a $95,150 first mortgage and a $3,350 downpayment. He never refinanced nor took out any HELOCs! If he gets this asking price — which doesn’t seem very likely — he will make $131,800 after a 6% commission.


I profiled this second property recently in the post The Lenders Are The Market. It was also a 1997 purchase, so I am repeating it here today.

228 Orange Blossom

Asking Price: $130,000

Income Requirement: $32,500

Downpayment Needed: $26,000

Purchase Price: $62,500

Purchase Date: 10/29/1997

Address: 228 Orange Blossom #34, Irvine, CA 92618

Beds: 1
Baths: 1
Sq. Ft.: 471
$/Sq. Ft.: $276
Lot Size:
Property Type: Condominium
Style: Other
Stories: 1
Floor: 1
View: Creek/Stream
Year Built: 1976
Community: Orangetree
County: Orange
MLS#: F1786080
Source: SoCalMLS
Status: Active
On Redfin: 275 days

Charming end unit. Lower level one bedroom with full bathroom and
kitchen. Inside laundry. Living room and patio area overlooking water
stream and soothing sounds of a waterfall. 1 car port. Association has
pool, spa, tennis courts and clubhouse. Excellent location next door to
Irvine Valley College. Near 5 and 405 Freeways, Irvine Spectrum
Entertainment Center, Business District, Shopping. Located in Building
# 12.

This property was a classic “put” to the bank. The owner paid $62,500
on 10/29/1997 using a $35,000 first mortgage and a $27,500 downpayment.
She only borrowed against the property once during the bubble taking
out a $20,000 loan in late 2003—that is until 7/23/2007 when she took
out a $212,000 first mortgage. Her timing was great because two weeks
later the credit crunch hit, and financing these properties became
significantly more difficult.

So which owner do you think was wiser? The one who did not HELOC the property stands to make a smaller profit, but he will retain good credit. Or do you think it is the owner who HELOCed every penny out of the property and walked away was wiser?

156 thoughts on “1997

  1. Freetrader

    Excellent analysis, IR.

    I would suggest a second potential variable to the median houshold income; that there may be a difference between the rate of wage inflation and the rate of base inflation in the cost of housing. The issue I am trying to get at is that the overall inflation rate is made up of many components which inflate at different rates, for example, the cost of food has historicly generally fallen relative to the cost of other goods; whereas the cost of housing would probably trend to track overall inflation or possibly increase past it. I would not carry this argument too far (since it allows one to simple-mindedly fall into the “they aren’t building any more land and real estate can only ever go up” argument) — but I think that there is an effect there that could proabably be quantified. Perhaps my comment is premised in the illogical hope that things aren’t quite as basd as they seem to be.

    That said, your basic analysis is unimpeachable as a general ‘reality check’ tool — either wages have to rise (which they aren’t going) or real estate prices are gonna keep falling.

    You may have noted in the WSJ and other publications today that rental rates are now falling sharply in OC — over 3% year on year — which puts more pressure on the rental market and a lower price level for “rental parity”.

    1. winstongator

      To the extent that homes carry a lot of commodity goods – lumber, drywall, copper – they may follow a different trend than general inflation.

      I was thinking about rent-vs-own on vacation at the beach, in an area with a roughly equal mix of owner-vacation-homes vs. primarily-rentals. If the ‘commodity’ underlying vacation home values is hotel rental rates, the sharply reduced demand will push rental rates, and then vacation home values down. One property claimed 16 weeks rented at $1500/wk and was listed at $1.4M – that’s < 2% yield! Minus appreciation or using it the other 36 weeks I couldn't figure out how it was anywhere near a good investment.

      1. Freetrader2

        I think your comment would apply to an input cost driven inflation trend, which I am not sure housing is, especially in the existing home market. I suppose that could apply to the housing market, if you include land in the mix (and since land is the plug in the equation, I guess that works in a sense). But I was thinking more of the substitution effect that occurs as income goes up over time — certain commodities, e.g., food, decrease in relative value, while other more scarce resources, e.g., housing, increases. This is an effect of increasing incomes that will actually happen to the extent that the growth in incomes outstrips the growth in the cost of the “essential” commodities.

        I agree with you on the rental parity computation — single family homes are almost never a good investment if rental income is your goal. Even in rental markets, you see weird investments in housing — about 10 months ago I signed my lease on a place in Hong Kong. I offered a very hefty rent for a four bedroom apartment, and the agent’s first response was “they will never accept that — they paid $4 million for the place, and that is a return of only 2%!” This was in November at the height of the financial crisis. My response was, in effect, that the price the owner had paid for the place was no concern of mine and not relevant to the discussion. They accepted the offer.

  2. MalibuRenter

    I was frustrated when I tried to calculate the present value of trashed credit. It was expensive for people with good credit, but a lot of it outstanding. It almost didn’t matter to people who already had bad credit to go into foreclosure.

    For people who did care about their credit and could pay their bills aside from their mortgage, good planning could wipe out their other debts simply by renting or moving in with their parents for a year or two.

    I was also concerned that the credit rating formulas, tax effects, and effects on future earnings would change if tons of people were foreclosed upon. I’m just waiting for congress to introduce legislation to reduce the effect of foreclosures on credit ratings. Someone will think it’s a good idea, regardless of the moral hazard.

    What’s the price of a foreclosure on credit? It depends on your situation, your actions just before and after. It also depends on a number of things outside of your control.

  3. IrvineRenter

    “I was also concerned that the credit rating formulas, tax effects, and effects on future earnings would change if tons of people were foreclosed upon.”

    It is my understanding that FICO scores are graded on a curve. If millions of people default, their credit scores are not hit as bad as single individual would get hit. Also, those that do not default would get a boost to their FICO scores as the million defaulters fell below them.

    I would not be surprised to see someone introduce legislation to manipulate FICO scores. It would be great political pandering, and lenders would quickly find a way around the problem if it were passed.

  4. winstongator

    From my slightly similar own experience, I could imagine that a nearly fresh EE graduate working for 5-year old Broadcom would have bought that first place in ’97. I could not imagine them staying in it the whole time, considering the meteoric rise in BRCM over the next 3 years. A similar new-hire (though I imagine their college recruiting is very slow today) to brcm today could probably afford the 1st, but it would be closer to the same affordability level as in ’97 20% lower, or around $200k. That would still make a nice profit.

    The huge difference between 1997 and 2009 is that Broadcom and other companies were on a hiring and takeover binge. Where there was a huge number of new graduates looking for starter homes in 97, if they don’t have a job yet, they’ll either stay at home or keep renting.

    Is it possible for median incomes to rise, yet median home prices fall? If there is a supply/demand imbalance – more supply of housing, less demand. The biggest bubble areas saw huge building surges, and nationwide we have a decrease in jobs. Even without a bubble, that supply/demand change should have been easy enough for economists to deduce falling home prices.

    I’d rather be the non-heloc. She’ll probably move up, take her 75-100k as a DP on a 400-500k property.

  5. AZDavidPhx

    The other problem that we have is that I’d say ’97 was about the dawning of the age of the McMansion and the Pimp My House social movement.

    We went and prematurely razed a whole bunch of 1200 to 1500 sq foot practical housing and erected behemoth starter castles in their places at double the price since these new bigger and “better” houses “cost” a whole lot more than the smaller and practical ones that were trucked off, piece by piece, to the landfill.

    I see this as a problem for those McMansion owners as those oversized houses are eventually going to have to become affordable which means that the prices are going to have to fall to a level relative to the smaller houses that they replaced – even if they are twice the size and stuffed to the rafters with pergraniteel; you cannot squeeze blood out of the turnip.

    1. HydroCabron

      “I see this as a problem for those McMansion owners as those oversized houses are eventually going to have to become affordable…”

      I thought of this while walking through a ’90s – not those ’90s, but the 1890s – section of Denver yesterday afternoon. On most blocks, few of the mansions are still single units, and those which remain whole are law offices. The rest have been cut up into 3 or more apartments, usually more.

      I figure that the typical McMansion will either be shared by multiple families, cut up into multiple apartments, or held by someone willing to pay huge heating and A/C bills for a status symbol until maintenance costs force a tear down or apartment conversion.

      Some will survive – likely the ones nearest the jobs.

      1. Dan in FL

        Similar buildings on the south hill in Spokane, WA. Totally forgot about those places until your post. Certainly a possibility. Why try to rent out a McMansion for $3500 to one family when you can refab a kitchen into the second floor and rent it out to two families for about the same.

        1. newbie2008

          Zoning and building codes for two reasons. Most are in SF and not duplexes. Two kitchens = duplex and where the fire wall between the units? It will depend on the city/county and who you know to get a variance. Many places also have restrictions on the number of unrelated people in a house/apt.

          Unless your MJ, there does seem to be an upper limit on rent for regular people that pay out of pocket. If a public company pays, the sky is the limit. Was MJ paying out of pocket or from a public company?

  6. Mcdonna1980

    Oh…You just had to bring up 1997. 1997 is the year of probably the biggest financial blunders of my life. I was living in LA and renting a house. My mother is savvy and realized buying made sense. She proposed that she help me buy a fourplex in Burbank close to Disney studios. She had found one for in the low $200,000. The property was cash flow positive. Today that place is generating like $8000-10,000 a month in rent. But no, I was young stupid and back out the escrow. This time around I’ll jump on my mom’s bottom call.

    1. AZDavidPhx

      This is also part of the problem… The pent-up speculation and wannabees sitting on the fence thinking that they are going to game the system when everything hits bottom.

      The average Joe thinking that he is going to position himself to catch the next housing bubble. Unfortunately, he does not realize that everyone else has the exact same idea and his delusions of grandeur are nothing but that – delusions.

      1. Mcdonna1980

        Oh, David where is your sense of humor today? I was just trying to laugh at myself for turning down a great investment that was handed to me on a sliver plater.

        1. AZDavidPhx

          There are a lot of people out there that are thinking this though. That’s the problem. You were just saying it in jest, but it’s a serious game plan to a lot of bubbleheads right now.

          1. Mcdonna1980

            Really? There is a lot of people out there who’s mother’s ofter to buy them a cash flow positive apartment building in 1997 and turned it down? I’m pretty sure I’m the only ding dong out there that turned that one down.

            I think I understand what your saying about a lot of people waiting to catch the next wave but that is not my plan at all.

            When we put the offer on that four-plex we were the only offer and it had been sitting on the market quite awhile. I suspect the same thing will happen this time around, too. Most that have been on the sidelines will buy way before the bottom hits so few will be around with enough cash when the real deals happen.

            I doubt the opportunity I was given will every present itself again, though. The opportunity to buy a cash flow positive property will probably come. But to buy one and then sell it for 1.8 million 10 years later… I think that was a once in lifetime opportunity that just past me bye.

  7. thrifty

    When you step back and look at how effective the various governmental measures have been for the common man, little to nothing has been accomplished. (True, interest rates are low but the result has generally been refinancing of homes not under water. That was not the objective). A lot of activity; virtually no accomplishment – and no reason to think the near future will be any different. I think turmoil will continue for at least 3 or 4 years. The proven DTI ratios of 28-36 will ultimately prevail, probably in spite of, not because of, all the “activity”.

    1. AZDavidPhx

      They are just doing what they can to maintain the status quo and keep life good for themselves and their business partners.

      I am seeing no evidence that the leadership is steering us into prosperity via production of any kind. The plan, as I see it, is that we are going to continue to buy all our widgets from China, software from India, cars from Japan, etc.

      All I see going on here is a bunch of road construction, bridges to nowhere, and the remaining masses rushing the entrances to every nursing school from one coast to another.

      What is the end game here? How can we keep buying all this stuff from other countries and pay for the stuff with construction of our own roads, bridges, and nurses to sponge-bath baby boomers? How is all this stuff that we are doing beneficial to the rest of the world?

      Fast forward 50 years and we are going to be a nation of fast food workers and government stooges. We’ll just be be selling each other cheeseburgers, writing parking tickets to one another, and stroking each other other with sponges. Living on minimum wage while the majority of wealth is held by the old money corporation owners that continuously pass the wealth down to their heirs.

      1. HydroCabron

        ” How is all this stuff that we are doing beneficial to the rest of the world?”

        We’re still the reserve currency, if for no other reason than the mountains of dollars everyone still holds. I don’t see how China can cease to buy treasuries in the near-to-medium term. Furthermore, we run 97% of the military bases throughout the world, making us the inefficient-but-resource-consuming policeman of the world. For industrial oligarchs in China, Russia, and Europe, this not a bad situation.

        I’m beginning to buy the arguments of the deflationist camp.

        Sure, the long-term result will be disaster, but there will at least be 15-25 years of slow, excruciating pain, just bad enough to destroy the psyche, but not bad enough to bring sweet death or unconsciousness.

        Furthermore, baby-boomer sponge baths look like a growth industry for sure. Stroking one another with sponges is at least a stable service-sector activity which creates two jobs simultaneously.

        1. AZDavidPhx

          My problem with all of this is that when you think back to how this country was founded by a bunch of immigrants who came over to farm the land, work in the factories, etc; this was a country that producted of food and widgets. I build you a wheelbarrow and trade it to you for some of your food. We adopted currency systems to make this barter system more efficient.

          We used to land to build farms and factories which would be used to produce these goods.

          What do we use our land for now? We build houses, banks, resorts, golf courses. Am I the only one that looks around and thinks “WTF?”

          Nowadays what is the barter? I’ll spongebath you and you fill out my mortgage application?

          I’m not saying that we have to return to an Agrarian society, but shouldn’t we at least try to come up with something that can be sold to the rest of the world other than our brand currency?

          1. winstongator

            No, other people think wtf too.

            Can I fill out your mortgage app while you’re spongebathing me?

            The real utility of the barter is the wheelbarrow allows the farmer to get 10% more yield for the same effort. This is a difference between a productive and non-productive investment. There’s a difference between building a factory and a home.

          2. Dan in FL

            Peter Schiff would agree with you too.

            My father-in-law is a big supporter of tariffs to prop up what’s left of our manufacturing. I’m starting to agree with him.

          3. Freetrader2

            Come on guys, this protectionist, “end of the world” talk is nonsense. Let’s not turn this analysis of the real estate market, and the associated financial debacle, into a forum for discredited economic ideas. Tariffs, or, as they call them in Washington, “voluntary import limitations” are the reason that Detroit is bankrupt today instead of being home to the world beating behemoths that used to reside there — the management of the big three decided to collude with their unions and the government to keep from competing with the Japanese. It seemed to work also, for a time. Our economy will be, basically, just fine until the Microsofts and Ciscos of the world start begging for ‘tariffs’. And there is absolutely no reason to prefer making hamburgers at $2.50 each to making a transistor for the same price. Both are equally necessary.

          4. AZDavidPhx

            Protectionist? Now that sounds spooky. End of the world talk? Why did you hold back? You forgot about firearm ammunition hoarding and underground bunker preperation.

            Nobody said that the world is ending – but the middle class is definitely eroding. How can you be so dismissive and deny that when the government is using the creation of fast food jobs to pad its manufacturing jobs numbers in order to cook the books?

            Building Blue-Collar … Burgers?

            Come on.

          5. Freetrader2

            Well, having to give each other sponge baths in lieu of retirement sounded pretty apocalypitic to me.

            But, why do you operate on the presumption that ‘manufacturing’ jobs, whatever they are, are somehow superior to ‘fast food jobs’? Why does a ‘manufacturing’ job somehow support the middle class, and a burger flipping one does not? I admit that that assumption is commonly held, it is still wrong. If you are saying that the economy will no longer create jobs whose cost is greater than the value added they provide, well, that is inevitable and in any case a good thing.

          6. Geo

            George Washington put in tariffs when the USA was first created becuase he knew without them the country would soon be economically beholden to England who would flood the US with under priced goods. Washington insisted on making sure the USA built it’s own industrial base and tariffs insured that.

            In a world full of countries with no respect for their citizens turning them into virtual slave labor you simply have to have a level of minimum standards for product production or tariffs to weed out the countries that don’t have them or your own country is undercut and quickly loses it’s production capapbilities becuase of cheapr imports.

            This has been true during Roman and Greek times as well.

            It will ALWAYS be true.

            Until the world becomes so uniform that all peoples demand and have certain minimum work standards which may NEVER happen becuase when tyrants takeover democracies work standards are usually the first thing to go again.

          7. ApostasyNow

            Perhaps you could look at some actual evidence about wage distributions in the various industrial sectors instead of just making stuff up.

            Oregon’s Wage Distribution by Industry as Varied as the Landscape


            “On the low end of the scale, about 58 percent of all wage records in the leisure and hospitality industry had an average wage of less than $10 per hour. About 40 percent of records for retail trade fell below $10 per hour, as did 51 percent of records in natural resources and mining.”

            “On the high end of the scale, more than one-third of all wage records in the information industry had an average wage of $30 per hour or more. Other sectors with significant portions of records in the $30 or more category were wholesale trade (26%), construction (26%), and educational and health services (25%).”

            So, burger-flipping jobs don’t pay much so you can’t be called middle class if you don’t earn a middle-class wage. Pretty simple concept. Also, most people do not think of one class of wage earner ‘superior’ to others (strawman arg), they just know that some earn more than others by looking at the data and evidence.

          8. newbie2008

            Fast food hourly rate is $5 to 12 and the cooked hamburger can’t be exported.
            Manufactured transistor hourly rate is $20 to $40 and the transistor can be easily exported.

            The old FDR cries that tariffs caused the great depression is just smoke to hid the fact that excess credit, increased federal taxation, wage and food price supports caused and extended the depression way beyond the normal cycle. WWII is what got the US out of the depression and not FDR’s fiscal voodoo. Protectionism may not work as well today because the US has lost/sold/scraped the tools to manufacture real goods.

          9. Freetrader

            Yes, well George Washington also owned slaves, so I guess that was a good idea as well? Seriously, your point is not valid. GW put in place internal tariffs because under the British merchantilist policies prior to the Younger Pitt the US was essentially not ALLOWED to develop a manufacturing base, and it was felt we needed one if we were to present being reabsorbed into the Empire. Pitt, who was a disciple of Adam Smith, begain the trend of freer markets that continues to this day, and which has made the UK and the US rich.

            Ever heard of the Smoot-Hawley tariff act? Caused the Great Depression (or at least a great contributor to it). All areas of the policital spectrum, right through left, would agree with that. It has been observed that the best thing we could do to eliminate third world poverty is to lift trade barriers further. Let’s not use IHB to proselytize for discredicted ideas fromt he 18th Century.

          10. Freetrader

            Apostasy, what is your point? The issue I was addressing is this pointless obsession people seem to have with manufacturing. A job is a job; and the wages generally reflect the value added involved. If a certain job is uneconomic (e.g., bolting a bumber onto a fender for $50 an hour) it won’t be coming back.

          11. Freetrader

            newbie, what does exports have to do with this? Why do you suppose something that can be expoprted is better than something that is consumed here? This mythical manufacturing job that pays $20 to $40 an hour that you cite will only exist if it is economic to pay someone that wage — so the person doing the work needs to be a highly skilled technical person, not a bumper-bolter.

            Smoot-Hawley did turn a credit-recession into a full global calamity. You are correct, though, that Roosevelt’s provisions probably just extended the recession — it is nice to see that FDR’s legacy is getting a more balanced assessment these days.

    2. T

      Mcdonna1980 – commiserations on being sensible about money – and therefore losing on a potential huge windfall. Even if it worked out for those that did buy, it could still have blown up on you as a newbie. I never found anything that made sense on a proven DTI ratios of 28-36 basis – I don’t think these ever applied in California.

      You’re all missing the point. Don’t none of you ever watch 60 mins. None of this debt is a problem. We’re all supposed to be dying on mass as a result of rogue terrorists with weapons of mass destruction and bio warfare, plagues, dying while waiting to get past the uninsured in the urgent care line etc… This was supposed to have hit in what 2007? 2010? I missed last week’s episode – maybe now its 2011 – sorry – is that sky net? wot’s this bit about paying back or worrying about long term financial planning – geeze! Get with the program.

      The discussion about what the right amount of housing inflation is suffers from forgetting how much prices have been inflated by fraud in comps.
      That fraud has to come out again… and prices will come back down again as it does. To me the more interesting question is why does anyone lend anyone else money to buy a home – where their only recourse is the home that is losing money, now that their expectation is that when it goes down, the home debtor is going to walk, and the IRS is going to help them all the way to their next rental. For this we have our govt to thank. The US became great on the backs of quaker based trade. Their word stood for something. They were respected and honorable and hard working. How much respect is there for the average home lender or borrower now? Does an American manufacturer deserve any respect these days? Are there any left?

      1. IrvineRenter

        “I never found anything that made sense on a proven DTI ratios of 28-36 basis – I don’t think these ever applied in California.”

        Many people forget these ratios have worked in California. That is the point of this post; it worked even in Irvine during the mid to late 90s.

        1. T

          I looked at various properties in the early 90s, mid 90s, and early 00s – I’ve given up actually looking at properties and just look at the listings. For the level of property I rented, in order to buy a similar property, I would always have had to grossly over-extend to buy that property rather than just renting. I have paid 100s of 1000s of dollars on rent – so for me it may have been cheaper to buy – but I have also moved many times as jobs have moved. Each time I looked at new construction, despite having good income, and spending less than gets earned, I could never qualify on a 3x income 30 yr basis. As income went up, so did prices That is ok, renting isn’t so bad – but for those who have spouses with strong nesting instincts, it’s a huge sore point, I know a lot of people who made out like bandits as a result of overspending on housing when prices were down. They don’t say too much about how the last couple of years have worked for them. In some areas, there are still huge profits, in others, it is huge losses… but how do those losses differ that much from the money I burned on rent? I knew it cost money to live somewhere – many of these home debtors expected to be paid for the privilege. If you want somewhere nice in SoCal it comes with a price tag that 3x most household incomes just can’t reach or a very long commute.

  8. IrvineRenter

    I like having Robert Shiller on my side:

    Shiller on Housing

    “[Shiller] says the housing market could “languish for many years,” due to the “huge inventory” of unsold holds, “shadow inventory” of homes kept off the market by banks and other potential sellers, and “a lot of financial problems.””

    1. winstongator

      What credit does he deserve? He was only spot-on for both the dot-com and housing bubbles. Let’s see if he can go 3-for-3.

    2. winstongator

      I think his most valuable insight there is “One thing is true about housing, it is a very inefficient market – and it shows momentum.” Time lags in markets contribute to boom/bust cycles. It happens with oil prices/investment and semiconductor sales/fab building.

      The dogma of efficient markets should be dead.

      1. MalibuRenter

        I’ve commented on this extensively. It’s not that all markets are inefficient. It’s that the single family housing market is inefficient. Even worse, it is overwhelmingly a market of amateurs.

        1. winstongator

          So, housing, stocks are both inefficient. What would you classify as a truly efficient market.

          I work in semiconductors and it experienced severe boom bust cycles, and I believe it is due to the time it takes to bring new production online. When industry-wide companies are running near full capacity, everyone decides to build a new fab (semi term for factory). When all those come online, you overshoot your target capacity because everyone else built too. Oil is similar.

          Part of market pricing is that resources will move to industries where they will be more useful and drive down the prices of a given good. Time lag can be 2 years or even more. That time lag will necessarily create inefficiencies.

          I believe that long-term the market sorts things out – housing prices are falling as an excessive price-rent ratio would dictate. Short term the bubble was extremely destructive. Failing to see the short-term inefficiencies in markets is a recipe for disaster.

  9. NewportSkipper

    You ask how can homes go up more than incomes, but you left out the 2nd of the two things people buy homes with: assets. It’s possible that assets accumulate over time and that would tend to support higher prices. Newport Beach is a perfect example of this.

    1. IrvineRenter

      It could also be that prices in Newport Beach have been bid up to a ridiculous and unsustainable level because people who bought there believe that prices there cannot go down.

      The Immunity Syndrome.

      Go look through Redfin and find properties purchased in Newport Beach from 1995-1998. You will see the same relationship between local incomes and house prices exhibited here in Irvine. The higher prices in Newport Beach are mostly because high wage earners choose to live there, not because it is a reservoir of value.

      1. IrvineRenter

        Reservoir of value or irrational exuberance?

        415 Marigold Ave Corona Del Mar, CA 92625, Sold: $284,000, Price: $1,169,000

        708 Avocado Avenue B Corona Del Mar, CA 92625, Sold: $310,000, Price: $1,049,000

        313 Carnation Ave #2 Corona Del Mar, CA 92625, Sold: $800,000, Price: $2,450,000

        4 Drakes Bay Dr Corona Del Mar, CA 92625, Sold: $865,000, Price: $2,050,000

        514 Poinsettia Ave Corona Del Mar, CA 92625, Sold: $353,500, Price: $1,685,000

        If Newport Beach supports higher prices due to the assets of its owners, why were prices so low in the mid 90s? Were the owners here poor back in the mid 90s?

        I think its is pretty obvious that the values in Newport Beach have no justification at all, and it is very likely to see a catastrophic collapse in real estate values. I predict we will see 50%-65% declines in home prices there. It would take that to get back to reasonable levels based on Mid 90s pricing plus some income growth appreciation.

        1. wheresthebeef

          Back in 1998, the girl I was dating rented a house in CDM (Cameo Highlands…great neighborhood on the far South end of CDM). I distinctly remember a few houses that sold on that street…for a whopping 600K. If only I had a time machine!

    2. AZDavidPhx

      What are these assets that people have that are driving up prices? Please, educate me.

      1. newbie2008

        There were a lot of people with only a HS education hocking loans and RE to people who had little to no chance of paying back on their own incomes. Those MB people made/stole over $100K to $300K per year via WS. Look at the GS guy last week. $400K and new employer was to pay 3X more. Too bad he’s in jail. I don’t read in the business rags about $100 hamburger for WS lunches, but the excesses are still around — just not as much in OC. With the funny loans there were people making $30K buying houses for $600K. Too bad most defaulted and left the taxpayer (you and I) holding the bag.

    3. winstongator

      Do you mean appreciate or accumulate? Accumulate is buying 100 shares of BRCM every month, and how much that would be worth.

      People also sell assets, and nearly every asset class is far less valuable today than it was 1-3 years ago.

      There are people who believe in an incomprehensible ‘magic’ of markets that sets prices accurately, and there are those who believe in market fundamentals – earnings, income, history of growth, rents, cash-flow – and that markets can be inefficient. I don’t know what evidence moves people from one group to another.

  10. Chuck

    I’m not doubting that you’re generally right; but sometimes it does seem that assets are simply revalued, and start to command higher prices in general. I’m wondering whether you’ve compared SoCal prices with real estate prices in Europe… I know that London might have been hit by the same bubble as here, but in Germany, France, Italy…? If real estate prices there are subtantially higher over the long term, that suggests that real estate prices reflect both cultural assumptions and desires. And that they might be sustainably higher; that having gone up, they simply won’t come down to where they once were.

    Put another way, the Kool Aid we talk about might be more stable than you are assuming.

    1. IrvineRenter

      “Put another way, the Kool Aid we talk about might be more stable than you are assuming.”

      That is possible, but the kool aid was pretty strong in 1990, and it did not stop a 7-year price decline down to affordable levels, and so far nothing about this price crash has suggested it will be any different — other than it may be worse.

    2. MalibuRenter

      People can be permabears or permabulls if they want. What changes is whether anyone gives them money to invest, and whether they have any money of their own to invest.

  11. lemonlou

    Pick-a-Pay Loans: Worse Than Subprime

    WSJ reporting
    As of April, 36.9% of Pick-A-Pay loans were at least 60 days past due, while 19% were in foreclosure, according to data from First American CoreLogic, a unit of Santa Ana, Calif.-based First American Corp.

    1. AZDavidPhx

      Yes, the geniuses running this shell-game apparantly didn’t think about when their mark turns the tables and picks the “no payment” payment.

      What a hustle – Every time I hear that stupid phrase “Pick A Pay”, I instantly think of a Casino game.

  12. Irvine5

    As your new Lennar home depreciates the Chinese Gypsum also makes you sick:

    from today’s wsj: Lennar Corp. has identified 400 homes in Florida that have confirmed problems with defective Chinese drywall, and it has set aside $39.8 million to repair the homes, the Miami-based home builder said in a securities filing Friday.

    The figures are as of May 31, Lennar said.

    Complaints about odors and corrosion linked to defective drywall have been increasing for months.

    The U.S. Consumer Product Safety Commission said in a letter to four U.S. Senators last week that it has received more than 600 complaints related to the drywall issue from 21 states and the District of Columbia. Most of the reports are from Florida, Louisiana and Virginia.

    Lennar has found defective Chinese drywall in some of its homes in Florida.
    Lennar and some other builders have been forced to gut homes, mostly built in 2006 and 2007, to replace drywall, wiring and other fixtures.

    Lennar said that it hasn’t yet found defective Chinese drywall in homes it built outside of Florida and that it isn’t yet able to “reasonably estimate its future exposure” to the problem, which has led to a spate of lawsuits against drywall suppliers and builders.

    The builder said it has a $20.7 million receivable for covered damages under its insurance policies.

    Lennar said it is seeking reimbursement from subcontractors, insurers and others for costs the company expects to face in investigating the problems and repairing damaged homes.

    Drywall, also known as wallboard, is made from gypsum coated with paper and is used in walls and ceilings.

    The CPSC said recently that staff members who have visited some of the homes noted odors and metal corrosion inside the homes.

    “While in the homes, they also consistently experienced some throat irritation, scratchy eyes, headache and other symptoms that tended to clear up or dissipate after some time outside the homes,” the agency said.

    The CPSC and state agencies are investigating potential health and safety risks related to the Chinese drywall.

  13. OC Progressive

    Evaluating things at the median has some inherent problems. People in the lower income levels move inland, rent, or double up. You have another group of people who are the savers, who either own their homes outright by now, or are well into paying off loans that were taken out when prices were much lower.

    The clearing price will be set by the median income of families who are actually in the market, which I suspect is measurably higher than the median income. It’s also not unusual to get multi-generational families where an aging parent or two will bring additional assets to the down payment and income.

    We still have a long way descent until we reach an equilibrium, especially since there’s every indication that the median income is dropping. (California’s income tax collections are down 20% year-over-year).

    1. NickelDime

      While I agree with some of what you’re saying, you need to reconsider this statement:

      “People in the lower income levels move inland, rent, or double up.”

      If they move inland, that raises the median.
      If they double up, that raises the median (assuming we’re talking about median household income).

      “It’s also not unusual to get multi-generational families where an aging parent or two will bring additional assets to the down payment and income.”

      Again, that raises the median household income.

      Statistics can be misleading, but not for reasons you are citing.

  14. Carl

    IR could you do a post comparing what you get for the dollars in 1997 vs. 2009 vs. the bottom? It could either be $/sq. ft or $/lot area. I know it is a subjective thing as to what is really valuable in a home purchase. My impression over the years has been that housing dollars actually buy less but it is hard to figure inflation and interest rates on the fly.

  15. freedomCM

    Irvine mhi = $91k, but the survey was 2005-2007.

    how many high salary jobs at New Century have evaporated since then?

  16. Blueberry Pie

    Is it logical to think house prices can go up more than incomes?

    Wouldn’t that be possible if the population was growing faster than new housing was being built?

    1. AZDavidPhx

      Would also be possible if people were buying up multiple houses, using lots of available credit, and holding them like speculative assets….

      Anyone here know anybody who “owns” a secondary speculation “investment” house? I do….

    2. thrifty

      Only if the job market grew faster than the population and was competing for employees from a limited pool. The opposite is in effect at the moment and shows no sign of changing in the near future. That’s one of Obama’s big concerns.

      1. Blueberry Pie

        All week I read the IHB and read interesting things about the housing economy. Then on the weekends I look at open houses, to see what’s actually available and end up with some realtor or mortgage broker yelling at me about how I’m wrong, or about how Ventura County is different than other markets.

        I start second-guessing myself. A mortgage guy on Saturday told me the market is bottoming right now (I assume housing markets rarely bottom in July). He talked about how all these houses with prices under $400k end up getting 10+ offers and bid up from their asking prices.

        And then I wonder who are all these people out here that can afford these houses? My wife and I combine for about $110k/year income. It really seems like we should be able to find an average, 30+ year old, 3 br, 2ba house with 1600sqft. If people like us can’t afford something like that, it really seems like the local economy just won’t be able to be sustainable. Who are all the business execs going to hire to do their accounting and teach their children when we have to move to Kansas to afford to live?

        1. Eat that!

          Exactly. Consider this though, Blue. The kool-aid intoxication is hard to shake. We are still too close to the peak values, the comparitively great deals are enticing but the excitment is fed by artificially low interest rates and good PR work by the Fed (green shoots!) and the NAR. This process is going to take some time and until the investors and kool-aid addicts take a hit the market won’t return to realistic levels. Let’s see what several years of falling rents and prices do to them.

          1. tacoshark

            With 110K a year, you should be able to own a 400-450k house with no prob if you’re putting 20% down. That’s less than 30% of your pay.

    3. IrvineRenter

      “Wouldn’t that be possible if the population was growing faster than new housing was being built?”

      Generally what you end up with in that circumstance is an increase in people stretching to buy which does cause some price increase, but mostly you get a diminished standard of living.

      Think about it; if a $110,000 yearly household income only gets you a small, old 3/2 in Irvine and a McMansion anywhere else, hasn’t the standard of living already been significantly diminished here?

      If you have to put a larger percentage of your income to obtain inferior housing stock, then your standard of living has fallen. That is what happens when population grown exceeds income growth.

      1. Blueberry Pie

        But I think that an equivalent job in a place where $400k buys you a McMansion, probably won’t pay $110,000.

        1. newbie2008

          The wages for typical salaried educated positions vary between 75% to 125% in different places across the US. Some of the professional jobs (MD, JD) have much higher ranges. The housing range is much higher than salaries. I see CA paying 25% more than the mid-west, but house price is about 4X to 7X more in CA than in the mid-west (just based on the house not lot size).

      2. winstongator

        Do you have stats on new home sales/construction for 03-, and population growth? In So FL, there was a huge building overshoot. What happens when supply > demand even when the price is 0? Sure you get investors who will try to rent condos & townhouses, but what if there aren’t enough renters? ‘Vacation’ properties will take up some of that slack.

        Wasn’t that new-home demolition video in SoCal? Sure it was further inland, but there’s a quantum leap from price decline to bulldozing.

        1. Blueberry Pie

          Yeah, the new-home (actually not quite finished homes) demo was in So Cal. Victorville to be exact. Victorville is worlds away from Orange County. Although much of Victorville’s build-up over the past 5-10 years was due to the people who chose to live in Victorville and commute to a job in Orange County.

  17. Lee in Irvine

    JMO ~ This is likely the best posting IR has done for this blog.

    After reading this, you have to ask yourself this one simple question:


    1. AZDavidPhx

      Thank you.

      I have been trying to make this argument for quite sometime now.

      A few weeks ago when we had the owner of one of the houses show up at the blog and pump the “Hate The Game Not The Player” defense, I asked him if he would want his kids to take on that kind of debt to buy his house from him and he would not give a straight anwer; I wonder why.

      Why do you think that the realtors go on to Zillow and hide the “Charts and Data” link on the homes that they are selling? Because they don’t want you to figure out how badly you are getting screwed compared to what the previous guy paid.

        1. Property Owner


          I have a feeling I was born in the same decade as you. I am fairly young still but I bought when I was pretty young (in my 20’s) because of saving and a lucky career decision.

          1. AZDavidPhx

            You aren’t that special, PropertyOwner.

            What about the young twenty something who has been equally prudent about saving money and made an equally lucky career choice who is about to lose all his money when he buys your house from you?

          2. Property Owner

            Like I said, I am not holding a gun to anyone’s head. If someone is buying it, they want it for a reason. I don’t see why I am responsible for other peoples choices whether good or bad?

            Since I am going to go right back in and buy another house for my family, should the guy I buy from give me a discount or feel bad knowing I am now in the knife catcher category and may lose all my down payment?

          3. IrvineRenter

            “I don’t see why I am responsible for other peoples choices whether good or bad?”

            I totally agree. I will buy when the prices are right for me. If our kool-aid intoxicated society inflates another housing bubble — which I hope it doesn’t — I may sell to a fool when prices are inflated. I will feel no guilt about this at all. I can only educate people, I cannot make decisions for them.

            What would people have you do? Sell at fundamental valuation when the market will bear 25% more? Even if you tried to do that by listing at the fundamental value, competing bids would take the price up to current comps. Should you give the highest bidder 25% off just because?

          4. AZDavidPhx

            PropertyOwner –

            I never said you were responsible for anyone’s choice. Sell it for what you can – I just want you to admit that you wouldn’t want to buy your own house or have your kids make the mistake of buying your house. I am just pointing out the problem and your situation just happens to be a good example of it.

      1. Property Owner


        I thought I gave you a pretty straight answer. It may have been a bit wordy but I felt you received an answer you accepted since you did not jump on me about it like some of my other answers.

        You still have a chip on your shoulder for me because I happen to have bought at the ‘right time’ but when is really the right time?
        When I bought my house, my family and friends thought I was crazy to pay that much (in the 300’s) for a 1500 sq. ft. house when I could have bought a brand new 2250 sq. ft. house in a gated community for $280K about 10 minutes away in another city.

        Just for fun to think about, if I happen to have placed my house on the market for say, $410K, do you think I would get some average offers or do you think I would have had a bidding frenzy ensue pushing up the offers to general market prices for my area anyway? Would you then say I was expecting the next generation to pay higer prices if I set the bar low and the ‘next generation’ bid to the current market level anyway?

        I am not forcing anyone’s hand to give me anything. In the end, the market will set my price regardless of what I want or think my house is worth. Nothing can change that fact.

        1. T

          It makes sense to set your price at market minus a tiny bit to get the active buyers to come and buy your property if you want to sell… and it sounds like that’s what you did… and good luck to you.

          Thing is though, when you start out and try and learn about this buying a home biz, they tell you not to take on too much debt. They say keep the DTI’s in the 28/36 range – of course that isn’t what they actually do around here.

          There are enough people out there who were able to get funded to overpay for a home which they could then sell on to another idiot who would over pay for a home – and then the music stopped and they took some chairs away… and now the music’s playing again and we all wonder how many chairs will go away next time and how hard it will be to get funded for a loan. So we have the people who would like to buy – and people like you who bought – the price went up and now you’d like to get as much of your profit as you can – after all you are only asking the going rate. It isn’t your fault the going rate is so high. The Arizona dude may have been a bit churlish in his attitude but I kind of agree how can it be right for one generation to demand so much cash from the next one…. but at the same time I figure – well if they are stupid enough to hand it over – they get what they deserve – or some one will eventually.

          Prices are what they are because enough people want to buy a home – the good stuff, that is priced right, is going like hot cakes. 110K is good money – unfortunately 110K means you can afford maybe 400K – at a stretch – and maybe you’d be pretty disgusted at how little 400K can buy.
          There is always someone richer who wants to buy more I guess.

        2. Lee in Irvine

          I’m gonna jump in here.

          You still have a chip on your shoulder for me because I happen to have bought at the ‘right time’ but when is really the right time?

          You tick me off!

          More than not, people that post in here are likely younger than you. A lot of us were getting our lives started when YOU BOUGHT at the “right time”! Why should I give a much higher percentage of my income to either bailout some home-debtor, or facilitate an early retirement for someone who bought two decades ago.

          The banks created this fuc*ing mess! And now that the music has ended, sellers expect to get ponzi scheme prices. Though it’s not working in most of Orange County, the govt is doing everything feasible to assist this bullshit, by awarding huge tax incentives, subsidizing mortgage rates, and encouraging banks to assist home-debtors to stay in houses instead of kicking them out. It’s all outrageous.

          1. Property Owner

            Hi Lee,

            The ‘You still have a chip on your shoulder’ was directed toward AZDavidPhx since he calls me out from time to time when I am just being a quiet observer. I don’t troll around but I will respond if slammed.

            I never said I was the baby on the block but I am not the older generation that is cashing out for retirement either. The money is going right back into the housing market for another house (with a slightly bigger loan) so that would make me your definition of a knife catcher and then you can laugh at me. Either way you are mad at me for making a profit and laugh at me for buying.

            I was just ‘getting started’ one time as well. I happened to take a look at an apartment building that I rented from before I bought. It was a 52 unit complex and I saw in the tax records, it was bought back in the ’80’s for a little over $800K. Now it is valued at several million dollars and takes in approx. $62,000 in rent a month or $740K a year. I missed out on that opportunity since I was just starting out as well. Should I be pissed at the property owner because he is making money hand over fist and has a multimillion dollar prperty from an $800K investment? My potential profit is peanuts compared to that guy.

            I did not state my definition of ‘free market’ well enough I guess. The way I was stating free market is that a person is free to buy or not. My statement had nothing to do with the government subsidy, FC moratoriums, etc. I actually do not like what is going on with the Gov. propping up the market either. If the rules were set to the way they are supposed to be, I would be fine with that since if ‘all’ home prices dropped, I could get a bigger house without that huge tax bill attached. I think you don’t really understand where I am coming from.

            The bidding war was hypothetical to the low asking price statement which seems to happen in today’s market.

        3. Lee in Irvine

          One More Point! You talk about the free market bidding up your house, but we don’t have a free market! We have a govt subsidized, too big to fail, bullshit market.

          I’m in favor of allowing the market to set the price of your home. BUT, the rules have to go back to the old way, meaning:

          1) MUCH less securitization of debt.
          2) Most buyers MUST qualify with a 20% down payment.
          3) DTI mush NOT be higher than 33%.
          4) The free market must be allowed to determine mortgage rates.
          5) NO MORE govt subsidies to buy real estate.
          6) NO MORE bailouts of banks or home debtors.
          7) Borrowers and lenders must be accountable for every loan they offer and assume.

          I wonder what kind of bidding war you’d get on your house then? LoL

          1. Freetrader2

            Lee, you seem to have a few issues and a huge sense of entitlement. If you know someone who bought Microsoft at $2 a share do you hate them as well? It’s funny how you rant about the “free market” setting interest rates, then layer on a bunch of requirements (intended, presumably, to reduce demand) that are anything but free market. I guess the world isn’t perfect enough for you. Oh, and you forgot to add “No more home mortgage interest tax deduction” to your list of non-negotiable demands.

          2. AZDavidPhx

            If you know someone who bought Microsoft at $2 a share do you hate them as well?

            Nice strawman you have going there, General. It’s a beauty.

            You are going to equate the purchase of a Microsoft stock with the purchase of a house? That makes a lot of sense.

            You think that a free market implies anarchy with no controls? Why not allow monopolies and price fixing? It’s all part of the free market. Those damn hippies with their entitlement complexes are screwing it all up for everyone.

            Keep up the good chest-thumping there, Free-Market-Warrior. Make Rush Limbaugh proud.

          3. Freetrader2

            Rush Limbaugh? No, never heard him actually. Adam Smith, maybe.

            I like the way how, lacking any semblance of an argument, you go straight for the invective. Assuming (incorrectly) that I am some kind of right winger, you equate me with Rush Limbaugh for telling you to stop whining — hey, we are in the middle of a housing crash, but prices apparently aren’t falling fast enough for you. Morons like you are very quick to decide that anyone who disagrees with them is the “other”, whatever the other is — if you were conservative, you would call me a socialist Obama lover (I get that one all the time as well by the way — idiots seem to collect at either end of the political spectrum). Then you declare intergenerational warfare on a bunch of people who are probably no older than you.

            My Microsoft anlogy was the correct one, and the message is: timing is everything, so stop whining. I can’t go back to 1864 to buy Carnegie Steel, and you can’t go back to 1980 to buy a house in Irvine for $90,000 (a time when the median houshold income in Irvine was around $25,000, by the way).

          4. IrvineRenter

            Who has the sense of entitlement? Lee? Or the homowner who demands the next generation pay 40% of their income to own a house because the homeowner is entitled to that enrichment?

            This isn’t a matter of entitlement. The homeowner can sell their house at whatever the market will bear, and Lee has the right to wait until the market will bear less.

          5. Lee in Irvine

            Blah, blah, blah!

            Do I feel like I’m (and my generation) entitled to the same American Dream of prior generations? Yes.

            Do I think you give a stupid analogy, comparing the purchase of MSFT to the purchase of the American Dream? Yes.

          6. Freetrader

            Agree. My point was that this discussion runs off the rails when one party (in this case Lee & David) start “demanding” that a seller reduce their price below the current market for some obscure “ethical” social justice rationale.

            Sellers should, and will, sell at what the market will bear, as buyers will buy. The distorting incentives that have been previously baked into the system (HMID, Federal guarantees) are not relevant during the negotation except as each party’s input into their own value calc.

          7. Freetrader

            “The American Dream”…that’s rich. Do you even this blog? It is the irrational expectations of home buyers that got us into this mess. You are owed nothing – just make the best choices out of the options you have.

        4. AZDavidPhx

          PropertyOwner –

          I’m not suggesting that you should put your house on the market for any particular dollar figure.

          I was just trying to see if you would encourage your kids to buy your house from you if they were interested or if you would feel better about ditching the house on a stranger knowing that whoever buys it is going to lose their money. You are dancing around the question like a politician and will not give a straight answer.

          I also think that you don’t realize that I sold out of the market in 2006 at the peak before everything crashed. For you to sit there and accuse me of being jealous of your fortune is not going to wash.

          My being annoyed has really nothing to do with you, but more the fact that some bank is going to fund a loser-of-a-loan to allow a fool out there to bid on your house and then take bailout money to cover the future losses.

          1. Property Owner


            Well as I believe someone pointed out in the other thread that your question about making your kids pay for your house what you would make a stranger pay is an apples and oranges question. Of course I would not sell my house to my kids for what I would sell it to a stranger just like I would not ask my kids to pay full price for a used car I may sell or pay $6.95 for that dinner I just cooked for them.
            If you are being hypothetical and are stating if I would let my children buy a house from someone asking what I am asking for my house, well my answer is if their need to buy is now and that is what the market is bearing (regardless of gov. intervention since the market is the market if you need to buy now), that is the only choice they have and if they can afford it, go for it because you have to live somewhere and if they choose to live in a pricier area, they will know it will cost more. Now if I felt the market was going to drop, I would suggest they wait but since I do not own them, they will have to make their own decisions.

            I never said you were jealous of the possible profit I would make. Where did I say that?

            Also, I did not know you sold in 2006. Good for you that you maximixed your profit on your house. I have no anger toward you for doing exactly what I am doing right now.

          2. AZDavidPhx

            There you go again, dancing around again, PropertyOwner.

            You are first trying to divert the topic by going off on how you would not make your kids pay what a stranger must pay.

            You then come back and start to go with where my actual question was coming from and you state:

            well my answer is if their need to buy is now and that is what the market is bearing (regardless of gov. intervention since the market is the market if you need to buy now), that is the only choice they have and if they can afford it, go for it

            Which to me this looks like you are presenting your kids with a false dilemma by implying that buying is the only way to go. Suppose I show up while you are talking to your kids about buying a house for your asking price and I interrupt and say “Why not rent instead of buy?”

            Would you urge your kids to rent the house or take out a loan and buy it? Renting or buying will solve the problem that you were addressing which is “you have to live somewhere“.

          3. Property Owner

            Ok Dave,

            Now you are the one starting to deviate from the original question.

            You asked if I would make my kids pay what I would make a stranger pay. You never brought renting into the equation.

          4. T

            I don’t understand this idea of anyone NEEDing to buy at any point. If you want to buy you have to pay what it costs – a price which is warped by various chicanery & interventions – but properties priced well are going with bidding wars… Much to my amazement – but that is how it is. Yeah you have to live somewhere but no one says you have to BUY somewhere,.. unless they’re the same ilk that regard a person who lost their home to foreclosure etc as homeless rather than a renter.

            I buy stock. I won’t pay more than a certain price. That means I get to wait til it gets down to that price and then I get to re-evaluate if I still want the stock or not. Given how housing has been funded here, how is that so very different?

    2. Blueberry Pie


      Because they think they can.

      And because many others have been getting away with it.

      1. Lee in Irvine

        I agree … BUT what has facilitated these irrational prices?

        (hand goes up) … I know, I know … Ponzi scheme financing!

        Now that Ponzi scheme financing is (mainly) gone, Orange County (Irvine being the epicenter), is NOT GONNA have a healthy real estate market until prices reach a level where organic sellers can pass their houses to the next generation of financially qualified buyers.

    1. IrvineRenter

      That is an interesting post and analysis. I will look into this more. So far Ivy Zellman and Credit Suisse have been very accurate in their analysis and methodology, so I am inclined to think the annual report of Wells Fargo may be suspect, but maybe not.

  18. avobservor

    Should we begin to consider a “worst case” scenario in a deflationary environment where housing price will head for a decade-long decline and a bottom can not be formed? What would be the best strategy for future buyers if the worst case does become reality? When I looked around I generally saw three possible scenarios related to housing market in SoCal:
    1. Scenario 1: market will recover in a year or two as the general economy stages a quick turnaround. Unemployment rate will drop, and wage and rent will rise again by next year. Lending standard will be loosened again as housing price resumes the pre-bubble style quick ascendance. Of course most folks with the ability to think and analyze would dismiss this in a heart beat. But it seems that a large portion of our population still believe this crap.
    2. Scenario 2: market (mid-high end in particular) will tank in the next 2-3 years as the peak of option ARMs and Alt-A recast hits. Foreclosure will shoot thru the roof and price will fall precipitously. Housing price will hit the bottom around 2011-2012, and may stay at the bottom for another few years before it begins to go up again roughly at the same rate as inflation. At the bottom the housing prices will drop 50-60% from peak. I think this has become the prevailing view of the SoCal market on IHB and other objective minded blog space.
    3. Scenario 3: we are stuck in a prolonged deflationary downward spiral. Above 10% unemployment rate becomes norm. Real wages and rent continue to fall year after year so a solid bottom thru rental parity and a standard level of income/debt ratio can not be established. Economic growth remains subpar despite repeated fiscal stimuli, low interest rates and other fancy policy tools that failed to quickly revive US during great depression, or Japan over the last 2 decades. And gov’t endless intervention to put a floor in housing market thru all these idiotic, short-sighted measures (foreclosure moratoria, artificial low mortgage rates, housing purchase subsidy programs….) will only serve to drag out the housing correction but can never revert the course. SoCal housing price in this scenario will keep dropping for 10-15 years, and median price will fall by 75-80% at the bottom.

    Given the historical precedence (Great Depression, Japan) of previous large credit bubble burst, and the fact that we are still recycling all the policy tools (fiscal stimulus, zero rate, QE ….) that failed to revive Japanese economy in the last 10-20 years, I don’t think scenario 3 is that of a remote possibility. Personally I would split the probability 50-50 between scenario 2 and 3.

    1. Freetrader2

      Your diagnoses are pretty accurate but I don’t think scenario #3 is very likely, actually. The more likely ‘worst likely case’ outcome is that continued fiscal stimulus erodes the value of the dollar and drives up prices — inflation not deflation. And a 10% unemployment rate is not mutually exclusive with high interest rates and 15% inflation — that’s what we had through much of the period 1968 – 1980. Governments learned a long time ago that people will tolerate inflation in preference to deflation, and deflation is so unhealthy that the government will only agree. So, even assuming the stimulus doesn’t work very well and unemployment doesn’t budge, the plunging value of the dollar brought on by the deficit spending will bring inflation in its wake, eventually affecting the housing market. Those who can continue to pay their mortgages will see their liabilities deminished away. Will the “real” value of real estate decrease? Probably, but the non-inflation-adjusted prices 10 years from now will almost certainly be much higher than they are today.

      1. avobservor

        I know that the mainstream media has been downplaying (or ignoring) the possibility of a prolonged deflation ever since the market meltdown of last fall subsided. But in reality and at macro level we seem to have all the key ingredients in place for a protracted deflationary spiral:
        1. Large insolvent financial institutions are now allowed to zombify and compete against healthy banks – this ensures we will have a sickly capital market for years to come.
        2. All these loan mods will entrap many home owners in continuing servicing their inflated loan amt, and infinitely prolong the debt-destruction process. Income used in servicing inflated mortgage debt will crow out consumption as IR stated in earlier post.
        3. We are in a synchronized global economic recession and there won’t be any robust external demand to soften the blow or bail us out.
        4. The crushing Medicare/Medicaid/social security liability (as baby boomers reach retirement age) will put tremendous constraints on our government’s ability to re-flate the economy
        5. Change in psychology and attitude towards consumption and saving by US households (IR has dedicated more than one post on this topic)
        6. The imbalance in US economy. The manufacturing base is largely gone, along with any vestige of high-paying blue collar jobs in this country (GM??). In the last 10 years a large part of the corporate profits were generated thru elaborate money shuffling from which exorbitant amt of economic rent could be extracted. That whole system has collapsed once the credit ponzi scheme came to an end, so were millions of fat paying jobs in RE, financial services, investment banking, etc. And there is no new industry on the horizon that can quickly replenish the income drain caused by this structural change. It will take years before the economy re-balances itself (with or without Gov’t help).

        1. Freetrader2

          You make some good points, except for #6, which is completely wrong. There will always be a lot of manfacturing done in the US (the defense industry is required to be here, and the coming inflation will make our manufacturing more price competitive) but the idea that the blue collar unionized worker is the backbone of the middle class is discredited. That man has retired and his kids write software and balance the books for a living. That is normal and all to the good, since we can’t support our high standard of living with a bunch of low-value-added jobs.

          I take your and IR’s point about the zombie financial system, but comparisons with the Great Depression and even Japan 1993-2000 are a pretty big stretch. Our instincts, unlike the Japan MOF, is to inflate the economy back to life, and with the Democrats running things that is the approach they will take. In addition, we don’t have anything like the demographic problems that Europe, Japan, and China are facing — we are relatively fortunate in that regard.

          My point, which wasn’t a particularly optimistic one, is that the efforts to stimuluate the economy will debase the currency and create inflation, full stop. Hell, they may even do it intentionally, since it would allow our fabled ‘manufacturing base’ to become even more price competitive. I just don’t think a deflationary spiral is very likely or realistic. An inflationary one (i.e., stagflation), sure.

      2. avobservor


        Yes we all know Fed (and US gov’t) prefers the risk of hyper-inflation over a deflation trap. But the problem is that they may not have much control over our economic future as much as they think they do. So it does not matter what their preference is – the more relevant question is if their policies will ever work to fight the economic collapse induced by a giant credit bubble burst. And history does not seem to support the notion that they will, or maybe we just do not have enough evidence indicating they will.

        As we all know by know the past 30-year economic expansion was enabled by excessive credit/debt. During bubble years credit(debt) functioned as real money (think of 0% financing) to push up general consumption level as well as property prices. But since this ponzi scheme imploded the purchasing power supported by debt had largely been wiped out, and we started the deleveraging process. Provided the extreme high leverage we had in the system (corporations, household, even government at various levels) it’s doubtful the debt-destruction can be quickly countered by Fed’s printing press.

        1. Freetrader2

          OK, since “we all know” that the Fed prefers to hyperinflation to deflation, if the Fed decides to debase the currency (inevitably causing inflation) then that will happen. Period. Economic conditions have not a lot to do with it (I assume you aren’t really suggesting that there is a risk of total economic collapse and a return to a barter economy). Comparisons with the Great Depression are completely misplaced, partly because the major currencies of the world were then (foolishly) tied together in fixed exhange system linked to each nation’s gold reserves; accordingly, most governments, including ours, had tight money policies that turned a credit problem into a 10-year Great Depression (and not coincidentally, World War II). Each country tried to defend its currency to increase its stock of gold. I don’t think its gonna happen that way again.

          As far as the last 30 years of economic growth being a giant ponzi scheme as you suggest, “we all know” nothing of the kind. I agree the MSM makes it seem that way, but the credit bubble was a phenomenon that essentially started in 2002; it was a direct consequence of the internet speciulative bubble and an indirect consequence of 9/11. The 2002-2006 period is four years, not 30, so your ponzi-scheme analogy, while partly correct within the narrow confines of that period of time, is completely wrong over the longer period 1980-2009. In 1980, Microsoft was a start up with a dozen employees, Oracle barely existed. There was no internet. Are you seriously trying to argue that there was no innovation or ‘actual’ non-finance driven wealth creation during the last 30 years? I hope you aren’t, because if you are, then you are either severely misinformed, or making an argument that you know to be untrue.

          1. avobservor

            Let me clarify on a couple of points:
            1. I was not trying to draw parallel between Great Depression/Japan 90s’ to the current economic recession/depression/great recession (or whatever you want to call it). I mentioned them only because these were the only cases of large-credit-bubble-induced economic collapse we had in the industrialized world in the last century. And my point is that history has shown that it was extremely difficult to fight a credit deflation this magnitude once it took hold in the economy, and we should not dismiss the possibility of such a scenario just because we have not had one in the last 60 years (remember how many people argued back in 2005 that a nationwide housing market decline was nearly impossible?). Of course I know that we have completely different market mechanism and policy responses at work today from what we had back in 1930s’, and US economy is different from Japan in many ways (do a quick search you will find many articles on this topic), but the fact remains that nobody has had any proven success in reviving a credit/debt bubble collapse within short period of time. Fed’s massive liquidity pumping always worked in the garden variety of inventory-adjustment recessions we had since WWII. But this one is not a normal recession and the normal tools Fed/Gov’t have may not work this time.
            2. There have been a lot documented evidence points the inception of this credit bubble building to early 80’s, when both consumer household debt to income ratio and US national debt to GDP ratio both began their steady ascendance. The 2002-2006 housing bubble was the just climax of this credit/debt expansion that finally pushed everything over the edge.

          2. Freetrader

            First of all, avob, I am enjoying this discussion. Thanks for that.

            As I recall we are only really disagreeing about the potential for long-term disinflation. I think it is possible but much less likely than you do. In response to your numbered items:

            1.) Your point is well taken, however, while I do think that the Japan Lost Decade was exacerbated by government policies intended to ease the pain rather than solve the problems (just like our current recession) goverhment dilly dallying about fiscal stimulus went on for six or seven years before both the credit issues and lack of demand were addressed. So, my point is that I don’t thank it is that likely, and my further point would be that our government, unlike Japan’s, would embrace inflation if it came to it. So in essence, my argument is simply that if debasing the currency creates inflation, that is one way to do it, so it isn’t necessarily out of the government’s hands at all.

            2.) Agree with this except for the cause and effect conclusion. Savings rates went down as both inflation and unemployment got out of control. As things stablized for a long period of time (almost 30 years) people, as they will, took state for granted and gradually indebted themselves. This pattern has been repeated many times in history and we were no exception. With the return of economic uncertainly, a lot of people will start saving more again. But I think the stats show that the real draw down in savings was during the credit boom period — and I don’t know the stats, but a whole lot of that consisted of homeowners drawing down their phantom home equity. A second thought here is that things really got heated up during the Clinton Administration, when, with a balanced budget, our government actually started contributing to the savings rate. Things got so good we just couldn’t take it apparently.

            You make some great points though.

    2. HydroCabron

      Deflation, Japanese-style, is worth pondering.

      I am so close to buying mass quantities of long bonds. If only you knew…

      Sure, interest rates will be going up for some ARM payers, but that’s only because they’re leaving the teaser period and joining the real world.

      For the rest of us, 2% may start to look pretty good. China is still buying treasuries as if they had no choice in the matter, and domestic demand has not yet appeared.

      Lock in that 4.3% during 20 years of deflation, and you come out looking like a genius.

      1. Freetrader2

        That 2% return won’t look very good with the 10%-15% annual inflation that may be coming. True, you have to compare that with bad returns you will get with other asset classes, but I wouldn’t put my retiring money into long bonds just yet.

        As far as the Chinese buying treasuries as if they had no choice in the matter; that is true. They have no choice in the matter. But it won’t be like this forever — the inevitable rebalancing of trade combined with the debasing of the currency will force the US government to push up the rates on future issues, pushing down the value of existing bonds.

        1. HydroCabron

          I sure don’t like the idea of holding 4.25% coupon bonds during 10% inflation. The problem is that I am not convinced that 10% inflation is coming anytime soon.

          30-year notes look risky, but if this fire sale continues, we may have 5-20 years in which to hold those notes. And if interest rates are pegged near zilch, there will be buyers who will be willing to pay the premium.

          If I were as certain as some are about the coming hyperinflation, I would not even be considering treasuries. I don’t yet understand how trade will rebalance, whether the Chinese will destroy their own currency through printing, etc. I don’t buy the popular meme that the Chinese are not-to-be-trifled-with super-sharp operators who will eat us alive. If they were, their government and society wouldn’t be the inefficient and polluted distaster that it is.

          1. Freetrader2

            I don’t really know whether we will have serious inflation or not — it is certainly one possibility. I do think that the government will be issuing a lot of treasuries over the next few years and that that might have an effect on interest rates. My only thought is to hedge your bets through diversification.

            I agree with you about the Chinese. There are not a threat, they are actually a partner of ours who are more dependent on us than we are on them. They have redirected their national savings to create a price competitive export sector; but that is a long way from having a fully diversified economy, and in any case, their demographic problems are immense thanks to the ‘one child’ policy; as has been said, the Chinese will be the first nation to get old before it gets rich.

  19. Matt - Denver Luxury Real Estte

    Interesting comparison and analysis. I especially found it fascinating that if the same % was put toward the home now, the median home price would be $419,000. Wow.

  20. dmartin

    Long time lurker here.

    To all those trying to speculate where the economy is going from here and when things will get back to normal. I would argue the answer is never. The US have been a faux economy for decades. As AZ David said in some posts above – we don’t produce anything. Whether it was cars, TVs , washing machines, microchips and routers, even consulting – we once had things the world wanted and needed. That just is not so anymore. Union jobs, welfare, military spending, government waste, were all allowed as the greater economy was thriving, we were manufacturing and selling something to the world. That does not accurately describe our country anymore. Its taking decades for this to filter through our economy and society. And those losing their earnings power are going into debt trying to keep their respective standard of living.

    I would argue certain segments of our society are gone for good and never returning. UAW workers are not going to be “re-schooled” in computers and social security pensions, SSI disability, even unemployment will all slowly collapse in the same fashion as is happening to other social services now in California. We will soon reminisce about enemployment benefits that way we do about free TV.

    I regularly tell my friends that Obama/Washington must clearly know that they cannot save Detroit (both the city and the auto industry). Michigan is Mississippi. Its Over. Kaput. But your president can’t ever publically admit this. It actually wisest to just let it happen on its own weight and throw them a billion here and there to keep their votes coming your way. Their kids who want jobs will all move away soon enough.

    The US as we know has been changed permanently. Its like the terms BC and AD. A period in history so changing that from this point on things will never be the same again. There is no reason comparing today to 5 years ago. Its not relevant anymore. Talk to kids graduating from college now. $75Kin loans and no prospects for a good job now or in the future.

    We are, even though we are so reluctant to admit it, going to be much more like the world economically. There will be wealth and poverty, but the middle class will slowly be choked. Maybe all these gated communities will realize the real reason for the gates.

    But , of course, none of this will be applicable to my subdivision

    1. Freetrader2

      Well, Obama shouldn’t be even trying to save Detroit, althought the bankruptcy option is the correct one. He is trying to keep as many auto workers employed as possible in the mid-term.

      The rest of your post is nonsense, I’m afraid.

      1. AZDavidPhx

        The rest of your post is nonsense, I’m afraid.

        Well – that sums it all up, I guess.

        We can remove our tin foil hats and crawl out from our panic rooms now that FreeTrader2 says that our conspiracy theories are just nonsensical ramblings of the unsophisticated.

      2. dmartin

        Thanks for saying nothing.

        What COMPARABLE jobs/markets are going to replace auto, construction, finance jobs lost in this recession.

        When I see a viable answer to this question, that is when I will believe we will come out of this recession and going back to “normal.’

        There is nothing conspiritorial about that at all.

        1. AZDavidPhx

          What COMPARABLE jobs/markets are going to replace auto, construction, finance jobs lost in this recession.

          Why do they have to be comparable? You think that manufacturing a hammer is any different than making a quarter pounder with cheese?

          1. darms

            Your hammer/machine tool/auto/major appliance/uchip can be used to make larger assemblies (value added) or to create related industry to support same (again, value added), can be sold anywhere & can be warehoused if the current market is bad while your quarter pounder with cheese is a strictly local product (unless you franchise the restaurant) of limited usefulness (feed me now!) and transitory shelf life. The only ‘value-added’ possible in your quarter-pounder economy is statin drugs & fitness clubs to undo the effects of over-consuming said product. Or is there a photoshop lurking in here somewhere?

        2. Freetrader

          Are you really trying to argue that the economiy is finished and that good jobs won’t come back? That every The auto, contstruction, and finance (e.g., New Century) jobs lost in this recession were mostly jobs that shouldn’t have existed in the first place. After a long, painfull recession, the skills of those workers will be allocated to jobs that make economic sense, and that won’t be in auto manufacturing, I am afraid, when has long term overcapactiy problems.

          1. darms

            Personally, I’m 52 & can confidently state that my electronics design job of 9 years (and quite likely my career of 35 years) which went to India in 2008 will not be coming back for me. Obviously there must be some kind of economy here that’s bigger than just fast-food, foreclosure attorneys & prison guards but what exactly it’s going to be eludes me. Wind power? The biggest mfgr of same is in Germany. Batteries? China. There is some interesting research in photo-voltaics here but where it will be manufactured remains to be seen.

          2. Freetrader

            I’m sorry to hear about your job loss and I don’t think that confidently discussing economic generalities will be much comfort to you. All economics trends happen over the long run, and as Keynes famously said, “in the long run we are all dead.” So, I wouldn’t want to presume to speak to your particular job or industry. But there is no doubt that this is a very tough receission that is hurting a lot of people.

            But what is a fact is that there will continue to be good jobs created as the economy evolves, as there always has been. Whether those jobs are located in OC or in California is another question, since our massive mismanagement of the State has done us no favors (and both parties are responsible for this mess — the problem is polarization, not speicific policies). However, California is a nice place, and has a great record of reinventing itself; indeed, every time the ‘death of California’ has been proclaimed in the past, the State and the economy have come back stronger than ever, which unfortunately has allowed our political class to avoid needed reforms.

    2. Geo

      First of all manufacturing can come back to the USA and if the dollar value falls it will.
      Even if the dollar falls it may becuase so many dangerous products are now seen to be coming form places like China (lead toys, sulfur drywall, poison outgassing furniture) that many people will now see once again that some things are better made in the USA where (ideally) more controls and inspections are in place.

      Secondly you forget huge part of our trade balance is software intellectual property such as Microsoft sales around the world.

      the real interesting thing that few realize though is that with the onset of robotics new manufacturing plants will often require zero – yes ZERO labor input.
      this will be a huge change for society which means even if manufacturing comes back many labor jobs won’t.

      Japan had falling employment becuase of robotics in manufacturing even when they were doing well.

      And since Robots can and are being DESIGNED to build and repair Robots even robot manufacturing and repair won’t necessarily by the job source.

      Society will need to work out a new societal division besides owner, laborer, farmer in the world of robotic labor.

      There simply won’t be much value in labor in a decade or two. IT will happen faster in new plants in new industries that pop up that will will be primarily and disproportionally robotized.

      After all if you were building a new manufacturing plant in the US would you make it 100% robotized if you could?

      (however that is waning as they are less dominant)

      1. Freetrader

        Geo, I am not sure who you are responding to but you make a few good points. As the dollar falls (and it probably will) US labor costs become more competitive and that will tend to increase exports.

        Robots are cetainly not a bad thing. You would need techincians to maintain them (self-repairing reborts notwithstanding) and those people would be higher paid than assembly-line workers.

        The bottom line, though, is that the US (and especially California) is a very high cost place, and manufacturing will only take place here if there is a significant advantage to it. The two most obvious advantages are proximity to markets (which is why the Japanese do much of their car manufacturing in the US now) and access to skilled labor (e.g., Silicon Valley). This is as it should be, and in any case, there isn’t really an alternative. The lower wage, unskilled, worker in the US makes more than their foreign counterpart, so times are going to be tough on those without skills. However, the US worker has much more access to education and opportunity than his or her Indian or Chinese counterpart, so it is relatively easy to move up the value chain.

    1. SanJoseRenter

      Being from Silicon Valley, how Irvine could be special puzzled me too …

      According to Wikipedia, Irvine has several universities and headquarters, including Broadcom, In-and-Out, and the Botox mfg Allergan.

      And a nice climate.

      The downsides are that The Irvine Company owns the available land, so you pay $400,000+/lot.

      And if you lost your job in a small city like Irvine (200,000 people), you would likely have to move elsewhere to find another one.

      1. fencewalker

        Irvine Renter says: “The higher prices in Newport Beach are mostly because high wage earners choose to live there, not because it is a reservoir of value.”

        If Newport attracts high wage earners, doesn’t that give it a reservoir of value?

        1. IrvineRenter

          No, the contention among many bulls is that areas like Newport Beach have a premium above and beyond that justified by its higher wages. What was directly stated above was that the accumulated assets of its residents had something to do with house values, as if owning stock made your house worth more. The main argument is that these people may borrow according to their income, but they can put in more equity because they are rich and they may choose to park their money in Newport Beach real estate.

          It sounds nice; in certain beachfront neighborhoods, it might be true, but history shows (see links I provided above) that properties in these cities do not serve as a reservoir of value during economic declines.

          1. NewportSkipper

            “What was directly stated above was that the accumulated assets of its residents had something to do with house values, as if owning stock made your house worth more.”

            Whoa, way to misrepresent. I said homes are bought with income and assets, and that the median income is less relevent because of this. You can agree to disagree, but everything else is just your opinion.

          2. IrvineRenter

            When the last bubble deflated in the mid 90s, properties in these neighborhoods did fall in price to be aligned with incomes. That much is verifiable fact. Perhaps it will be different this time. We will have to wait and see.

          3. winstongator

            What assets do NB residents own that have not massively declined in value, where that asset decline would then cause a price decline? Now, you can’t use their housing assets because you’re logic gets circular. Can you also point to an asset price increase that would correspond with the housing bubble – can you show that the increased prices were a result of increased asset values?

            Even if it were assets justifying the prices, the drop in asset values would yield a price drop.

  21. Lee in Irvine

    Everyone must read this story in Rolling Stone magazine.

    BTW, Who needs free markets, when your Goldman Sachs, and control both political parties. Why have one, when you can have two?

    1. Lee in Irvine

      One more point. The more I understand the history of Goldman Sachs, the more I realize just how evil they are … and Evil, yes they are! They more than any other firm (outside of the FED), inflated the real estate bubble. They were leaders in the securitization of mortgages and deregulation, they, with Paulson in charge, lobbied the SEC to change the leverage rules that increased from 12 – 1, to 40 – 1. Then realizing the music was about to end, they mysteriously found themselves as HUGE beneficiaries of the AIG bailout … just in time (saved by the bell) … 13 billion dollars! What a sham … Paulson gives AIG bailout money, appoints Ed Liddy to CEO, and Goldman Sachs indirectly gets 13 billion dollars. Poof … how about that magic … and without the use of smoke and mirrors.

      I’m rambling on … but there’s gonna be a day, when all this bullshit comes to light, and the people of this country are gonna demand …

      Well, you get the idea.

    2. Lee in Irvine

      I just gotta say one more thing about Goldman, then I’ll shut up.

      Why, oh why, did the NY Times (or any other MSM) not dedicate more time to the corruption and manipulation at Goldman Sachs. I mean after all, the NYT spent the greater part of this decade writing about the monkey man in the White House. And before you go there (racism), I’m obviously talking about the hillbilly from Texas, NOT Smooth Barry the teleprompter man.

      The MSM completely ignores the shenanigans at Goldman. WHY? Because they’re hypocrites! It took a ballsy, young columnist, from Rolling Stone Magazine to point the finger (guilty) at the bastards at Goldman.

      I love ranting at the bottom of the IHB thread! Anger … grrrrr … just kidding. Everyone have a beautiful evening.

      I’ve got to get home, and open a bottle of Red.

      1. Geo

        “Why, oh why, did the NY Times (or any other MSM) not dedicate more time to the corruption and manipulation at Goldman Sachs.”

        becuase the financial firms bought huge amounts of advertising and newspapers and television stations do not call into question the financial solvency of their major advertisers – especially when it is the WHOLE INDUSTRY.

        They MIGHT do an isolated story against a single minor advertiser when they think it is inevitable they will be discovered anyway but never major advertisers.

        newspapers, magazines and TV – unless you read a completely subscription supported source like “The Nation” are not designed to give you info. they are designed to give you enough apparently truthful info to increase subscription/viewer base to maximize the advertising dollars PERIOD.

        When you are reading a newspaper or magazine or watching TV you are reading something that is only one step away from the advertisers hand written copy. Sometimes the articles ARE written and approved by the advertisers in subtle or even direct ways.

        1. Freetrader

          “The Nation” WTF? LOL

          I don’t know where to begin. If you are getting your economic insights from The Nation then it explains why your comments have little credibility. By the way, the Nation is not subscriber financed, it is financed as a charity by well-heeled political activists because it has a pre-determined political agenda. Even if you agree with the contents of The Nation, to call it more “objective” is simply absurd.

          1. darms

            Say what you will WRT “The Nation” but one of their chief economics writers is William Greider – have you read any of his works? Or do you prefer ‘guilt by association’ over actual research?

          2. Freetrader

            Oh, I prefer guilt by association of course.

            I am familiar with Greider, who is respected as a sort of populist economics writer. I tried to read his book on the Fed long ago (“Secrets of the Temple”) but didn’t finish it, which says more about me than about him. I have nothing against Greider, however, I don’t think that The Nation is going to provide one with a very balanced view of the world economy, given its fairly clear political slant. BTW, I don’t get my economic views just by reading “The National Review” of “The Weekly Standard” either.

      1. Freetrader

        Obviously Lee needs to grow up a bit and read a few more publications. He will be explaining the international Jewish conspiracy to us next.

        1. Major Schadenfreude

          What did he say that was inaccurate?

          What he neglected to mention was that Paulson and Liddy all had connections to Goldmen Sachs. They bailed out their own people with taxpayer money from a mess that GS helped create and exploit. Now GS are giving themselves bonuses.

          An entire generation of first time homebuyers lost money whether they bought a home or not because of the shenanigans and collusion of Wall St. and Washington. GS was at the center of it all and they need to be held accountable.

          1. Freetrader

            What did “who” say that was inaccurate?

            Are you the only person in America who doesn’t know that Paulson and Liddy had GS ties? It was part of the reason they had the jobs they did.

            I love this lynch mob mentality – if a company fucks up and goes under (AIG, Lehman, etc.) we yell “hang ’em from the yardarms” for making us taxpayers bail ’em out. If a company does well, like GS, we go after them because, well, because they are successful and that pisses us off.

            GS is an impressive machine that has done a lot for America and the economy (I am not, by the way, a particular fan of GS or of the fact that so many of its execs are well connected in both the Democratic [Gov. Corzine, e.g.] and Republican parties). Those are facts. If you can make a case for illegality and corruption, by all means make it. Otherwise you are just incoherently ranting like our friend Lee.

          2. Lee in Irvine

            Quit assuming.

            I’m not an anti-semite, nor did I allude to anything that would make you think I was an anti-semite.

          3. Freetrader2

            Lee, I was being facetious, and did not mean to imply that you are actually anti-semitic. It was simply an allusion to another conspiracy theory.

          4. tonyE

            Hey, no problem. They made lots of money AFTER we bailed them out.

            So now, before they offer themselves bonuses, they should PAY US BACK FIRST.

            Nothing wrong with that.

          5. Freetrader

            GS have already paid back the TARP money — they actually didn’t want it, but signed up at the behest of the government that wanted full participatation. They had only a relatively tiny exposure — they lost $2.1 billion in the fourth quarter of last year, their only quarterly loss ever.

  22. geo

    Add one mor enew development to the mix.
    Transportable land improvements.

    Already hotels are being constructed out of modular units which can be moved to areas or more or less occupancy simply be shipping the rooms and restacking them. This HUGELY reduces the risk in hotel construction since if a project fails it can be downsized and rooms moved to an area of greater need.

    Modular housing is about to take off too and although it is often discussed in terms of efficiency of production it also has the ability to be dissembled and moved.

    Imagine what mobile land improvements will do to the real estate market.

    Built too many houses in an area like Detroit suffering a downturn? no problem. ship them and reassemble them somewhere else.

    I imagine this will necessitate new “land sales” for new construction which may actually turn into “land leases” .

  23. Geo

    while unsold housing inventory is often considered to be remarketable and hnece able to hold down prices for many years into the future -in actual fact unoccupied housing take a remarkably short time to deteriorate to ininhabitable, unrecovarable states.

    Houses that remain unoccupied for two or three years (and we are approaching 1 to 2 years for many developments now) won’t be there to affect the housing market in three years. They will be cheaper to tear down and rebuild.

    and in the current market no empty house holder like a bank wants to spend the maintainence money to keep the empty houses up and guarded which is a substantial monthly outlay.

  24. Ellery

    Interesting to see homeowners boast about the profit that they would realize if they were to sell their houses now.

    There is no such thing as “profit” on the house you live in. If you sell it, you have to throw that “profit” right back into another property if you were to buy.

    If you have a second home…and sold that one…that would be a profit.

    All an increased value (on a primary residence) means is that you pay more for insurance and taxes. The government and the insurance companies thank you for that.

    Borrowing against an increased value is just borrowing more money…nothing more, nothing less. And we know how that turned out for people.

  25. HOA Management Charlotte

    Interesting post. I have been wondering this issue, so thanks for sharing.I was thinking about rent-vs-own on vacation at the beach, in an area with a roughly equal mix of owner-vacation-homes vs. primarily-rentals. If the ‘commodity’ underlying vacation home values is hotel rental rates, the sharply reduced demand will push rental rates, and then vacation home values down. I will definitely be coming back to your blog.

    HOA Management Charlotte

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