A Theory of House Prices and Housing Markets

Why are house prices what they are, and where are house prices going? Today’s posts answers those questions by providing a conceptual understanding of house prices and housing markets.

508 ORANGE BLOSSOM Irvine, CA 92618 kitchen

Irvine Home Address … 508 ORANGE BLOSSOM Irvine, CA 92618
Resale Home Price …… $135,000


Ho, ho, ho
It’s magic, you know
Never believe it’s not so
It’s magic, you know
Never believe, it’s not so

Magic — Pilot

Californian’s believe house prices go up by magic. Real estate appreciation is religion in California as people blindly accept the Truth of never-ending price increases. Few question current prices or wonder why current prices go up as most fool themselves with wishful thinking, cockeyed optimism, and kool aid intoxication. Most people do not understand real estate prices — they think they do — every Californian is an expert on real estate, after all, we have about half a million realtors, but few people really understand markets. Motivated by greed, blinded by ignorance and enabled by lenders, borrowers inflated The Great Housing Bubble.


A foundational understanding of house prices and housing markets is critical. From 2003 onward, with exception of those who purchased houses with conservative financing, which was rare, most buyers bought in ignorance. Some were undeniably stupid and irresponsible, but most were simply ignorant going with the herd believing everyone couldn’t be wrong. Well, they were wrong, and the errors they made are easily identifiable and correctable with a better conceptual understanding of house prices and housing markets.

My understanding of housing markets permeates my posts, but the foundational work upon which I base my posts comes from my education and experience — something unique to me and heretofore undocumented; consequently, this post lays down foundational concepts of house prices and housing markets for future reference.

Three primary variables determine house prices

House prices are set by supply and demand in the market, but demand is arguably more important because house prices cannot rise higher than buyers’ abilities to pay. Therefore, this discussion will focus first on demand, then on how supply impacts prices set by market demand.

The three variables directly responsible for determining house prices are (1) savings, (2) interest rates and (3) allowable debt-to-income ratios. A buyer’s ability to bid for real estate is limited by their savings (and their willingness to put savings toward housing) and their borrowing. Amounts borrowed depend on interest rates and underwriting standards. Of the various loan underwriting standards, the most important is the allowable debt-to-income ratio because it is the direct link between income and the loan amount.

Notice that borrower income did not make the list, at least not directly, because borrower income is only important to the degree it is applied toward making debt service payments. The allowable monthly payment when amortized over 30 years at current interest rates yields the borrower loan balance. The current price-to-income ratio distortion is caused by the combination of very low interest rates and very high allowable DTIs. As I noted in, House Prices Will Decline in 2010, prices can fall even when interest rates are low if lenders simultaneously reduce allowable DTIs. In fact, the credit crunch which began in August of 2007 is crushing the housing market due primarily to declining allowable DTIs. The credit crunch is not over, and IMO, aggregate DTIs have not bottomed for this cycle.

Irvine debt-to-income ratios 1975-2009

Borrower income is important because it serves as a measurable base for market demand. Aggregate incomes rise with economic growth and inflation, and since income plugs in to the house price equation through the allowable debt-to-income ratio, house prices rise in concert with local incomes. Over the long term house price appreciation and income growth must move together; trees cannot grow to the sky.

A Buyer’s budget

Each prospective buyer investigates current financing terms as part of their process. Lenders apply current underwriting standards and determine the loan balance they will approve and downpayment required before they will fund. Since loan plus downpayment equals maximum bid amount, prospective buyers house-shop with the budget established for them by their lender. As is human nature, most people spend their full budget.

Every buyer goes through this basic process, and since financed purchases dominate the resale market, price levels of individual properties become tethered to the incomes of individuals who desire that property. For instance, today’s featured property is at the bottom of Irvine’s property ladder. If high wage earners suddenly became enamoured with living in condos like this, prices would rise substantially. The substitution effect to similar resale and rental properties keeps income, price and quality in balance.

number of households by income range Irvine

Link to Census data table for Irvine

Irvine has a large number of high wage earners, and its income distribution is not as “downward tilting” as other cities. As a result, wage earners at the mid to high end tend to settle for less in Irvine than they could obtain in other markets because the product in Irvine is not McMansion dominated. The opposite exists in cities like Palmdale where a sea of McMansions trickles down to the maids and field hands at the bottom of the income distribution.

High wage earners can both borrow more and save more of their disposable income. Also, high wage earners are generally long-time wage earners who probably already own a home, so in addition to their formidable saving power, many high wage earners also transfer stored equity from one property to the next, assuming they did not spend it.

A distribution of prices based on income

If you take the income distribution for Irvine, apply conservative underwriting standards of four-times income, a reasonable downpayment and an allowance for stored equity, the resulting distribution of housing prices looks like the chart below.

Loan equity savings and house prices

So why doesn’t our market look like that? Well, to a large degree, it does, although low interest rates and residual bubble inflation has increased the above numbers to an unsustainable level. In addition, the current market is mismatched between the number of people capable of supporting house prices and the number of houses for sale at various price points.

For instance, according to the data, about 22,000 of our 69,000 households can support prices over $750,000. That is 32% of the market. When more than half of Irvine properties have comparable values sustainable by less than a third of the population, something has to give. If you look at what is for sale, over 40% of listings are over $750,000, and as we
know, much of this market is tied up in Shadow Inventory.

As inventory is released at the mid- to high- end, prices of individual properties will decline, but the median will not. People will still spend the same amount on housing, but they will get more for their money. That plus the changing mix from low to high will make the median less reliable. Just as the median has overstated the decline to date in most markets, it will show strength later where only weakness exists. If mortgage interest rates do not rise, the story of 2010 may be a rising median with continually falling prices on individual houses.

Demand, supply and football

Demand is measured by a borrower’s ability to put money toward real estate, and contrary to popular belief, desire is not demand. Excess supply lowers base market prices established by demand. To better illustrate this concept, consider the following football analogy:

Sellers (supply) are blitzing linebackers and buyers are offensive linemen. If more linebackers blitz than offensive linemen block, then the offense gets thrown for a loss. If more sellers want to sell than buyers want buy, then prices decline; buyers have to be enticed from the sidelines. However, if enough offensive linemen pick up the blitzing linebackers and push the scrum forward, the offense advances the ball. If buyer demand exceeds seller offerings, prices go up as sellers have to be enticed from the sidelines.

In football, the offense generally advances the ball just as buyers generally advance prices with their rising incomes. However, in football, each team is limited in the number of players. In housing markets, no limit exists which can create enormous supply and demand imbalances. When subprime lending took off, we sent hundreds of offensive linemen on the field, and they pushed prices across the goal line. Now, we have a much smaller and leaner offensive unit facing a defense composed of the zombie debt holders who previously were celebrating in the end zone.

Lenders are ordering linebackers not to blitz to prevent further losses, but the number of linebackers building on the defensive side of the ball ensures the offense will not be advancing the appreciation ball very far (imagine being the running back buried in the picture). Such is the nature of overhead supply — banks may hold on to properties to prevent a loss, but they will sell swiftly if they can get out at breakeven, and realistically, being an unruly group of zombies — cartels are inherently unstable — a few linebackers are going to blitz anyway.

BTW, I am still mourning the Packer’s loss in the playoffs….

It starts at the bottom

The entry level buyer utilizing only their savings plus a loan is the foundation of the housing market. If you follow the chain of move ups backward, it eventually leads to the entry level buyer, and as a result, nobody in the real estate market gains move-up equity until the entry level buyer does. If owners of entry level properties do not gain equity over time due to price declines or stagnation, they do not have the equity necessary to move up, and neither will any other seller in the move-up equity chain.

I want to be careful here because the equity move-up market does not function like most people think it does; buying a home is not the first stop on the equity train leading straight to a Laguna Beach mansion. Each step up also requires an increase in income to support a larger mortgage. With each step homeowners transport their equity — at least those who did not spend it through HELOC abuse — and bid up prices on the next property rung. Over time this produces significant stored equity in neighborhoods most desired.

During the rally of the Great Housing Bubble, subprime financing doubled or tripled the borrowing power of the entry level buyers. Rich Toscano pointed out (sorry, I can’t find the link) housing prices in San Diego rose $250,000 across all property classes in 2004. If you add $250,000 to the average loan balance of your move up buyer, the owner selling that entry level property just received a $250,000 windfall they can use to bid up prices at the next level. This reverberates through the entire system and inflates housing bubbles.

Hard Landing Las Vegas

Move-ups must come down

If you examine the three main sources of buyer funding; loan, savings and equity; all three have been under pressure since 2007, and this trend will continue.

Loan balances have been getting smaller because lenders had to go back to rational underwriting standards. Incomes only supported about 50% of the average loan balance in 2006, and the greatest single cause of lower house prices, by far, has been smaller borrower loan balances. The Federal Reserve temporarily helped by lowering interest rates, but mortgage interest rates will almost certainly rise making future loan balances even smaller.

Personal savings rates went negative during the bubble, and much of the reason for our current economic contraction is that people stopped spending and started saving again. With the long term erosion in savings rates experienced during the bubble, fewer borrowers have sufficient savings to buy a home, and those that do have savings have less of it. The result is smaller downpayments — at least outside of Irvine.

Equity has been declining because during the bubble, everyone spent it, and after the bubble, everyone lost it. I have documented on numerous occasions the perils of mortgage equity withdrawal and HELOC abuse. Equity has been crushed by falling prices since 2006 with exception the delusional high end where move ups terminate. The foundation of the housing market is crumbling from below, and only the lack of transaction volume sustains high-end bubble equity. With equity disappearing at the bottom of the market, the high end has nobody to sell to but each other. There is a limit to how many properties even Nicolas Cage can own.

What is required for a healthy real estate market?

The low end of the market is resetting. Based on payment affordability, it is inexpensive to own a low-end Irvine condo like today’s featured property. Prices may go down further as interest rates rise, but payment affordability on these low-end condos is at a bottom. That is a good thing because until these condos find a pricing bottom, the housing market is doomed. There is no chain of moves ups when there is no equity.

Before there will be a sustainable market recovery, we need (1) entry-level units like these to find a pricing bottom, (2) unemployment to go down, (3) wages to go up, and (4) people to start saving. We may be finding a bottom at the low end (I still have doubts), and savings rates are improving, but the savings baseline is zero, unemployment is still rising, and wages are still stagnant. We do not have the building blocks of a sustained housing market price recovery. When the stars and the moon align, loan balances expand, downpayments enlarge, and move-up equity accumulates; those are the three essential elements of an appreciating market.

Once we return to sanity after a few more years of decline and clean up, lenders will be responsible (which worries me) to ensure the growth of loan balances never again exceeds our collective ability to pay. Everyone enjoys the ride up, but once we cross the threshold of insolvency, the market collapse is truly devastating. Let’s not do it again.

508 ORANGE BLOSSOM Irvine, CA 92618 kitchen

Irvine Home Address … 508 ORANGE BLOSSOM Irvine, CA 92618

Resale Home Price … $135,000

Income Requirement ……. $28,529
Downpayment Needed … $4,725
3.5% Down FHA Financing

Home Purchase Price … $92,500
Home Purchase Date …. 6/28/1991

Net Gain (Loss) ………. $34,400
Percent Change ………. 45.9%
Annual Appreciation … 2.0%

Mortgage Interest Rate ………. 5.18%
Monthly Mortgage Payment … $714
Monthly Cash Outlays ………… $1,150
Monthly Cost of Ownership … $950

Property Details for 508 ORANGE BLOSSOM Irvine, CA 92618

Beds 1
Baths 1 bath
Home Size 512 sq ft
($264 / sq ft)
Lot Size n/a
Year Built 1977
Days on Market 5
Listing Updated 1/14/2010
MLS Number P717447
Property Type Condominium, Residential
Community Orangetree
Tract Cm

According to the listing agent, this listing may be a pre-foreclosure or short sale.

LOWER UNIT. Great, cozy one-bedroom condo with its own deck off LR slider to lovely stream w/bubbling water, rocks, plants, view of little bridge over stream. Eating area-counter in kitchen, master bedroom suite with dressing area, separate commode and shower over tub, walk-in closet. Own covered parking space, plenty of guest parting space–easy for your guests to find your home! REAL ONE-BEDROOM-NOT A STUDIO. HAS OWN INSIDE WASHER & DRYER. Lake Condos have two community pools, spa, gym, basketball court, tennis court, playground and clubhouse. There is a golf course across Irvine Center Drive. Excellent location next door to Irvine Valley College, UCI down the road (think bike to school). Near 5 and 405 Freeways, Irvine Spectrum Entertainment Center, Business District, Shopping. Located in Building #23. GREAT INVESTMENT OPPORTUNITY. BEST BUY/LEAST EXPENSIVE 1-bedroom CONDO in all of Irvine-the safest city in the USA!

There is a golf course across Irvine Center Drive. This is true, but I doubt anyone living on less than $1,000 a month housing costs is playing much $100+ per round golf on a world-class Tom Fazio golf course… unless you live to golf perhaps.

Personally, I like when the agents upload the floorplan. I wish more listings did this.

Notice the less-than-stellar 2% annual appreciation since 1990. If it were for a drop in interest rates from 10% to 5%, this property would be priced below its 1990 purchase price (1990 was the peak of the last bubble). Twenty years, and the only appreciation on this property is due to a change in financing terms.

Look at the financing requirements for this home: Income Requirement $28,529, Downpayment Needed $4,725, 3.5% Down FHA Financing. If that isn’t affordable, I don’t know what is. Of course, people making $30,000 a year may not have $5,000 saved up for a downpayment, but that is the reward prudent renters are supposed to receive — less competition when bidding on property.

81 thoughts on “A Theory of House Prices and Housing Markets

  1. Freetrader

    I would have to say that this is probably a pretty good investment right now — a middle-age rental apartment near the local JC. An OK income property. You would have to rent to a series of college students, but that should be possible. It’s depressing to think that this is a short sale, apparently, after 20 years — even if the value is flat, it is a mystery to me how you couldn’t pay down at least some part of an $80,000 mortage over 20 years. If Roya had bought here instead of in North Korea, she might still be a property owner today.

    1. Chris

      I tend to agree with you but one thing that really worries me: the current state of California. Illinois is now a basket case of what can go wrong with a state. If CA cannot meet its obligation (and there is and will not be a federal bailout of states…too many of them), we’re talking draconian austerity next.

      What could possibly be one case of a draconian austerity measure? Try college closures…like IVC. If that were to happen (not likely you say? Well, I would say many folks would call me crazy 3 years ago if I told them that Lehman Brothers would fold), there goes your investment property.

      The only way I would ever buy a property in CA (Irvine is still my first choice because of schooling for my kid(s)) is if my family were to **LIVE** in it for a period of time (say more than 5 years). That’s it….I could take a loss on it…think of it as amortization because of usage 🙂

      My 2 pennies.

      1. DarthFerret

        Actually, I know a few landlords with properties in Orangetree, and they all tell me that most of their renters are UCI students (preferrably grad students if they can get them). This is despite the obvious physical proximity to IVC.

        One possible explanation: who moves out of their parent’s house to go to a JC? If you’re going to IVC, you’re an Irvine kid living with Mom & Dad to save money on tuition, room, and board before xferring to a 4-yr school for your last 2 years.


  2. Parity but keep waiting

    These types of properties in Irvine will never appreciate at the rate of an Irvine SFR because they are the antithesis of the Irvine psychography.

    That said, this will be purchased by an investor with cash. Check writers bringing dump trucks of cash are very active right now. That is amazing in itself.

  3. Yummyhatorade

    Why do you make facts up all the time?  You don’t know the assets and equity of anyone.  You also include the incomes of non market participants in your official-looking chart. But you do sell it like there’s no tomorrow.

    1. Asset Mgr

      There is a musical chairs of assets in irvine. Discecting an area with a population of 200,000 (that had a population of 10,000 in 1970 and 140,000 in 2000) is dangerous.

      Assets and incomes are not static in area like Irvine. They haven’t been this decade and won’t be next. At the very least one needs to accept that fact for this past decade otherwise they are not accepting reality. The irvine population is dynamic around the southern California and global economy. Money moves in and money moves out.

    2. IrvineRenter

      “Why do you make facts up all the time? You don’t know the assets and equity of anyone. You also include the incomes of non market participants in your official-looking chart. But you do sell it like there’s no tomorrow.”

      Ah, the life-sucking drain of negative energy in the morning.

      Did you beat your wife again this morning too? Kick your dog?

      Since you mention selling, I assume you are a frustrated realtor unable to make a sale because your kool aid peddling isn’t being believed because of this blog. Maybe if you spent more energy working for your own success rather than being jealous of others, you might amount to something.

      Your trolling is a sign of my success. Thank you for the kudos. I will keep moving forward while you nip at my heals and look the fool.

      1. Yummyhatorade

        Try substance next time. Arrogance is not enough.

        And you are the king of negativity.

        I understand your frustration, but it is not my fault.

        1. Lee in Irvine

          “I understand your frustration, but it is not my fault.”

          WTF are you talking about? Hello … the entire economy has buckled down to its knees, we’re on the brink of a possible economic depression, and the worlds financial system was bailed out by worlds largest governments. IR’s frustration is probably reading post from [deleted] like you, who said there was no housing bubble. Remember that?

        2. Be polite to your host

          You surely are entitled to your opinions and that goes without saying; but if you’re going to particiapte in a blog, the least you could do is be polite to your host on the blog.

          1. NOT

            When I first read this thread I thought: Wow, someone did something to IR’s drink this morning.

            I guess I haven’t been a reader for >2 yrs but who is this “Yummyhatorade” person and when did they say “there was no housing bubble”… Or did I mess a recent (astute?) observation?

            IR: “Ah, the life-sucking drain of negative energy in the morning.” — NICE!

            IR: “Did you beat your wife again this morning too? Kick your dog?” — WOW, uncharacteristic. Don’t let this person get to you, it is just words typed by someone somewhere.

            We all dig the time you spend on here. Thank you for that. Please remember that folks like “Yummyhatorade” add to the fun times here :-)… Especially when followed by “Ah, the life-sucking drain of negative energy in the morning.”

          2. IrvineRenter

            I am usually very tolerant of my guests, but sometimes when I recognize what someone is trying to do, and I don’t have the patience to deal with it, I would just like them to go away.

            I don’t mind the occasional Gadfly as they often have a point or advance the conversation. I can deal with annoyance, but trolling hostility adds no value. I encourage other points of view, allow others the final word (usually), and try to promote a lively yet focused discussion.

            I could have spent all day with linguistic jujitsu, and perhaps that would have been more interesting, but I decided to live without my dose of hate today. It happens.

          3. Freetrader

            For what it is worth, I thought your response to that idiot troller Yummyhatorade was completely appropriate. I would assume though that the motivation for his post was probably a pathetic attempt to get some attention. I assume they are happy now. There is always a fine line between ignoring an obvious troll and giving every comment a worthwhile response. Your mistake (if any — I don’t imply you actually made a mistake) was to give this idiot the respect of treating their ‘question’ seriously, instead of simply ignoring them.

    3. Lee in Irvine

      “Why do you make facts up all the time?”

      There’s (a)opinions, (b)beliefs, and (c)FACTS … it’s important you learn how to distinguish between the three.

      It’s impossible to make up “facts”. You can mislabel an opinion as a “fact”, but you can’t make up a “fact”.

  4. Stock Investor

    “… pre-foreclosure or short sale … Look at the financing requirements for this home: … FHA Financing.”

    IMHO, bogus calculation.

    Several months ago, I submited all cash offer on short sale. 20% above asking price, and bank did not approve.

    Recent equity sale prices must be used instead of short sale advertisements.

    1. IrvineRenter

      You are probably right that the owner-occupant income and downpayment will never come to pass because some flipper will buy this and price the low-end buyer back out of the market.

      If you are making all-cash offers, you are shopping in the wrong market. Short sales are not consummating at significant discounts. I witnessed an auction a few months ago where a property with a standing short sale offer of $210,000 went at auction for $157,000. I did not follow up, but it doesn’t take a genius to speculate that the trustee sale buyer contacted the listing agent and offered a buyer commission if the listing agent can reproduce the short sale offer of $210,000.

      Today’s featured property will probably garner bids all the way up to $175,000 — not because it is a great deal at that price, but because very few alternatives are available. If it goes to auction, it likely will transact near today’s asking price because the bidder pool is not polluted with financing buyers.

      You shouldn’t be wasting your time with all-cash short sale offers. The bargains are in the auction market.

      1. Stock Investor


        By the way, You are correct. There was phone call from agent, but this time poperty required probably about $50K in repairs. Maybe eviction process was very stressful for previous owner.

  5. PC

    My wife really wants to buy, and yet I am leery.

    Well, when wife is happy, life is happy, and I do try to keep her happy.

    Can anyone give an opinion on a 2 bed, 1.75 bath town-house style unit with one covered parking spot in a condo complex in Laguna Niguel? HOA $309. Offer price $240,000. Total payment (mortgage, hoa, property taxes, insurance) roughly $1,900 per month.

    My gross income is $64k, my wife brings in a little money but we’re not counting her as she’s mostly a student right now.

    1. PC

      Is the price stupid for my income and still too bubble high for the details? That’s my question I guess. There are no major upgrades like pergraniteel but it is livable.

      1. freedomCM

        What did similar units go for 10 years ago? How many of the units are going to default, driving down values and driving the HOA fee up? Major assessments by the HOA to maintain the 30 year old exterior? Will you be happy living in that unit for 10 years, until the price comes back up to today’s level? are you going to try to have a family in a 2bd unit?

        I’m renting a 20 yo condo in AV, a 3/2.5 with a 2c garage, for only $1700. they are selling for $325k now, for comparison. They sold for $200k in 2000.

        1. PC

          Thank you for answering.

          To answer the questions I can anwer:

          It was built in the early 1980s.

          In 1997 it sold for $107k.
          In 2000 for $156k.
          At peak in 2004 it sold for $375k (yes, ridiculous!)

          It appears the complex is FHA-approved. One of the guidelines released Dec 7 by FHA was at least 85% of owners had to be paying HOA fees.

    2. 3 BR

      You should be able to get a 3 BR condo at that $240K price level. You might not get any garage but you should be able to get a covered parking. Your income sounds reasonably proporionate to the $1,900 payment at about 35.5% DTI although some may think it should be 33% or less…

      1. 3 BR

        Just to clarify, you won’t get it in Irvine at that price level – as of now – but hopefully in Laguna Niguel or A.V.

        1. PC

          Thank you. We’ve been seeing a lot of good prices, but they’re all bank owned or short sales (taking months and months). The people with cash offers are bidding low at auction or undercutting first-time homebuyers like ourselves with higher cash offers. It’s not surprising to see ourselves competing against 20+ offers in a week.

          If you are seeing actionable homes in the price range you’re mentioning, please point them out, because I haven’t seen them yet.

          We have 800+ credit scores (both my wife and I) and we can put down 10% (we could scrape and put down 20% or liquidate retirement savings to put down 40% but we want to have some reserves and a retirement). So it’s all about 10% down and FHA-approved locales for us. 😛

          Anyone have any ideas on where they think interest rates and prices will go to in South OC for condos and detached homes in 12 months’ time?

          1. PC

            I meant to say, we’ve been seeing low-end prices in the $240,000 range for 2-bedroom condos in the South OC area. I don’t want to spend more than that and it seems like we’re priced out of the 3-bedroom condo market. So if you see some at those prices that aren’t short sales, please point them out.

  6. AZDavidPhx

    I would argue that these things are not even worthy of being called ‘Entry Level’. It implies that everyone who wants to be a house has to first start out with a condo just to build some equity.

    I think you have to distinguish between entry level bachelor pads and entry level family homes.

    The entry level family house is going to cost more due to having more privacy – but NOT PONZI SCHEME put up your first born and left Kidney more!

    I am still wanting to have the income discussion with the bullish observers who are pointing to large down payments as evidence that prices are stable because I am looking at income numbers and savings rates and the arithmetic is not adding up.

    I am going to be very very generous here, suspend all disbelief, and accept the fantasy income statistics cited on wikipedia that Irvine boasts a median household income of 99K (probably closer to 85K in reality). The bureau of economic analysis believes that nationally the personal savings rate is between 4 and 5% of disposable income.  This is about as optimistic a statistic as one can find – reality is probably closer to ZERO depending on how you want to define ‘savings’.  Let’s be optimistic and assume 5% going into a savings account somewhere.

    So if we take that 99K income, we can get a weekly paycheck of around 1400.00 or about 73000.00 for an entire year. Let’s assume that Irvine is different; it defies the national average and everybody saves a whopping 10% (TWICE the national average) of this disposable income – or 7300.00 per year. My arithmetic tells me that a 200K down payment is somewhere on the order of 27 years – maybe a little less if in an interest bearing account – let’s call it an even 25 years.

    So if Irvine is currently seeing a median sales price of around 550K, one has to assume that these buyers are bringing at least a 100K down payment which would take 12.5 years to save under the above assumptions.

    But let’s assume all these highly optimistic assumptions hold true ‘for the most part’.

    Our buyer ‘gets in’ his new 550K property after putting down the 100K that he spent 12.5 years saving. He gets himself a nice mortgage, tax bill, and insurance policy and he is now spending about 3300.00 a month to live his dream. But his income is 1400.00 a week. So if he gets paid 4x a month then we are talking 59% of disposable income going to pay for the house.  That must be some AMAZING weather over there!  Schools too!

    Suppose the buyer puts down 200K that he spent 25 years saving and is now ready to buy his starter home at the young age of 45. His carrying cost for the mortgage, taxes, insurance, is now 2500.00 a month or 45% of his disposable income – WOW what an improvement we have! Only 45% and all we have to do now is assume that this buyer is going to maintain this high income stream until he is 75 years old.  What’s the average lifespan? 78?

    But let’s assume that Irvine is full of savers who live significantly below their means and save 25K (34%) of their disposable income for 8 years straight and obtain their 200K downpayment and buy this 550K house – clearly their savings rate is now going to plunge substantially as interest is paid on the loan rather than go into a savings account somewhere.

    If this buyer then falls back to the very high 10% savings rate, it will take him 4-6 months just to save up enough money to carry the house for 1 month if he becomes unemployed. How can this situation be tenable on a 30 year time scale? This has disaster written all over it and it is making the most optimistic of assumptions.

     So what is really going on out there right now?

    What is most likely is that these down payments are the result of an asset sale like a previous house that the buyer was fortunate to purchase before the bubble took off and then continuously refinanced as interest rates declined. The previous house may not be worth the same as at peak, but there is still maybe 50% bubble equity left due to government programs trying to keep prices inflated and manipulation of first time buyers being sold something substandard so that the current player can trade up.

    This is clearly not sustainable as the pool of moveruppers exhausts itself with new buyers posessing less and less equity.

    Disagree?  There has to be at least one bullish observer out there willing to make the income argument – let’s hear it.


      I saved about $100k in 3-4 years. My rent was $700/mo at the time. I was by no means serious about saving until the last year. There may be some flaws in your calculation.

      1. AZDavidPhx

        I never said it was impossible to save 100K in 3 to 4 years. You are arguing against a statement that I never made. The statement was how likely is it that Irvine is full of these kinds of savers that defy the national average? And if this is true then how do you explain all the HELOC abuse being observed here on a regular basis?

        1. TACOSHARK

          I’m just pointing out that your 28 year old average joe like me did it. How likely it is depends on how many more are like me. You say not many, I say somewhere between 1 and a million.

          1. AZDavidPhx

            But your age is not relevant. What matters is your income. Your point is predicated on age having a causal relationship to income.

            Isn’t it possible for a 28 year old engineer to take home more bread than a 50 year old school teacher?

            You may humble yourself by calling yourself an ‘average Joe’ in order to further your bullish argument but most people do not save that kind of money which is why I said that maybe Irvine is different and it just defies the savings rate of most Americans.

          2. wheresthebeef

            TACOSHARK, your savings habits and financial situation are nowhere near the average Joe around here. Trust me on that. If you saved 100K in 3 to four years, you are saving $2500+ per month. Most people won’t even come close to this. You are obviously making close to or over 100K.

            Assume you pay normal rent here ($1400+/month) and all the msc expensives…school loans, car loans, retirement savings, utilities, food, spending while maintaining somewhat of a social life. Throw in a family and your expensives go up dramatically.

            You must be single and do the roommate thing with the $700/month rent. I applaud you for being a saver, but don’t think that everybody out there has the same habits as you. They don’t…especially in superficial OC. I know enough people around here and have dated enough people to come to this conclusion.

          3. AZDavidPhx

            You are assuming that everything said was accurate and not overstated. Unless the author feels like publishing their their income tax return it cannot be validated. It seems ridiculous for an anonymous blogger to lie about their personal circumstances – but if you have no counter argument to refute arithmetic it makes for a great diversion because it attempts to shame the reader into accepting the argument backed by nothing but hot air.

          4. TACOSHARK

            So hostile. I merely stated my experience. Nothing more, nothing less. If its typical or not is the choice of belief we have.

          5. AZDavidPhx

            I once believed in Santa Clause, my friend. It was not until I got a little bit older and thought about how likely it was that a fat man in a red suit was flying the world, crawling into stinky filthy chimneys, etc to trade some sweet toys for a plate of cheap cookies and a glass of milk. I suppose that if I ignored enough things I could still believe it today.

    2. Stock Investor

      “Let’s be optimistic and assume 5% going into a savings account somewhere.”

      Sorry, Bank of America offers Regular Saving with 0.1% interest rate. Not good enough.

      Let’s be optimistic and assume:
      – $16.5K going into 401K
      – (after tax income – $16.5K – $25K) going into mutual funds and foreign bonds
      – both accounts are growing 15% annually

      1. AZDavidPhx

        How does your 401K retirement savings account help you save up a 200K down payment for a house? You are going to hold off on buying until you are 65?

        Your argument is ridiculous; blow some more smoke.

        1. Stock Investor

          401k plans are actually company-specific. There may be hardship withdrawals and loans.

          Personaly, I already used 401k loan for downpayment long time ago. Fully secured loan, which is not reported to credit bureaus. So it does not affect credit score and some ratios. Contrary to popular belief, 401k is good financial instrument if used right.

          By the way, I was talking about 2 accounts. Investment account has no limitations at all.

          1. AZDavidPhx

            OK, so you are saying then that the median buyer is going to leverage a 401K plan in the future in order to scrounge up this large down payment via a company ‘loan’. This sounds like a sweet arrangement – I am taking notes here. We need to get the word out FAST: do not save! Invest in your company’s 401K Casino plan and hope for the best! Roll the dice! Savings is for schmucks!

          2. PC

            And if you ever get laid off or leave your place of employment, the entire balance of the 401(k) loan is due and payable within 90 days or it’s a withdrawal with taxes and penalty due.

          3. Stock Investor

            “PC: the entire balance of the 401(k) loan is due and payable within 90 days”

            No, it is company-specific detail. Quote from my old 401K plan:

            “If you leave XXX before repaying a loan, you may continue to make loan payments by personal check or ACH Debit, subject to restrictions imposed by comapny upon the repayment method. XXX will send you a payment book with instructions on when and where to mail your payments.”

          4. Stock Inverstor

            “AZDavidPhx: so you are saying then that the median buyer is going to leverage”

            Median buyer is pseudo-mathematical abstraction.

            Total $10.06: 1 penny, 1 nickel and 1 $10 gold coin. Out of 3 coins which one is the most important? Median (nickel)?

            There are three kinds of lies: lies, damned lies, and statistics. Thanks to Benjamin Disraeli.

            “AZDavidPhx: Invest in your company’s 401K Casino plan and hope for the best! Roll the dice! Savings is for schmucks!”

            Well, might I ask what is Your risk-free proposal?

            Fundamental rule of the world: no risk, no gain.

          5. AZDavidPhx

            Stock Trader –

            Your nickel analogy is a classic strawman argument.

            We are talking about the median income related to median sales price. There is an obvious relationship between these two indicators no matter how much you try to blow smoke and muddy the discussion with false analogies that evade the original argument.

            The question being debated how a working man earning the median income can afford the median sales price of 550K.

            Your nickel example doesn’t come close to addressing this; instead you just restated the question into something else and answered it.

            Got BS?

          6. Stock Investor

            “We are talking about the median income related to median sales price. There is an obvious relationship between these two indicators …”

            It is easy to calculate median sales price, but how did You calculate median income of Irvine homebuyer?

            Please, note: Irvine homebuyers and Irvine workers are not the same people. For example, canadian businessman was buying something in Lennar’s Actoria, but he did not work in Irvine.

          7. Stock Investor

            And, by the way, I am not a trader. I buy to hold. I sell if there are better investment opportunities.

          8. AZDavidPhx

            Stock Flipper –

            ow did You calculate median income of Irvine homebuyer?

            I used the 99K figure cited on Wikipedia – I suspect it is about as accurate as a Zillow ZEstimate as it “jumped” from 85K recorded in the 2005 census magically to “99K” by 2007.

            Irvine homebuyers and Irvine workers are not the same people.

            More hot air!

          9. Freetrader


            There may be a misunderstanding here. A “401k Loan” is not really a loan but an approved withdrawal from one’s 401k plan. It is a ‘loan’ in the sense that you are supposed to pay it back with interest, but — you are paying it back to yourself as part of your future 401k contributions.

            I never had much non-401k savings when I purchased my first home and most of the down payment came from a 401k loan. Which does indicate that the computations you have may not be totally accurate, since although 401k loans are limited to 50% of one’s 401k balance, but on the other hand, 401k balances are pre-tax dollars. I am a big fan of 401ks, needless to say, so I wouldn’t characterize them as a ‘casino plan’ as you do. There are a great mechanism to save and to build wealth.

            If anyone else has negative experiences with 401k loans, I would be interested in hearing them, but 401ks are great vehicles.

    3. Multiplication Tables

      David, start with the number of homes that will be sold in Irvine over the next 3 years. That will tell you how many people need a large down payment. The number of homes that will be sold in Irvine over the next 3 years isn’t very large.

      Here are a couple additional facts to consider:
      1. People who buy homes in Irvine make more than $99k.
      2. People who buy in Irvine do not need to currently live in Irvine.

      You don’t need an endless supply of savers. You only need enough to cover sales volume over a period of years. People are saving money and savers are being replenished constantly.

        1. Multiplication Tables

          That would have been an astute observation to your original long winded mental masturbation post. At least it would have been succint and I would have a few minutes of my life back.

          In any event I will help you out. There will be roughly 3000 single family homes sold in Irvine over the next 3 years. How many people do you think have 100k now? and how many can save 100k in that time period? Of course irvine could turn into an undesirable slum LOL.

          1. AZDavidPhx

            So you are hedging your entire argument based upon a volatile number like a game of Roulette which nothing more than a number plucked from a crystal ball. I think Wall Street is your true calling.

          2. Multiplication Tables

            Humor me, how many single family homes will be sold in irvine over the next 3 years? If you were less lazy you could probably get an average in any point in time. You would also probably have more money saved.

            I would also gladly accept another 15 paragaph 1500 word post that goes nowhere. That would give me another laugh.

            I don’t own a home. In the past year I have saved over 100k, so part of your last post may have some validity.

          3. AZDavidPhx

            I am pretty sure that the number of sales will be inversely proportional to the decline in median price as well as proportional to the increase in foreclosures. Irvine is looking at a pretty nice shadow inventory but how slowly the banks unload them can only be known by fortune tellers such as yourself.

            Congratulations to your successful 100K savings in the past year. I saved a couple trillion myself; let me guess, you called the number that was on the flyer stapled to the telephone pole giving out the big secret.

          4. Multiplication Tables

            If you still don’t understand that very few large down payments are required to support 500-700k prices in Irvine then you are hopeless.

          5. AZDavidPhx

            I am more than willing to accept your solution; just show me your arithmetic so I can correct my thinking. You have made several assertions, but have only managed to explain them with that little wave of the hand thing that you keep doing over and over again. Leave the Jedi mindtrick to the movies.

          6. Multiple Tables

            The best part is that all of the arithmetic was done in your never ending post you only questioned the large down payments.

            This blog will provide sales volume of single family homes in Irvine over the past 30 years. Maybe you should re-read your 1500 word essay and this blog another half dozen times.

            Then maybe it will sink in, but I’m not holding my breath.

          7. AZDavidPhx

            Can you not see how silly your propaganda is?

            To make a ridiculous statement like:

            Those who buy in Irvine don’t need to currently live in Irvine

            So I am going to go ahead and buy that Irvine McMansion by putting down 200K and fill out all that paperwork for the 350K mortgage because I don’t feel like commuting from the Malibu beach house up on the cliffs that I own outright and in the clear.

          8. panda bear

            “I don’t own a home. In the past year I have saved over 100k”

            you must be a 40 yrs old, single, living with parents, have no life to be able to save 100K in a year…

          9. muzie

            I saved 100k a year as well for the past 5 years. I’m not 40, living with parents or no life. I do have very good income and I rent.

            Of course I’m not typical, I’m an anomaly.

            Multiple Tables’ point was with transaction volumes and sample sizes being so low (aka. 1000 per year as he mentioned), it doesn’t take many “anomalies” to skew the “expected” result.

            I don’t really buy Multiple Tables’ argument, as the substitution effect kicks in and at that point you’re looking at much more than 3000 relevant transactions in 3 years – sales compete with neighboring areas. I’m not particularly interested in Irvine myself.

            Not planning to buy, but trying to see both sides. People here underestimate the stubborness of sellers and banks.

            I for one don’t see why the government shananigans won’t continue for the foreseeable future. May not cause any price appreciation, but if you told buyers what they can expect is 3-5% depreciation for the next ten years very few will be willing to wait that long, or at all.

      1. IrvineRenter

        “You don’t need an endless supply of savers. You only need enough to cover sales volume over a period of years. People are saving money and savers are being replenished constantly.”

        There certainly has been no shortage of cash-heavy buyers in Irvine over the last couple of years, and they are what supports the market at current levels. And you are correct that if supply is kept down to levels where the number of buyers are not overwhelmed, prices will not fall.

        My quibble comes in your final sentence. People are not saving money. Aggregate numbers for savings went negative in 2006, and they are still only at 50% of historic norms. IMO, the supply of new savers will not match the supply of houses needing to be sold. I may be wrong; we will see.

        1. Multiplication Tables

          Irvine Renter, I can only speak for myself and people I know who have dramatically increased savings with our good fortunes over the past several years.

          I think you will be wrong in Irvine with single family homes but right in more than half of orange county and right about condos in Irvine. The volume of single family homes sold per month is very low in Irvine, but the demand and desire is very high. The proof is in the current offers, multiple all cash and high down payment offers abound. Irvine single family homes are not an FHA purchase.

          1. AZDavidPhx

            So arithmetic does not hold for houses. A bubble of epic proportions explodes in front of this observer and he is so drunk from his bubble fortune that he cannot see the consequences awaiting us. He is just business as usual.

            The truly alarming thing here is that people like this demonstrate that we have not learned our lesson yet.

            What is it going to take? A complete collapse of the Dollar? Widespread poverty?

            Keep it up, Multiple Tables, we are getting there.

          2. Multiplication Tables

            David you are off on your little planet again better known as IR’s blog. I’m getting sick of holding your hand.

            How hard is it for you to understand that someone making $100k per year can afford a $550k home now with a 20% down payment.

            I’m going to throw in a freebie for you: I bet you don’t realize your boss makes 3-4 times your income.

          3. IrvineRenter

            “The volume of single family homes sold per month is very low in Irvine, but the demand and desire is very high. The proof is in the current offers, multiple all cash and high down payment offers abound.”

            This has certainly been the case over the last couple of years, and it may continue. I just don’t think it can or will because there are too many bad loans.

            “Irvine single family homes are not an FHA purchase.”

            That is true, partly because the FHA loans often are not large enough, and partly because cash-heavy buyers are outbidding FHA buyers. I see no reason to believe that trend will not continue.

            Don’t mind David. Sometimes he is like a dog with a bone and won’t let go.

          4. NOT

            “That is true, partly because the FHA loans often are not large enough, and partly because cash-heavy buyers are outbidding FHA buyers. I see no reason to believe that trend will not continue.”

            You know, the last couple of years I totally agreed with you on this but I can’t seem to see an end to this nonsense. I think there are either going to be tons of new buyers trying to get good schooling for their kids or there are going to be fence sitters (such as myself) who decide that it is OK to throw away some $ in exchange for something that you can eventually own (and change as you will right now).

            It does not seem likely that we will ever reach IHB (the other one) “Fundamental Value”, or even fair market value, as there seems to ALWAYS be a greater fool/fish.

  7. IrvineRenter


    Your astute observation is longer than my post. Are you sure you don’t want to write a guest column every once in a while?

    These units are supposed to be a way for a prudent saver to store equity and save versus renting, that is the move-up play.

    If someone owns this place for $950 a month instead of paying $1,250 in rent, they save $300 more than a renter — an excellent reason to own. When the owner is ready to move-up, the positive cashflow can sometimes be counted as additional income to boost the loan amount and help move up. Often a frugal bachelor would buy a property like this even when he could afford much more just to save the money. The move-up in that scenario is caused by increasing the DTI.

    There are many ways to play it, but buying for appreciation is not one of them — at least it will not be a successful ownership play for quite a while.

    1. AZDavidPhx

      It’s a long observation, but it’s the big elephant on the couch that the bulls are pretending is not there.

      I understand your point completely about monthly payment affordability – but suppose a 40 year old moves to Irvine from say Arizona. Does he have to submit to living in a condo for 10 years to climb the ladder or can he rent for a few years and save enough to buy a house.

      I am just saying that Irvine’s lopsided cost of living makes it an expensive proposition to give up a higher standard of living elsewhere to start climbing the Irvine ladder in a small condo.

  8. Soylent Green Is People

    $135,000 in Irvine for a 1b/1ba condo buys 5 or so houses in other states with healthy employment and stable population bases to pull from. Sure, you’re not going to make a fortune overnight, but if 1 out of 5 rentals fail, you’ve lost a small portion of your equity. If this apartment goes sideways you’ve bet the farm and lost. Not my cuppa tea, mate.

    My .02c

    Soylent Green Is People

  9. freedomCM

    I think that for these low-end unit (and lets face it, 450sqft and a carport is low end) you underestimate the substitution effect.

    Someone buying this unit isn’t buying the Irvine schools and atmosphere, since they don’t have kids, etc. So why not rent in Lake Forest of south coast for half the price? Or for this price and get a new irvine co apartment with all the amenities?

  10. newbie2008

    The Irvine income chart clearly shows non-Gaussian distribution. Will removal of student household make a Gaussian distribution? The tradiation assumptions of the US economy rested upon a middle class and the vast majority in the middle class with a Gaussian distribution. The non-Gaussian distribution can explain alot of Irvine’s resistance to the market decline, but I think will eventually decline.

    Is FHA accepting condo loan applications?

    FHA Loan cost: $7,500
    BHO’s 1st time tax credit (8,000)
    net move in cost: $500 cash back

    Free rent during FC process: 14M @ 1300/M = $18,200
    Net profit = $18,700

    The beat goes on.

  11. newbie2008

    Thanks for clarifying to the readers that the starter house theory relies on inceasing income not RE’s house appreciation. If all houses appreaciated the same level and income was constant, you could not move up. Starter home theory works by forced saving (no negatative amoritization), differential appreciation (buy in hot market and then sell and move to cold market). Starter home inflation would help in covering the downpayment. I see incomes as flat for the next 4 years. For the typical joe, REAL incomes will not increase with 10% unemployment. REAL incomes will not incease unless unemployment is under 4% or 5%.

  12. IrvineRenter

    Why Shanghai Real Estate Is The Most Obvious Bubble Ever

    Even residents find it peculiar:

    Gloria Gu paid $483,000 for an apartment near Shanghai’s financial district so her 3-year-old son could attend one of the city’s best kindergartens. Six months later, a similar place in her building sold for $615,000.

    “Prices are way past reasonable,” said Gu, 31, a food company manager who bought her three-bedroom, 140-square-meter (1,507-square-foot) apartment in the Pudong area in May. “The market is too good to be true.”

    1. Freetrader

      Interesting article, but “yes” and “no”.

      “Yes”, China is experiencing a real estate bubble. The economy is pumped up with loose money and is sloshing into the property market. There will certainly be a correction at some point. But “no”, it shouldn’t end up anything like the Western world bubble that came crashing down in 2007, destroying the world’s economy.

      A couple of key facts: 1.) most buyers in China pay a large amount of cash. In fact, 25% of all purchases in China are 100% cash. In the photo essay you linked to, the borrowers all noted they borrowed “the maximum” amount for their purchse. What is the maximum LTV ratio in China? 50%.

      2.) the statistical rise of housing prices to incomes is misleading. China is still a very poor country, and the ‘average’ person has no hope of ever buying a home (in the long run, this relative poverty will prevent China from ever achieving an average standard of living close to that of the US). But ‘home buyers’ in China are not ‘average’, especially in places like Shanghai. They are privileged. Only the top 15% to 20% of the population is in the home buying market. When the statistics are adjusted for this fact (i.e., home prices versus the earnings of the 15% to 20% of the people who are privileged enough to afford a decent home) the cost of housing in China has actually decreased, as a percentage of income, over the past 10 years.

      I live in China, and spend a lot of my time talking to “China will take over the world” idiots who believe that the US is finished. Not true. But China isn’t about to collapse, either.

  13. 3 br

    Ok, not many but 69 abbeywood lane in AV sold for about $242,000. 25576 Via Cresta 11 in LN sold for $255,000 in the last few weeks. I don’t know if they were short sales or not but they’re listed as sold 7 are 3 BR. As far as active listings, I think IR or your RE agent can point you to some if you ask.

  14. mrjumbomortgage

    The Google Charts are pointing to a very tough year economically. I learned a long time ago to watch behavior and action above all else. I do the action test when out in the real world. Full Post here..

    Not Just[ Jumbo Loan](www.thegreatloan.com “Jumbo Loan”) Talk Either.

  15. irvine_home_owner

    AZDave needs to temper his sources of media,
    You need to filter all the info they feed ya,
    Median income is the straw man,
    Cash buyers will just state what they can,
    So don’t trust what you read on Wikipedia.

  16. NoWowway

    The HOA is over $300/month. These are old previously-HUD properties. Unless you are on the top floor, these things are noisy as hell if there are kids or other active people living above you. You had better enjoy their choice of music and you had better like getting up/going to bed when your upstairs neighbors do, too.

    Just saying

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