Orange County home prices too high for incomes or rents

No matter how you look at home price data, it is simply too high to be sustained in Orange County.

Irvine Home Address … 25 TAROCCO 25 Irvine, CA 92618

Resale Home Price …… $282,500

She lives in a fairy tale

Somewhere too far for us to find

Forgotten the taste and smell

Of the world that she's left behind

Keep your feet on the ground

When your head's in the clouds

Well go get your shovel

And we'll dig a deep hole

To bury the castle

Paramore — Brick By Boring Brick

California home buyers live in a fairytale world where house prices go up forever and provide them with endless spending money. It's a seductive tale, and many people put their heads in the clouds (or is it up their a$$), live the fairytale and borrow and spend themselves into oblivion. It doesn't matter how much you pay as long as someone else has to pay the bills.

O.C. home prices still triple U.S. costs

December 1st, 2010, 1:00 am — posted by Jon Lansner

Despite horrific drops in the values of Orange County housing, a local home still practically costs what three typical American homes go for. Yes, one home here or three somewhere near Main Street U.S.A.

That’s one measure of local affordability, on a national scale. Just ponder fresh National Association of Realtors’ home price data for metropolitan areas: A typical Orange County house sold in the third quarter (median selling price: $508,400), cost 2.86 times the median-priced American home (cost: $177,900 in the third quarter!)

It’s equally troubling in a historic context: This Orange County premium remains higher now that it was in 1989 — the peak of the previous run-up in local housing prices.

Let's be clear about what is not happening here: There is not premium for a premium. There is a premium for Orange County real estate compared to the rest of the nation because Orange County residents have higher incomes. However, the premium on the premium paid by Orange County loan owners is causesd by people foolishly over-extending themselves to capture appreciation caused by people foolishly over-extending themselves. It is a self-reinforcing delusion punctuated by periods of steep declines when reality becomes unavoidable.

To be fair, this “Orange County premium” peaked at 3.42 American homes for one Orange County house in 2004. A 19% drop in local prices vs. a 3% drop nationally in the ensuing six years help narrow the local-vs.-national pricing gap.

So, the big question: Is the premium “worth it?” The math suggests that O.C.’s weather, culture and usually above-average salaries — and usually a good job market — supports pricier local housing.

Yes, local imcomes support higher prices, but only to the degree that incomes are higher than other areas. The rest is foolishness and kool aid intoxication.

And since 1982, local housing on average has costs double — eh, 2.38 times to be exact — to buy here compared to that mythical median-price American house.

Current economic weakness, no less some major challenges and the local and state level, bring the size of the premium deserved by Orange County housing into question for the future. Remember, one way to increase demand for housing is to be an attractive draw for out-of-towners seeking new employment of lifestyle.

Who is going to come to Orange County and pay these bloated prices? What high-paying business is going to expand here given the high home prices, high commercial rents, high state taxes, and dysfunctional state government that continually enacts business-unfriendly legislation? And what high wage earners are going to come here so they can pay more taxes and spend 40% or more of their income to live in a house half as nice as what they left behind?

Despite claims to the contrary put forth in the comments, house prices here are not justified by local incomes….

O.C. homes: 4th costliest vs. income

November 22nd, 2010, 9:30 am — posted by Jon Lansner

The price of entry to Orange County remains high.

Metro Price Income Ratio
Honolulu $621,000 $83,600 7.4
San Francisco $725,000 $101,000 7.2
New York-NJ $420,000 $64,700 6.5
O.C. $530,000 $83,600 6.3
Santa Cruz $502,000 $84,000 6.0
Los Angeles $353,000 $61,200 5.8
San Jose $575,000 $100,400 5.7
San Luis Obispo $380,000 $69,800 5.4
San Diego $390,000 $74,100 5.3
Oxnard $413,000 $86,300 4.8
Nation Price Income Ratio
U.S. $177,000 $62,000 2.9
Metro Price Income Ratio
Springfield, IL $116,000 $74,100 1.6
Utica-Rome, NY $90,000 $57,800 1.6
Grand Rapids, MI $91,000 $58,900 1.5
Elmira, NY $85,000 $58,600 1.5
Battle Creek, MI $81,000 $56,900 1.4
South Bend, IN $70,000 $53,600 1.3
Decatur, IL $73,000 $57,600 1.3
Saginaw, MI $61,000 $49,500 1.2
Detroit $52,000 $52,000 1.0
Monroe, MI $63,000 $63,900 1.0

Here’s another measure showing that despite steep price declines, Orange County homes are still costly compared to the rest of the nation — especially when local incomes are figured in!

FiServ’s recent home-price outlook contained intriguing stats on 212 markets and the relationship between the median selling price of homes (for second quarter 2010) in major metropolitan areas across the nation and the local household median incomes from 2009.

What did FiServ find?

  • In Orange County homes sold for 6.3 times the median family income.
  • That’s a little more than double the nationwide median of 2.9 years worth of income vs. median home prices.
  • Orange County ranks as the fourth-highest cost ratio of the 212 markets tracked.
  • California dominated the 10 costliest list with 8; only Honolulu (No. 1) and New York (No. 3) were from outside the Golden State.
  • Where’s the “cheapest” housing by this measure? Five of the 10 at the bottom are from Michigan — including Detroit at one year’s salary for a home!

Orange County residents put twice as much of their wage income toward housing than do people living in the rest of the country. Why is that? They do because they think they will get rich owning California real estate. It is foolishness on a grand scale.

Some have argued that housing is scarce, therefore, people are bidding up prices to get whatever is available. If that were true, rents would be correspondingly high. Rents do not support local pricing.

O.C. homes SoCal’s priciest vs. renting

December 2nd, 2010, 4:48 pm — posted by Jon Lansner

Orange County homes are far pricier than most of the housing in Southern California when compared to respective rents in the 7-county area.

County Ratio Year Change
O.C. 302 +6%
Santa Barbara 297 +19%
Ventura 259 -2%
San Diego 235 +3%
L.A. 210 +5%
Riverside 183 +15%
San Bernardino 141 +13%
All SoCal 212 +8%

That’s the conclusion of fresh statistics from the Real Estate Research Council of Southern California that involved the age-old buy-or-rent debate.

The council’s math compared median selling prices by county from DataQuick and average asking rents from RealFacts. For the third quarter, Orange County home-sale prices were 302 times local monthly rents — a cost ratio 42% higher than the regional average and the highest of the seven SoCal counties tracked.

Orange County has been the region’s priciest place to own a home by this math since the first quarter of 2008 when Santa Barbara County was tops. In the third quarter, Santa Barbara was second priciest by this measure, with its median sale prices 297 times typical monthly rents.

By this math, renting looked a bit better in the third quarter vs. the previosu three months as the ownehsip cost index rose 6% in Oraneg County and 8% regionwide.

Yet, clearly, tumbling home-sale prices has helped narrow the buy-to-rent gap in recent years. Since the cyclical peak for this ownership-cost ratio five years ago, the Orange County buy-to-rent ratio has fallen 34% while the regional ratio is off 41%.

So Orange County loan owners pay far more for housing as a percentage of their incomes, and they pay far more than is justified by the local rents. So what happens when reality catches up the fantasies of appreciation?

High-end homesellers cut prices sharply

December 1st, 2010, 12:36 pm — posted by Jon Lansner

Sellers of Orange County’s upper-crust properties are doing the deepest discounting.

Recent stats from — which tracks prices of homes listing for sale in brokers’ MLS system — show:

  • At the 75th percentile — the midpoint by price of the upper half of homes listed – Orange County’s asking price in November ran $694,833 – that is down 2.9% vs. the previous month and off 9.8% vs. the year earlier. This marker for Orange County’s higher-priced homes has fallen on a year-over-year basis for eight consecutive months.
  • At the 25th percentile — the midpoint of the lower half of homes listed – the asking price in November ran $299,940 – that is -2.2% vs. the previous month and 0.1% vs. the year earlier. This marker for Orange County’s cheaper homes has risen on a year-over-year basis for a year. (Arguably, an 0.1% gain isn’t much of an advance!)
  • The changing fortunes of these two niches puts the pricing gap between top and bottom at 122% — or $365,840 — the thinnest difference in listing prices between high and low ends since April 2008.
  • This gap was at its peak at 167% — or $500,000 — as recently as August 2009. Since then the “bottom” pricing — the 25th percentile — has been flat while the top’s asking prices — the 75th percentile — dropped 16%!

By the way, the actual median listing price — the 50th percentile — for November was $432,600, down 3.2% in a month and down 3.8% in a year.

The downward trend in asking prices for high-end properties is unmistakable. It will also continue for the foreseeable future because prices are way, way too high. Once the banks get around to foreclosing on the squatters in more expensive homes, inventory will swell further and prices will continue their descent.

Condo values and volatility

One of the more obvious signs that real estate was in a bubble was the price change and price levels of condominiums. Condo values are historically the most volatile. These are typically undesirable or semi-desirable properties, but once kool aid intoxication takes over and lenders fuel the flames with cheap debt, prices really catch fire.

All real estate is valuable in a housing bubble because appreciation rewards everyone. Since condos are relatively inexpensive, it is an easy way for the small-time specuvestor to play the game. The demand for these assets rises to the limit of lender folly during the boom, and it falls to its utilitarian value during a bust. Since people prefer larger detached properties, condos have limited utility, and prices fall precipitously.

It is truly astonishing what people were willing to pay for old, fee-laden, and cramped condos in Irvine. Today's featured property was purchased for $410,000 on 3/23/2006. It was probably a bargain at the time considering it has two bedrooms. There were some one-bedroom units that sold for over $400,000 in Irvine at the peak. The owners used a $328,000 first mortgage, a $82,000 HELOC, and a $0 down payment.

They quit paying the mortgage sometime in early 2009.

Foreclosure Record

Recording Date: 08/20/2009

Document Type: Notice of Default

Since this property is empty, the bank is in no hurry to foreclose. Instead after almost 500 days on the market, it dances to the tune of amend-extend-pretend.

Irvine Home Address … 25 TAROCCO 25 Irvine, CA 92618

Resale Home Price … $282,500

Home Purchase Price … $410,000

Home Purchase Date …. 5/23/2006

Net Gain (Loss) ………. $(144,450)

Percent Change ………. -35.2%

Annual Appreciation … -8.1%

Cost of Ownership


$282,500 ………. Asking Price

$9,888 ………. 3.5% Down FHA Financing

4.55% …………… Mortgage Interest Rate

$272,613 ………. 30-Year Mortgage

$55,535 ………. Income Requirement

$1,389 ………. Monthly Mortgage Payment

$245 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$47 ………. Homeowners Insurance

$370 ………. Homeowners Association Fees


$2,051 ………. Monthly Cash Outlays

-$128 ………. Tax Savings (% of Interest and Property Tax)

-$356 ………. Equity Hidden in Payment

$17 ………. Lost Income to Down Payment (net of taxes)

$35 ………. Maintenance and Replacement Reserves


$1,620 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$2,825 ………. Furnishing and Move In @1%

$2,825 ………. Closing Costs @1%

$2,726 ………… Interest Points @1% of Loan

$9,888 ………. Down Payment


$18,264 ………. Total Cash Costs

$24,800 ………… Emergency Cash Reserves


$43,064 ………. Total Savings Needed

Property Details for 25 TAROCCO 25 Irvine, CA 92618


Beds: 2

Baths: 1 full 1 part baths

Home size: 995 sq ft

($284 / sq ft)

Lot Size: n/a

Year Built: 1983

Days on Market: 493

Listing Updated: 40455

MLS Number: P696563

Property Type: Condominium, Residential

Community: Orangetree

Tract: Othr


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


2ND LIEN HOLDER IS STILL CRUNCHING NUMBERS ON WHAT THEY WILL ACCEPT TO RELEASE LIEN — That is the story will all short sales. Short sales are primarily a negotiation between the delinquent borrower and the second lien holder. It's the main reason short sales take forever and rarely transact.

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,

Irvine Renter

51 thoughts on “Orange County home prices too high for incomes or rents

  1. winstongator

    This local analysis is much more accurate and useful than extrapolating national issues onto the OC market.

    I think you’ve also captured why some markets respond differently to things like exotic mortgages and lower rates. The higher DTI people are carrying, the more sensitive prices are to relatively small changes in costs. This points to what we should do.

    Since Fannie/Freddie are 90% of the mortgage market, they should become especially strict on DTI. There is an easy way to look at it for those self-employed that want to massage the numbers. You only get credit for what you report on your taxes. Fannie/Freddie can look that up cheaply and quickly. And if you are caught intentionally changing your numbers – banned from their programs for 1-2 years.

    The GSEs are encouraging people to buy homes. They should not extend that encouragement to homes that people can only marginally afford.

    Then in the private securitization market, allow only narrow windows of DTI, so you could buy a 15-20% DTI, a 20-25%, or an overspender special 35-40% DTI security (front-end, pre-tax income). Mixing 40% DTI’s with 10% DTI’s does not make a security more stable, it is just hiding the potential losses from the 40% security.

    A desirable area commands a premium. But there is little to think that this premium should be changing 50-100% over a short period. That was the bubble. Areas like Miami, desirable areas were already commanding a premium (sensible), but that premium started rising quickly (problem).

  2. octal77

    A troubling trend that I have noted in Irvine
    is a tendency for owners/renters to double up.

    In other words, owners rent out rooms to help
    defray expenses, most likely the mortgage.

    I know about this trend because I have helped
    friends move in as renters. (I live in
    Woodbridge [32 years]).

    Problem: more people per sq/ft equates to more
    cars parked on the streets, more demands
    on infrastructure and more congestion.

    In total, more personal stress and less
    quality of life.

    I have wondered if this trend of more people
    in less space (see IHB The New Age of the Tiny
    House Dec 1st) would reinforce the current
    absurd price / rent ratios?

    Thoughts from the group?

    1. Geotpf

      I doubt this will be a serious problem overall (parking wise, etc.), because for every property that has rooms rented out, another property (like this one) will be sitting empty in limbo. I don’t think SoCal’s population overall is increasing much-in fact, it might be decreasing at this point, as people move to the (cheaper) midwest and Mexicans go back to the home country after not being able to find jobs (I’m sure all those guys in front of the Home Depot aren’t finding as much work these days).

      1. Swiller

        “Since this property is empty, the bank is in no hurry to foreclose.”

        This is what I have posted about before. Many here have hated on people defaulting and living “rent free”, but where’s the hate for banksters that sit on empty properties. I’d rather have a working american live in a home not paying rent, then a bankster leaving a home empty creating artificial demand. The banksters need to foreclose and take their properties back and put them on the market.

        Let the prices free fall so the next generation of americans can have home ownership for what it was intended…to live and raise a family, not as a Wall St. casino investment. I feel the burning anger of thousands who cannot get a piece of property and some piece of mind, but are forced to endure renting.

        Home ownership is worth a whole hell of a lot…to me, but at the prices they want in OC….no. The direction it is headed for the “middle class” in OC, is to accumulate your wealth through labor, invest in Wall St., and when you retire, move out to a squalor state, buy a home with cash for $100,000 or LESS, and THEN you can own your own property.

        1. IrvineRenter

          “where’s the hate for banksters that sit on empty properties.”

          There is plenty of animosity for the banksters too. The people living rent-free are merely taking advantage of a situation they don’t control. The banksters control the situation, and both the delinquent squatters and the empty houses withheld from the market are their fault.

        2. winstongator

          Lots of people don’t like the banks sitting on empty properties. Those are the worst cases of not moving quickly to complete foreclosures and get homes on the market. IR has written a lot expressing displeasure with that. I personally dislike the banks’ actions worse than rent-free squatters (I understand the ‘squatters’ actions & motivations).

          1. lee in irvine

            “I personally dislike the banks’ actions worse than rent-free squatters (I understand the ‘squatters’ actions & motivations).”

            Me Too! Banks suck ass!

          2. Honcho

            Why is it wrong for the bank to decide the best way to mitigate its losses? If the banks allowed all defaulted borrowers to sit indefinitely, everyone would stop paying on their loans (not that this isn’t happening in the current state), right? It makes sense to evict these people to keep the stick of eviction nearby to prod people into staying current. After that, it is up to the bank to decide how to best recoup its losses, whether that be holding onto the property to restrict supply or flooding the market. What is good for the bank isn’t necessarily what’s best for anyone else.

          3. IrvineRenter

            It’s amazing that the banks even have the power to impact the market through withholding inventory. It just shows how much bad debt and property they really have. Banks should be competing with each other to dispose of their assets, but the cartel is holding together remarkably well right now. As they start to release this inventory, it will become more difficult for them to stop the trickle from turning into a flood.

          4. lee in irvine

            I think until the property is sold at a foreclosure auction, the bank doesn’t have to realize its loss. If these banks were forced to mark assets to market (FASB 157), half of them would be toast right now, and most of the other half would be close to insolvency.

            These banks have a short-term interests in stretching the time from default to sale. The banks cannot be concerned with tomorrow (the future) when they’re fighting for their lives today (the present).

          5. norcal

            I’m just trying to imagine what things would look like if the cartel DIDN’T hold together and was forced to sell all those foreclosed houses. How much bad debt is there on the books in the form of second mortgages and HELOCs? That’s what will get zeroed out of the assets column at the relevant banks, but whether it gets added to the debits column I don’t know. Are these seconds and HELOCs secured assets – i.e., have they been sold to other parties? If so, they’re the guys’ who’ll be hurting (and that could include pension funds in the end).

            Not to say that bank delays are good, but wondering what the alternative looks like. A bankupt Bank of America?

            Interesting time….

          6. IrvineRenter

            Most of the originating banks kept the second mortgages and HELOCs on their books. There is over $100B on the books of each of the major banks. If these were marked to market, it would be a banking catastrophe.

          7. Perspective

            That’s true in our case. Countrywide originated our 2nd purchase and they’re the current investor/owner.

          8. lee in irvine

            As of the end of last year, BofA listed 1.5T on their balance sheet as long-term investment (level 3) assets. If they were forced to list these assets honestly, there would be no equity (toast).

          9. Shevy

            Honcho- You make a good point, however, since our tax dollars have been and continue to be used to bail out banks I think that some consideration for what they do to the market by artificially manipulating supply and lobbying politicians for policies that help the bank while hurting average Americans has to be made.

            Banks are using tax dollars, the elimination of market to market accounting, and other policies that have been created thanks our government that give banks no lose opportunities. Many of these policies help the banks while hurting the average American. Many potential buyers see their tax dollars used to artificially inflate the prices of the homes they want to buy. I don’t agree that this is a fair way for the bank to recoup their losses, especially when the average American is paying and continues to pay and bank execs continue to take huge bonuses.

          10. Shevy

            Currently, bank execs are allowed to pretend everything is fine while benefiting from policies that only help banks at the expense of the average American and future generations. Instead of indirectly supporting the system why not develop a solution that quits rewarding the greedy and irresponsible yet saves the banks by directly supporting them and actually knowing the cost of this and getting it back from their profits. Of course, necessary supports will likely prevent them from making any real profits for many years to come, isn’t this better than having those profits funneled to those that created the mess?
            Of course the banks do not want to face it head on because then those making the decisions will not be allowed to pay themselves 10x, 20x, or 30x what the average American earns. As long as banks have control of our policy makers and create policies that reward the irresponsible and greedy the average American will continue to struggle.
            I’m surprised that I have not heard more about equal housing and civil rights groups taking on the banks. I have heard from multiple reliable sources that the banks have a method that they use to foreclose on homes that they take lower losses on while allowing those that have larger losses to squat. This is a big part of what’s supporting areas like Irvine while other areas have even over shot their bottom. Naturally, in general this allows higher end loan owners to squat while poorer loan owners are foreclosed on more rapidly. I have heard that this is a strategic policy from good sources; I can’t imagine this would go over well with a rights groups. However, the mistake the right groups would likely make is to try to keep those people in the homes through bad loan mod programs etc., instead of forcing banks to foreclose on an equal opportunity basis.

          11. Honcho

            I’m not sure a policy encouraging rapid foreclosures that would cause further bank losses would be good for the tax payer. Sure, since tax payers bailed out the banks, I don’t have any problem with the concept that they should have a voice at the table, but a decision to force banks to sell foreclosed properties rapidly or to recognize losses now, would seem to require greater tax dollars to further support the banks.

            I think your point below is a good one (thanks for dividing up posts so points don’t get lost). I am also surprised that we haven’t seen more commentary or public dialogue about disparate foreclosure times in different demographic areas.

          12. Shevy

            Hi Honcho- the current erosion of the dollar that is bailing out the banks through the back door is not good for the tax payer. I do not buy the argument that prices dropping another 10 or even 20% in some markets is bad for the average/most Americans. Moreover, I believe that it will be good for the overall economy and tax payer in most areas.

            First, it will not effect those that own below rental parity, those that own above rental parity are likely better off walking away and renting anyway, and those that are looking to buy will be helped tremendously. From what I can tell, the only people it hurts in real terms are the banks. They have done a great job of spinning it that and making people believe taht it hurts all homeowners if someone on your block is foreclosed on. Prices will eventually come back to historical norms regardless, delaying only delays return to historical norms, recover, and funnels wealth from average Americans to bankers, if your neighbors house is in forecloser,is your payment going to go up? By bailing them out is your payment going to go down? If you are not selling without any intent to re-purchase how does it really effect you?

            Of course, if it’s allowed to sit there empty it will effect you a lot more because it will likely not be maintained. If they’re allowed to squat it will also likly effect you more because your tax dollars will be spent to support that and moreover, others will get the same idea.

          13. Honcho

            Solid arguments. And certainly open for debate over which is the most efficient and cost effective way to return this thing to “normal.”

            At the end of the day, I think you still have to let the investor decide what is the best way to recover its losses, but if they have their hand at the bail-out trough, they better be prepared to have to listen to reasoned arguments about what is best for everyone, not just their bottom line.

            I’d like to see the policy argument be played out a little more by people a lot smarter than me so we can see the full ramifications of whatever course is taken.

    2. Perspective

      It’s not just homeowners taking in renters to help out with the housing costs; it’s multi-generation households. In my neighborhood it’s very common for grandparent(s) to live with the homeowner. I assume this allows the grandparent’s SSI to contribute to the mortgage making the home affordable.

  3. Sue in Irvine

    Swiller…are you the poster who frequently admits to not paying your mortgage, squatting, and proud of it? Well, then of course you wrote your paragraph about don’t hate on squatters. Sorry, I don’t agree.

    If you’re not the proud squatter….my apologies for mixing you up with another poster.

    1. Swiller

      I’m the proud owner who not only lost his 20% down (84k but with fees etc, more), but is yet *another* 20% down from purchase price (current homes even 2 doors down from me sell for $299,000).

      I haven’t defaulted yet…but I think reality will force my hand in spite of my pride of ownership. The system was gamed, but in the end, I have only myself to hold accountable.

      1. Perspective

        How much over equivalent rental cost are you paying (after tax considerations)? i.e. How much are you bleeding each month? Or better yet, rather than a raw figure, what percentage of your gross monthly income does that overage represent?

        I’m just curious about how much pressure needs to be applied before people start considering default (in the absense of hardship).

        That percentage for us is < 2%. Therefore I don't "feel" pressure yet every month I make a mortgage payment...

        1. norcal

          There’s been a study out that says that >25% underwater is the beginning for strategic defaulting. But if your neighbors are already doing it the likelihood that you will increases by something like 50-75%, because perceptions of local morals shows it’s acceptable.

          Strange that it’s not just a 100% financial decision. Perspective is right – just compare the rent to your mortgage and look at your chances for long-term recuperation, and make your decision accordingly.

  4. AbroadThankGod

    Here’s the extremely frustrating part of the equation you underline above, IR: it IS possibly to get very rich off a foolish and irrational market like Orange County (or the dotcom bubble, commodities, etc). In fact, the system is rigged precisely for the rich and powerful to take advantage of these bubbles while they run up. Then they cut bate and let the little guy take the hit on the downward cycle. (Witness Goldman Sachs versus Joe Blow down the street with an underwater loan.)

    None of what I’m saying is new or untraveled territory for this blog. But it still drives me batty to think that the only way to really get ahead is to make the irrational, morally hazardous play…

    1. AZDavidPhx

      In fact, the system is rigged precisely for the rich and powerful to take advantage of these bubbles while they run up.

      HEY! Come on… Trickle down economics is real.

      Unfortunately, these people are able to enrich themselves at the expense of the masses because as a whole, the masses are idiotic. Just look at the people whom the masses elect to public office.

      If the common man had the “get rich slowly” attitude then the bubble never could have been blown. Unfortunately, it’s all about getting rich quick. As long as the sheeple are always looking for that get rich quick ticket – they will be ripe for the picking.

  5. lee in irvine

    Very good points by IR.

    One thing I’ve learned from all this, the dynamics in one bubble area deflating can very quite a bit from other areas. Las Vegas was quick and easy due to all the new money that bought during the prime bubble years. Orange County is full of home-debtors who refinanced themselves into oblivion. Many of these OC morons have a lot stronger attachment to their homes (vs LV) because they’ve lived in them longer. But one thing is certain, as more go upside-down, more will simply stop paying, and live rent free for 2 years. We have thousands of them doing it right now, and this number is growing.

    Ponzi Scheme is unwinding.

    1. AZDavidPhx

      My perception is that the banks are just more inclined to ignore the more expensive losses for as long as possible. So the folks squatting in expensive houses have more of an advantage than those in the cheaper ones.

      I don’t think it has anything to do with OC people being more attached to their houses than anyone else. The “economic recovery” is a foregone conclusion in the common man’s mind. All they have to do is “hold out a little longer” until the next bubble gets blown.

      Unfortunately, I say the next “bubble” in prices is going to be inflation when the banks stop hoarding cash and start pumping it out to the little people again.

  6. tenmagnet

    The success of new homes sales seem to indicate that a large number of buyers are willing to pay what many might call a “premium” to live in certain parts of Irvine.
    Otherwise, the new supply of homes wouldn’t have been absorbed so quickly.

    1. IrvineRenter

      Irvine certainly does command a premium. It is the nicest planned community in Orange County (although Rancho Mission Viejo has done some nice ones too).

      Part of the reason the new home sales have been readily absorbed is because the 800 units the Irvine Company built are the only new houses in a county of 2.4 million people. There must be some demand for new homes in a population that large.

      I just pulled comps today on a foreclosure property in Las Vegas. The builder has been successfully selling a model for $180K in the neighborhood that can be purchased resale for $140K. Some people just want new.

      I am not anti-Irvine, nor do I think everyone who bought in Irvine is a fool. I do think the premium many pay is excessive and lacks any rational justification. That being said, people are free to pay for what they want, and as long as they recognize the costs going in, it is up to them.

      What I do is expose the foolish rationalizations people make to themselves to justify their emotional decision. Many don’t like to hear that.

      1. irvine_home_owner

        Part of the reason the new home sales have been readily absorbed is because the 800 units the Irvine Company built are the only new houses in a county of 2.4 million people. There must be some demand for new homes in a population that large.

        But there are many other new homes in Orange County that did not sell as fast as the ones in Irvine.

        Laguna Niguel’s Shappell project has been selling since mid 2000. Glenwood in Aliso Viejo has not sold out. Serrano Heights in Oranges has new home communities that did not move as fast as Woodbury. A small SFR tract in Lake Forest, Summit Crest, had 29 homes and have not sold through. There are others in Westminister, Huntington Beach, Costa Mesa and Newport. All of those combined didn’t match the volume and pace of Woodbury/WBE.

        Does that not indicate there is a demand in Irvine… especially for new homes (which is contrary to one of your previous blog post)?

        1. tenmagnet

          Not sure if you recall when IR conducted the call with Dan Young from TIC here.
          The guy was hammered left and right with negative criticism about all the planned new construction.
          Most, if not all of the product they rolled out early last has sold.
          That’s not demand, in a down economy no less.
          Why not invite Dan Young back for a follow up?

  7. winstongator

    What is the average DTI in Irvine? You’ve got a $55k income going for a $280k condo. So $110k should get you $560k? So, someone making $440k should be @ $2M? In much of the country, the people making that much don’t go near million dollar properties, let alone $2M’s.

    Also, front-end DTI based on pre-tax income makes less sense as you go to more expensive homes/higher tax brackets.

    1. Perspective

      When you start getting into the higher incomes, the “amount of home” these households will buy depends as much on their balance sheet as their income statement.

  8. irvine_home_owner

    Just measuring income to median price isn’t enough. There are quite a few factors that can make that picture different.

    1. Is that household income or individual income? In the Midwest, where the price median is lower, those homes could be single income families so their relative cost is similar to a dual income family in Orange County.

    2. While localized housing prices have very large variants… other goods/costs do not. A big purchase like a car or SUV cost relatively the same in Orange County as it does in Detroit so the impact on their income is more than here making their relative debt to income cost higher.

    3. This also doesn’t take into account how people are willing to reduce debt/costs more in higher median areas to free up more income for housing. An argument against buying in Irvine because of the public school system is to buy in a cheaper area and use the money saved to put your kids in a private school. So while the incomes match and their housing price is lower… their cash flow is the same. And in the end, more likely than not, the Irvine property will be worth more than the [insert cheaper city name] property.

    4. The measurement of income is not an easy metric to track. If someone pays all cash for an $800k home in Irvine, they only have to make enough per year to pay for utilities and property tax.

    I’m sure this will lead to some debate about how income is measured but before we go there, why do the other places get a pass? Hawaii, NY and NorCal have always had high real estate to income ratios yet somehow it’s okay. Even LA, Oxnard and San Luis Obispo are high on that list… I would be more concerned about their volatility than ours.

    1. tenmagnet

      All those are good points but why buy in Irvine?
      Waiting for the Irvine is no different than Yucaipa comments.

    2. Geotpf

      I think overall income ratios are less important than actual supply/demand. That is, how many people are trying to buy a house today and how much can they afford (or not afford but still get a loan for), and how many properties are available? These numbers are somewhat tied to income levels, but only loosely.

      Also, in situations with basically flat home prices, and rents lower than monthly payments (let alone total monthly expenses, including insurance, net taxes (property taxes minus mortgage interest deduction), HOA fees, and repairs), renting becomes a much more attractive option for lower income folks (and everybody else, frankly). And that is the situation that Irvine (and most of LA and Orange Counties) are in.

      That is, if you think prices are flat or declining, and rents are less than monthly expenses, why on earth would you buy now? You might lookie loo and see if you find a perfect place or one at an insane discount, but other than that, renting is the best option for the short to medium term. Of course, in areas where this is reversed (the IE for instance), buying makes a lot of sense.

      1. Perspective

        Lookie-loos are dangerous! I thought everything pointed to a bubble in 2006, but I appeased the wife by looking at models every so often. Wouldn’t you know, we found one she loved in early 2007.

        I don’t trust myself. That’s one reason I won’t go lookie-loo on car lots either. I know that shiny new BMW will just be too tempting…

      2. irvine_home_owner


        What you are talking about is “rental parity”. But isn’t that the case in Irvine now? There have been a few properties that IR has profiled and he said they were at rental parity.

        If SFRs in Irvine are renting at about $2500-$3000 per month, doesn’t that make a $600k-$700k SFR a BUY recommendation (even with just 3.5% down)?

        Sure, someone can say they can rent a 3br apartment for less than $2500/month so why buy that 3br house? All I can say is living in an SFR is different than living in an apartment and many people think it’s worth the difference.

        That same psychology applies to why housing is more expensive in some areas than others. You can live in Riverside for less… but some would pay more to not live in Riverside.

        1. IrvineRenter

          The people who buy at or below rental parity will be happy, assuming they won’t need to sell for a few years. As Perspective points out, being underwater is far less stressful when you can afford the payments, and it is even less stressful if you are saving money versus renting.

          This isn’t 2007 or 2008 anymore. I am not opposed to anyone purchasing in Irvine. I just don’t want to see people delude themselves into thinking many of the silly myths of the bubble that prompted many people to buy when they shouldn’t have.

  9. FoolishRenter

    High housing in many area’s are created to make the people dependent on govt housing programs or in area that regular market forces are not in play such as HI where there is not a healthy RE market due to a restriction on supply. I think that either way, it makes for good voting blocks for those already in office.

    Most REA use a figure of less than 1% for upkeep on a house. From experience in owner occuppied and rental property, the 1% would only apply to a new house and 3-5% is a more likely figure for houses over 15 years old.

    1. Perspective

      1% may be high for a new condo/townhouse too, as your HOA fees cover maintenance on everything other than what’s inside your home. We’ve lived in our townhome nearly 4 years now, and haven’t spent a dollar on maintenance (“maintenance” meaning things you’d have to fix or replace that a landlord would in a rental, not cleaning).

      And before everyone jumps on HOA fees and how you can receive special assessments and increases, we just received notice that our sub-HOA fees are decreasing $20 for 2011.

  10. jb

    HOA’s can be poorly run. Sometimes criminally run. Both of the associations that I’ve been a part of have had special assessments and increased fees. The one that I’ve owned for 16 years has increased from about $170 to $440. It also had a special assessment of about $4,000. This is for a 1 bedroom condo!

    Another association had many legal issues which resulted in a doubling of the monthly HOA for years.

    I’ll pass on the “small” associations. I will gladly do the larger Woodbridge or Westpark associations.

  11. BD

    Hello All –

    …just another thought about home pricing in OC and Irvine in particular.

    In most of the rest of the country (outside the most expensive markets) the need for dual incomes to support housing costs is not nearly as high. This is a real risk and consideration that people should consider more carefully when reaching for OC / Irvine RE.

    It seems obvious to me that relying on dual incomes to pay a mortgage and car payments and other expenses is inherently very, very dangerous. This dangerous behavior is linked to foreclosure and bankruptcies. This is the ‘two income trap’.

    A family in this situation is only one job loss or significant family issue – like a debilitating illness – away from a ver bad outcome / result.

    When you have one spouse not working you have a reserve income provider to put into the workforce if needed but, when both work and both resources are needed to pay expenses you and your family are at an unbelievable risk.

    The ‘two income trap’ is real and dangerous.

    Watch this if you are interested.

    My .02


  12. FoolishRenter

    The owner/borrower may not have faired well too badly with no skin in the game and a year of free rent. Why not continue to squat?

    Hopefully he didn’t take out a non-purchase money loan. Maybe the HOA will go after him for the back HOA fee, late fees and collection fees. Hard to get blood from a stone. Likely, the HOA (paying members) will take it in the shorts.

    Excellent use of the 25% and 75%-tile chart to illustrate that the low end has already dropped and high end have a long way to go down. Is the second shoe about to drop in housing.

    The public doesn’t seem to understand that a high prices using mortages to prop-up the prices are bad for the economy, except for the bankers and those collection fees on the transactions. It miss directs the resources from real long-term job creatation and steals from the economic base. Fees are being collected for shuffling deeds and money. The borrow money will be paid off by the taxpayer or shareholders, cause the CEO’s, banksters and REA are not going to return their fees, bonuses and commis. I guess the taxman was also happy with those arrangement.

  13. Still Renting in IRV

    This is one of my favorite posts I have read, great jo IR!

    To further illustrate how unaffordable Irvine is, Let’s use an example that only to 5x home price to income ratio

    Let’s say someone makes 110k per year (just above FICA max). Thanks to Uncle Sam, the great state of California, and benefits, they are probably taking home ~65% of their gross income, let’s make it 6k per month.

    If they bought that home for 550k and put 20% down, their PITI would be in the neighborhood of 3k per month, 50% of take home pay.

    Add $600 per month for HOA, utilities (incl cable, internet and phones), lawncare,and $2400 is left over.

    Assume a family of four, $800 per month for food which allows for minimal eating out opportunities, $1600 remaining.

    Assume they have one car payment and 2 cars. Insurance, car payment, gas, tolls, license and registration, minor maintenance totals $1000 per month and left with $600

    That $600 would have to cover clothes, savings,other necessities, all entertainment (including vacations), programs/daycare/toys for the kids and it is easy to see they are not making ends meet and this doesn’t take into consideration major purchases (furniture, furnace etc.)

    In other words, that 550k house in not affordable for the family making 110k

    Also, there was a great article on today related to hidden costs of home ownership.

    IMO, Irvine median home prices SHOULD be in the ~4.0x median income range to reflect the premium OC provides

  14. jb

    Thanks for that link, BD. I just read her books a couple of months ago. I’m glad that Obama hired her!

  15. jed clampett

    i’ve been to elmira

    like , the most ongodly place i’ve ever seen ; something out of a stephen king novel except at daytime

    1 1/2 times income is pushing it

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