Predictions for 2010

The decade of the naughts is past; get over it.

27 LILY POOL Irvine, CA 92620 kitchen

Irvine Home Address … 27 LILY POOL Irvine, CA 92620
Resale Home Price …… $1,298,800


I turn on the tube and what do I see
A whole lotta people cryin’ “Don’t blame me”
They point their crooked little fingers ar everybody else
Spend all their time feelin’ sorry for themselves
Victim of this, victim of that
Your momma’s too thin; your daddy’s too fat

Get over it
Get over it
All this whinin’ and cryin’ and pitchin’ a fit
Get over it, get over it

Get Over It — The Eagles

Recap of Past Predictions

First, I wrote Predictions for 2008, and last year I wrote Predictions for 2009. Nothing too bold or surprising either time:

“Most of the macroeconomic conditions I made in 2008 are still
operative, and several of the predictions I made which came true will
likely repeat in 2009. These are:

  1. 2008 will see the worst single-year decline in the median house price ever recorded
  2. One or more of our major financial institutions and one or more of our major homebuilders will fail
  3. A severe local recession
  4. I predict we will see many more angry homedebtor’s troll the blog

I do not believe 2009 will see median house prices decline as much
as 2008, but I do believe they will drop significantly, particularly in
high-end neighborhoods. The low-end neighborhoods are closer to the
bottom than to the top, so 30%+ declines in these neighborhoods are not
likely. The high end neighborhoods will experience big drops. Most did
not drop 30% last year, so they have more room to drop. The
unemployment rate is high, and the economy is in recession which will
put pressures on home prices. The dreaded ARM problem is not going away, and these loans will start blowing up this year and on through 2011.”

Not much has changed from my review of the situation a year ago. Lenders did manage to avoid dealing with the problem for a full year, so prices did not budge, and we now have a massive shadow inventory.

“However, there is one bright spot for the housing market that will
blunt the declines in 2009: ultra-low mortgage interest rates. We will see properties at rental parity in 2009.
The low interest rates are going to reduce the cost of borrowing to the
point that many properties will reach rental parity this year.”

I got that one right, and

“With the low interest rates, and with the foreclosures resulting from this year’s loan resets being a year away, we are in a good position to see our first bear market rally. This summer, we might see two or three months of sustained appreciation.”

That happened too, and it happened for the reasons described. As I have noted on other occasions, these conditions are not sustainable.

Predictions for 2010

In looking ahead to 2010, I see a number of important factors that will influence the housing market. Many of the issues discussed today will be the focus of future posts.

Mortgage interest rates will increase in 2010

I don’t know how high they will go, but mortgage interest rates will begin their ascent to a (somewhat) natural market. Any stable homeowner who has not refinanced should do it now or forever miss their chance.

Inventory will increase in 2010

Eventually, lenders are going to have to foreclose on properties, kick out the squatters, and resell the houses in the resale market. Inventory is coming; how much of that we will see in 2010 is anyone’s guess, but I believe we will see much more than we saw in 2009.

Affordability will improve as mid to high end properties are released to the market, and prices of the houses of greatest interest to buyers in Irvine should come down because, despite the buyer interest, there are more properties in distress than there are buyers interested in obtaining them.

Properties selling at or below rental parity becomes the norm in 2010.

As I have noted on other occasions, many properties, even in Irvine, are trading at or below rental parity. This will happen more often, and it will happen at higher and higher price points.

Sales volumes will increase in 2010

Despite the rumors of a healthy real estate market, transaction volumes remain 15% below historic norms on a seasonally adjusted basis. Sales volumes will increase due to greater supply, and prices will go down.

Prices in Irvine will fall 2%-5% in 2010

Increasing interest rates will decrease affordability, and increasing supply will force sales onto the market. The combination will cause prices to begin a multi-year slow decline similar to the 1994-1997 period. The price decline will not be orderly, and the relative stability in the median will mask seismic shifts within the market at sales composition changes (more mid to high end properties will sell) and prices of individual properties decline.

Legislators will consider subordinating GSE loans to artificially increase the lending limit to save the Coastal California market.

If the GSEs wanted to raise the funding cap from
$729,000 to $1,229,000. They could simply allow their mortgages to be
subordinated to a single fixed-rate mortgage up to $500,000, and the
GSEs would be insuring their $729,000 mortgage as a second. The
interest rate on the first would be even lower than the GSE
mortgage—what risk is there? The GSEs would be taking on substantially
more risk, but it would allow them to underwrite loans on more
expensive properties, save the Coastal California housing market (not),
and pass enormous losses on to the US taxpayer.

Don’t be surprised when someone suggests this as a Treasury Department leak and we read it in the MSM. Obviously, I think this is a spectacularly bad idea, but lenders won’t, particularly if they think they can pass losses on to us.

“Assumability” will become the financing buzz word of the next decade

Yesterday I noted that fixed-rate mortgage rates had bottomed. IMO, we are likely to embark on a 20 year cycle of increasing interest rates as we keep one step behind inflation overheating our economy and burning off government debt in a pyre of our devalued currency. In a rising interest rate environment, there is significant value in a seller’s financing, if a future buyer can assume the loan.

Refinancing and mortgage equity withdrawal will not be part of our economy for the next decade

Increasing interest rates mean refinancing is at an end, and mortgage equity withdrawal will also be curtailed. When prices were rising and debt was getting ever cheaper, mortgage equity withdrawal exploded. In a rising interest rate environment, borrowing costs go up and home prices do not appreciate as much (or in our case any at all), so there is little equity to withdrawal, and the cost of borrowing and spending this money is very high.

The housing ATM is broken until we enter another long-term phase of lower interest rates. The rules have changed, and we are now entering an inflationary world. Get used to it.

27 LILY POOL Irvine, CA 92620 kitchen

Irvine Home Address … 27 LILY POOL Irvine, CA 92620

Resale Home Price … $1,298,800

Income Requirement ……. $276,945
Downpayment Needed … $259,760
20% Down Conventional

Home Purchase Price … $1,299,500
Home Purchase Date …. 3/4/2005

Net Gain (Loss) ………. $(78,628)
Percent Change ………. -0.1%
Annual Appreciation … 0.0%

Mortgage Interest Rate ………. 5.26%
Monthly Mortgage Payment … $5,744
Monthly Cash Outlays ………… $7,670
Monthly Cost of Ownership … $5,710

Property Details for 27 LILY POOL Irvine, CA 92620

Beds 5
Baths 4 full 1 part baths
Size 4,000 sq ft
($325 / sq ft)
Lot Size 6,051 sq ft
Year Built 2005
Days on Market 4
Listing Updated 12/23/2009
MLS Number S599684
Property Type Single Family, Residential
Community Northwood
Tract Arbr

Executive well-appointed luxury home situated on a prime cul-de-sac adjacent community park, absolute showroom condtion, elegant formal entry w/rich distressed hardwood floor, large mainfloor suite, huge gourmet kitchen w/sit-up center island w/deep sink, granite countertops w/full backsplash, stainless appliance package, built-in KitchenAid refrigerator, dual convection ovens, six burner cooktop, walk-in pantry plus butler’s pantry w/wine storage compartment, separate formal living/dining rooms, family room w/built-in entertainment center, in- ceiling surround system, rock-face fireplace, decorator paint, finely designed drapery, berber carpet, shutters, crown moulding, leaded glass, lighted ceiling fans, oversized master suite extends to luxuriously upgraded master bath w/step-in shower, deep oval soaking tub, generous size walk-in wardrobe closet, professionally designed backyard w/BBQ/refrigerator/firepit, fountain, resort-lifestyle association amenities, Irvine School District

Irvine Housing Blog No Kool Aid

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing
the Irvine home market and combating California Kool-Aid since
September 2006.

Have a great weekend,

Irvine Renter

31 thoughts on “Predictions for 2010

  1. OC Progressive

    Let’s not forget that the most important single aspect of the housing market will be the employment picture, which continues to look bleak.

    According to census figures cited in Wikipedia, 77% of top quintile households have two or more wage-earners, and in today’s economy, odds are high that one or both of those household members has taken a significant cut in income.

    And, of course, those once hard-working houses have become slackers and aren’t producing steady streams of tax-free income from mortgage equity withdrawal.

    We took a devastating hit to jobs and incomes when the mortgage equity withdrawal bubble crashed. That tax-free income was 9% of consumable income nationally when it peaked in 4th quarter 2006, and perhaps twice that locally. We not only lost scads of jobs in the real estate/lending/construction industry, but also a big chunk of our retail economy that’s not coming back.

    When lenders insist on verified incomes and realistic DTI levels, there are fewer and fewer households with the income to qualify for loans.

    Many people treat this as a normal recession, but it’s not. Incomes won’t come back.

    1. IrvineRenter

      I probably should have talked more about unemployment yesterday as well because it is one of the big contributors to shadow inventory, and it is one of the biggest stories of 2009. Going forward, I think unemployment will peak this year, but it will be a drag on the economy for quite some time.

      Appreciation is Dead

      “The fundamental value driving up home prices is the growth in wages — at least indirectly. Wage growth drives rental rates higher, and it is rental rates which determine the fundamental value of housing; therefore, wage growth determines the rate at which housing will increase in value. Irvine has experienced wage growth exceeding other areas of the country. This is why pay scales are currently double the national average. However, this trend cannot continue forever.

      Factor Price Equalization

      When the cost of a good or service rises, people seek out lower cost alternatives. When the same product is available in a different market, buyers will purchase in the lower cost market until prices equalize. This is most notable in labor markets. After NAFTA was signed, wages for unskilled labor declined in the United States and rose in Mexico. Of greater importance to the higher skilled labor of Irvine is the problem we know as “outsourcing.”


      Outsourcing is happening all around us. I have a relative who works in customer support for a major computer maker. They are working to outsource most of his department to Banglore, India. Nissan has relocated its North American headquarters from Southern California to Tennessee. These are examples of high-paying, high-skill jobs leaving our area. This is happening for two reasons: one, they can pay less in other markets, and two, they can’t get employees to move to Southern California because the cost of living is too high. The second problem will lessen as house prices crash, but the first problem is not going away. We are paid too much in Irvine, and businesses are moving where skilled labor can be found less expensively; therefore, we many not see a continuation of 3% wage growth in Irvine for the future.”

  2. Lee in Irvine

    “If the GSEs wanted to raise the funding cap from $729,000 to $1,229,000.”

    There’s no doubt the coastal politicians are gonna make a run at this. No Doubt. However, it will only lead to more economic imbalances in Southern California. We can’t have an economy where our incomes are 20-50% more than the rest of the country, but our home prices are 3-4 X’S the country. As many of know, it just doesn’t work.

    Also, I could see a political fight from others in DC that do not represent these districts. After all, a case could easily be made that this is welfare for the wealthy. “The govt is subsidizing huge mortgages for people in California.”

    One more point … the govt still needs to decide what they’re gonna do with the GSEs. After all, they’re insolvent. The more money they loan, the more money they lose, and this leads to more bailouts from the taxpayers. I think they should turn the GSEs into private co’s, and therefore they would be forced to become profitable (CHARGE MORE). However, this isn’t gonna happen.

    1. IrvineRenter

      I hope you are right and politicians from other districts raise the objections you note. I am really worried about this one because it has the potential for hundreds of billions of taxpayer losses, and because it has the potential to enslave future generations of Californians. As a society, do we really want to see 40% or more of our earnings go to servicing debt? Do Californian’s exist to enrich the lending industry?

      1. thrifty

        Speaking of 40%, here’s a quote from Volcker’s interview referenced below:
        “At one point, Wall Street had almost 40% of all the profits in the country. And, you know, its contribution to the welfare of the country does not approach 40%. Something’s out of line here.”

  3. thrifty

    A question and a comment for all IHB viewers:
    1. Question: Little has been said about Geithner’s eliminating the debt ceiling for fannie mae and freddie mac for the next 3 years. With the tax payer on the hook, does this mean that the Treasury will buy (at the full prices) the fictitiously marked-to-market loans that banks are carrying on their books – or are there other mechanisms I’m missing?

    2. Comment: an excellent short interview on Dec 29 in Business Week online with Paul Volcker. Here’s the link:

    Happy New Year to all.

  4. Eric from Austin

    I’m a young guy who knows nothing about how to think in an inflationary world. I make good money, have a stable, very affordable 30 year mortgage, cash in savings, etc but how does a person cope with high inflation?

    Is it safe to assume that wages will rise to keep pace with inflation? If so, then I feel pretty good because all of my debt is long term, low fixed interest (mortgage, student loans, car).

    I guess it makes sense to take that big European vacation sooner rather than later, before our dollar erodes…same with high dollar imported items?

    1. IrvineRenter

      We will most likely see price inflation exceed wage inflation because our currency will lose value. We are embarking on a long term period of competitive devaluation of our currency. This will cause the price of imported raw materials and goods to rise which will raise prices and lower our standard of living. Wages will not keep up with the price inflation caused by the currency devaluation. Back in the 70s, the price inflation was caused in some measure by wage inflation; people used their higher wages to bid up the price of everything. This time around, the price inflation will be caused by a different mechanism, so the linkage between price inflation and wage inflation will be broken.

      1. Eric in Austin

        So in other words we are all worse off? That’s crappy. There has to be something a person can do to preserve wealth during a period of higher, prolonged inflation. I just always want to be making the right moves and getting battered by inflation feels “unfair”

        1. thrifty

          if you truly believe that inflation is inevitable, commodities will go up in value. Gold is a commodity. Buy gold or shares in a fund that buys gold or invests in gold mining businesses.

          1. Eat that!

            But does that really do any good? You still have to convert the gold back to dollars to buy the even more expensive commodities.

          2. thrifty

            Simple. You wouldn’t have bought the gold or any other commodity unless you believed inflation would occur,. Just hold onto them until you are certain inflation is finished, then sell. They will have appreciated and you’ll make a profit. You can then review your investment options at that point in time.

        2. matt138

          Inflation is the silent tax that many bitch about but continue to keep large sums of money in savings earning 2%.?

          You can buy Real Estate (think long term), real money, hard assets, and conservative dividend paying stocks (hopefully in an appreciating currency and hopefully your broker is not a douche)

          Those with CDs, treasuries, money market accounts, and other stuff in US Dollars will get poorer. Think of it as building a sandcastle at low tide and trying to shovel sand on the walls surrounding the castle as the water keeps rising – sheer madness.

      2. Chris

        “We will most likely see price inflation exceed wage inflation because our currency will lose value.”

        IR, you forgot one thing: US was self-sufficient during WWII. Price inflation will not happen because competitions will sprung up to drive down prices, locally and abroad. You can’t really compare US with Zimbabwe or Argentina because, unlike US, those 2 countries cannot be self-sufficient and hence inflation occurs.

        The only way inflation will return is when wage and price spiral out of control like what US has experienced during the 70s. Unfortunately, you no longer have wage inflation because of global competition.

        1. inflation in 2008

          Well, if I recall coorectly, inflation was a problem in the 1st half of 2008. commodity prices were going high and these are priced internationally. But inflation had a greater effect here because the dollar was/is weaker than it was before. If you are a Euro country, and oil prices (priced in dollars) were rising but the dollar value relative to euro is falling, then you’re hedged to a certain degree. Also, the U.S. was self sufficient (and definitely a major industrial power) but how long would it take to revive the consumer products industries (such VCR, TV’s..etc) in order to beat out higher import prices? I think we’re moving towards a world where the U.S. consumer is not the only engine of economic growth. It amkes sense and is probably be a good thing.

    2. ignorantoutsider

      euro/pound may race the dollar down so the london/paris/rome vacation will be fine. Just dont bet on China.

    3. Sardina

      I have first hand experience with high inflation, lived in Russia in 90th. I know, I know, it’s two completely different situations, but still, nobody I know expected that to happened back then, just like people don’t expect it to happen here.

      In Russia, it was price inflation but not a wage inflation. Basically, your salary stays almost the same when prices doubled, tripled or quadrupled month after month. As result, even if you have manageable debt, living expenses would take so huge part of your paycheck that pretty much no money left to repay it. Just an exercise, take your monthly food expenses, multiply by 3. Add gas, utilities, phone, insurance multiplied by 5.

      See how much left.

      Then do it again to see how much left in 6 month, adding say 10% to paycheck. Oh, and don’t forget to divide your cash savings accordingly:

      The biggest bill before 91 in Russia was 100 rubles. It’s monthly amount you could live on. Not much but you won’t starve.

      In 1995 the biggest bill was 100 000 rubles, and it wasn’t nearly enough. People who had cash savings lost everything – doesn’t matter how much you got, divide it by 1000 and you left with nothing. Real estate prices were going down as well – people spend all their money for necessities.

  5. Chuck

    Ok, so walk me through this. Let’s say someone bought a house that hasn’t dropped much (yet) in appraised value – say, it’s still worth 500K. If the owner knew that one would be able to buy a similar house for 300K in a year, at which point it would be below rental parity, might it not be a wise move for that homedebtor to borrow another 60K against the first house, to buy a second one in a year? True, one would pay an unnecessary 6% for a year, but in the end, it would make sense, right?

    1. IrvineRenter

      It is cleaner and easier to sell and buy a second house cheaper in a year. Owning an asset that declines in value by $200K is never a good thing, any financing on the property will make a bad thing worse. There is no way to keep a house that declines in value a great deal and turn it into a financial win.

  6. matt138

    Irvine Renter – House prices are a function of what people can afford to pay. When interest rates rise, would house prices not fall accordingly to maintain current affordability levels? Basically, will people be able to afford higher monthly payments?

    Affordability decreases during appreciation periods due to increased demand and leverage. The opposite would be true of periods of depreciation as buyers and banks (absent gov/t prodding) tighten up no?

    1. IrvineRenter

      When interest rates rise, all other things being equal, prices will fall because amounts finances will be smaller. The only way to counteract this effect is to have higher incomes — something not likely in this economy — or increase the allowable DTIs of borrowers. Well, lenders tried the last one during the housing bubble, and now we have a foreclosure crisis eclipsing the Great Depression.

      Affordability will continue to get better as prices decline, but not much better. Once aggregate numbers get down in the 25%-30% range, they won’t go much lower as people will still choose to lever up and get as much house as they can.

      It will never be much cheaper to own than to rent because people will buy in order to save money putting a floor beneath prices. We are not at those price levels yet.

  7. mike in irvine

    The most interesting inference that i can draw from your prediction about a 2-5% decline in irvine market would imply that the best time to buy a house in Irvine was during March to May of 2009..looks like i missed the bus again… 🙂 i was hoping for a 10% decline to reflect affordability and rise in interest rates.

    1. J Irvine

      Same here. I put a bid on a house in May 2009 and was chosen among 17 other bidders. At the last minute I backed out because I read this blog and others similar to this and was afraid to put my money in real estate. Seems like I missed the bus and I regret it everyday.

      1. thrifty

        Irvine isn’t an island of perpetual prosperity in a sea of recession. Home prices will go lower, here as elsewhere. I think 2-5% is much too conservative a guesstimate of how much lower.

  8. Home Mortgage Kansas

    I enjoyed reading your 2010 predictions. These are amongst some of the most optimistic outlooks I have read this New Year. I guess when I’m looking at the market in regards to 2009, can it really get much worse? Here to hoping you hit the nail on the head

  9. Chapman says

    I think I read in the OC Register that a Chapman University’s economist is actually predicting about 6.5% INCREASE. Everyone else in the paper was predicting price increases. It seems that the Kool-Aid is alive and well. Oh, well, I will be priced out forever or at least till the next cycle!

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