Rent or Own? Fall 2009

Everyone wants a comfortable family home; a safe place to share family
love and memories. The question becomes should you create this
environment in a home you rent? or a home you own?

life in Irvine, California

Irvine Home Address … 8 Blue Ridge Rd Irvine, CA 92620
Resale Home Price …… $675,000


Such a feelins comin over me
There is wonder in most everything I see
Not a cloud in the sky
Got the sun in my eyes
And I wont be surprised if its a dream

Top of the World — The Carpenters

There is an excitement in the air. People believe the recession is over, there is not a cloud in the sky, and possibilities are endless. Now where is that HELOC money so we can get back to living?

The mainstream media is dominated by articles full of wishful thinking. The optimism is blinding people to the realities of the commercial real estate bust and the residential ARM resets yet to be written down. We still have two major deflationary events in front of us, and there is scarcely a mention of it in the MSM.

What is fueling optimism in the real estate market — other than residual kool-aid intoxication — is a host of government market props. These include (1) an $8,000 tax credit to qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009, (2) the Federal Reserve buying agency debt so the GSEs and the FHA can continue to underwrite loans no investors want in order to hold down mortgage interest rates, and (3) withholding of product inventory to create artificial shortages.

Buy? or Rent?

Buyers believe the government props will sustain the market long enough for free-market conditions to support current price levels. In short, buyers believe we are at the bottom. Renters believe the local market will fall off a cliff once the government market props have been removed. Who is right? Is the market “on ice” like buyers believe? or is it “on fire” like the renters believe?

Irvine Fire and Ice Scenarios

The Federal Reserve’s Dilemma

The Federal Reserve is not charged with re-inflating the housing bubble and returning our economy to HELOC borrowing for personal consumption. As Barney Frank put it, “It (expanding FHA) was
an effort to keep prices from falling too fast. That’s a policy.
” Do you understand the implication of his official policy statement? The US Government — and the FED — are charged with making sure prices do not fall too fast. Once prices stop falling in an uncontrolled death spiral, the props will be removed.

The FED does not want to be a market prop, but they do not feel like they have much choice in the matter. Each market that crashes deflated hundreds of billions of dollars of lender collateral, or as is more common now, lender property. Lenders would love to maintain the illusion of high prices in Coastal California.

Once prices start to fall sharply, cure rates fall off and people walk away from their properties. This tipping point is reached when the downward spiral takes over; foreclosures lower prices which creates more foreclosures. The lenders are desperate to prevent this.

The Federal Reserve is under pressure to wind down special programs and market supports and return the economy to a regulated free market (do you like that oxymoron?) If the Federal Reserve keeps these programs in props in place, it will be very inflationary, and it may even result in a big inflation spike in 2011. Eventually, the market props will need to be phased out.

With the Federal Reserve trying to balance its competing priorities, sustained appreciation in the real estate market is not very likely, particularly in markets like ours where the downward spiral has not crushed prices yet. The FED will attempt to hold mortgage interest rates low by buying agency paper until such time they don’t need to. They will do this until inflation forces their hand and makes them stop. If they are able to succeed, they may be able to flatten the market and ease interest rates back up while the market fundamentals catch up.

The Lost Decade

The chart above shows median home prices in Irvine stabilizing at
$450,000 in 2010 as interest rates bottom at 4.5%. The average interest rate since the early 1970s when the GSEs
started keeping records is 8% (7.99% actually). I further assumed
interest rates will rise once this economic crisis is over from an
unprecedented 4.5% to the long term average of 8%.

None of us knows what will happen next. The best we can do is take an objective look at the information and try to make a good decision. Right now, in the fall of 2009, the circumstances favor renting unless you are buying with a 7-10 year timeframe. There is too much potential downside risk and very limited upside potential. If you are buying today in Irvine because you expect appreciation, you will be disappointed in the short and medium term. In the long term, we are all dead.

life in Irvine, California

Irvine Home Address … 8 Blue Ridge Rd Irvine, CA 92620

Resale Home Price … $675,000

Income Requirement ……. $124,236
Downpayment Needed … $135,000

Home Purchase Price … $865,000
Home Purchase Date …. 7/18/2007

Net Gain (Loss) ………. $(230,500)
Percent Change ………. -22.0%
Annual Appreciation … -7.9%

Monthly Mortgage Payment … $2,899
Monthly Cash Outlays ………… $3,780
Monthly Cost of Ownership … $2,830

Redfin Property Details for 8 Blue Ridge Rd Irvine, CA 92620

Beds: 4
Baths: 2.5
Sq. Ft.: 2,509
$/Sq. Ft.: $269
Lot Size: 5,998 Sq. Ft.
Property Type: Detached, Single Family Residence
Stories: 2
Year Built: 1979
Community: Northwood
County: Orange
MLS#: K09059907
Source: MRMLS
Status: Active
On Redfin: 137 days

Irvine home built in 1979 4 Bedroom 2 1/2 Bathroom boasting 2,495 sq ft in Living Space.


Check out this listing price history:

Date Event Price
Oct 14, 2009 Price Changed $675,000
Oct 13, 2009 Price Changed $600,000
Oct 13, 2009 Relisted
Jun 04, 2009 Delisted
Jun 01, 2009 Listed $550,000

This is an unforeclosed short sale from what I can tell in the property records. Either the lender is getting greedy to recover more of its lost loan money or this seller is delusional. It could be a bit of both.

This property was purchased on 7/18/2007 for $865,000. The owners used a $778,500 first mortgage and a $86,500 downpayment. It didn’t take them long to give up on the property.

Foreclosure Record
Recording Date: 12/15/2008
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2008000573928

Foreclosure Record
Recording Date: 08/20/2008
Document Type: Notice of Default
Document #: 2008000396611

There must be more to this story. A couple who put in a significant downpayment gave up paying about a year after move in? I doubt they felt they were so far underwater it was hopeless. This may be a job loss or other family issue.

I assume the people must still live there and they are handling this as a short sale. If so, they haven’t made a payment to anyone for their housing for the last year. Free housing during the Great Recession is this family’s compensation for losing their home.

43 thoughts on “Rent or Own? Fall 2009

  1. MalibuRenter

    All of the variables in today’s analysis are nominal. What happens when you run everything with real interest rates and real prices?

    I suspect you will reveal that much of the public is not noticing that current real interest rates are not especially low. If you go to you can see that 10 year treasuries are slightly higher than average when adjusted for inflation.

    Current borrowers in Irvine are making two bets. 1. Current deflation will not continue. Otherwise, they would certainly want to rent. 2. Nominal interest rates will not go much higher. Because so many people watch nominal interest rates instead of real interest rates, it affects the housing market.

    1. IrvineRenter

      Yes, real interest rates are very high when you consider the deflation occurring. Unfortunately, the CPI which is the only adjustment I can make, is starting to show some inflation when we all know deflation is still going on. Real interest rates as calculated by adjusting to the CPI will look lower than I believe they really are. Perhaps Shadow Stats or some other site has a better measure of inflation to work with.

      This actually brings up a related point; Ben Bernanke wants real interest rates to go negative, but this is impossible in a deflationary environment. Until deflation ends and real inflation occurs, the big players who really move the economy will not borrow much money. When negative interest rates actually pay people to borrow, money supply will expand again, and the economy will perk up. Until we have negative real interest rates, the economy will go nowhere fast.

      1. tonye

        real interest rates high?

        Check this credit card out:

        79% interest rate + $75 yearly fee.

        Now, that’s a HIGH interest rate.

        In my experience the banks have a split personality.

        On the one hand they are trying to recoup their losses by increasing interest rates (like my Macy’s never used CC which just raised rates to 26%).. OTOH, if you have good credit they are giving money away with 0% teaser and very low rates (7%).

        I think the banks are desperate. The people that will use the very high interest rate cards are likely to default hence the banks can’e make much money off them.

        Of course, People with good credit, jobs and/or money are not using the very high rate cards, they use the very low rate cards and with some intelligence they can easily move stuff around the 0% offers, or more likely, just pay off the amounts every month.

        So, I think the CC business is not that good mid term for the banks.

        Meanwhile the mortage business is risky.

        And yes, with a 0% CPI, a rate of 5% is no lower than the 18% from 1981 when inflation was running 15%… In fact, the current rates are effectively higher!

  2. awgee

    The biggest dilema the Fed faces is how do they stop buying treasuries? The latest TIC just came out and shows China, Japan, and the UK are again buying less treasuries and bills. Right now, the Fed is buying a horrendous amount throught POMO or surreptitiously exchanging teasuries for foreign held agency debt. The Fed can not stop buying because interest rates would skyrocket and the US gov would not be able to roll over its debt and pay the interest on the debt. And the Fed can not continue to buy because foreign buyers of treasuries are divesting from the dollar as the reserve currency.

    1. tonye

      We need a nice war.

      Isn’t that how Democratic presidents always fix the economy?

      Do you think we can beat China?

        1. mike23w

          That darn democrat George W Bush is always starting wars. His dad, also a democrat, started the Gulf war. Those darn democrats.

          Oh wait.

          1. newbie2008

            2 RINO’S.
            Same teams for the finance and defense. Only thing is the doubling of the bailouts.

    2. Lee in Irvine

      Since Obama has taken power, nothing has changed with all this ponzi scheme bullshit going on at The FED & The Treasury. If anything, things have gotten a lot worse. These scumbag politicians and bureaucrats just want to kick the can down the road.

      I think many people have learned their lesson from this massive pipe dream gone bad, but the govt will do everything they possibly can to make those same people forget.

      Hey … The Bankers have already forgotten about the debacle … hells bells, they’re insolvent, yet with the govt assistance, they’re gonna pay record bonuses this year. Ain’t that grand!


      1. tonye

        I thought Obama stood for “change”?

        Maybe we need to revisit The Who:

        “Meet the new boss,
        same as the old boss”

  3. Modguy

    Not sure if this is the result of the media’s more optimistic spin lately, but this is what we experienced this weekend that we kept commenting to each other about as we went about our business:

    – South Coast plaza was PACKED at about 4pm Saturday… And people were buying. Big change from just a couple months ago.

    – Our go-to sushi place, also full. 20 minute wait. Two months ago, we ate there alone one night.

    – The Block… Packed, couldn’t find parking, when we went to NM Last Call on Saturday night at 9 PM. It was a ghost town two months ago.

    – Leased a new car yesterday. Lexus sold 12 cars while we were there (for 6 HOURS) because we had to wait our turn for the one finance person on duty.

    Sunday night, every restaurant in the Asian market on the corner of Walnut/Jeffery had a line out the door.

    Can a recession end just because psychologically people WANT it to end? Even if we still have fundamental problems, it just seems people are sick of staying home and “saving”.

    Actually, I hope so. I’m sick of the doom-and-gloom 🙁

    1. IrvineRenter

      Change in consumer attitude can do much, but unless someone is loaning them money to spend, I don’t see the stimulus. Recessions end when those with cash start spending it. The recovery gathers steam when people start going back to work and receive credit offers to “help them out” with a life of servitude. If the people you were seeing were those with good jobs and savings, then we may be at the beginning of the government-fueled expansion. I doubt there will be a pickup in aggregate demand from the free-market economy (if there is such a thing).

    2. Lee in Irvine

      ModGuy … Americans days of spending more money that they make in income, then relying on bloated assets and consumer debt to fill the gap, is ENDING.

      We’re all a little sick and tired “doom and gloom”, which is the reason why many of us want the govt to stop playing games with our economy, and allow the true free market to reset. The economy needs to be placed back on a sustainable path. A sustainable growing economy isn’t sexy, but it doesn’t destroy people’s lives the way that a Ponzi scheme economy does. The longer we play games with our economy, the longer the pain will persist. It’s that simple! The Japanese know all about this.

    3. thrifty

      Consumer spending in the Palm Springs area is down considerably. My wife owns a couple of small businesses and talks regularly with other business owners. All are seeing very significant declines in various types of businesses through out the valley.
      Real estate market? Eight visiting couples from south Orange Co spent Fri and Sat nite at a spec home built last year and originally marketed at $8M. It’s now asking $3.95M and renting for $1000/night. It’s located in a gate guarded community itself located in a larger gate guarded community. The visitors didn’t see a single person in nearby homes (all on an acre or more).
      I think the South Coast Plaza, Lexus buying, etc. is an anomaly. Will be interesting to see what’s happening in 6-12 months.

      1. matt138

        I’ve thought the same thing visiting shopping arenas. I just smile and think, “what recession?”
        I just get an eerie feeling that all those people are going to get clobbered.

    4. QualityPicks

      I think I have noticed increased traffic at malls, stores and a little bit at restaurants. This past Saturday night was pretty packed at the Spectrum, it reminded me of a couple of years ago.

      However, we went to Simply Fondue restaurant in San Juan Capistrano and we were the only people there the whole hour and a half we were there.

  4. IrvineRenter

    Bernanke cautions on risks from imbalances

    SANTA BARBARA, Calif., Oct 19 (Reuters) – U.S. Federal Reserve Chairman Ben Bernanke warned on Monday that Asian policies promoting exports could lead to a reemergence of imbalances in trade and capital flows, which some believe helped fuel the U.S. housing bubble.

    Trade surpluses achieved through policies that artificially enhance domestic saving and export industries distort the allocation of resources, he said.

    “To achieve more balanced and durable economic growth and to reduce the risks of financial instability, we must avoid ever-increasing and unsustainable imbalances in trade and capital flows,” he said in comments prepared for delivery to a San Francisco Fed conference on Asia.

    Bernanke said imbalances have narrowed following the crisis, but warned that as the global economy recovers and trade volumes rebound, global imbalances may reassert themselves.

    The Fed chairman said that that Asian economies had rebounded strongly from the crisis, with annualized growth rates in the double digits expected in China, Hong Kong, Korea, Malaysia, Singapore, and Taiwan.

    “At this point, while risks to the economic outlook certainly remain, Asia appears to be leading the global recovery,” he said.

    Countries with the most open economies, such as Singapore, Hong Kong, and Taiwan took the biggest hits as a result of the turmoil, he said. China, India, and Indonesia, which are “among the least financially open” economies, expanded throughout the crisis, Bernanke said.

    However, while conceding that greater global integration increases vulnerability to world-wide economic shocks, he said greater openness would promote stronger growth over the longer term.

    “Protectionism and the erecting of barriers to capital flows should thus be strongly resisted,” he said. (Reporting by Mark Felsenthal; Editing by W Simon)

    1. Alan

      “reemergence” WTF? Exactly when did the trade and capital flow imbalance end?

      And it sure looks like he just made the case for less financially open economies, unless you enjoy taking the biggest hits and having the slowest recoveries.

      Except from a Goldman Sachs bonus perspective.

  5. Brock

    So what does everyone think? What will be the “bottom” price per square foot in places like Fountain Valley and Laguna Niguel?

    1. thrifty

      I’m mystified by the continuing rise in the Dow and S&P while money market funds over the last 2 months have continued to show week over week increases in fund growth despite abysmal interest rates. Given increasing unemployment, job losses, the real estate fiasco, etc., what expectations are driving the market?

  6. Mark

    Great post. Thank you.

    My better half wants us to start shopping for a home now because of the lower interest rates and the tax deductions. We’re renting and saving a lot, but renting is killing us on the income tax front right now. Just killing us.

    Can you pls. explore more about any fallacies associated with the tax deductions that come with “homedebtorship”? I think a lot of people in OC are considering buying a home for the wrong reasons (not just lower rates and declining prices seen today).

    Also, are there things that renters in Irvine and OC, in general, are doing to alleviate the brutal assault on their take home pay (federal and state income taxes)?

    Just wondering out loud. I wouldn’t ask except it appears that we Californians are starring down the barrel of more income tax and property increases in future years.

    Thank you.

    1. QualityPicks

      Well, on the other hand, if you buy a house you will be saying that property taxes and HOA fees are just killing you big time and are not worth the saved Federal taxes.

    2. irvine_home_owner

      I do think the tax deduction savings of home ownership is understated. I’ve done my taxes without putting in the mortgage interest and property tax calculation and the difference is pretty significant.

      1. BHC

        from that the difference, can you subtract: home insurance, HOA, property tax?

        I’m curious to see if it still comes out ahead, and by how much % of the cost of the house…


      2. MalibuRenter

        It’s more significant to people with high incomes in CA, and who have a large mortgage.

        Thus, you are getting some relief for being in a high income tax state, and having a big mortgage. Regardless of your income tax rate, you are always better off paying less for your house.

    3. thrifty

      It’s easy to reasonably estimate what your savings would be for any year in which you’ve paid california taxes. Simply add the actual amount of federal and state tax you paid and divide that sum by your adjusted gross income. That is the percentage you would have saved. For example, if you paid $15000 federal and $6000 Cal
      totalling $21000, and your adjusted gross income is $80000, then
      21000/80000 = .26 = 26%.%.
      Then add your annual mortgage and property taxes together. Suppose they are mort = 18000; tax = 2200; total = $20,200.
      Then multiply .26 x $20200 = $5252 = good rough estimate of total annual savings from owning.
      This estimate can be picked apart depending on how accurate you wish to be but it will probably be within 10-15%. And a more accurate figure will likely require carrying a worksheet around. Hope this is of some help.

    4. newbie2008

      Mark, IMHO
      Just add up all the expenses for home ownership, tax, interest, MR, HOA, repairs, insurance, lawn care, utilities, etc. vs. renting cost (rent and renter’s insurance). A tax program like TurboTax(R) can be used to figure with and out house owner owner cost after taxes. CA has renter’s deduction for lower income tax filers. On the expense side the tax and interest are Sch A deductible. I don’t know about MR. The reduction of principle is not deductible, but should be considered as forced saving or spending if the property prices declines. Also consider the cost of purchase ~1% to 2% for closing cost and other fees and ~7% on selling the house.

      For many high income with high charitable deductions, the interest is essentially AMTed out. For those with little deductions, Sch A filing removed the standard deduction. Best to run the number by an accountant.

      A tax saving of $3,000 per year is little consolation for a house price drop of $150,000.

      Remember you’re considering buying a house not a home.

  7. tacoshark

    By the time you pay property taxes and HOA, you’ll break even on the income tax deduction. Its a wash. There is no “net” tax benefit.

  8. irvine2008

    Just a correction on thrifty’s comments. If you itemize your taxes you will forgo the default standard deduction. so in thrifty’s case it wud be close to 4000, that is your actual benefit from owning this house.

    Also the deductions are on the interest pad. Since the interest paid is going to be less because of record low interest rates.

    Also do not forget about your insurance + HOA + maintenance.

    Thax savings on a home purchase are not understated as quoted by “irvine_home_owner”, In my opinion they are overrated.

    1. irvine_home_owner

      As you pointed out, it depends.

      On newer homes, with Mello Roos and high HOAs, there may be no difference or even negative results. On older homes, those costs are non-existent or less (although maintenance costs may be higher).

      A while back I did a breakdown on 4/3s in Irvine where the sales price was $650k or less and I focused on homes built after 1990 to minimize maintenance costs. Most of those homes alos had very low or no HOAs. After doing the math, it seemed that rental parity was close with payments around $3000 and current rents for 4/3s in Irvine at anywhere from $2700-$3500. Even if you adjust the tax savings, you’re not off by much. This could explain a recent run-up on SFRs located in West Irvine, where the cost to own is not much more than to rent.

      Now, this isn’t saying you should buy… I’m just trying to state the other side because usually when I hear someone tell me that the tax savings isn’t very much, they’ve never owned so they don’t really know how much the savings actually is in their own case.

      There is still the issue of actually having a 20% down payment and the possibility of losing all of that in the next few years… but having moved from owner to renter and back to owner within a year’s time, there are some headaches of being a renter that are understated too.

    2. thrifty

      The actual taxes paid (line 75 on fed return and line 62 on Cal return) include either itemized deductions or the standard deduction(s) and all other modifications as well.
      Insurance, HOA and maintenance are not deductible.
      I do understand that there are other considerations in addition to the tax benefits; my suggestion had strictly to do only with a quick but helpful estimate of the actual dollars saved in taxes.

  9. Chris

    I dunno how many times I have to repeat myself until I get sick in the stomach: govt intervention versus fundamentals.

    Guess what? So far, it’s the govt that’s winning.

    “Administration officials unveiled a plan to aid state and local housing finance agencies, which provide mortgages to first-time and lower-income homebuyers and enable the development or rehabilitation of rental properties. Officials declined to put a pricetag on the program, but said there would be no cost to taxpayers.”

    There would be no cost to taxpayers because, after this admin raids through everything, there would be NO taxpayers left in US 🙂

  10. Craig

    Your worst case scenario is still way too optimistic. Prices in Irvine are going to crash below where they were at the start of the bubble, before resuming the gradual upward trend tracking inflation. See your own Las Vegas bubble chart for a preview of Irvine price trends.

    Home prices here are still unsustainably high compared to income levels. Jobs are still not being added. Commercial real estate is still sitting vacant and on the brink of its own crash. Banks are still sitting on massive shadow inventory. Capitulation hasn’t happened yet.

    The only hope to avoid this would be a broad-based economic recovery, but that would likely create double-digit inflation, leading to defaults on unprecedented numbers of ARMs, killing the housing market and the young recovery along with it.

    Sorry to be gloomy, and I hope I’m wrong.

    Fiserv is predicting another 11 percent drop nationally by June of next year, with 20-plus percent drops in Los Angeles, Phoenix, Las Vegas, and Miami:

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