Low Interest Rates Are Not Clearing the Market Inventory

Despite the lowest interest rates in over 50 years, buyer demand is still low, and increasing inventory is just sitting there waiting for sellers to lower their asking prices.

Irvine Home Address … 1102 TIMBERWOOD Irvine, CA 92620

Resale Home Price …… $419,000

And the seasons they go 'round and 'round

And the painted ponies go up and down

We're captive on the carousel of time

We can't return we can only look behind

From where we came

And go round and round and round

In the circle game

Joni Mitchell — Circle Game

The housing cycle is like a giant carousel. Prices move up and down tethered to an underlying fundamental value. Whenever we look back the cycle is rather obvious, but when we are caught up with kool aid intoxication, each rise looks different than the last. We are trapped in this endless circle game; trapped by our own greed and foolish pride; trapped by are desires for appreciation income and the consumption it brings; trapped by our denial of the obvious; trapped by wishful thinking as we cling to a real estate fantasy that doesn't really exist.

During the down cycle, we try to resurrect the market with artificial stimulants. Like a addict coming off a heroin high, the crash is as painful as the euphoria that preceded. We try to deaden the pain with more stimulants until finally the corpse of the market remains moribund and nature takes its course.

Record-low mortgage rates fail to move market

Housing recovery stymied by nervousness about jobs, economy

By Bill Briggs — August 11, 2010

What’s the magic number? Three? Two? One?


How about less than zero? With deflation, even a zero percent interest rate is high in real terms. Perhaps if they took interest rates negative and started paying people to borrow money, demand might increase.

Of course, the real problem in our market isn't payment affordability — low interest rates are making that less of a problem — the real problem is that prices are still too high and must come down.

How far must long-term mortgage rates tumble before the summer silence filling many residential real estate markets is broken by whispers of a real rebound?

Benjamin Clark has pondered the question. Despite a steady decline this summer that has trimmed the average rate on a 30-year fixed loan to about 4.49 percent – a historic low – home sales and mortgage refinancing activity remain mired in the muck of job uncertainty and underwater loans.

So Clark, head of the National Association of Exclusive Buyer Agents, told his 500 members to name a number. Given the current economic conditions, he asked, what 30-year fixed mortgage rate would “spur significant additional real estate sales?”

Many agents flashed their desperation: About one-third believe the 30-year rate must slink into the 3 percent range to fuel healthy action while about one in 10 agents feels the rate must touch the twos. But most respondents — 42 percent of the agents — said that there is no bargain-basement threshold where the rate “becomes relevant enough” to overcome larger economic worries and entice a fresh tide of transactions.

That is despair. When 42% believe that no matter how low the rates go that nothing will increase sales, people have lost hope. Is that a sign of a bottom? Perhaps for interest rates, but not for prices.

Has the almighty mortgage rate – at least for now – lost its power and luster? Does the rate matter anymore?

“Rates alone are not the magic factor” they once were, Clark acknowledged. Based in Salt Lake City, Utah, Clark said he has remained busy this summer with buyers, although his clients are on the hunt not due to shrinking rates: This simply was the right time for them to purchase. Still, he said that if long-term mortgage rates were to trickle into the 3.75, 3.5 or 3.0 percent range, “that would help.”

“But,” Clark added, “I’m all about the zero percent!

No. He is all about the 6%. If zero percent interest rates allow him to generate a 6% commission, then he is happy.

“The rates definitely do something. If they were a little higher, the market would be even slower. If they were a little lower, things would be a little better,” Clark said.

To Clark’s point, the volume of mortgage loan applications edged higher in the first week of August, according to the Mortgage Bankers Association’s weekly survey, released Wednesday.

The buying landscape is similarly bleak despite the dwindling rates. During July, monthly purchase applications lapsed by 3 percent from June, according to the MBA. And in June, buyers’ applications declined 15 percent from May. Industry experts pin the current lack of buyer interest on unemployment or lingering worries about losing a paycheck. In Clark’s survey of buyer agents, he asked “What are (the) reasons buyers may put off buying … in spite of very low interest rates?” The top answer, at 77 percent: “lack of job security.”

The fact that such a high percentage of potential buyers fear losing their income reveals much about the current state of our economy. People should be cautious about buying a home when they don't know if they can make the payments, particularly now that they actually have to put their own money into the deal. When 100% financing was available, there was no risk other than a credit score, but when people have to put their own money down, they are wisely more risk averse.

Refinancing activity also is sluggish.

"We are not seeing a huge impact from the lower rates in terms of refinancing and this is likely due to borrower burnout," said MBA spokeswoman Carolyn Kemp. "As rates have been historically low for some time now, the pool of borrowers who were eligible to refinance have likely already done so."

The refinance market has been over stimulated. We have pulled all the demand forward we possibly can. As interest rates go back up, refinancing activity will decline to historically low levels and stay there for a very long time.

“It’s unprecedented” that such a historically low rate has failed to incite buying or refinancing stampedes, said Greg McBride, senior financial analyst for Bankrate.com. “But at the same time it’s not a big surprise. … I don’t view it as an oddity … It’s the job market."

Suffice it to say that you could reduce interest rates to zero – if somebody doesn’t have a job or is nervous about income, they’re not going to plunge into ownership,” McBride said. “It just goes to show you that mortgage rates alone are not going to revive the housing market."

The fact that interest rates alone will not revive the housing market is very bad news for lenders with a huge number of delinquent borrowers. This inventory must be pushed through the system. Lenders were hoping they could clear the inventory at high prices through low interest rates. That isn't going to happen. It will require a combination of low interest rates, low prices and increasing employment to clear the market. Unfortunately, the low interest rates are likely a temporary phenomenon. Safe-haven investors buying mortgage debt insured by the US government through the GSEs has pushed rates to very low levels. As these investors find opportunities with higher yields in an improving economy, interest rates will move higher.

“I wouldn’t go so far to say (they) don’t matter. It’s just one variable. If you combine that one variable with a better outlook in the job market, people will start buying housing.”

At 4.49 percent, the current 30-year fixed rate is the lowest since Freddie Mac began tracking rates in 1971. To find a lower benchmark you would have to go back to the World War II era, when borrowers could obtain shorter-term home loans for about 3 percent.

Real estate blogger and economist Ted C. Jones contends the probability is “moderate to high” that mortgage rates will climb by 1 percent over the next 12 months as the economy improves.

That prediction is probably correct, not that this particular forecaster has any credibility….

Jones, senior vice president of Houston-based Stewart Title Guaranty Co., said U.S. workers already are “crawling off the bottom” of the unemployment floor. And he sees, within the murkiness of the larger economy, “a light at the end of the tunnel – and it’s not another train.”

Go stand out on the tracks and let us know what happens, Mr. Jones. After we scrape you off the front of the train, you can tell us about the light.

“I’m not a feel-good economist either," he said.

That's a credibility builder. So how have his prognostications been to date?

In 2007 Jones told agents at a real estate seminar: "You’re not going to believe the hurricane that’s going to hit us," he said. “But I am seeing some stable recoveries … What is the probability of a 10 percent home-price decline over the next year? Low.”

So in 2007 he was telling people the probability of a 10% decline was low. Well, he was wrong. Prices fell more than 10% in 2007 and another 10% in 2008.

He says federal tax incentives that sparked the spring buying binge reduced some of the overstock of housing inventory. And looking ahead, he cites a predicted U.S. population growth spurt (some 100 million people over the next 40 years) as the engine that will help revive new-home construction.

“So I don’t see rates getting to the three, two or one percent level,” Jones said.

“We have to look at these rates today as the best buying opportunity in some people’s lifetime,” Jones added. “What bothers me, though, is we’re scaring people away (with gloomy economic outlooks) – people who can lock in housing costs for the rest of their lives at rates we may never see again.”

No, you don't have to look at these low rates as the best buying opportunity in some people's lifetime, unless you live in a depressed market like Las Vegas. In an inflated market like ours, the low interest rates are merely delaying the inevitable decline.

Higher interest rates will cause prices to drop

Many have suggested that prices may move higher in the face of rising interest rates because prices did go up during rising interest rates of the 1970s. In fact, we inflated a housing bubble in the face of rising interest rates, so the theory goes that it might happen again. Let's review a little financial history and see if you think prices will rally in the face of rising interest rates.

First, it is critical to understand exactly how and why lenders inflated the first housing bubble of the 1970s. There was a deep recession in 1973-1974. The housing recession it spawned did not end until 1975 where the chart above picks up. House prices were depressed relative to incomes in 1975, and the improving economy prompted a great deal of buying and homebuilding activity.

The Federal Reserve in the late 1970s was trying to stimulate the economy to recover from the oil shock of the OPEC embargo, and they vacillated between raising and lowing interest rates unable to find a balance between economic growth and price stability. As a result, inflation grew out of control, and coupled with the power of labor unions to negotiate higher wages, the country fell into a wage-price inflationary cycle. We do not have those powerful labor unions today (except in California government), and we are facing high unemployment. There is no upward pressure on wages, and there won't be for quite some time.

But even if we had rising wages, it wasn't rising wages that inflated the 1970s housing bubble. It was the anticipation of rising wages and the willingness of lenders to loan at debt-to-income ratios over 32% that inflated the housing bubble. Lenders inflated the 1970s housing bubble by loaning money at unstable debt-to-income ratios (see chart above).

Federal Reserve Chairman Paul Volcker saw this occurring and decided to put a stop to it. When he raised interest rates to 20% in the early 1980s and removed all the liquidity from the system, he did it for one basic reason: he needed to stop banks from loaning money based on the anticipation of inflation. Inflation expectation is just like appreciation expectation; both cause people to overpay for assets, and both cause lenders to throw caution to the wind and allow borrowers to inflate asset bubbles.

A common misconception about inflation expectation is that it was a consumer phenomenon. It was primarily a banking problem. As we witnessed during our most recent housing bubble, consumers will borrow all the money they are offered even if it kills them. Lenders are the adults in the transaction, and it was their behavior that was the target of the interest rate increases of the 1980s.

As the anticipation of inflation was curbed, lenders quickly began to realize that borrowers were not able to sustain debt-to-income ratios in excess of 32%, so they stopped underwriting these loans — for a while at least — then they got stupid again in the late 80s and inflated another housing bubble.

Applying the lessons of the 70s

So let's apply the lesson of the late 70s to today. When mortgage interest rates begin to rise — and they will go back up — affordability will drop if prices remain where they are today. Lenders will be forced to make a choice: (1) allow borrowers to take out loans at debt-to-income ratios exceeding 32% or (2) deny borrower requests for loans at those amounts and allow house prices to fall. Which choice do you think they will make?

I don't see them as having a choice. If a mortgage is not insured by the GSEs or FHA, there is currently no secondary market for this loan. The government is not going to permit DTIs to go back up above 32% because they just spent billions in loan modification programs to bring DTIs down. Borrowers default when DTIs go over 32%. That has been proven over and over again. Only when lenders are inflating a bubble is this fact masked as troubled borrowers sell into a market rally. Once aggregate DTIs get high enough, the system becomes unstable, and prices crash back down to levels where real incomes (not liar loan incomes) are applied to a 32% DTI. That is the real estate cycle.

For those who believe prices will rise in the face of rising interest rates, you must believe lenders will underwrite loans at debt-to-income ratios exceeding 32%. That is not going to happen in the foreseeable future because the losses on these loans in default are too high, and the government controls the market. For as stupid and as corrupt as our government appears at times, they are not going to pay the losses of lenders indefinitely. DTIs at 32% or less are here for the foreseeable future.

So if we accept that market prices are going to be determined by real incomes applied to a 32% DTI, then market prices are going to be very sensitive to interest rates. If we had a market condition where supply was limited (as we have witnessed since early 2009), people may be forced to substitute downward to prop up prices, but with the shadow inventory yet to be purged, there will be no shortage of properties over the next several years.

Since we have a huge amount of inventory to push through the system, you can expect prices to be set by real incomes, current interest rates, and a 32% DTI for quite some time. That is why prices will fall as interest rates to up over the next several years.

Peak buyer walks away

The previous owner of this property purchased it for $539,000 on 8/2/2005. She used a $431,200 first mortgage, a $53,900 second mortgage, and a $53,900 down payment — which she has now lost.

She didn't get to squat as long as many others did, but she still got over 1 year without making any payments.

Foreclosure Record

Recording Date: 04/01/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 08/19/2009

Document Type: Notice of Default

A flipper bought this property at auction for $372,000 on 5/25/2010. Like two of the flips I profiled last week, this flipper did nothing to renovate the property and hoped merely to put it back on the market and sell it as-is. Irvine buyers just don't go for that.

Date Event Price
Aug 05, 2010 Price Changed $419,000
Aug 02, 2010 Price Changed $427,500
Jul 15, 2010 Listed $440,000

He has lowered the price 5%, and he only has another 5% to go before taking a loss. Without some cosmetic improvements, this property will likely just sit there.

If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.

Irvine Home Address … 1102 TIMBERWOOD Irvine, CA 92620

Resale Home Price … $419,000

Home Purchase Price … $372,000

Home Purchase Date …. 5/25/2010

Net Gain (Loss) ………. $21,860

Percent Change ………. 5.9%

Annual Appreciation … 48.5%

Cost of Ownership


$419,000 ………. Asking Price

$14,665 ………. 3.5% Down FHA Financing

4.57% …………… Mortgage Interest Rate

$404,335 ………. 30-Year Mortgage

$82,561 ………. Income Requirement

$2,066 ………. Monthly Mortgage Payment

$363 ………. Property Tax

$100 ………. Special Taxes and Levies (Mello Roos)

$35 ………. Homeowners Insurance

$277 ………. Homeowners Association Fees


$2,841 ………. Monthly Cash Outlays

-$333 ………. Tax Savings (% of Interest and Property Tax)

-$526 ………. Equity Hidden in Payment

$25 ………. Lost Income to Down Payment (net of taxes)

$52 ………. Maintenance and Replacement Reserves


$2,059 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$4,190 ………. Furnishing and Move In @1%

$4,190 ………. Closing Costs @1%

$4,043 ………… Interest Points @1% of Loan

$14,665 ………. Down Payment


$27,088 ………. Total Cash Costs

$31,500 ………… Emergency Cash Reserves


$58,588 ………. Total Savings Needed

Property Details for 1102 TIMBERWOOD Irvine, CA 92620


Beds: 2

Baths: 2 full 1 part baths

Home size: 1,267 sq ft

($331 / sq ft)

Lot Size: n/a

Year Built: 2000

Days on Market: 25

Listing Updated: 40395

MLS Number: P743479

Property Type: Condominium, Townhouse, Residential

Community: Northwood

Tract: Coll


Cute Townhouse in Northwood. 2 Beds 2.5 Baths with New carpet flooring, New paint, New microwave, and New Disposal. Must See!

51 thoughts on “Low Interest Rates Are Not Clearing the Market Inventory

  1. winstongator

    How many homes purchased during the bubble period were second homes? A huge percentage of those are being sold either at a loss, or going to the bank. Prices for homes people will live in will have a lot more support than ‘investment’ or vacation homes. How much of the sales volume was people using ‘equity’ to trade-up? Those two factors are gone and not coming back, so it would be natural to think that sales volume will be smaller for a while.

    A few weeks ago it seemed like these trustee flips were can’t miss. Now, not so much. Is it final sales prices falling or the auction prices going up that are squeezing the margins?

  2. mike23w

    > That is why prices will fall as interest rates go up over the next several years.

    any chance we’ll see an article on what influences interest rates and mortgage rates?

    and how interest rates affect mortgage rates (or vice versa)?

    seems fundamental and i don’t think i’ve seen an article on this yet.

    i would certainly find it interesting.

  3. Kelja

    When the flippers start to get their fingers burned, then we really know the housing market is in trouble!

    1. irvineneighbor

      So, your observation is buyers will still overpay for a recently remodeled kitchen. When will we free ourselves from the tyranny of pergraniteel?

      Did the flipper overpay at auction or are we going to see a lot of cash investors getting fingers singed with the drop in sales volume? It was bad timing to list in this price range in the wake of the tax credit expiring.

      1. irvine_home_owner

        I would rather have the tyranny of pergraniteel than the craptitude of linformiwhite.

        I can understand the feelings against pergo, but granite is still an “upgrade” and I can’t think of anything better and would stay current longer than stainless steel appliances. Do you have a better combination?

        We even discuss this here:


  4. Stock Investor

    IrvineRenter: “When mortgage interest rates begin to rise — and they will go back up …”

    Actually, the question is: when.

    IMHO, it is complicated. For example, high interest rates may destroy Federal Reserve balance sheet, because there are a lot of junk MBS now.

  5. Planet Reality

    It’s not a question of believing home prices will rise if interest rates rise. It’s a matter of accepting it as a possibility. Irvine Renter blindly believes a scenario can not happen due to desire. Moreover blindly assuming that all tiers of a market move together as one and making general statements from Compton to Irvine will lead to bad predictions.

    Unemployment for people making over $150,000 is under 3%.

    Welcome to the world of the Irvine home buyer.

    1. Planet Reality

      By the way, I don’t expect mortgage rates to rise while home prices rise. However even I’m not arrogant enough to neglect it as a real viable scenario:

      The fed keeps rates too low for to long, quantitative easing goes on steroids, inflation kicks in while rates are at zero, banks and corporations repeat the 70s. Low paying people are screwed while higher paid people get by.

      I still think the most likely scenario is low rates for a long time, with premium market feeling far less impact.

      1. awgee

        Interest rates will stay low as long as JPM can continue to sell interest rate swaps. When JPM can no longer sell IRS, interest rates will skyrocket.

        1. Planet Reality

          Let me correct you:

          When JPM wants the market to crash it will no longer be able to sell interest rate swaps.

      2. ochomehunter

        I disagree with all inflation theories out there and like the one you suggest. Quantative easing will cause speculation not demand. Walstreet is all about speculation and in the short term we can see wild price fluctuations, but in the end its the real demand that determines if there is inflation.

        Lets look at 2001 to 2007, although fueled by easy monitary policy by FED, the world spent spent and grew like crazy, jobs were more than job seekers so price rise made sense, but the price rise was unsustainable due to demand which came from speculation, not from real need! Folks bought homes they couldnt afford and then bought 2nd homes (Nicoles Cage example).

        Real demand will not come until jobs come back and jobs wont come back until demand rises. We are in this vicious downward spiral where companies are cutting more and more costs to meet the bottom line hence directly/indirectly killing the demand by raising unemployment. THe cycle continues!

    2. Walter

      I think both IR an PR make interesting points. Issue is the fiscal, monetary and regulation policies of the government have a large influence over the future of real estate and inflation. Trying to predict what the politicians will do is almost impossible.

      I have lost hope trying to figure out what will happen. Best I can think of now is to diversify my holdings while staying clear of long term bonds. I think they do not provide enough reward in light of the beating they will take if inflation does show up.

      1. Perspective

        I’m with you Walter. I guess I am “long” housing since I “own” one today, so I’m not in the position of many here trying to decide when the “time to buy” will arrive; but I’m not looking to add an investment property to my balance sheet because “fighting the Fed” and predicting how this will play-out is beyond my abilities.

      2. Anonymous

        Re: predicting what politicians will do

        Well, that’s easy. The answer, as always is ” whatever it takes to get re-elected” 🙁

    3. DarthFerret

      Unemployment for people making over $150,000 is under 3%.

      What a ridiculous statement! How many unemployed people do you know that make over $150,000? HELLO!!! They’re unemployed!!!

      Welcome to Planet Realty, where logic and fact are poor substitutes for nonsensical platitudes, especially when your commission is on the line and your broker has told you what to believe.

      WAKE UP! Prices ARE falling in Irvine. I see it everywhere around me. Just go browse Redfin and take a look at all the price reductions since April. They haven’t fallen ENOUGH, so I’m not buying yet. When it’s cheaper to own, then I’ll buy. We’re not there yet in most cases, but we’re definitely moving in the right direction.


        1. N2

          Okay, I read the linked report because I wanted to see how the researchers corrected for the obvious fact Darth alluded to above: unemployment tends to reduce income. Turns out, they didn’t.

          If I understand their methodology correctly, they essentially surveyed people as follows:
          Q1. Are you unemployed or underemployed?
          Q2. What is your household income this year?

          Shockingly, people who answered yes to the first question tended to have a lower income.

          1. irvine_home_owner

            I’m not sure that’s exactly correct.

            I believe the report is more accurate than you are stating.

            Do you actually think that any exec they interviewed who used to make $150k+ that is now unemployed got categorized in the < $30k yearly income bracket for that study? Common sense will tell you that the numbers are fairly on. Higher paid jobs requires for the most part higher education and since the number of people that possess such qualifications shrinks then the unemployment in that category would be smaller because of the pool of candidates. Is it no wonder that cities that have residents in higher income brackets have had lower RE price drops? I'm not just talking Irvine... go to Newport Beach or even Tustin Ranch.

          2. ochomehunter

            I know several (over 50) executives who made over $250K in my construction industry who no longer have jobs. Unemployment in Construction has hit over 40% (real number, no kidding), Unemployment in RE Brokers/loan officers is also well over 40%. I can assure you that between 2004-2008 most brokers/loan officers made well over $150K, now they barely make national average if they are lucky to be still in the workforce. Money has become very hard to come by. Companies have reduced high paying redundant positions. When time comes to trim the fat, companies let go execs first as they one exec salary can get you 2-3 talented hard working folks for same price.

          3. irvine_home_owner


            I’m not sure but I think there are more over $150k jobs in industries outside construction than there are in them.

            Those loan/brokers are probably part of the 3%… again… not a big a field as others.

            And I wouldn’t be too sure about the companies always letting the execs go first to trim the fat. In many companies, it’s the execs who make that decision and do you think they will cut their job or the ones below them.

          4. ochomehunter

            In large corporations, that is the trend where senior managers get fired as they are more directors than doers if you know what I mean. When work dwindles down, you dont need middle managers as senior execs bridge the gap.

            Also on survey, the right way to survey is to call every unemployed person and ask them how much they were making in last 3-years prior to layoff. I can guarantee you that IRS has all this information at their fingertips as they see annual filings. BUT it is not in the best interest of Govt. to get this data out.

          5. AZDavidPhx

            Comparing unemployment at various income levels is a fool’s errand. Suppose a job existed that paid 1 Trillion Dollars per year and it belonged to one person on the planet.

            Someone like PR comes along then and says unemployment is 0% for folks making 1 Trillion or more so therefore those poor souls making 30K per year with their much higher unemployment rate are really being screwed by the system.

            The argument is no different than that being made by the authors of that silly publication.

          6. irvine_home_owner

            Simple question:

            Do you personally think unemployment is higher at the $150k+ level or below the $30k wage level?

            I don’t think any educated person needs a study to answer that.

          7. ochomehunter

            How about this! NAR does housing prices in Median as prices are skewed, median can rise while prices fall and we know how it works. What about US come up with median income as suppose to natinal average? We can get a true picture of where wages are moving!

          8. irvine_home_owner


            “Comparing unemployment at various income levels is a fool’s errand.”

            Why is that? In the past you have used income level to determine affordability in Irvine… how is that any different than what PR is saying?

            If the average income in Irvine is $100k (just pulling a number out) and the average income in Santa Ana is $30k (again a random number)… and employment levels are 5% and 20% respectively, which area do you think will have lower real estate values? Everyone keeps saying that jobs/wages will drive the economy/real estate… isn’t that the same thing?

          9. AZDavidPhx

            IHO –

            I compare median income to median house price. The relation is at the median and you can make a valid observation.

            You can’t compare unemployment for 30K wage earners vs 100K wage earners unless you establish that the same number of wage earners are in each group. Obviously the set of 30K wage earners is much larger than the set of 100K wage earners. So how can you seriously draw a conclusion between the two groups when the set size is a factor in the unemployment rate?

            I have seen both high wage earners and low wage earners get laid off. Only difference is that there are more low paying jobs than high paying jobs so obviously most people getting laid off will be in the lower wage group. This is the problem with their math that PR is ignoring.

          10. AZDavidPhx

            IHO –

            What if Irvine has more retired or independently wealthy people versus Santa Ana? It would make Irvine’s unemployment look much lower than SA.

            The point is that there are other demographics that can factor in. PR is zooming down to household income and drawing conclusions about unemployment – ignoring other variables.

          11. irvine_home_owner


            “I compare median income to median house price. The relation is at the median and you can make a valid observation.”

            Unless of course there are other variables about the median income that you are ignoring.

            “The point is that there are other demographics that can factor in. PR is zooming down to household income and drawing conclusions about unemployment – ignoring other variables.”

            Where did you get your figure for median income in Irvine again? Did that take into account that many of the residents are non-US citizens? Could there have been some other variables you were ignoring.

            “You can’t compare unemployment for 30K wage earners vs 100K wage earners unless you establish that the same number of wage earners are in each group.”

            What?!? If the median wage earner is 100k in one city and the median wage earner in the other is 30k, unemployment rate based on income level will matter.

            “I have seen both high wage earners and low wage earners get laid off. Only difference is that there are more low paying jobs than high paying jobs so obviously most people getting laid off will be in the lower wage group.”

            Isn’t that the point? Sure there are other variables but on a macro level, no math is required to understand that if a larger portion of the population of a city is unemployed… less people can pay their mortgage… propery is distressed… QED. Otherwise, explain the difference in RE values between Irvine and other cities with the same population but a lower median income.

            For someone who likes to accuse people of using strawman tactics… you sure are painting with a broad straw brush.

          12. Planet Reality

            The facts are a hard pill for many here to swallow.

            Fact is unemployment is very low for 6 figure income jobs and the median income of Irvine SFR neighborhoods is $125K-$150K.

        2. AZDavidPhx

          PR must think that the total number of 100K jobs is equal to the total number of 30K jobs in the labor market.

          1. Planet Reality

            I don’t “think” anything. I posted a study that showed how unemployment varied. Also the median income of most Irvine neighborhoods with SFRs varies from $125-150K, those are facts, not what I think.

          2. Caloshua

            Thanks for clarifying what we have all been “thinking”. You don’t “think”, as you have well said.

  6. Planet Reality

    IR let me also explain a fatal flaw in how you are analyzing and generalizing the 1970s DTI data. The income that is used in the chart is lagging home price by one to 2 years, a huge problem in the 70s when higher income people were seeing 10-20% or more raises due to inflation. In addition it is not accounting for the income mix of the purchasers as different tiers of income felt differing impact in the 1970s. In the 1970s poor people continued to lose their jobs while higher incomes could see a 30% raise.

    People making over 6 figured have very low unemployment now while riverside is in full blown depression.

    1. Perspective

      I’ve seen those graphs charting unemployment. The level of education is directly related to the level of unemployment. While high school drop-outs have an unemployment rate in the high-teens, the graduate degree holders’ rate is extremely low (< 3% as you stated). Unfortunately, this may be more fuel for the class warfare fire burning in the Democratic party...

    2. IrvineRenter

      The income used in the chart is not lagging by one or two years. The expectation of income is lagging, and that is why lenders were loaning people money at insane DTI levels. It is also the very circumstance Paul Volcker set out to eliminate by raising interest rates.

      I the late 70s poor people did not see job losses while higher income people continued to see incomes rise. That is a fantasy you have about what is happening now that you are projecting onto the past without basis in fact.

      You imagine a world where high end prices have not collapsed because people really make enough money to support those prices while low income people do not. In reality, high end prices have not collapsed yet because lenders have not foreclosed on the pretenders squatting in homes they cannot afford.

  7. gl


    Could you please check if this house is a flip?

    The address is :

    19 perryville, irvine.



  8. john


    “Debts Rise, and Go Unpaid, as Bust Erodes Home Equity

    During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security. Now the money has been spent and struggling borrowers are unable or unwilling to pay it back.

    The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association.”


  9. Soylent Green Is People

    Low mortgage rates will be with us for a considerable amount of time. Buyers realize this and have decided to stay out of the market until prices are forced lower. I’ll talk with a buyer about X payment produced by lower rates and it lands like a lead balloon. “Meh.. I just don’t see the big rush to move forward. I’m gonna wait”

    And wait they should. Here’s a scenario laid out before me today by a Realtor pitching their new listing. The agent has a home to sell in a pricy neighborhood. The buyers were going through the loan mod process. Last night (8/11/12) they learn that the mod is denied, and that the NTS is 8/16/10. Assuming zero postponements, the Agent has 3 business days and the weekend to sell the house. During the pitch I hear “I really could use your help selling this. The property will be on the MLS tomorrow (Friday). The sellers are listing it for $1.1m, because, you know how hard it is to get a seller to let go of their home when they paid $1.5m in 2006. It’s overpriced for the area, but… you know….”

    Let that marinate for a bit.

    The Realtor is taking an over priced listing from delusional sellers and have nary a whisper of time to put the home in escrow before the deal goes to auction. I’m sure this is playing out elsewhere. If so, why would buyers venture into the waters when so many knuckleheads remain in the business attempting to sell homes that are wildly overpriced?

    Rates aren’t the solution to housing. Neither is employment per se, since the County of Orange believes the greatest growth in employment in this decade will come from the lower wage service sector. Low income jobs demand low priced housing. Las Vegas is a prime example of this theory. Irvine isn’t LV, but it’s not immune to the same economic pressures that brought their prices down to realistic levels. High wage jobs need to come to OC to sustain high prices. Without them, prices must begin their eventual swoon back to balance.

    My .02c

    Soylent Green Is People.

  10. FoolishRenter

    Housing price for will remain high with squatter’s rights for “owners” who can’t pay. One can just do the math. Yearly rent vs. 5% down loan. If the yearly rent is more that 5%, buying at an inflated price makes sense. If you’re lay-off, don’t want to pay and live in a non-recourse state or one action state, stop paying and live rent free for a year or two years. If the get 2 years of free rent your ROI would be over 100%. That’s much better than the bank’s 0.5% rate plus eviction after 60 days if renting.

    The squatters will remain until the banks can move the liability from the defective loan to the federal govt through refinancing, mortage modification or selling at inflated prices.

    1. Marc

      Non-recourse is probably priced into the loan in these non-recourse states so all other creditors end up paying for the idiots who default.

      1. SanJoseRenter

        I’ve never seen evidence that banks priced non-recourse losses into loans since the rate of default was so low and they could keep the down payment, but you can bet they do now. (and they are certainly risk-averse now.)

  11. Will

    Optimistic Spin – Wow, things are getting better! You can now get a two-bedroom condo in Irvine for less than $500K.

    Pessimistic Spin – Look at what you have to pay for a shoe-box two-bedroom in Irvine!

  12. theyenguy

    1) You write: ” This inventory must be pushed through the system”

    My response is there is an alternative: foreclosure and leasing.

    2) You write: “The low-interest rates are likely a temporary phenomenon. Safe-haven investors buying mortgage debt insured by the US government through the GSEs has pushed rates to very low levels. As these investors find opportunities with higher yields in an improving economy, interest rates will move higher” … “Real estate blogger and economist Ted C. Jones contends the probability is “moderate to high” that mortgage rates will climb by 1 percent over the next 12 months as the economy improves.”

    My response is that short sellers of debt, invested in ETFs like TMV and TYO, and by investors going long in corporate, bank, and sovereign credit default swaps, will send interest rates exploding higher causing investors flight from bond investments of all types, such as mortgage-backed mutual funds like GSUAX, and the Emerging Market Bond ETF, EMB, and the US Government Bond ETF, TLT

    I suggest a read of the my linked article Peak Credit Likely Achieved Today As Total Bonds Turn Down, where I write that Total Bonds, BND, turned down August 12, 2010. Thus Peak Credit, that is Peak Debt, was likely achieved; and if this be the case, then ”bond deflation” has commenced.

    The banks turned the Federal Reserve’s TARP capital infusion back to the US Federal Reserve where it resides as excess reserves, as is seen in the chart of excess reserves, EXCRESNS, posted in Dr. Housing Bubble in article There Will Be No U.S. Economic Recovery In The Second Half Of 2010 – 13 Charts Showing Weak Housing Trends, Option ARM Data, Dramatic Employment Changes, And Mortgage Equity Withdrawals.

    The excess reserves are not being deployed in lending, they reside in a liquidity trap, and their value well be rapidly under the short selling scenario outlined above.

    The weekly chart of Total Bonds, BND Weekly, shows a rise that has come carry trade investing. Now that carry trades are unwinding DMV:FXY and CEW:FXY, there is an additional stimulus for a sharp drop in bond values like that seen in bonds September and October of 2008.

    The world entered into Kondratieff Winter yesterday August 11, 2010 as currencies were sold off resulting in a sell off of stocks and commodities; and today, August 12, 2010, bonds traded down, commencing the end of credit.

    I believe in the nearer future, Credit Bosses, what I call Credit Seigniors, will be appointed to issue and manage credit, as the debt bubble implodes and the economy shatters.

    Here in the US, I envision, that out of a coming credit crisis, where there is no credit available, a Financial Regulator, will exercise Discretionary Governance, and announce a Home Leasing Program administered by the banks on their REO properties and those of Freddie Mac, Fannie Mae and the US Federal Reserve.

    Mortgage lending and securitization of loans will cease, and leasing of homes will be a public private partnership cooperative endeavor. Companies that have done servicing mortgage-backed securities, such as Anworth Mortgage Asset Corporation, ANH, will quickly disappear from the economic landscape, as mortgage bond funds such as Goldman Sachs Mortgage Bonds, GSUAX, tumble in value.

    I also envision that this Credit Seignior, perhaps in public private partnership with American Express, AXP, and Capitol One Finance, COF, will provide seigniorage for credit. He will provide finance and issue credit mostly to those companies which serve strategic national needs.

    It is important to understand that the two spigots of investment liquidity have been turned off.

    The first spigot to be turned off was the ending of TARP and other Federal Facilities on March 31, 2010.

    The second spigot to be turned off was the sell-off currencies on April 26, 2010, followed by a purchase of currencies on June 10, 2010 with the announcement of the EFSF monetary authority, and then a sell-off of currencies on August 11, 2010.

    With both spigots of investment liquidity turned off, it is like I write: the world has entered into Kondratieff Winter with stocks, many commodities and now bonds selling off. And as a result interest rates will be soaring. There will be a liquidity squeeze, where there will not be enough buyers for sellers, and as a result liquidity will evaporate, resulting in a credit crisis, where the only credit will come from a combine of government and banking and the credit will be distributed according to the security needs of the nation and industry.

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