If you are renting rather than owning, you are “flat” real estate. Going flat can be a trading position to profit from, if the drop is deep enough.
Asking Price: $600,000
Address: 15 Iowa Irvine, CA 92606
{book3}
In ten minutes I’ll be laying out flat on the floor
Like I need to defend my own innocence
So what, I did it, I admit it, and I’m pleading the 5th
One more anthem for the know it all
I won’t be standing up for long I better learn how to crawl
Learn how to crawl
In ten minutes I’ll be laying out flat on the floor
Flat On The Floor — Nickelback
When traders takes a position in a market, they can be either “long” or “short.” If traders have no position, they are said to be “flat.” Traders who are long the market have an ownership stake, and they want to asset to go up in price. Traders who are short the market borrowed the asset, sold it, and they must repurchase the asset later to repay the debt. The short position is profitable if prices go down.
In residential real estate, it is not realistically possible to be short (you could play the futures though). Someone is not going to loan you their house and allow you to sell it to time the peak. What homeowners can do is to functions much the same: they can sell their home, go flat, and buy a different (presumably better) home later and profit from the difference. The “flat trade” is much more difficult than it sounds.
Real estate as an asset class has two significant drawbacks: (1) illiquidity and (2) high transaction costs. The problems make the flat trade challenging. When you sell a house, you will most likely pay a 6% commission. When you buy a house, you will incur closing costs and fees amount to about 4% of the transaction. When you consider the transaction costs, you must time the market to capture a 10% move, or you will actually lose money. Last year in Irvine, the Median Irvine home price is down 7.2 percent.
Nobody other than renters wants to see the flat trade be a success. Lenders know falling prices make for greater losses, the Federal Reserve knows low interest rates support higher prices, and the Government knows if they do not help the lenders and the Federal Reserve, then taxpayers are going to get the bill for the clean up; therefore, all the powers-that-be are scheming to keep prices high.
On a local level, we have tight supply and low transaction volumes sustaining prices about 30% above rental parity. Limiting supply — to the degree such a thing is possible — can theoretically keep prices at elevated levels indefinitely assuming the market remains at relatively low transaction volumes. This is certainly what property owners in Irvine want. Who can blame them?
If the REO inventory entering the system is large, and if it is sold relatively quickly, the increase in volume will cause prices to fall — probably the remaining 30% down to rental parity. If the market conditions that prevailed in 1997 recur, or if interest rates return to their historic norms, prices will fall more than 30%, and the flat trade would be very successful here.
Another variable that must be considered when contemplating the flat trade is your monthly cost versus renting. There are many people who may be able to profit from the short trade, but their current payments are less than rents because they locked in a payment many years ago. The people that have substantial equity may not want to try the short trade because it will cost them extra each month to rent. In fact, I would not recommend trying the short trade if you monthly cost of ownership is significantly below what the property would rent for.
The flat trade is getting much more difficult in many markets because the bulk of the declines have already occurred. Many nearby communities have declined below rental parity, and there are real bargains in some of these markets. There is still interest rate risk and overwhelming supply in these markets, but the subprime dominated markets are much closer to the bottom than to the top. The window of opportunity for the flat trade has closed in these markets.
{book}
Another problem with the flat trade is timing it properly, and Timing Does Matter. It is difficult to sell into the frenzy because it is hard to predict when an irrational crowd will change. There were signs of a market top in 2004, just before the Option ARM took off and market prices went skyward. When timing the market, most people look for clear signs in the rear-view mirror.
For The Great Housing Bubble, the clear signal was the credit crunch and the onset of falling prices in August of 2007; unfortunately, the best signal is also a sign of a collapse in liquidity which makes a property much more difficult to sell. Waiting for the signal is clear may cost 5% or 10% of the sales price as a discount. Few have the savvy to identify and act on these signals; although, some of our esteemed members in the forums have done it — the flat trade is possible.
In any market decline, the most desirable properties will decline last. The mid to high end of the market has declined the least so far, but this merely means they have the furthest to fall. The flat trade is still possible here, and in the beach communities around Southern California, but this opportunity will pass quickly. Once prices get within 10% of the bottom, there isn’t enough drop left to profit from the flat trade.
Asking Price: $600,000
Income Requirement: $150,000
Downpayment Needed: $120,000
Purchase Price: $860,000
Purchase Date: 6/29/2006
Address: 15 Iowa Irvine, CA 92606
| Beds: | 4 |
| Baths: | 3 |
| Sq. Ft.: | 2,200 |
| $/Sq. Ft.: | $273 |
| Lot Size: | 4,840
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Mediterranean |
| Stories: | 2 |
| Year Built: | 1999 |
| Community: | Walnut |
| County: | Orange |
| MLS#: | P697358 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 1 day |
COMMUNITY ON A QUITE CUL DE SAC.THIS HOME FEATURES PLANTATION SHUTTERS,
TILED FLOORS, MAPLE CABINETS, CUSTOMBUILT-INS, EXTRA LARGE
PROFESSIONALLY LANDSCAPED TROPICAL YARD WITH BUILT IN BARBEQUE. GREAT
PLACE TO ENTERTAIN AND RELAX. THIS HOME SHOWS VERY WELL. COLLEGE PARK
ELEMENTARY AWARD WINNING SCHOOL.
HIGHLY UPGRADED?
ALL CAPS
This property was purchased on 6/29/2006 for $860,000. The owners put some money down, but not enough to warrant hanging around.
| Date | Event | Price | Appreciation |
|---|---|---|---|
| Jul 30, 2009 | Listed | $600,000 | — |
| Jun 29, 2006 | Sold | $860,000 | 13.3%/yr |
| May 01, 2003 | Sold | $579,000 | 15.0%/yr |
| Aug 31, 1999 | Sold | $347,000 | — |
This property is on a fast-track from default through foreclosure and eventual sale.
Foreclosure Record
Recording Date: 05/13/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2009000240902
Foreclosure Record
Recording Date: 02/11/2009
Document Type: Notice of Default
Document #: 2009000063919
If this property sells for its current asking price, and if a 6% commission is paid, the total loss will be $296,000.
This property is nearly a 2003 rollback, and it is asking 30% off its peak purchase price.
QUITE the Cul de sac!
And there’s obviously a new grammar rule for realtors, where “built-in” is hyphenated but “custombuilt” in is not.
In any case, I’m very interested in any home where you can somehow include an EXTRA LARGE yard on a 4840 square foot lot and still have room for a 2200 square foot house. This must be one of those mystery spots where the normal rules of space and time don’t apply.
And….the listing’s been pulled.
Plantation shutters? Those look like the same old stupid screw in fake shutters you see everywhere. God I hate those things.
“Plantation shutters” should have an actual function, imho.
I find it funny when REOs are pulled after being profiled. IR, which one happens more: REOs yanking their listings, or private owners?
This one was there last night. There are a variety of reasons listings get pulled, and I don’t know why this one was taken down.
The plantation shutters do have a purpose. Was reading about fireresistant building, the heavy wood shutters don’t combust easily) unlike say a light thin cloth window covering) if there is a raging fire outside and the windows get really hot, thus preventing the fire from spreading to the interior of the house.
That is important as the homes are meant to be a fire shelter in a worst case scenario where you don’t have time to evacuate.
These “shutters” are merely pieces of decoration screwed into the siding. There is no mechanism for them to open or close.
Very common decorative adornment in California. Sort of pathetic that they would advertise the existence of the non-functional shutters — the purpose of the shutters is to disguise how essentially ugly the structure is.
Dan and Freetrader,
“Plantation Shutters” are entirely different from traditional exterior shutters. Plantation shutters are on the interior of a home, and do offer a great deal to those who have them. Our rental has them on every window (even the arched ones), and my wife and I agree we will definitely have them in our home when we buy. They are great for controlling light, air, and privacy. These 3 are all a must in such tightly-built SoCal housing. We spend quite a bit less on A/C since we can turn them so noone can see in, but air comes in. In the morning, it’s a quick flick if we want to sleep longer.
Chuck Ponzi
How can this be a quite (or quiet) cul de sac when it’s one house away from the 5? Remember the house on Nebraska featured by IR about 2 months ago? That one was right behind the freeway wall.
I wonder if that one sold.
Several possibilities: it really is quite a cul de sac, or the cul de sac itself does not have much traffic and is quiet – the noise coming from the freeway instead. Or in case you are hearing impaired …
Let’s face it, if you’ve bought into real estate never going down, and buying now or being locked out forever, who’s going to complain about a difference in perception of noise?
Yup, that is quite a QUITE cul-du-sac.
Actually, it is a pretty nice house at a price that looks almost ‘normal’. But then one notices that it is on a tiny lot about 10 feet from I-5.
IR’s graph brought back to me the horrors of advanced microeconomic class. If I read between the lines correctly, you seem to be suggesting that the difference between the flat trade and going long is narrrowing, that transaction costs will eat up most anticipated profits at this point, so that without necessarily advocating that it is time to jump back in the market, you note the reduction of the ability of traders to arbitrage an obvious market distortion may mean that the market may look a little more rational for awhile.
Forgive my Panglossian comment here, but if people such as IR are even thinking that the period for going flat may be coming to an end, there may be some market support coming as some renters jump back in pool. I do not know whether the shadow inventory and relatively low interest rates make this a false bottom, however.
Certainly seems to be an educated read on what IR’s saying, but I wouldn’t take it to the extreme of saying “it’s a good time to buy”. (I know you didn’t use those words FT).
With another 30% drop to get to “rental parity”, and the very real possibility for overshoot, there is money to be saved still by staying flat. Add in the interest rate problem, the very real possibility of rents declining, and shadow inventory, and 50% or more might still be left on the downside.
In my practice, I tell my clients that we have at least 20% more to fall, but I try to be conservative in those estimations. In our market, we still probably have 40-50% drop still coming, especially in the high end SFH market. Low end condos will drop to almost worthless.
What FL market is that? Broward county, where I grew up, has seen pretty much 50% drops from peak on SFH, and 70-80% on condo/townhomes. The rental properties I’ve briefly checked show that things are pretty close to rental parity. Problem is – not enough renters! There is such a supply glut it will take out-of-towners buying up props as vacation spots.
Good point in that “rental parity” is a slippery beast. Nominal rent is pretty meaningless if you can’t find a renter. Maybe that’s what Dan means when he suggests some condos might actually be worthless.
If I were really brave I’d buy a fairly nice high-rise condo near the beach in Florida — but I’m not that brave. The FL market is even more boom and bust than OC, and unlike OC there isn’t an underlying ‘real’ economy to speak of, so it seems to be purely an investment/speculation driven market.
The townhome development I lived in for a few years, has had 2 non FC(9)/REO(15) sales in 2009 out of 450 units. The most recently sold unit’s sales history:
2000 – 80k
2003 – 123k
2009 – 45k
45k w/no dp 5.5% -> cost of ownership, $340/mo. I’m guessing that unit could rent for more than that.
You can wait on the FL condos. They’ll be depressed price wise for a while. I wouldn’t suggest buying unless you were going to use it for a good stretch of time or were going to retire there.
What are the condo fees?
That’s where the worthlessness comes in. Can’t even rent some of these places out for what the condo fees are.
“Forgive my Panglossian comment here, but if people such as IR are even thinking that the period for going flat may be coming to an end, there may be some market support coming as some renters jump back in pool. I do not know whether the shadow inventory and relatively low interest rates make this a false bottom, however.”
I wouldn’t say it is a good time to buy for the reasons you listed, but we are quickly approaching the time when it is not a good time to sell.
In a normal market, there is no advantage to either buy or sell. When prices peak, it is a good time to sell and a horrible time to buy, and at the market bottom, it is a good time to buy and a horrible time to sell. We are transitioning from a great time to sell toward a neutral market with a buy signal being 12 to 18 months off, assuming REO takes prices down another notch.
What all of this tells me is the lower interest rates and refi’s are working along with holding down the supply. In other areas south of here you can find better pricing but Irvine with limited inventory has held up well but Shady Canyon is dropping. So the higher end is falling now.
The question out there for TIC will they change their models, prices and lot sizes? Will they really change to meet a market? We all want a decent size house on a decent size lot not a box on a postcard like this house.
A 2500 sq. foot house on a 7 k lot would still be better than what we have now.
Even though I would love a 3k house on a 10k lot.
uggggggg
People don’t seem to pay for large lots-they pay for large houses. Especially in Irvine. The math seems to be that people will pay 90% as much for the same square footage on a 5,000 sq ft lot as they would on a 10,000 sq ft lot, so it makes sense for a builder to get 80% more money for the same amount of land.
With outdoor living here so evident you would think we could build a pool or a spa at least.
I have one now and it’s just so worth it. Patio, table, grill, pool, spa—hello this is SCAL!!!!
Again the quality of life. In Florida one of the houses we built had different pools to choose from–I would say 75% picked the builders pool instead of building their own.
TIC needs to find a new market and new way to make housing interesting again. These boxes are so unattractive and boring! Going Green would be a huge market as well–
I know of someone who successfully shorted RE. Sold their home to an investor, banked $300k profit, then rented back from investor. 2 years later, investor FC’d, home sold at REO for nearly 20% less than original owner paid in 2002. Original owner could have got back in at the lower price and almost paid for it completely out of the profit from the ‘investor’ sale.
Yes, I know of a large raw land transaction in the Palm Springs area where the originally seller bought a property for $750,000, seller financed the property to a buyer who paid $2,500,000 over 3 years and then walked from the property. The seller took the property back in foreclosure on his original note. So far, he has already made $1,750,000, and he has the land back. Of course, he is probably stuck with this land until the next cycle, but it was a successful short trade of sorts.
I assume the 2.5 million wasn’t the full purchase price the sale was at. I’ll bet the seller would have perferred to have had the full purchase price instead of the land back, but I’m also sure he can’t complain, since he did more than triple his money (and got the land back).
Uhh… Newhall Land, anyone? Lennar? Anyone? Calpers losing $1B and Lennar getting it back for pennies? Bueller?
More like selling a very expensive call option.
That is how it worked out for him.
No, they merely were “flat” during the period of renting. Shorting means you make money directly if the price went down, which is not possible on tangible items.
The easiest way to short real estate would have been to short publicly traded REITs. If you did this over the past year, you would have made big bucks. Of course, this would be true with almost any stock.
The way everyone was so long real-estate, this guy’s action seemed to be selling RE short.
Most advisors & investing personalities were in the long RE, long equities camp. But what were they short? Cash. The liquidity and savings cushion for when things go bad. Do efficient markets assume infinite liquidity?
Using IR’s calculator, this comes out to monthly costs of $2700/mo – which I’d guess is roughly what it could rent for.
(Note: interest @ 5.25, no HOA (this could be wrong), and 0 for ‘loss of income for down’ as this would be a move up home and equity from the last property would be your down)
I suspect any home built in Irvine only a decade ago would have a HOA fee, possibly a substantial one. Probably Mello Roos too.
It is the Mello Roos and HOA dues that really hurt the valuations in Irvine. Even when pricing looks similar, the property in Irvine often costs much more to own because of the taxes and fees.
Any comments on yesterday’s article from the OC Register about this being the bottom? The two economist cited seem to dispute that there is another wave of foreclosures to come.
Our story: After reading this blog, we sold our townhome in May 2008 for a $75,000 loss (including transaction costs). Prices in that community have fallen another $100,000. In the meantime, we have been renting a larger home for less than our mortgage. Last week, a foreclosure notice was posted on the door. We plan to find another rental and then buy in 12-18 months. Thanks for all the tips.
I am surprised anyone would be calling a bottom right now (other than realtors). There is no sign of improvement in anything, and the shadow inventory certainly does exist, and it will need to be sold.
Congratulations on your flat trade. It seems to be working in your favor so far, and I think your timeframe will work out well.
There is definitely a temporary bottom at the very least. Look at the graphs at the Redfin links below to see what I mean.
http://www.redfin.com/city/9361/CA/Irvine
http://www.redfin.com/county/332/CA/Orange-County
Now, could there be a double dip and a second crash? Sure, if this mythical shadow inventory ever appears. But it hasn’t yet.
So you’re calling a bottom in price per square foot?
You’ve been paying the rent and your landlord went into foreclosure?
What about your security deposit?
Have you stopped paying the rent?
Dang it, that sucks… paying rent and your landlord not making the payments..
Renters are supposed to pay rent. If the landlord pockets the money instead of making his mortgage payment, that’s between him and the bank.
These people did what they said they would do. No shame in that. It is a shame they are forced to move, but they shouldn’t feel “taken”. They paid rent, and they got to stay in the house.
Who knows? They may end up finding an even larger house for less rent than this one.
That depends — on whether the renter gets their deposit back, and gets adequate contractual notice before being forced to move out. Generally speaking, if an ‘owner’ is willing to stiff the bank for the mortgage payments and walk away from the property, they have already spent the first and last and deposit as well as the rent, so the renter gets ripped off. And that is illegal.
Do you have a lease? I believe that the lease carries over to the next purchaser of the property, including the bank. If you are happy where you are at, I would stick around as long as possible.
There was legislation passed late last year which protects renters in homes that are FC’d on.
I believe if the house was FC’d after October of ’08, you must be given at least 90 days to vacate the property. If you have a lease, the lease has to be completed to it’s full term before you are required to vacate.
This is actually what happened to my mother. She is renting from a person who stopped paying the mortgage and my Mother kept paying the owner rent for a year. She received a notice to vacate due to the property going to the bank. Mind you the property reverted to the bank in late 2008 and she only received the notice to vacate in June 2009!
Well, the bank (Chase) wants to take the property back before the 90 days so they offered her ‘cash for keys’ to vacate in 30 days. I negotiated for more money and a little more time and my Mother took the deal. Now I am moving her out this week and she is basically getting 6 months of her rent back from the cash for keys deal as a renter. Not a bad deal I would say.
Oh, I forgot. After she received the notice, she was told she does not need to pay rent for the remaining time in the property. So she stopped. Guess what? The old property owners who were FC’d on actually sent her a letter asking for the rent since it was after the first! I called them and told them their money train is gone and we know what they did. I then told them that they have been collecting rent on a property they do not own for several months and they should probably be arrested for fraud. He quickly said we don’t need to pay the rent and hung up.
What slimeballs!
I like how you handled that.
Send the Sheriff over with the check…
IR, what about an update blog for current renters who get their rental FC’ed.
Prior years were terrible, because the renter had to make a claim against the original owner who was likely no where to be found and. The new laws seems much fair to all the parties involved.
Thanks for all the tips. I love the IHB community.
Our lease has expired, so the best we get is 90 days post auction. We received the foreclosure notice the day that we had put the August rent check in the mail, so we stopped payment on the rent check and let the property owner know. The PO, of course, insists that this is all a misunderstanding that he is going to clear up. He says he was doing a partial payment to get a loan modification. Not sure that one can get a loan mod on a non-owner occupied home, but anyway… Until he shows me that he is current, we are not paying rent. At least this way, we can recoop our large security deposit and moving costs. Moving is a bummer though, especially when we are having a baby this week.
congrats on the baby! and great call on holding back the rent. I would have done the same. Just let him know that you have all ‘skipped’ months rent available to him – as soon as he can show you proof that the NOD has been cancelled.
Many of us have access to the public records online (and those show when NODs get cancelled) so if you need any 3rd party proof just ask around.
Good article. I think you hit the nail on why prices haven’t fallen the way the should; California has a limited supply of housing. I read an article about three years ago saying that compared to other states California needs about 3 million more housing units for the demand curve to intersect the supply curve.
I lived in the Los Angeles area my whole life, and I’ve noticed that area’s once designated for the working class are become areas for the young affluent class. The reason is limited supply.
Hopefully developers will wise up and start building homes with not all the amenities to capture the working class market. Then we will see prices fall to their historic norm.
There is not a shortage of housing units in California-in fact, in some parts of the state, there’s an extreme surplus (anywhere in the desert, for instance). There is, however, a shortage of housing units in prime areas.
California’s Reckoning—and Ours
California’s budget debacle holds a lesson for America, but one we will probably ignore. It’s easy to attribute the state’s protracted budget stalemate, now temporarily resolved with about $26 billion of spending cuts and accounting gimmicks, to the deep recession and California’s peculiar politics. Up to a point, that’s true. Representing an eighth of the U.S. economy, California has been harder hit than most states. Unemployment, now 11.6 percent (national average: 9.5 percent), could top 13 percent in 2010, says economist Eduardo Martinez of Moody’s Economy.com. Meanwhile, the requirement that any tax increase muster a two-thirds vote in the legislature promotes paralysis. Democrats prefer tax hikes to spending cuts, and Republicans can block higher taxes.
All this produced the recent drama: plunging tax revenue and the state’s resulting huge budget deficits; endless negotiations between Gov. Arnold Schwarzenegger and legislative leaders; the deadlock that led the state to issue scrip (in effect, IOUs) to pay bills; and a final agreement on a 2009-10 budget. But there is also a bigger story with national implications. California has reached a tipping point. Its government made more promises than its economy can easily support. For years, state leaders papered over the contradiction with loans and modest changes. By overwhelming these expedients, the recession triggered an inevitable reckoning.
…
Make no mistake: The spending cuts and tax increases the state enacted to bridge its budget deficits are not cosmetic. In February, the Legislature agreed to a penny increase in the state sales tax, bringing the total—including local sales taxes—to about nine cents or more. Top income tax rates, already among the highest in the country, were raised. So were motor vehicle registration fees. Spending cuts approved in February and July are deep. Together, the cuts equal almost 30 percent of the general revenue fund and will affect schools, prisons, colleges and welfare.
The state’s liberal establishment is in mourning. “Reversing 40 years of progress” is how Jean Ross of the California Budget Project, a liberal research and advocacy group, put it in one blog. Some welfare benefits will be cut by half. California’s student-teacher ratio, now about a third above the national average, will probably go even higher. The University of California system lost 20 percent of its state payments. It’s raising tuition and student fees 9.3 percent, imposing salary reductions of 4 to 10 percent on more than 100,000 workers, and delaying faculty hires.
National parallels again seem apparent. Federal budget deficits—reflecting the urge to spend and not tax—predate the recession and, as baby boomers retire, will survive any recovery. Amazingly, the Obama administration would worsen the long-term outlook by expanding federal health insurance coverage. There’s much mushy thinking about how we’ll muddle through.
California has pioneered this sort of delusion. The presumption was that a dynamic economy would pay for expansive government. But California’s relative economic performance has actually deteriorated. In the 1980s, the state’s economy grew much faster than the national economy; annual growth averaged 5.1 percent vs. 3.1 percent nationally. In the present decade, the gap is smaller—2.9 percent versus 2.3 percent—and much of the state’s advantage reflects the unsustainable housing boom, of which California was the epicenter.
On paper, the state could solve its budget problems by raising taxes further. But in practice, that might backfire by weakening the economy and tax base. California scores poorly in state ratings of business climate. In a CNBC survey, it ranked 32nd overall but last in “cost of business” and 49th in “business friendliness.” Information technology (Intel, Google, Hewlett Packard) and biotechnology remain strengths, but some traditional industries are struggling. High costs, as well as tax breaks from other states, have caused movie studios to shift production from Southern California. In 1996, feature films involved 14,500 production days in the Los Angeles area, says FilmL.A.; in 2008, the figure was half that.
So California is stretched between a precarious economy and a strong popular desire for government. The state’s wrenching experience suggests that, as a nation, we should begin to pare back government’s future commitments to avoid a similar fate. But California’s experience also suggests we’ll remain in denial, prisoners of wishful thinking, until the fateful reckoning arrives in the unimagined future.
“So California is stretched between a precarious economy and a strong popular desire for government.”
I don’t agree with these media statements about how people want more government. Sure, there are certainly those living off the government nipple that want larger government, but my belief is the average person does not want or need it.
Californians love big government. Look at all the voter initiatives that increased government spending and government payrolls, a few examples are 3 strikes, increased taxes for infrastructure, school classroom size, etc.
Not all Californians do…. as a rule of thumb, if an initiative costs money I vote it down.
Interesting point about the 10% cost of trading. I guess that’s why the only flat trader I know had to pay that anyhow (ie. A relocation, so had to pay to buy/sell no matter what which makes the cost of going flat moot)
Your blog is one of the sites that I have been reading every morning in the last 6 months.
I am living in the San Gabriel Valley area, am looking for houses in the South Pasadena, Alhambra, Temple city, or Arcadia areas. I am very confused now because almost all houses that were for sale are sold now, except a few unattractive one that were close to a main artery road or a freeway. For the occasional open houses that I may find in the weekends, I was meeting with virtually dozens of potential buyers on the spots.
I agree with your statement “tight supply and low transaction volumes sustaining prices about 30% above rental parity”. The question is whether the tight supply is truely because there is not much sellers due to, for example, the banks are holding their REOs; or beause there are a lot of potential buyers. Do any of you have concrete data to make an eviden-based guess?
My observation is that it could be the latter. The sudden rise in the last ten years have forced a lot of conservative middle class families to delay purchasing their first houses or moving to a better houses. With ten years of savings, these people are now well positioned to shop around – even though the price is still too high for the younger families with only a few years of savings.
If the sustainable and historical norm is for a young family to work and save for just a few years, then, they should be able to buy a median priced house with 20% downpayment. For now, dynamically, that stable situation will have to wait until most of those having 10 years of savings, and are also making more as mid-career professionals have bought their houses.
I don’t know about SoCal, but I searched the ACS (american census housing survey) data for evidence of things like this for my metro area, DC. What I found was that for the county of mid-range suburbia, in 2007 there were 14,000 more renters with household incomes over 150k/year than there were in 1998. I call this the excess of fence-sitters, or the prudently priced-out. When you compare this to a current total listed inventory of 8000 homes in that county, this excess demand is pretty significant. That’s because it’s in addition to everyone who would normally be buying now anyway.
To get a sense of the size of this effect in your area, search for the ACS survey, as close to the peak in affordability and the peak in absurdity as you can get, and compare the household income distributions for renters.
The other thing I looked for was how the ownership percentage changed to gauge how many people bought in fear of being priced out forever. That was only 7000 people or so in the county I’m trying to live/buy in. This gives a rough estimate of distress, although the people who purchased during the peak of the bubble are actually a smaller portion of the distress compared to those who bought early an heloc’d. That’s where under-writing really failed, apparently.
“The question is whether the tight supply is truely because there is not much sellers due to, for example, the banks are holding their REOs; or beause there are a lot of potential buyers. Do any of you have concrete data to make an eviden-based guess?”
For good data on the foreclosure picture and future inventory, I suggest you read Mr. Mortgage.
As for your second concern, I can’t find a convenient link, but I recently read that sales are still 40% below historic norms; therefore, it is not that there are many potential buyers. There are very few buyers, but even less inventory due to the banks holding it all.
The data still points to further declines due to excess inventory despite what current conditions reflect.
We were in a situation to make the flat trade work. I thought of selling our house in January of ’08. No, it was not too late. Because of significant equity, we could have sold the house at a discount and still netted out $600K or so.
The idea was that we wanted to buy a smaller house in a better location in the same neighborhood and then rebuild _again_. Learning from your mistakes, so to speak.
If we had done so, we could have easily bought in today (or next year) and paid cash for the house and then borrow $200K to do the rebuild. And still have significant cash left over.
The problem, of course, is that using your house as a trading investment is a complete and absolute hassle and it pretty much wrecks your every day life.
Being that our mortgage payment (we refi’d this year to 5 1/4%) is so significantly less than the rental cost we decided to just live with it. We were content to shift our 401Ks to bonds.
I do know of one of my kid’s schoolmates’ parents who sold their house in TR in the summer of ’07 and have been renting on top of the hill since. I don’t know what they’re financial situation was nor for how long they had been living in the house they sold. So, either they made out like bandits or they avoided a bad financial situation.
“The problem, of course, is that using your house as a trading investment is a complete and absolute hassle and it pretty much wrecks your every day life.”
Yes, that is the real issue here, and it is why more people are not doing it.
Hey,
Thanks for the post. Just a minor question, here. I’m a little confused about the graph. Isn’t profit supposed to be the area (P-ATC)xQm? Are you saying MC is the same as ATC in the housing market? I’m just scratching my head trying to figure out if it’s ever possible for MC and ATC to be the same curve considering that MC is supposed to intersect ATC’s minimum point. The only example I can come up with is if AFC = 0, then ATC = AVC. If AVC is constant, then AVC = MC = ATC. How can this be true with an upward sloping MC?