Beyond personal greed, house price inflation is bad

Houses are the one commodity everyone wants to go up in price. Far from being a benefit, house price inflation is a drag on economic growth.

Irvine Home Address … 14 CARTIER AISLE Irvine, CA 92620

Resale Home Price …… $350,000

In every possible way.

And oh, my dreams, it's never quite as it seems,

Never quite as it seems.

Cranberries — Dreams

For readers of this blog, the editorial that follows will not cover new ground. For the wider readership in California, what follows is pure sacrilege.

Bursting our bubble

Why do we continue to think that rising home prices are a good thing?

By Michael Kinsley — February 15, 2011

If President Obama could ask for one gift from the economy — one statistic that turns unexpectedly rosy — what would it be? If Americans in general could choose one change in their financial situation, what would they choose?

I suppose Obama would choose a decline in the unemployment rate. But a close second for Obama, and quite possibly first on the list of other Americans, would be a rebound in house prices. Although we all recognize now that real estate was a classic bubble, bubbles are wonderful fun. It's the burst that hurts. In the good old days — before 2007 — following the prices for which houses in your neighborhood were selling and then recalculating your own net worth was a national sport. Even the experts who correctly predicted a price decline or collapse generally delivered that prediction as bad news.

The first eighteen months of writing for this blog, I needed to do it anonymously for fear of repercussion for delivering my good news that house prices were going to go down.

The assumption is that ever-rising house prices are good, and that a decline in house prices is bad. Ordinarily we cheer when the price of an essential (product goes down, and complain when it goes up. Take oil, for example. We like it when the price of gasoline goes down and are unhappy when it goes up. But with homeownership, it's the other way around.

I wouldn't attempt to argue that the current mess of the real estate market — the irresponsible lending, the home loans underwater, the brutal foreclosures, the ramification for the economy in general — add up to a good thing. But before we start dreaming of a return to the days when ever-rising real estate prices were considered a constitutional right, let's think this through a bit. Why do we want home prices to go up?

I remember when I first started writing for the blog, some of the bulls accused me of talking down the market so i could profit from its demise. When I replied that I wanted prices to go down and stay down because it's better to spend less on housing, people responded to me as if I were insane.

The simple fact is people want higher house prices because they want the financial gain of owning an appreciating asset. Nothing more.

In very general terms (with plenty of exceptions and variations) the housing market affects three different groups. There are those trying to break in — generally young people searching for their first home. There are those in the middle, who want to trade up from a smaller house to a bigger one. And there are longtime homeowners, “empty nesters” who are approaching or already enjoying retirement and want to downsize or get out of the market completely.

How are each of these groups affected by rising house prices? The first group surely doesn't benefit. During the big housing bubble, stories about young couples watching helplessly as the American dream of homeownership passed out of their reach were a newspaper staple. As prices come down, more people can afford to buy a house. That's a good thing, isn't it?

I used to be surprised at how affordable housing advocates went silent when house prices started to go down. They should have been cheering, but I wonder if the loss of their cause or their livelihood prompted them to think high house prices aren't so bad after all. It does create a need for affordable housing advocates.

Then there are the people who want to trade one house for another. Mostly they are hoping to trade up — to a larger house for an expanding family, or a nicer neighborhood. These people are in the same situation as the first-time buyers. Obviously all house prices don't go up and down in unison. They are affected by neighborhood, by region of the country, and by changing fashions and tastes in home design. But on average the house you want to buy should have gone up or down in price by something like the same percentage as the house you want to sell. And if you're trading up, that means rising prices should hurt you just as they hurt the first-time home buyer.

The move up market is an illusion. Unless a homeowner gets a raise, saves prodigiously, or obtains a non-real estate windfall, there isn't any opportunity to move up. Gaining $100,000 in appreciation doesn't get a homeowner any closer to buying the move-up house that also went up $100,000 or more in value.

The only people who clearly benefit from rising home prices are those who are selling their last house or downsizing. This is the same group that benefited most from the previous run-up in prices — that is, typically, older people who have lived in the same house for years. Most of these people enjoyed the enormous past run-up in prices. In 1970, the median price of a house was $25,000. In 2006, at the top of the bubble, it was about $240,000. Even adjusted for inflation, that means home prices more than doubled during the period.

Do We Owe Baby Boomers Their Imagined Home Equity for Retirement? They seem to think so.

These homeowners are mostly not underwater. That is, the value of their houses is more than the remaining balance on their mortgages. In fact, they could still sell their houses at a profit even in the current market.

I don't think Mr. Kinsley realizes how many of these long-term homeowners spent their houses.

Whatever figure you may have stored in your head about the “value” of your house (removing this figure to polish and admire it when home prices are rising; leaving it to gather dust in some dresser drawer of your unconscious when they aren't), a house is worth only what someone will pay for it. That number has two components: one is the value of occupancy — that is, the privilege of living in the house, mowing the lawn, calling the plumber and so on. This should roughly equal what the house would rent for. The other component is the investment value — how much you think the price of the house will go up when you sell it.

Do you think he reads IHB? Rental parity was not a concept people wrote or talked about much prior to the housing bubble. He probably reads Dean Baker, an economist who writes frequently about rental parity and called the housing bubble.

Any investment value greater than zero (or zero plus inflation) is suspicious because it depends on the greater-fool theory.

Yes, that is a Ponzi scheme.

There is no physical reason why a house should become more valuable at all. It is not growing like a crop. It is not producing anything that you can turn around and sell, like a factory. It just sits there.

One of the many reasons our economy is suffering right now is because we diverted resources to housing that gained us nothing. If we had overbuilt factories, at least we could get some productive use from the factory. Houses are pure consumption. They produce nothing once built, except perhaps for the need for more stuff for the house.

It becomes more valuable because people believe that it will become more valuable. Worse, since the general assumption that it will become more valuable is already reflected in the price you paid, you need a buyer who believes that it will become more valuable even faster than the general consensus.

The larger issue in all this is the wisdom of encouraging homeownership — even if you don't get carried away with it as we did in 2007 to 2009, practically forcing mortgages on people at gunpoint. About two-thirds of Americans do live in homes that they own (along with the bank). There is no way all of them could cash out and collect that number in their heads — how much is their house worth? — even now that it's 30% or 40% lower than it was before. And it's hard to see why people should want that number to resume its relentless rise back up and beyond.

The fact that people are underwater is exactly why so many need and want house prices to go up.

Housing has been identified by an entire generation as a fountain of free money. Many people in California are going to consume hundreds of thousands of dollars more than they earned due to owning HELOC producing California real estate. It is so embedded in our culture that only a multi-decade housing recession would purge the kool aid. That won't happen as long as the kool aid intoxicated have anything to say about the matter.

A little too much Ponzi

The owner of today's featured property paid $207,500 back on 5/30/1990 near the peak of the previous housing bubble. He held on through the previous decline, and he only had a $158,400 first mortgage on 5/20/1999.

On 4/18/2003 he refinanced with a $276,000 first mortgage he is now delinquent on. On 2/25/2004 he borrows $120,000 from someone with the same surname. The shortfall on the delinquency on the first mortgage will come out of proceeds available to pay the second; therefore, this is a short sale.

Foreclosure Record

Recording Date: 10/08/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/07/2010

Document Type: Notice of Default

If this is a relative holding the second mortgage, the short sale process is as easy or as complicated as that mortgage holder makes it. They should be motivated to settle. The servicer on the first mortgage in default is adding about 1.5% to principal balance each month which eats into the second mortgage recovery.

Irvine Home Address … 14 CARTIER AISLE Irvine, CA 92620

Resale Home Price … $350,000

Home Purchase Price … $207,500

Home Purchase Date …. 5/30/1990

Net Gain (Loss) ………. $121,500

Percent Change ………. 58.6%

Annual Appreciation … 2.5%

Cost of Ownership


$350,000 ………. Asking Price

$12,250 ………. 3.5% Down FHA Financing

5.02% …………… Mortgage Interest Rate

$337,750 ………. 30-Year Mortgage

$72,636 ………. Income Requirement

$1,817 ………. Monthly Mortgage Payment

$303 ………. Property Tax

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

$58 ………. Homeowners Insurance

$140 ………. Homeowners Association Fees


$2,319 ………. Monthly Cash Outlays

-$300 ………. Tax Savings (% of Interest and Property Tax)

-$404 ………. Equity Hidden in Payment

$24 ………. Lost Income to Down Payment (net of taxes)

$44 ………. Maintenance and Replacement Reserves


$1,682 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$3,500 ………. Furnishing and Move In @1%

$3,500 ………. Closing Costs @1%

$3,378 ………… Interest Points @1% of Loan

$12,250 ………. Down Payment


$22,628 ………. Total Cash Costs

$25,700 ………… Emergency Cash Reserves


$48,328 ………. Total Savings Needed

Property Details for 14 CARTIER AISLE Irvine, CA 92620


Beds: 3

Baths: 2

Sq. Ft.: 1424


Lot Size: –

Property Type: Residential, Condominium

Style: One Level, Mediterranean

Year Built: 1989

Community: Northwood

County: Orange

MLS#: P769891

Source: SoCalMLS

Status: ActiveThis listing is for sale and the sellers are accepting offers.

On Redfin: 1 day


The Lowest price in Northwood Villa community! No Mello Roos! Conviniently located near Trabuco Grove shopping center, Heritage Library, and Heritage Park. Private small backyard with wood deck. Direct 1 car garage plus extra 1 deattached cover car garage that can be used as storage. Located in award winning Irvine Unified School District. Great location and investment potential.

Conviniently? deattached?

Thank you for reading the Irvine Housing Blog.

Astutely observing the housing market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

50 thoughts on “Beyond personal greed, house price inflation is bad

    1. AZDavidPhx

      And look at that bubbly median price in the included chart! Oh boy! Where do I sign up to buy?! I totally want to be a 30-year house debtor when the bottom falls out of that market!

  1. Jiji

    The only thing wrong with this is that most new businesses are financed with a home equity loan,

    Yes and this “IS” the major reason you will not likely see under 6% unemployment until the majority of home owners have equity again.

    1. IrvineRenter

      Of all the astute observers that come here, you are the most resigned to the idea that the housing Ponzi scheme must continue. You may be right, but I don’t think its a good idea to have the California economy continue to be completely dependent upon the cycle of the housing Ponzi scheme. Like you, I tend to believe the California economy will not fully recover until the next Ponzi scheme begins to inflate.

    2. AZDavidPhx

      If most new businesses are financed with HELOCS then they are probably bull$hit businesses to begin. I don’t want the Federal Government backing house debt so Irvine-Dick can start up his Dog-Wash Pet Resort. Sorry.

    3. rkp

      i think small biz owners use HELOCs to finance their businesses because its easy – not because its the only source. there are many other sources of capital and most require more work such as a biz plan so outside of additional work, small biz owners will still be able to finance their businesses.

      1. SanJoseRenter

        A business plan and $2 will get you a Starbuck’s coffee.

        You have no idea how hard it is to finance a small business these days.

        The options get really thin if personal savings, HELOC, friends and family, selling the house or using the house as collateral don’t work.

        SBA loans are significantly down, never mind regular bank loans.

        Most franchisers have increased their initial franchise fee by 30% since the recession started to weed out undercapitalized franchisees, and now require hands-on operators.

        The Armageddon in small business parallels that in real estate.

  2. Planet Reality

    The move up market is a farse only if you describe it as: “hey I bought a house in 5 years I will trade up”.

    The move up market is real if you describe it as: “hey I bought a house, over the past 10 years I’ve paid down $100K of the mortgage, my income is 50% higher, I also saved another $100K cash and my other investments appreciated, It doesn’t matter if my house went up or down in price.”

    That’s the real move up market, it can be less extreme: “hey I bought a house 5 years ago, paid down $30K of the mortgage, saved $40k extra cash for a new house and my income is 25% higher, oh yeah I also saw returns on my other investments”

    1. IrvineRenter

      As you noted in both of your examples, a move up requires more income and/or more savings. That isn’t how most Ponzis see it. Most believe you simply have to buy and own real estate and the equity from appreciation pays for the move up. It doesn’t work that way.

      1. Planet Reality

        The key is buying near rental parity. You are locked in and immune to any of the typical wild rent and price increases of southern California.

        Folks who want to play this trade up game in life are smart to hitch their wagon to prime Irvine. Eventually when they retire they can trade down to a much nicer rural area pay cash for the house and have an additional nest egg.

        1. doh

          It seems keeping this blog going just provides a daily forum to promote the Irvine area (and buying a house in general) for whichever real estate related company is behind the Planet Reality identity. I am sure said entity gets a chuckle out of this opportunity they have been provided. And I imagine they get more than a few converts too!

          1. Planet Reality

            Good lord, this is entertainment.

            It takes a 10 year olds education level and maybe 40 hours of self education to understand the real estate market.

            Spend less time with your emotions, and more time with a spreadsheet.

          2. Renter Irvine

            Yeah, I agree. Take his comments with a ton of salt, just like from any RE agent. Maybe he works in the PR department of the Irvine Company?

    2. wheresthebeef

      Here’s one for you PR:

      “Hey I bought a house 5 years ago, paid down 30K of my mortgage, unfortunately I am still 150K upsidedown.”

      Even if you were a saver and got decent wage increases there will be NO move up buying!

      1. Planet Reality

        You are correct, that move up market is dead in most areas.

        However in Irvine or a more prime area like manhattan beach it can look more like this:

        “hey I bought a house 5 years ago with a 30% cash down payment, now the market is down maybe 10 or 15% in my prime location. Thats not bad because the home I want to buy is also down close to that, also I have a great job, over the past 5 years I’ve saved $200,000 and I’ve made smart investments, my already high income increased 30%, maybe I’ll move a few blocks closer to the beach and surf more”

        Or FCB:

        “hey I have cash, I have lots of it, get out of my way, I do what I want”

        1. Planet Surreality

          Right now, at this very moment, it is like Christmas at THE IRVINE SPECTRUM! They’re not making any more land, you know, and foreign cash buyers are arriving in DROVES–you can see them all joyously frolicking at THE IRVINE SPECTRUM!

          The Seattle market falls, NYC market falls, Santa Monica falls, but IRVINE is the most special of special markets, because we have foreign cash buyers! And did you hear about our public school system? But most of all… the IRVINE SPECTRUM, where it’s like Christmas and other major holidays EVERY SINGLE DAY!

          1. Planet Reality

            :-). Most of the markets you mention are doing much better than Irvine. It’s like Festivus on Wall Street.

    3. AZDavidPhx

      It’s a good thing that you paid down 100K of that mortgage because the “r”ealtor fee is going to have to come from somewhere. Hopefully the thought of slaving away for years to pay a “r”ealtor to sell your house isn’t a problem for you.

      1. rkp

        5% raise per year – its not unattainable and happens frequently

        PR and others believe irvine is becoming a place for high wage earners who will continue to outpace the overall wage growth

        whether it is irvine specifically or not is up to debate but i think we can agree that upper middle class salaries were not hit by this recession. at least for my company, fortune 500 technology, we reduced the raises budget but still gave raises these last few years.

        1. Planet Reality

          Rkp, you know the old adage: misery loves company? I speak the truth, unfortunately some rather wallow in misery and avoid reality. 4-5% a year is not even that impressive, anyone not getting that should refine and update their skills. Take responsibility and make something happen for your future.

          1. Planet Surreality

            Of course! Everyone has read Dow 36,000 by now, and if you’re not earning 10-25% annually in the market then you’d better go back to business school pronto! Real estate in special places (TM) always goes up, the stock market always goes up, and anyone who hasn’t earned a raise this past year is just a dim-witted working stiff who hasn’t upgraded his skills. EVERY professional in ALL other fields–especially my Ph.D. engineer friends–has earned a significant raise for 20 straight years and counting.

            Without a doubt the multitudes celebrating like its Christmas EVERY DAY at the IRVINE SPECTRUM are doubling their income at least every ten years–probably every three. And if not, they’ll be replaced by the sparkling hordes of FOREIGN CASH BUYERS in no time!

    4. Watcingfromafar

      We bought our house in ’88, reasonably nice 3 ` 1/2 well built house in a good hood, adequate to raise our two kids in. We paid it off in about 12 years, and have lived rent free since (except for the property tax). The house is worth today maybe 2X what we paid for it, and had we sold at the peak it would have been worth maybe 3X.

      A couple of times since we retired the original mortgage we considered a move up. Both times, upon further review, we decided that there was no incremental benefit to the move up, certainly not enough to justify being strangled again by a mortgage. Freedom from a mortgage (or rent payments) allows a trememdous degree of “emotional freedom”.

      Of course, our house doesn’t impress the relatives and friends like a McM would, but I can live with that.

    5. RealisticOptimist

      I agree that there is a move up market like you described, but the point is that most people don’t view it like that.

      Most people were buying bigger houses by essentially flipping their original house. I never understood it…like this blog points out, If prices jump 25%, the “move-up” house jumped by more dollars.

      Say you own a 200k house and want a 300k house. If both double in price, now your house is 400k and the other house is 600k. Sure, you doubled your money, but now instead of a 100k jump, you are jumping 200k.

      I never understood how people didn’t get this. I’d listen to people talking about selling their house because it’s twice what they paid for it, and how much money they made…but so was every other house out there! All they saw was the profit they made…totally failed to acknowledge the increased cost of the next purchase.

      1. samuroo

        For us it was simple. We could afford the payments on the bigger house, but didn’t have the down payment. So we bought smaller in 1999, it appreciated, sold it in 2002 and used the gain for a down on the bigger house which we could comfortably afford.

        1. RealisticOptimist

          That makes sense. I would imagine it’s not a common scenario to be able to afford a more expensive house and just not have the down payment.

  3. Mark

    I live in an area where as many as 4 of my adjacent neighbors have disclosed that they have wanted to sell, and still want to sell, but are saying they are waiting until the housing prices rebound again before they do so. Many are of retirement age, so they probably want to move down, not up. All these distressed properties and foreclosures are one very interesting part of the meltdown equation, but I’m surprised to learn that there are quite a few “discretional sellers” who have a proverbial parking clamp on their future plans right now. I’m not sure I agree with the wisdom of waiting more because the DOM no. are very high and there’s downward price pressure even in nicer areas of south OC.
    Either way, it’s disappointing that many older couples in OC wanting to move on (or down) and younger families wanting to move up have both been frozen by uncertainty.

    1. Marc

      I don’t think they are frozen by uncertainty but the refusal of the older generation to accept that fact that the run up in house prices over the years was unsustainable.

      1. Mark

        I agree with you. When I say they are waiting for housing prices to rebound, they want to sell their home for $700,000 or $800,000. Comps in my area (South OC, Lake Forest) are already well below that.
        They’re disgusted, which tells us something else about the feeling of entitlement. They bought the home when it was built for around $200K to $300K. Very interesting emotions surrounding all of this.

        1. blaird

          These old farts do realize that while their home has fallen 40% in value, chances are the home they are going to move to (in AZ, NV or some other retirement mecca) has fallen 60%. They are actually better off now than they were at the peak. Even if they stay in this area they are not that much worse off. As long as they didn’t spend their equity…….

  4. Pwned

    Added to the wasted capital of people investing 100s of thousands into stucco boxes that don’t produce anything is the money sitting in crap interest savings accounts that people on the sidelines are holding onto. This whole mess is keeping billions in capital out of useful, productive sectors. All to enrich a few thousand wall street bankers.

    1. IrvineRenter

      Recording Date: 07/02/2008
      Document Type: Notice of Default

      The notice of default was recorded in July of 2008 which means they haven’t been making a payment since April 2008 at the latest. In all likelihood, the bank allowed them to be delinquent more than three months before issuing the NOD, so it is quite possible they have not made a payment in 4 years. They also managed to extract $150,000 in free money plus their $75,000 down payment on their 2003 purchase.

      Do you think they bothered to save any money going 4 years without a payment? After pissing away $225,000 in loan booty, I rather doubt it.

      1. LarryB

        Dumb question, but why wouldn’t a bank foreclose after all this time? What is the advantage to the bank to have her live there?

        1. SanJoseRenter

          > why wouldn’t a bank foreclose after all this time?

          2 reasons:

          1) booking the loss would erodes the bank’s capital reserve. Virtually no US bank could survive with mark-to-market accounting, suspended by regulators. Instead there is mark-to-fantasy.

          2) the banks get 0% interest from the Fed, so it costs them less to allow squatting than assuming responsibility for maintaining the house.

    2. AZDavidPhx

      Hopefully she did something to lose the non-recourse protection of her loan. Won’t be much reason to boast when the IRS sets in on her.

      1. Perspective

        As long as the debt is discharged before 12/31/2012, neither the IRS nor FTB will consider the debt forgiven as income (assuming it was an owner-occupied residence).

      2. rkp

        i think its *IF* the IRS sets in on her….with so many people going through short sales and skipping out on recourse loans, i am sure the govt will change the rules.

  5. Marc

    I have a question: when selling my house, can I list it on MLS myself and get a lawyer for the sale/contract process instead of an agent? I know I can list it on MLS but is it feasible to replace the agent with a lawyer? This way I could save the 2.5% for the listing agent since I am willing to list and show the house myself. Are there lawyers that specialize in RE sales and how much would they charge. Let’s assume I can sell my house for $600k so the commission I could save is $15k. Let’s assume the lawyer charges $250/hr for the standard sale, and it takes him maybe 20 hours so I could save $10k without taking any additional risks?

    1. Mark

      I think you can do it. I investigated this initiatlly, but went the route of working with a realtor (I was buying).

      The trick will be finding an attorney who knows what the hell they are doing because the California Real Estate Industrial Complex are all assassins of trees. Seriously, I’ve never observed so much ridiculous paperwork in all my life and for what? Just to buy a house? Where does this disdain for trees come from! If only Ents from the Lord of the Rings movies were real, they’d kick every California realtor in the ass. I worked with a Realtor to buy my house in OC. He was very good and the transaction went smoothly. But to save some bucks, I guess you could go the attorney route.

    2. Shevy

      Hi Marc; There are a number of options available. Most importantly the fee is always negotiable. Please contact us if you would like to meet and discuss different options.

  6. Vincenzo

    >Ordinarily we cheer when the price of an essential (product goes down, and complain when it goes up. Take oil, for example. We like it when the price of gasoline goes down and are unhappy when it goes up. But with homeownership, it’s the other way around.

    Sometimes, expensive gasoline is a good thing. People stop driving for no reason, and highways become empty.

    The same thing with houses. Since 2000, house prices in Irvine have doubled or tripled. Medium income people cannot buy in Irvine; so, there are more jobs in the area.

    But eventually, companies will relocate to cheaper states where they it’ll be easy to find workers. It’s a good thing, too. You’ll be able to relocate with the company to a place where you’ll find a nice house for $100,000 or less.

  7. PeonInChief

    It may comfort you to believe that “affordable housing advocates” didn’t want house prices to fall, but that’s not true. The collapse in housing prices simply had little impact on the majority of those who need government-sponsored affordable housing. It was irrelevant. Before the bubble housing prices were too high for the poorest 30% of the population, and that will not change after the bubble.

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