I last pounded realtors back in January in Urgency Versus Reality: realtors Win, Buyers Lose. It's a subject entertaining to revisit. Today, the New York Times takes a shot.
Warning! This post has a graphic with an objectionable four-letter word… and perhaps another seven-letter word….
Irvine Home Address … 35 MORNING Vw Irvine, CA 92603
Resale Home Price …… $1,275,000
Oh I should have seen the signs
Now we're falling back in time
So far from where we started
So far from what we wanted
And I'm trying to right this wrong
So I need you to be strong
So far from where we started
So far from what we wanted
State of Shock — Money Honey
As the housing bubble deflates, I am struck by how far we are from where we started, and rather than try to regain our sanity, we blow air into the bubble, we foster moral hazard, and we embrace any get-rich-quick scheme available. There is no concern for the collective good any longer. Or are we only concerned with homeowners. If so, then everyone should own a home; thus it must be a great time to buy, right?
Great Time to Buy (Famous Last Words)By DAMON DARLIN Published: March 12, 2010
“IT’S a great time to buy a home.”
Real estate agents were saying that in 2001, as home prices were rising. They also said it when home prices peaked in 2005 — in fact, David Lereah, former chief economist of the National Association of Realtors, published a book that year titled “Are You Missing the Real Estate Boom?”
And many real estate agents said it was time to buy as prices began to drop — and continued to say it over the past several years as prices fell by an average of 33 percent in America’s 20 largest cities.
Mr. Lereah would acknowledge that he had gotten it wrong. But from the perspective of many real estate agents, it is always a good time to buy.
I suppose I should be content trashing David Lereah in the Wall Street Journal, but since his name popped up in this article, I couldn't resist.
“What they are really saying is that it is a good time to be involved in a transaction that generates a commission,” says Barry Ritholtz, C.E.O. and director of equity research at FusionIQ, a quantitative research firm. He’s also author of “The Big Picture,” an irreverent blog on markets.
Barry is the man! [pictured right]
Glenn Kelman, chief executive of Redfin, is not.
“I can’t prove to you that housing prices have definitely bottomed out,” Mr. Kelman says. “I can say with a fair degree of certainty that the cost of money will go higher.” [I agree]
OF course, if rates go up, home prices tend to dampen. Borrowing $300,000 at 5 percent costs you $1,610 a month. If rates rise to 6 percent, that’s $188 a month more, or $67,680 over 30 years. Would the price of a $375,000 house fall because of a half-point rate hike? Now you are back to guessing about home prices. Don’t go there. Maintain your focus.
WTF? Don't go there? Don't think about future house prices? I thought I was going to be able to praise Redfin's guy, but then he spouted nonsense like a realtor, so I will try not to focus on that.
“People are frequently buying for the wrong reasons,” says Frank LLosa, a real estate agent working in northern Virginia. In most cases, he says, they think that they are getting an income tax break or that their home is an investment.
He points out that a buyer of a $300,000 home would have to see the house appreciate $18,000 just to cover the commission and closing costs. Then figure in the predictable costs of maintenance, the opportunity costs of the mortgage down payment and the amount one could have saved by renting a similar place more cheaply.
Mr. LLosa thinks that many people — including him — would be better off renting. People ought to buy a house for what he calls “warm and fuzzy feelings,” but they shouldn’t try to predict home prices. Nor should real estate agents, who aren’t much wiser.
“I don’t think real estate professionals should be in the business of telling people when it is a great time to buy,” he said.
I like this guy. Might he be a Realtor with a capital R? "An alternative perspective on Real Estate… the truth." Wow! This is promising. Check out some of these posts: Go FSBO! Save $20,000! Agent Tells All!; Agent Rebates. Free Money or Expensive Savings?
A good time to buy?
Bulls celebrate massive government intervention as a good thing, as if we are rescued from a temporary downturn and prices are set to head to the moon. Personally, I think that is crazy, particularly locally and closer to the coast, but I am just an opinionated blogger.
What do you think? Do you believe this is a good time to buy?
Irvine Home Address … 35 MORNING Vw Irvine, CA 92603
Resale Home Price … $1,275,000
Home Purchase Price … $695,000
Home Purchase Date …. 8/28/2001
Net Gain (Loss) ………. $503,500
Percent Change ………. 83.5%
Annual Appreciation … 7.0%
Cost of Ownership
$1,275,000 ………. Asking Price
$255,000 ………. 20% Down Conventional
5.00% …………… Mortgage Interest Rate
$1,020,000 ………. 30-Year Mortgage
$264,001 ………. Income Requirement
$5,476 ………. Monthly Mortgage Payment
$1105 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$106 ………. Homeowners Insurance
$376 ………. Homeowners Association Fees
$7,063 ………. Monthly Cash Outlays
-$1476 ………. Tax Savings (% of Interest and Property Tax)
-$1226 ………. Equity Hidden in Payment
$496 ………. Lost Income to Down Payment (net of taxes)
$159 ………. Maintenance and Replacement Reserves
$5,016 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$12,750 ………. Furnishing and Move In @1%
$12,750 ………. Closing Costs @1%
$10,200 ………… Interest Points @1% of Loan
$255,000 ………. Down Payment
$290,700 ………. Total Cash Costs
$76,800 ………… Emergency Cash Reserves
$367,500 ………. Total Savings Needed
Property Details for 35 MORNING Vw Irvine, CA 92603
2 full 1 part baths Baths
2,415 sq ft Home size
($528 / sq ft)
5,000 sq ft Lot Size
Year Built 1979
3 Days on Market
MLS Number S608552
Single Family, Residential Property Type
Turtle Rock Community
35 Morning View is the home that you have been waiting for.Sit and look out at spectacular views of Shady Canyon,Strawberry Farms Golf Club,the lake/reservoir, mountains and city lights.This secluded home is located at the end of a cul da sac with a large landscaped island. As you enter the courtyard,with bubbling fountain,through the Dutch Entry doors you are in the homes entry and formal dining room,with vaulted ceilings and wood floors. A few steps up and you are in the formal living room with it marble fireplace,handcrafted mantle and panoramic,sit down view.The master bedroom is on this level with a walk in closet,built-ins,French Doors to the deck and views,views, views.Downstairs is a family room with another fireplace,built-ins,a door to the large patio and more views. There are also two bedrooms and a full bath downstairs.The kitchen is on the main level and is light and bright with an oversized skylight,built in refrigerator and an eating area. Don't miss this fantastic home.
Did the agent forget to mention THIS IS A DUPLEX!!! $1,275,000 for a duplex that needs an updated kitchen. Hmmm… No bubble here.
I am not sure if these owners deserve a B for mortgage management. They refinanced their mortgage in 2003 with a lower balance and lower interest rate, so it appears they may have even accelerated their payoff which would earn an A, but there is no way to be certain. There are two HELOCs that appear later which would earn them a C, but there is no other evidence that they took out the money.
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 2006.
Have a great weekend,
We are relocating to the LA area and I’ve been reading the blog for a while. Great information … I wish you covered the town we are considering!
If I can pick your brains a little bit, with a few questions on recent deals we have been tracking in Los Angeles …
1) A property we were intersted in just sold at $700k less than the listing price. We were a bit upset as that put the property right at the amount we would like to spend. We spoke to our realtor and she said that it was a cash deal, the sellers got an additional $500k on the side and she has seen this a few times in cash deals as it lowers the buyer’s tax base.
Is this legal? What loophole allows this?
2) The other one is a short sale and the buyer is paying off a secondary lien holder in the amount of $600k. Once agian the lower selling price will be the recorded sales price and used for a lower tax base.
Our realtor thought this was bad because it lowers the appraisal value for future sales. As a buyer that might be good for us, but I don’t appreciate their ability to “cheat” the system and pay lower property taxes.
Any insights? We have bought and sold a few houses on the east coast, but LA seems to be a world of its own!!
Just buy and live in the same property for 15+ years, then you can “cheat” the system using Prop 13.
With a half a million dollar scam to lower their tax base, looks like they are getting double the tax protection!
How about a flat tax rate? How about getting rid of any write off for mortgage interest?
Property tax scam, and maybe even an income tax scam as well. Swiller is correct for a change.
I am not sure whether I really believe the story of the $500,000 cash on the deal however — it is certainly illegal and it is hard to imagine a broker being willing to go along with it. Well, scratch that last thought.
Not illegal at all.
Buyers assume greater risk because in most instances, they have not inspected the property first.
Banks or owners factor this risk in; many times in these cases there is substantial damage to the property from the previous loanholder leaving in anger.
All cash buyers know that this is the tradeoff for lower price.
Ah, a “Misstrial”? Well that is what you had better hope for. It is certainly illegal to mistate the price of a property on the sale documents, either by paying money under the table or by disguising it as some other quid pro quo. It is illegal for both income tax and property tax purposes, and probably as a matter of contract law as well. Don’t go advising your dangerous and illegal tactics on this blog, please.
I obviously misunderstood the nature of the purchase contracts entered into which were among the subjects of this above-post.
The contracts I enter into do not have any under-the-table or off-document sales prices.
I tried to make that clear in my posts, however, I failed to make those points clear.
Sorry for any misunderstandings on my part.
Misstrial — Oh, OK, sorry for jumping all over you, espeically calling you an ‘idiot’ when it was just a misunderstanding. I was wondering if that was the case — the initial poster wrote about someone paying cash under the table and recording only the non-cash portion.
If what you are doing getting a ‘cash discount’ that is perfectly fine and good for you by the way.
It can be difficult at times to convey a thought(s) over the internet.
With documents, I go over them very carefully, many times upwards of ten times to make certain
On the internet, its a bit more challenging for me to convey my thoughts. With documents, I do some very serious checking to make absolutely certain that I have not made any errors of any sort.
However, with the fast pace (at times) of online communications, I, at times, inadvertently fail to explain everything.
I also have developed quite a thick skin having won many blog disputes involving housing matters since 2005.
I drop in occasionally and visit IR’s blog every once in a while to make certain he’s not being threatened by any lawyah and that he’s holding up the fort, so to speak.
In fact once, IR may recall, an attorney who threatened IR with a defamation suit wasn’t even licensed to practice law in California. What a day that was…
Sorry for the repeats and half-sentences.
We agree on this one!
You’re right. LA is different. It has always been more expensive to live there. However, I think the bubble disproportionately elevated prices compared to the rest of the country – and, imho, there is a significant risk in buying now if one has the option to wait another 12-18 months. Interest rates clearly are critical to affordability. But the price/gross income ratio is also. The old maxim of not spending more than 3-3.5x your gross annual income on a home still doesn’t work in vast areas of so. cal. For instance, I’ve been following the San Clemente area for several years and, despite seeing a larger number of homes and condos for sale and more and more short sales, the median income is about $80K and the median home price is about $540K – no where near the classic ratio. I think prices will fall much more quickly than incomes will rise in order to restore that ratio.
I suggest that you check several websites, such as city-data, that have stats on median and mean home prices and incomes, etc. to get ball park ideas of local economics. They vary quite a bit by site so checking several is wise. Good luck!
If the buyer paid $500k outside of escrow, then the price reduction is: 700k – 500k = 200k (it’s not 700k less than the listing price). What price did the house sell for? Are you talking about a one million or a 3 million house? I don’t believe the buyer paid $500k outside of escrow. How would your Realtor know it if there’s no record of the $500k? Did the buyers and sellers went around advertising it?
This is an absolute violation of RESPA (Real Estate Settlement Procedures Act) among other common law type claims.
No it is not.
I intend to do this very thing, and believe me, I have a lot at stake to lose…
Check around on the internet – quite a number of deals are done involving *all cash* and an accompanying discount. Usually in most cases the buyer or their inspector does not perform a property inspection.
This is *frequently* the case for property auctions and bank-owned.
One of my property hounds sends me offers to join investor groups buying all-cash properties due to the discount. The cost to join in: $100k minimum.
Correct. Misstrial is either an idiot or a criminal.
I apologize. The purchase agreements I intend to enter into are supervised by the court clerk at auctions held on the courthouse steps.
No criminal activity here.
Sounds like a fish story to inticing extreme bidding from potential buyers. If the story was true, it would be cutting into other REs’ commission and comparables, so dropping the dime to the taxman on the seller, buyer and REA would be a simple call with a cash reward. Also a half million, non-reportable cash transaction on the side is hard to hide unless you have bank connections and associted with the under-world.
Remember your REA is likely working for his best interest, then the sellers interest and lastly your interest. REA generally ARE PAID BY THE SELLER, NOT YOU.
On today’s property: A private owned duplex, buy before it for only $528/sf goes up again and your priced out of the market at over $600 per sf. and with higher interest rates.
Inflation with the high unemployment gives rise to higher interest rates, high cost for essentials, but lagging wages. Easy to hire replacements unless cartel-controlled (essentially only govt. jobs and executives).
Essentials to spend on for the poor are food and water come first, then housing, then medical (except for druggies). One these are taken care of then other upgraded items will be an “essential” expense.
The US forefathers fought for freedom. Now our D&R govt calls us to fight to be slaves to debt/bankssters, materialism and other perversions that Hollywood and the banksters pumps out. Americans think they are one of the best in the world at math and science, but they need to learn to do simple math.
A. Expenses going up 6% with wages going up 5% and your also in a 10% higher bracket or
B. Wages going up 20% and expense going up 25% and a high tax bracket.
C. Expense stable, wages at 0.2% higher and taxes the same?
Most people like B, because they’re getting paid more.
Actually it is B, since a person can easily lower expenses, but most people can’t easily earn 20% more income. As for more tax, one could invest in tax deferred accounts to lower their tax burden.
There are a lot of crooks in LA. Buyer beware.
It’s funny how he suggests not to think about the effect interest rates have on home prices, yet during the boom years that same logic was used to justify increasing prices. “Interest rates are at historic lows so now I can get more house for the money!”
In his defense, people were also ignoring the effect that interest rates had on housing on the way up. They would say:
“hey, look, now that interest rates have dropped to X from Y, I can now afford a better house.”
In actuality, it worked more like
“Hey, look, now that interest rates have dropped to X from Y, I can pay more for the same house!”
Octomom Could Lose Her House
Oh, no, poor Octomom! I’m sure some ‘bankster’ is resposible. It is of course the banksters’ fault that she spent all of her money on plastic surgery. And she wanted so badly to be a good mother. Maybe she should get Swiller or Misstrial to advise her on legal tactics…
No false-accusations based on a hypothetical or allegations without probable cause please.
We got a judge in IHB! We got a judge. At least he has a job 😉
Can you spell ‘overrule’?
Misstrial, you are the one who is advising people to pay cash under the table in order to get a lower property tax/income tax transaction basis. Looks like ‘probable cause’ to me.
I wrote the above before reading Misstrial’s clarifiction — scratch that…
Frank is great. He (and one of his agents) was great to work with. His philosophy really is a good one. The buyer or seller decides when it’s the right time to buy for them, and it’s their job to help you find and “win” the best value for your money, whether that’s getting the highest price for your sale, or the lowest price you can bargain for and still get the house you want.
In the meantime his franklymls search will give you all the tools you need to learn everything you can both about the local market and about the individual property’s actual attributes (not just what the LA says).
In Redfin’s defense, I still have yet to see any dataset that shows a correlation between nominally lower home prices and rising interest rates. The Seattle Bubble Blog had a great post that showed _real_ prices declining at a couple of instances of rising rates. Which was great, because it was the first time I had even seen that demonstrated compellingly. But when he redid the chart with nominal prices it went away. So if you have any data showing that the logic of higher rates -> lower prices actually plays out that way on a nominal basis, please, please post it.
You have shown many times that lower monthly payments leads to higher prices, but I’d like to see the converse.
Wouldn’t it depend on the set of cicumstances? Did wages go up faster than rates? Did housing prices go up faster than rates? It’s a pacing problem between the income inflation, house inflation, and rates inflation. Which gets trickier with inflation of other stuff as well (ex. say oil inflation making gas, food etc cost more). Hard stuff to forecast.
I will do some further research. Getting good data is difficult as you go back in time.
The closest parallel to our current circumstances would be the late 60s early 70s when interest rates were low but the Federal Reserve was printing money to push the economy. When interest rates started rising off the bottom in the early 70s, the housing market stalled (prices didn’t go down because they were not inflated at the start). It was a difficult time economically.
In the late 70s we had wage driven inflation from the labor unions coupled with resource driven inflation from the oil embargo. Prices for houses actually rose in that environment because the banks anticipated the wage inflation and underwrote loans at 60% DTIs. In short, banks inflated the first California housing bubble because of inflation expectation.
Wages are generally a lagging, yet necessary, part of an inflationary spiral. Thus, if inflation (and interest rates) start moving up at 8, 9 or 10% clip, wages will move up too, but only at a lesser, say, 4,5 or 6% clip. So generally its true, rising inflation & interest rates leads to higher (nominal) prices as was the case in the seventies and eighties.
However, as Cara notes, on an inflation adjusted basis, home prices in a high interest rate environment move down. Thus, while a nominal price of a home may have stagnated or moved up 1% from 200K to 202K, your purchasing power has gone up by 4, 5 or 6%. In this case, even though you pay the same or more on a nominal basis, your purchasing power means you pay less.
So if interest rates do rise thanks to inflation, dont be surprised if housing prices you see dont go down. Just remember that incomes (presumably including yours) are going up more than enough to compensate for it.
It all depends on whether you care about the nominal or the real increases/decreases. If you already own, and you bought something you could afford, like, and is comparable to renting in monthly cost then all you really care about is whether your house decreases nominally such that if you have to move you can get back most of the DP and principal you put in (other than transaction costs). If you can get a better house in the future because of real price decreases, great! You can move-up then, much more easily and affordably than if another bubble happens. If not, you already have a house you liked enough to buy.
If you haven’t bought yet, then you care about the real price. Because what you want to know is whether your purchasing power will allow you to buy a better house in the future than it can now. (and avoid those transaction costs) Whether that happens on a nominal basis or not is kind of beside the point.
Cogo, you’re right on the spiral cycle.
The govt and business will quickly blame increasing wages are the cause and call for wage and price controls. Of course only wages will not met the requirement to match the real CPI. Remember how the CPI was adjust to discount the price of the increased prices in cars and housing, while over compensate for the price of buying the latest computer in the 1990’s. Like I really got the latest computer and programs every 2 years. Remember the govt. said we had no significant inflation in the 1990’s and full employment. Look what happen to all the non-govt union jobs.
The technical jobs have had increased yearly wages, but they not paid OT and working 55 to 65 hour per week.
Your reasoning makes sense except for the fact that we are at a high unemployment out here in La La land (aka California). It’s going to be quite some time before average wages go up though inflation may return before that.
Like you said wages are generally a lagging part of an inflationary spiral. I just think they will lag for an awful long time. Look at all the “underemployed” people out there and those taking furloughs. I don’t see average wages going up to compensate for keeping housing prices elevated. I expect house prices to continue to fall. (barring a lot more govt intervention)
In a stable economic environment, home prices tend to be more stubborn in falling than rising because home sellers are simply stubborn about what they believe their home value is which is a resistance that does not exsist when home prices are rising. In today’s environment, when incomes are being scrutinized more than the bubble years, you will see less people qualified, and if interest rates rise enough, then the loan becomes even harder to get (reducing demand) regardless of what potential buyers would like to do, especially if they were already at their max debt to income (DTI) ratio. In this environment and without additional stimulus, given enough time, prices will eventually fall to where the average DTI is proportionate to the average home price. This fall in prices maybe a little or maybe a lot – it depends on supply and actual demand.
Strictly Anecdotal: In 1980, near the end of stagflation, mortgage interest was near 17%. A home purchase required 20% down and the lenders held you to 200% of income for the purchase price. ($25,000 income = $50,000 house). I beleive that those interest rates clearly depressed prices.
Strictly Anecdotal – clearly. You would think the prices went down but the chart says otherwise
Great post and story. This made me think about a couple things:
Renting vs. Buying
The one thing I still can’t wrap my head around is why it isn’t much, much more expensive to rent a single family home in Orange County today? It should be a freaking privilege to be able to get up and move to where ever you want to live in southern Cal – to work, send your kids to school and to shelter yourself and your belongings. Instead, that concept is completely upside down here. Renting a SFH here is cheaper. Homedebtorship is being sold as the cheaper (or “more legimitate”) option over renting, because, you know, renting is for college grads and drifters, not for families….or so goes the sentiment.
Risks for Home Buyers with Families
As a prospective buyer in South OC right now, I must consider the current economic uncertainty here (jobs), the unstable housing market, and the California state budget crisis. Many readers probably don’t realize how the decline in state and municipal funds in OC districts will adversely affect school performances here. Realtors are not talking about the local school districts very much.
I just think there are some serious risks associated with being chained to a mortgage debt of $400K+ right now. I’m looking, but happy to continue renting for a while.
Is it my imagination, or was the 2001 purchase price just a wee bit rediculous? Great view, nice location, but a duplex!JMTC
$425k for a duplex was expensive in 1997. You only find such builder-friendly monstrosities in Irvine. But $1,275,000 in the middle of a recession is astonishing. What are they putting in the kool-aid down there?
I remember when units in this development were going for $450k – $500k. Late 1980’s.
They really fought Strawberry Farms GC on one issue or another.
I lived up on Rainbow Ridge.
Those were the days….
In the late 80s you could still buy a TR SFH fixer upper for 200K. We did.
That was a LOOOOONG time ago.
And, 200K back in the late 80s was a LOT OF MONEY.
It was never “the days”. TR has always been pricey.
This house… might just sell for a MIL given the view. But it is indeed a duplex within a very tight HOA. Heck, a lot of homes on that side of TR are duplexes.. even at the very top of the hill you can see duplexes. Nice ones, fantastic views but still duplexes.
My post referred to the development overlooking Strawberry Farms which was the topic of the OP.
However now that you mentioned it, a buyer could buy in TR for $200k, probably somewhat less too if you include TR Meadows.
In Irvine generally, $200k even “back then” was not considered a lot of money – on this we disagree.
With that in mind, “those were the days” bears repeating! Which includes TR. And yes, some are duplexes, but not the ordinary ones for certain…
I my field (all with BS to Ph.D.) in an industrial jobs, the wages are now about 2x of the 1980’s wages and the houses are about 4x.
A the university, it’s better for the starting professors, about 2.5x to 3x in salaries and more stability.
How can you own property for only 15 years and qualify fo prop 13,you would have to inheritant the property from your parents that brought the property 1976 and earlier. Only 20 percent of the county is still on prop 13,since most folks have to be 55 years and older. I know because I’m 52 years old and was too young for prop 13. About 75 percntn of houses in south co and Irvine where built pos 1976.And most of the hispanics in Santa Ana and Anaheim brought the 1976 and earlier houses and didn’t qualify for prop 13 since they brought it and didn’t inheritance it.
Prop 13 applies to all properties. The benefits are only noticed after a few years of better than 2% appreciation in price while the value for property tax purposes are held to 2% annual increases. The high inflation of the late 70’s make properties purchased prior to then the most noticeable but everyone gets the benefits of Prop 13.
All qualify for prop. 13, but some are just more equal than others, e.g., senior citizens freeze on property taxes when purchasing a step-up property, even when the new property is 30x in cost and 5x in size. Works best if original property was purchased before 1980’s. Property tax aon 1980 500 sf condo and then buys a mansion = same tax. Like I said just some are more equal than others.
Sub Genius, Are you serious with your B answer and reasons? :}
No worries, BHO said we’re in a recovery. :} Happy day are here again !
If you’re a bankster.
Do people not realize that the only significant secondary market that exists is Fannie Mae, Freddie Mac, and FHA. They are losing BILLIONS of dollars!!!! Expecting the banks and Wall Street to fill in the financing gap is ludicrous. Once they do step in, rates are going to skyrocket. Do we not realize how we got in this mess? Call me Chicken Little, but I’m in the camp that the Sh*t has yet to hit the fan.
If you like IHB I’d recommend that you read Llosa’s site. It is very interesting and full of good advice, well worth a read
On the topic of realtors — we’re relocating from LA to the Peninsula area south of SF. I called a realtor about a SFH for lease, and he immediately launched into sell mode, including all the old chestnuts — ‘It’s a good time to buy’, ‘Interest rates are going up’, etc., etc. It’s in their blood. It’s what they’re bred to do. They’re salespeople.
In the area we’re looking, sales prices are out of this world. But rents, while still fairly high, are nowhere near in proportion. It’s a strange, strange market up there. Know of many well-off, successful people who don’t understand it and make the rational decision to rent. That’s what we’ll be doing, too.