Gated community in the heart of Placentia 'Old Town'. This tri-level home boasts 3 bedrooms 3.5 baths featuring a downstairs bedroom with full bath. Large living room and balcony adjacent to dining room. Office over looks spacious living area. Only one common wall.
Owner is planning a full renovation, so there is potential to customize this into your dream home.
Will be listed at $349,000 but is available now for a limited time at $329,900.
If you have questions regarding this property, please contact Shevy:
In another remarkably foolish proposal to pander to loan owners, Representative Marcy Kaptur of Ohio proposes a freeze on foreclosures to give squatters more free housing.
Most politicians live to pander. Tax dollars are viewed as an ATM machine they can go to whenever they want to buy enough votes to get re-elected. Pork-barrel politics is a way of life in Washington.
An Ohio member of Congress has proposed a resolution that would enact a temporary freeze on foreclosures across the U.S. similar to the Great Depression. The proposal would enact a moratorium on all residential foreclosures.
Rep. Marcy Kaptur (D-OH) offered the resolution before the House Financial Services Committee. The proposal asks President Barack Obama to declare a “national residential mortgage foreclosure emergency,” and also urges state lawmakers to use their “police powers” to enact moratoriums on foreclosures.
This is the dumbest idea I have heard in quite a while. It's obvious this congressional representative has given no thought to the ramifications of what she is proposing.
First, there is no emergency. Foreclosures are the cure, not the disease. This is like telling a patient suffering from acute appendicitis that they shouldn't get an appendectomy. The debt burdenening the population is the real problem. Housing debt is extinguished in foreclosure.
Second, if this were enacted, wouldn't everyone on the fringe strategically default? Anyone struggling with their payments would know they can't be foreclosed on and evicted, so why would they continue to struggle? Further, wouldn't this be grossly unfair to everyone who does make their payments? Why would anyone keep making their payments when they could live in the house for free?
Stupid ideas like these come from a complete misunderstanding of the problem and how housing finance works. If the borrowers who can't live up to their financial obligations do not experience the negative consequences of their actions, then no borrower will exercise any judgment prior to taking free money.
No private lender would loan money if they don't have any assurance they will get repaid or otherwise get to foreclose and obtain their loan capital. If the government were to continue underwriting and insuring these loans, everyone will eventually be living in free government housing. The process would be to apply for a loan, get the property, then stop making payments and live there for nothing. Perhaps some fools would continue to pay, but with no possibility of foreclosure, why would anyone pay?
The final and most pernicious effect of a foreclosure moratorium is to extend the duration of the economic downturn. Freezing foreclosures does nothing but buy time for those on foreclosure's death row, keep capital tied up in non-performing assets, and prolong everyone's misery.
The resolution sites a variety of issues troubling the housing market stating, “Whereas the United States finds its housing market in a precarious and unstable state, where homeowners' mortgage balances are routinely larger than the current value of their homes and where people are losing their homes at an alarming rate.
People who owe more than the house is worth don't own anything. Further, new families find the homes lost in foreclosure. The house isn't misplaced, it simply passes from someone who can't afford the debt service to someone who can. A foreclosure moratorium is a slap in the face to everyone who is waiting to buy one of these homes. Existing loan owners are being favored over the next generation of buyers for no good reason.
“The President of the United States should declare a national residential mortgage foreclosure emergency and, through such declaration, encourage the States, by use of their police power, to enact a moratorium on residential mortgage foreclosures similar to the moratorium enacted by the State of Minnesota in 1933 and upheld by the Supreme Court.”
The Minnesota Mortgage Moratorium Act of 1933 was controversial when it was upheld by the Supreme Court because the state was interfering with private contracts under the guise of an emergency. There is no emergency here, other than Ms. Kaptur's desire to pander to loan owners.
Kaptur represents Ohio, which has been devastated by the foreclosure crisis and is one of 18 states designated for the federal government’s Hardest Hit Fund targeted to help mostly unemployed homeowners at risk of losing their homes to foreclosure. Rising unemployment in the region is triggering a massive second wave of foreclosures in many areas of the state, including hard hit Cleveland.
A foreclosure freeze would give lenders’ and homeowners time to work out a solution on millions of home mortgages that are forecast to be foreclosed in the next five years.
What solution is there to work out? Haven't lenders and borrowers had over four years of wrestling with this problem? In reality, there is only one solution that will allow borrowers to keep their homes: BORROWERS NEED TO MAKE LOAN PAYMENTS. It isn't very complicated when you think about it.
The problem is that borrowers want to keep their houses without making loan payments, and that option isn't in their contract. They can quit making payments and leave the house at any time. That option is in their contract. They can try to work out a loan modification, but that is not an entitlement, and lenders don't like to unilaterally change the contract in favor of the borrower.
Not everyone agrees with Ms. Kaptur, fortunately. Back in March of 2009, I asked the question are foreclosures a Crisis or Cure?
Some people should never have been given the loans they had; they can't afford the properties they occupy. Today's featured property is beyond the means of its owners, so it is going into foreclosure. Is this foreclosure a crisis? or is is the cure to their debt problems? …
As a society, we need to stop viewing this as a “foreclosure crisis.” There is no foreclosure crisis; there is a debt disease, and foreclosure is the cure.
NEW YORK (TheStreet) — Former Federal Deposit Insurance Corp. Chairman Sheila Bair made some excellent points in her Washington Post Op-ed piece Monday but overlooked one important point: The U.S. needs to double down on foreclosures.
To the former regulator, forgiveness is the answer. Bair said that the banks had showed a “stubborn refusal to deal head-on with past-due and underwater mortgages,” and that it was “time for banks and investors to write off uncollectible home equity loans and negotiate new terms with distressed mortgage borrowers that reflect today's lower property values.”
True enough.
No, it's not true enough. Investors do need to write off their uncollectible second mortgages, that much is true, but lenders have no obligation to renegotiate terms with delinquent mortgage squatters to give them principal forgiveness. That would merely lead to more irresponsible borrowing.
But why should the banks automatically write off any second-mortgage or home equity line of credit that goes delinquent? If word were to get out, any borrower who was actually in a position to comfortably make their first mortgage payment, plus a payment on a second mortgage, would seriously consider a “strategic default.” They wouldn't lose their homes under Bair's plan.
Bair does place some blame on consumers, saying that leading into the credit crunch, “it became old-fashioned to save up for the down payment on that first home,” and that “taking out a mortgage shifted from the most serious financial decision a family would make to a speculative bet on how far home prices would rise.“
No, ramping up writedowns isn't the only answer. Want to save the banking system and restart the housing market. Why not also step up foreclosures?
Now we get to the ugly Truth: The mortgage mods and foreclosure abatement programs are really all about propping up insolvent banking institutions on the taxpayer dollar and at the expense of the middle class. These programs are another losing round of helping Wall Street at the expense of Main Street. It is the worst kind of trickle down economics.
Herbert Spencer wrote, “The ultimate result of shielding men from the effects of folly is to fill the world with fools.” We have done precisely that.
An Option ARM success story?
The Option ARM was the most toxic loan program ever developed, but a few people actually made this loan work for them. Today's featured property owners are the first I have ever seen who used this loan responsibly.
This property was bought on 10/1/2001 for $158,000. The owners used a $150,000 first mortgage and a $8,000 down payment. On 7/15/2003 they refinanced with an option ARM for $151,000, and they never refinanced after that. They did obtain a HELOC for $35,000 on 12/22/2010, but there is no evidence they used it.
With the insanity going on around them, these people used and Option ARM responsibly and apparently paid down their mortgage. Despite the housing crash, they are obtaining a small profit on the sale, and their credit will remain solid.
I wonder if they regret not taking the free money when they could have obtained a $400,000 loan on this property back in 2006? I hope they don't.
Spacious condo with ceramic tile floors. Mirrored closet doors in master bdrm, vaulted ceiling in living & dining rooms. Private balcony overlooking water streams and beautiful landscape. Excellent Schools SANTIAGO ELEMENTARY & NORTHWOOD HIGH SCHOOL. Walk to shops, banks, UPS store, restaurants and groceries. Extremely accessible location, close to schools, freeways, and parks. HOA dues include water, trash, insurance. Great community amenities include pool, spa & tennis courts and more. NOT A REO OR SHORT SALE.
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Proprietary IHB commentary and analysis
With 4.5% interest rates, this condo is probably more affordable today than it was in 2001 when incomes were lower and interest rates were higher. At $1,467 per month cost of ownership, it is at or below rental parity for someone wanting to live in an 857 SF 2/1 condo. These units should trade for prices below rental parity. This family has lived there for 10 years. That's a long time for such a small space.
Resale Home Price …… $215,000
House Purchase Price … $158,500
House Purchase Date …. 10/1/2001
Net Gain (Loss) ………. $43,600
Percent Change ………. 27.5%
Annual Appreciation … 3.1%
Cost of Home Ownership
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$215,000 ………. Asking Price
$7,525 ………. 3.5% Down FHA Financing
4.59% …………… Mortgage Interest Rate
$207,475 ………. 30-Year Mortgage
$45,530 ………. Income Requirement
$1,062 ………. Monthly Mortgage Payment
$186 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$45 ………. Homeowners Insurance (@ 0.25%)
$239 ………. Private Mortgage Insurance
$242 ………. Homeowners Association Fees
============================================
$1,774 ………. Monthly Cash Outlays
-$98 ………. Tax Savings (% of Interest and Property Tax)
-$269 ………. Equity Hidden in Payment (Amortization)
$13 ………. Lost Income to Down Payment (net of taxes)
I could almost kiss the stars, for shining so bright!
Hey now
Hey now
This is what dreams are made of
Hilary Duff — What Dreams Are Made Of
Since I began writing for the IHB, I have believed part of my task has been to dispel the myths surrounding California real estate. During the real estate bubble people came to believe houses had mystical powers. The kool aid intoxication was very strong because so many people obtained so much free money from incredibly stupid lenders. As the housing bubble continues to deflate, people are finally starting to let go of their most cherished housing myths, but they don't give up easily.
Today's young people would be foolish to imitate their parents and view ownership as the cornerstone of personal finance.
By ROBERT BRIDGES — July 11, 2011
At the risk of heaping more misery on the struggling residential property market, an analysis of home-price and ownership data for the last 30 years in California—the Golden State with notoriously golden property prices—indicates that the average single family house has never been a particularly stellar investment.
In a society increasingly concerned with providing for retirement security and housing affordability, this finding has large implications. It means that we have put excessive emphasis on owner-occupied housing for social objectives, mistakenly relied on homebuilding for economic stimulus, and fostered misconceptions about homeownership and financial independence. We've diverted capital from more productive investments and misallocated scarce public resources.
Yes, that is exactly what we have done. We developed an economy inexorably linked to rising house prices. We encouraged everyone to take on copious amounts of debt to acquire real estate under the false pretense of nearly unlimited free spending money simply for signing some loan documents. This false perception about the true value of real estate caused an enormous price increase which in turn gave a false signal to homebuilders that we needed thousands of McMansions in areas where people had to commute an hour or more to their jobs. The response to the fake demand caused resources to be diverted away from productive uses and into non-productive single-family homes. These wasted resources are gathering dust in empty homes all over California.
Between 1980 and 2010, the value of a median-price, single-family house in California rose by an average of 3.6% per year—to $296,820 from $99,550, according to data from the California Association of Realtors, Freddie Mac and the U.S. Census. Even if that house was sold at the most recent market peak in 2007, the average annual price growth was just 6.61%.
So a dollar used to purchase a median-price, single-family California home in 1980 would have grown to $5.63 in 2007, and to $2.98 in 2010. The same dollar invested in the Dow Jones Industrial Index would have been worth $14.41 in 2007, and $11.49 in 2010.
This example is not fair for a couple of reasons. First, it assumes an all-cash comparison. Leverage on real estate is generally 80%, and during the housing bubble it was 100%. The best leverage in stocks is merely 50%. When prices rise, the leverage makes the returns much larger. Of course, when prices fall, the leverage wipes people out. Also, people generally can't get cash from a stock investment without liquidation. With houses, people were given access to their unrealized gains through cash-out refinancing. Those two advantages made real estate much more attractive when prices were rising and leverage was cheap.
Here's another way of looking at the situation. If a disciplined investor who might have considered purchasing that median-price house in 1980 had opted instead to invest the 20% down payment of $19,910 and the normal homeownership expenses (above the cost of renting) over the years in the Dow Jones Industrial Index, the value of his portfolio in 2010 would have been $1,800,016. The stocks would have been worth more than the house by $1,503,196. If the analysis is based on 2007, the stock portfolio would have been worth $2,186,120, exceeding the house value by $1,625,850.
In light of this lackluster investment performance, and in the aftermath of the recent housing-market collapse, why is there such rapt attention to the revival of the homebuilding industry and residential property markets? The answer is that for policy makers whose survival depends on economic recovery, few activities have such direct, intense and immediate positive economic impact as new home construction.
California's economy is overly dependent upon homebuilding. With 38% unemployment locally, it shouldn't be surprising that the economy is sputtering.
These positive effects are transitory, however, when local economies have insufficient permanent employment to justify a constant level of demand for new housing stock. Existing housing does little to create new employment beyond limited levels of service employment. By contrast, a business investment in the amount of the several hundred thousand dollars represented in the value of a house would likely create many permanent jobs and produce income, profits and competition. As with most things, the benefits of building new homes come with a sobering caveat: What becomes of the work force once the party is over?
This is the question California has been consistently unwilling to face. Houses produce nothing. They are not factories producing widgets saleable to other parts of the world. Houses are pure consumption, and as the Romans showed us, a society based on consumption is ultimately doomed.
Home values may gain value over time, but home equity is locked-in until the house is sold.
It should be, but this author obviously hasn't been reading the IHB. The liberation and spending of home equity is a staple of the California economy.
The profits may then be reinvested or spent, creating significant stimulative effects, but usually this happens when market conditions are strong, exacerbating unsustainable market booms. When troubled assets are dumped, or when defaults occur during weak market conditions, the trough is deepened.
Housing markets may be forever doomed to cyclicality for many reasons, but public policies that stimulate new construction or home purchases by tax and financing subsidies, reduction of qualifying incomes, buyer credits, mortgage backstopping, and preferential zoning and permitting, only intensify these cycles.
These policies are also an admission of California's dependence upon artificial stimulus and Ponzi borrowing.
Efforts to reduce loan balances and to create special rescue programs have reduced the security of loans, challenged the enforceability of contracts, and driven up real borrowing costs.
Actually, no. Loan modifications and other government meddling in the private contracts between lender and borrower should have those impacts, but since the entire mortgage market is government backed, we have not seen these inevitable problems yet. We will. Wait until the conforming limit drops and jumbo financing becomes the only game in town.
Nearly a third of our states do not allow lenders the recourse provisions necessary to go after a borrower's personal assets in case of default on a residential mortgage. The sanctity of mortgage obligations has become the rough moral equivalent of the 55-mile-per-hour speed limit.
There is also a misconception that paying off a home mortgage is a path to financial or retirement security. The reality is that tapping the equity is expensive: Home-equity loans or lines of credit made with low qualifying incomes often command high interest rates and costs. If an emergency occurs—the loss of a job, or a business setback—it's likely that the same conditions creating the problem will lower the value and impede the marketability of the home and curtail the availability of financing for a buyer. Funds set aside for emergencies should always be liquid assets.
In this instance, the professor has drawn a bad conclusion from the need for liquid assets. Yes, people should have liquid assets and reserves for emergencies — unless they are borrowing with an FHA loan when they will be given a year of squatting — however, once sufficient reserves are in place, nothing provides peace of mind more than having a house paid in full.
Is it wise for coming generations to continue to view ownership as the cornerstone of personal finance? Young people planning for retirement increasingly face a choice between house payments and contributions to retirement accounts. They simply can't afford both. With the specter of looming cuts in Social Security and other entitlement programs, or even possible systemic insolvency, the challenge for tomorrow's retirees is income self-sufficiency.
It is always unwise to put all your eggs in one basket. During the bubble everyone put as much money as possible toward buying real estate. Think about it, with prices back at 2003 levels, anyone who bought in the last eight years is likely underwater. If that is their cornerstone of personal finance, the foundation is crumbling. They're screwed.
A nation of house buyers becomes captive to the economic cyclicality caused by bursts of construction activity, and it is not lifted or sustained by the limited levels of service employment related to existing housing. By contrast, a nation of business startups and investors supports our capital markets and creates long-term employment, income, exports and the myriad technological advancements desperately needed by an expanding American society.
New home construction and the markets for existing homes should be recognized as activities secondary to, and dependent on, employment. Healthy job markets create healthy property markets, not the reverse.
I have been making the same case for months. The economy will not improve by building more homes. It will take job growth and stimulus from outside of homebuilding and real estate to ignite the real estate market. Homebuilding and real estate sales follow an economic expansion, they do not lead it.
Housing demand driven by job growth creates conditions capable of sustaining a stable level of construction employment, attracting private equity investment, sustaining competitive private debt markets, encouraging capital growth, and ensuring the lowest possible housing prices.
Owner-occupied homes will always be the basis for healthy and stable neighborhoods. But coming generations need to realize that while houses are possessions and part of a good life, they are not always good investments on the road to financial independence.
Mr. Bridges is professor of clinical finance and business economics at the University of Southern California's Marshall School of Business.
I have my doubts Californians will ever give up their dreams about real estate riches. The lure of free money is too strong. Who wouldn't want to quit their job and just own a nice house that provides all their needs? It beats working for a living.
Happiness through regular cash infusions
It may take a decade or more, but the lifestyle choice to borrow and spend home equity must come to an end. The housing ATM has been turned off for almost six years now, but the memory of that life remains sitting dormant waiting for another housing bubble to germinate and take root.
The owner of todays featured property paid $258,000 on 10/17/2002, which makes this a 2002 rollback. We now stand at nine years of zero appreciation. She used a $232,200 first mortgage and a $25,800 down payment.
On 5/27/2004 she refinanced with a $238,000 first mortgage.
On 1/6/2005 she refinanced with a $276,000 first mortgage.
On 2/7/2006 she refinanced with a $296,000 Option ARM with a 1.25% teaser rate and obtained a $40,000 HELOC.
Total mortgage debt is $336,000.
Total mortgage equity withdrawal is a paltry $103,800, a lightweight by Irvine standards.
This form of HELOC abuse is characteristic of someone who irresponsibly ran up credit card bills each year living beyond her means then went to the housing ATM to pay it off. The yearly refinances reflect a serious degree of HELOC addiction.
THE METROPOLITAN IS THE PIONEER OF EXECUTIVE LUXURY CONDOS IN IRVINE. GREAT Location! Min. to Fwys, OC Airport, Shopping and Beaches! Marble Tile Floors in Kitchen, Entry Way and Bathroom. Off-White Textured Carpet, White Moldings & Doors all Neutral Colors.
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Proprietary IHB commentary and analysis
The Metropolitan was the bleeding edge of luxury condos in Irvine. Just like the condos built during the bubble, they were the wrong product built in the wrong place at the wrong time.
Resale Home Price …… $239,900
House Purchase Price … $258,000
House Purchase Date …. 10/17/2002
Net Gain (Loss) ………. ($32,494)
Percent Change ………. -12.6%
Annual Appreciation … -0.8%
Cost of Home Ownership
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$239,900 ………. Asking Price
$8,396 ………. 3.5% Down FHA Financing
4.59% …………… Mortgage Interest Rate
$231,504 ………. 30-Year Mortgage
$50,803 ………. Income Requirement
$1,185 ………. Monthly Mortgage Payment
$208 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$50 ………. Homeowners Insurance (@ 0.25%)
$266 ………. Private Mortgage Insurance
$392 ………. Homeowners Association Fees
============================================
$2,102 ………. Monthly Cash Outlays
-$109 ………. Tax Savings (% of Interest and Property Tax)
-$300 ………. Equity Hidden in Payment (Amortization)
$14 ………. Lost Income to Down Payment (net of taxes)
How much value is added by more size, an additional bedroom, or the newness of the house? Today we take a detailed look at the components of a typical Irvine house and reveal what the market is saying about value.
Over the last two posts on the Irvine Housing Market, we have looked at aggregate totals for Irvine and at individual neighborhoods. The nitty-gritty is in the details. What features in homes do buyers value in the market? Today we take a careful look at the devil in the details.
Global Decision is an analytics consulting firm. While our methods are not industry-specific, our engagements are skewed towards specific industries in Southern California, such as real estate (along with online gaming and restaurant chains). We specialize in applying both foundational and advanced analytics to better understand business and economic issues.
Today’s post is part three of our series on hedonic housing valuation in Irvine. The goal of a hedonic housing valuation model is to use all information about a sale, including both the sale price and the characteristics of the home (number of beds, number of baths, square footage, etc.) to understand how the home’s value is derived from its constituent parts. Wikipedia offers a good overview of hedonic regression or see the Global Decision tutorial on how to build your own hedonic regression model.
What factors are used in Hedonic Housing Models?
The choice of which factors to include in a hedonic housing model, or any regression model for that matter, are often driven by (1) availability of data and (2) general insight from the model builder or wisdom of the team. In our case, a background review of other hedonic models along with generally accepted intuition drove the initial set of factors. For some example results, please see http://www.hnb.hr/publikac/istrazivanja/w-019.pdf. The .pdf link is a well-written and thoughtful hedonic model created by the National Bank of Croatia to better understand home price trends in that country. On page 22 of this English-language document, the authors list the factors that fed into their model (which focused more on attached housing, the most prevalent dwelling type in European cities). For the city of Zagreb, they have many of the same factors as we have for Irvine: floor area, number of rooms, garage, neighborhood, and a few specific to them such as type of heating, presence of an elevator, and other items that generally add value in urban attached housing units.
What factors are using in the Irvine Hedonic Housing Model?
In Irvine, it turns out that most of the variation in home values is captured in a small number of factors. For our model, we us the following list:
Bedrooms
Bathrooms
Lotsize
Square footage of house
Number of garage spots
Number of stories
Age of structure
Neighborhood
(Year-Quarter)
What about the quote that you can make an elephant’s trunk wiggle with 5 factors?
Overfitting of a model occurs when you use so many factors that you are losing the general meaning of each factor and instead creating a level of fit that is very specific to the data you are analyzing. There is always a danger of overfitting when using small datasets with lots of factors. Because our model has over 7,000 data points, using 8 factors plus time is not likely to produce overfitting.
One useful output of the Irvine Hedonic Housing Model is that we can understand how the factors associated with a property drive market value. We looked at the “neighborhood” factor in detail in the previous post, and today we explore results from the other factors.
Good models often confirm the intuitive: all else equal, we’d expect a one-story property to command a premium and a 3-car garage is a plus for most buyers. The numbers reflect these facts. A one-story property commands a premium of 4.3%, and a three-story property creates a reduction in value of 3.8%. While the direction of these impacts is intuitive, the model helps us understand the best estimate for the magnitude of such impacts.
Add a bedroom:
The impact of just “adding a bedroom” is often near zero. To understand this result, first recall that the result is really the impact of “adding a bedroom where all else is held constant.” So a Woodbridge, 2-story, 1977, 3-bed/2-bath, 1800 sq ft home becomes a Woodbridge, 2-story, 1977, 4-bed/2-bath 1800 sq ft home. Yes, you’ve added a bedroom – but you’ve really stolen the space from other rooms because the total square footage of the home is held constant. For this reason, it’s not uncommon that hedonic housing models actually produce a slight negative impact from just the addition of a bedroom. Most homes are constructed so that the addition of a bedroom is coupled with the addition of square footage – leading to an overall gain in value given both impacts.
Add a bathroom:
Irvine buyers love bathrooms. Each one adds almost 4% to the value of the property. So if that’s the case, why don’t we see 3-bed/6-bath properties? The Irvine Hedonic Housing Model fits a relationship between property attributes and value based on the data fed into the model. The vast majority of homes in our dataset have between 2.0 and 4.0 bathrooms. Thus, the specific relationship indicated by the model is generally valid in that range.
Three Car Garage:
A three car garage adds 5.3% to the value of a property, relative to having the baseline 2-car garage. One can debate the impact of a 3-car garage on the aesthetics of a SFR, but it’s beyond question that the market value of a home is increased with such an attribute. As an aside, the standard error of that particular measure is just 0.3% — meaning that it’s very probable that the 5.3% estimate is close to the true incremental value of the 3-car garage.
Age of Structure:
All else equal, adding a year to the age of the structure creates a small reduction in value (0.6%). Over many years, however, this creates a large premium for newer properties. There are many possible reasons for this situation: newer properties have lower repair and maintenance costs; they are built from superior materials (no lead/asbestos); they have more functionality (electrical outlets on every wall); and they are more energy efficient; and they meet modern design aesthetics.
Size (Square foot of home and lot):
To model the impact of a larger home or lot we need to take a slightly different approach. Empirical evidence strongly suggests that each square foot of home size adds a fixed amount of dollars. As an example, consider the following chart from last week’s post:
You can see the generally linear relationship between the square footage of a property and the sales price.
In order to model this in our model (which predicts the % change in values) we have to change our thinking. Instead of looking at adding an extra 100 sq. ft. of size, we need to think exponentially. Our model looks at adding x% of size to the house. By doing so, we end up with a value flow-through ratio. We define this flow-through ratio as the ratio of increase in size to the increase in property value. In our case, we have a flow-through ratio of 44% for square footage and 11% for lotsize. If we double the size of the square footage, we generate a 44% increase in property value. Similarly, for lot size, if we double the size of the lot, we generate an 11% increase in property value.
Because “doubling” of either lotsize or property square footage is not often a reasonable design choice, we prefer to couch our metrics in terms of “adding 10% to” the relevant factor. An increase of 44% for doubling of size works out to an increase of 3.7% for each 10% increase in size.
Have Irvine buyers changed preferences over time?
An interesting discussion regarding the Irvine housing market often involves much speculation about the buyers themselves. Between the years of 2000 and 2011, much has varied about how buyers have financed their homes, the types of homes purchased (newer vs. older), and even the size of the homes. We can also look at how the results of the Irvine Hedonic Housing Model vary over time by constructing separate models for various time ranges. To investigate this issue, we’ve created four models that break the 2000-2011 timeframe down into 2000-2003, 2004-2006, 2007-2008, and 2009-2011. We’ve determined the “value add” for the factors listed above for each timeframe the show the results below:
One conclusion from the above chart is that Irvine buyers have consistently assigned similar values to the underlying factors of the properties purchased. With the exception of an extreme spike in the value-add for a 2007-2008 “one story” property, the other value-adds are relatively constant over time. This is a surprising result: we know that property financing was dramatically different in pre-bubble and post-bubble periods.
There is also much talk about the “foreign cash buyers” (FCBs) and other buyer prototypes that impact the Irvine housing market. We can now rest assured that these shadowy figures assign the same general valuation to the features of the property as John and Jane Q Public who are out shopping for a home. Another possibility is that the ratio of buyer prototypes active in the market has remained constant over the 11 year period of study. Perhaps the FCB has consistently purchased the same percentage of Irvine housing stock over time. Further study of loan data by property is needed to confirm or reject theories regarding composition of the buyer pool.
The one variable that appears to be trending down in impact is age: the fact that homes are older appears to be of less concern to 2009-2011 buyers (vs. 2000-2003 buyers). This is, in part, explained by the fact that Irvine experienced a number of new neighborhoods from 2000 to 2011. Back in 2000, there was little “new” housing in Irvine – almost all sales were between 15 and 32 years old. In 2010, there was a sizable cluster of homes between 4 and 15 years old and a cluster of homes between 22-26 years old, and then homes 30-40 years old. This distribution reflects the boom-and-bust history of Irvine home values. When values are dropping (see 1991-1996), demand is low and few homes are built. As the vintage Irvine neighborhoods get older, the average degradation in value (per year) is reduced.
IrvineRenter's Commentary
Having worked for homebuilders most of my career, I was intrigued by the data on home features (below).
Builders have long known there is a penalty for only having one bathroom. Originally, one bathroom homes were created for cost: bathrooms are expensive. However, over time, it became apparent that buyers were willing to put dollars toward bathrooms, so builders seldom fall below the standard of two bathrooms per home. For a time, builders experimented with larger and larger bathrooms and more of them. There seemed to be no limit to the buyer's appetite for bathrooms. Have you noticed how master bathrooms are almost as large as the bedroom itself? This is no mistake. Buyers are demanding this space.
Builders have also wrestled with the provision of a third story to add square footage to houses with very small ground floor footprints. Buyers don't like them. The third floor is generally limited to 500SF for code reasons, so when builders add this space, they can only add 500SF. Since they also diminish the value of the final product by 3.8%, there is almost no additional value created in third story construction. The Irvine Company has experimented with this design in several communities, and it continues to prove unpopular.
The addition of a third garage stall has also been a difficult builder decision. If these three garage stalls are side-by-side, it makes the house much wider, or consumes the entire front elevation which makes the house unattractive. There is unquestionably an increase in value when adding the third car, so builders and architects have experimented with tandem garage arrangements where three cars can fit into the width of two. The three-car with tandem configuration is popular because most people use the tandem space to store their stuff. Rarely do people actually park three cars in their three car garages. As long as the third garage stall — which is very inexpensive square footage — adds 5.3% to the value, expect builders to provide this space. They would be foolish not to.
I was not surprised to see additional lot size added little or no value. The Irvine Company figured this out years ago. Lots in Irvine are 10% to 20% smaller than lots in surrounding communities, yet Irvine actually commands a premium. On a per-square-foot of lot basis, the Irvine premium is remarkable. And since the Irvine Company is in the business of selling land, obtaining a huge land premium is the focus of all their efforts. I expect to see lot sizes shrink even further as the Irvine Company increases density to further increase their land value. This may create opportunity for competitors, but the Irvine Company will likely ignore what competitors are doing and focus on increasing their land value.
I was not surprised to see the preference for new or the flattening of values as properties age. A 40-year old property is not much different than a 25-year old property if both have received the same owner care. I rented a 40-year old property in University Park for over three years that was renovated prior to my moving in. The property felt new to us, and I wouldn't have valued it any more or less than a comparable property in Woodbridge that may have been 15 years newer. Newness wears off after about 10 years, and properties older than that are valued based on how recently the interior was updated.
I want to thank Jaysen again for this great analysis. I hope you have found it as valuable and as enlightening as I have.
Builder selling on the MLS at $283/SF
Builders never used to sell on the MLS. To a builder, commissions are just a cost. They would rather pay their own employee a small percentage for the listing, and pay nothing to a buyer's agent. Rather than pay 6%, they only want to pay 1% or perhaps 2%.
realtors have always tried to sell themselves as adding value. They convince sellers they can market and sell a home and obtain more money than they cost in commissions. For typical homebuyers, access to the MLS is worth the price they pay. However, builders think realtors are full of it.
Despite their reservations, builders are now selling properties on the MLS. Is this desperation, or a wise move to market their product? Given the current state of sales, it is probably a bit of both. Only time will tell.
Enjoy nearly single level living! All living on second floor (only oversized laundry room and storage below. This home has dramatic 12 foot ceilings in the living areas and a spacious open kitchen and great room leading to an outdoor private deck. Dual masters with generous closets and bathrooms, as well as a third separate bedroom. Fixtures include gourmet kitchen with granite countertops, stainless steel appliances, upgraded hardwood flooring, and more included options! Located in the desirable Village of Woodbury, just outside your door is shopping, parks, pools and more. One of the last opportunities to own a brand-new home in Wodbury. Charming motor courts provide access to oversized 2 car attached garages. Within walking distance to stores, restaurants, entertainment at Woodbury Town Center, and it's less than two miles from the I-5 and even closer to the 133 Toll Road. $2,500 Design Credit available!
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Proprietary IHB commentary and analysis
The Mello Roos number below is a guess based on the assumption that it would be 1% of the purchase price.
Resale Home Price …… $526,150
Cost of Home Ownership
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$526,150 ………. Asking Price
$105,230 ………. 20% Down Conventional
4.59% …………… Mortgage Interest Rate
$420,920 ………. 30-Year Mortgage
$92,370 ………. Income Requirement
$2,155 ………. Monthly Mortgage Payment
$456 ………. Property Tax (@1.04%)
$450 ………. Special Taxes and Levies (Mello Roos)
$110 ………. Homeowners Insurance (@ 0.25%)
$0 ………. Private Mortgage Insurance
$298 ………. Homeowners Association Fees
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$3,469 ………. Monthly Cash Outlays
-$362 ………. Tax Savings (% of Interest and Property Tax)
-$545 ………. Equity Hidden in Payment (Amortization)
$181 ………. Lost Income to Down Payment (net of taxes)
A data analyst for the National Association of realtors is projecting it will take at least three years to liquidate the distressed inventory. In reality, it will take much longer.
On very rare occasions, representatives of realtor associations provide an accurate view of the housing market. Today we have and interview with the OC Register and Jed Smith, the managing director of quantitative research for the National Association of realtors. i disagree with many of his specific points, but he is painting a realistically grim view of the next few years.
Jed Smith is managing director of quantitative research for the National Association of Realtors. He says that short sales and bank-owned homes will account for around 35% of U.S. housing deals for the next three years. We asked him how he sees the outlook for housing …
Us: What will the industry’s mood be in November when Realtors gather for NAR’s annual convention in Anaheim?
Jed: Realistic optimism in terms of sales and price expectations may be the important issues. Most sources appear to view the market at or near its bottom with modest recovery in a number of regions. People recognize that the economic and job recoveries are slow, but there is a general belief that we have already seen the worst of the bad news.
IHB: Most sources believe the housing market is not at the bottom, and more bad news is on the way.
There is also recognition, however, that we really can’t predict anything
IHB: Yes, there is widespread recognition that realtors cannot predict anything. Mostly, they will call the bottom at every opportunity and blather on about how now is a good time to buy.
— given that governmental, international, and consumer trends and actions have become increasingly unpredictable with the prolonged Great Recession. Unknown unknowns, frequently mentioned as Black Swans, are increasingly an important factor. Therefore, to the degree that we can foresee and predict, I think the outlook will be one of cautious optimism.
IHB: Cautious optimism indeed.
Us: The housing recovery is on anything but warp speed. How much longer will this downturn go on?
Jed: Sales have fluctuated, ranging on an overall yearly basis between 4.9 million and 5.2 million since 2008. As of May, home sales were in the 4.8 million range annualized, and we expect approximately 5.1 million existing home sales for 2011 and 5.3 million in 2012 as the economy continues to recover and create additional jobs.
Jobs are the key driver of sales, and the disappointing job market over the last few years appears to have impacted the existing home sales market. We now appear to be in a recovery mode.
IHB: Sales have not fluctuated much. Sales have crashed hard, and remain near historic lows. We do not appear to be in a recovery mode. We are in the second leg down of a double dip in home prices.
It looks like home sales will be stronger in the second half of the year,
IHB: To whom does it look like sales will be stronger? Why would sales increase during a time of year when sales and prices typically decline?
but healthy job creation is necessary to ensure a solid recovery in both housing and the overall economy. The job market has sputtered recently, and because variations in local job creation impact housing demand, the housing markets will recover unevenly around the country.
Prices have been a major disappointment in recent years.
IHB: For those of us waiting for the bubble to deflate so we can buy a house at a reasonable valuation, prices drops have been a major satisfaction.
Part of the price weakness in existing home sales has been to the overall deleveraging in the economy,
IHB: Yes, lenders made many Americans insolvent by giving them more debt than they could possibly service. The deleveraging has not finished as lenders still have billions of dollars in bad loans to write off.
and part of the price situation has been driven by the significant number of distressed home sales (foreclosures and short sales) that have driven the markets. Approximately 35% of existing home sales are distressed, and while the number will fluctuate from month to month, we expect to continue to have a distressed property situation for the next three years.
IHB: If the NAr is admitting it will take three years, it's safe to assume it will take five to seven.
We expect price stabilization in the forthcoming years, with modest increases in areas where jobs are created and distressed inventories decrease. Absorption of inventory is the key to price improvement, and we expect this to occur in forthcoming months.
IHB: Eventually prices will stabilize. In a few years, we may see some modest price increases in the areas where the recovery is the strongest. Absorption of distressed inventory is the key, but the total volume is also very important. Since the NAr is unwilling or unable to give us accurate measures of either shadow inventory or the rate of absorption, they have no clue how long the process will take.
Us: What’s holding the housing market back?
Jed: As a result of the Great Recession we have issues of job creation and loan availability.
IHB: Job creation will not happen quickly, and we still have 38% unemployment in the construction trades locally. Loan availability will not improve until those potential borrowers who have gone through short sale or foreclosure are offered loans. It will be quite a while.
We think that there is a significant level of pent-up demand given the overall growth in the number of households in the past 10 years, but pent-up demand can only be realized if there is a meaningful gain in jobs.
IHB: Pent up demand is the bullshit realtors smell when they know they have nothing else.
In addition, low interest rates are not particularly beneficial if financial institutions have unrealistically high credit standards due to excessive risk aversion.
IHB: That statement is true, but those are not the conditions we are facing. Credit standards are still too low. We are arguing over the definition of a qualified residential mortgage because lenders want to shift risk to the US Taxpayer. Lenders may finally reach a point of excessive risk aversion, but since we are exiting a period where lenders had no risk aversion whatsoever, any tightening of credit standards feels excessive. Lenders will continue to tighten standards until they stop losing money.
Finally, some additional recovery of consumer confidence, which will probably occur as people realize that the Great Recession is over, will help to facilitate the housing markets. We are already seeing modest improvements on a local basis in home sales and prices, and hopefully the recovery will gather steam.
Us: Can the market get back on its feet with so many underwater and defaulting homes out there?
Jed: The existing home sales market is absorbing distressed properties as they come onto the market. Unfortunately, distressed properties tend to sell at discounts of 20% to current market prices.
IHB: Distressed sales reset market pricing. Delusional sellers with WTF asking prices don't count. Further, if sales were robust and demand were strong, distressed properties would not need to be discounted in order to sell. In a weak demand market, all sales will be below recent comps. Lowering price is the only way to generate sufficient buyer interest to sell property.
By implication, Jed is leading us to believe that prices will rebound 20% when distressed sales stop. That isn't necessarily the case. If demand is low, any seller would be required to lower price to sell. The must-sell inventory of distressed sellers is leading prices lower now, but anyone who wants to sell is facing the same dynamic of low demand.
The total level of foreclosures and short sales has been in the neighborhood of 35% of overall existing home sales for the past several years, sometimes more, sometimes less on a monthly basis.
The outlook for the immediate future is for moderately rising sales and increasing price stability, with modestly rising prices in areas with good job recovery and loan availability. We would like to be able to forecast a booming recovery; however, the realistic outlook is for modest improvements on a continuing basis.
IHB: The realistic outlook is is for stagnant sales and moderately falling prices, perhaps steeply falling this fall and winter. Perhaps next year we will see some stabilization in pricing and sales, but not in 2011.
Us: Most say the market is hampered by tight lending standards. Has the pendulum has swung too far?
Jed: Interest rates continue to be near historic lows, but credit availability is limited. Many consumers are simply unable to obtain loans — even with substantial down payments in hand and credit scores in the 800 range.
IHB: Complete and utter bullshit. Lenders are competing with each other to get loans from borrowers with large down payments and high FICO scores. There aren't very many of those people. The borrowers who can't obtain credit are those with little or no money to put down and low FICO scores. To suggest otherwise is to perpetuate a self-serving lie endorsed by the NAr.
We get approximately 1,000 comments every month in response to our Realtors Confidence Index survey, and our members cite numerous examples of responsible potential buyers being unable to get mortgages.
IHB: Yes, unqualified borrowers are not getting loans. They shouldn't. Giving unqualified borrowers loans is one of the causes of the epidemic of foreclosures after the collapse of the housing bubble.
realtors from the bubble era are not accustomed to lenders turning down anyone, so they whine and complain when their unsuitable borrower cannot get a loan.
Financial institutions appear to have become unduly risk averse. This has a major negative impact on the housing markets.
The pendulum has indeed swung too far. Dr. Bernanke has recently noted that credit availability is an issue — and he should know, being chairman of the Federal Reserve Board. Our view is that if banks would simply return to normal sound underwriting standards and begin lending to more creditworthy borrowers, we’d get a much faster recovery in the housing sector.
The pendulum has not swung back too far. Banks are returning to normal sound underwriting standards. That's why credit availability is an “issue.” Credit availability is supposed to be an issue. It is supposed to be a barrier to entering the housing market. Borrowers are supposed to demonstrate they can repay the loan to sustain home ownership. We abandoned those standards during the bubble, and now the market must adjust to the sane lending standards of 20 years ago.
Us: Any final thoughts?
Jed: There is a tendency to focus on prices and housing as an investment when discussing the existing home sales markets. However, people buy houses because of lifestyle preferences — the desire to own a home for personal and family reasons.
There is a tendency of realtors to pimp the market by promising delusional returns for those who buy homes. They should stop. People do want to own for lifestyle preferences, but that doesn't mean they should be forced to pay a huge premium over renting to do it.
In addition, NAR surveys indicate that homeowners currently own a home, on average, for approximately 8 years; monthly or even yearly fluctuations in value are actually of no significance to most homeowners.
IHB: LOL! “yearly fluctuations in value are actually of no significance to most homeowners?” I can't believe he actually said that. Everyone in California lived for the yearly fluctuation in home values so they could go back to the housing ATM for more money. Changes in home values are an obsession with most California homeowners.
Although there are clearly financial benefits to owning a home, the clear benefit of homeownership is the actual enjoyment of the home as a place to establish roots, build a future, and live your life — not the maximization of a financial portfolio strategy.
On that we can all agree.
Double the mortgage, double the fun
The market peaked more than five years ago, and lending standards have been much tighter since then. However, there is still no shortage of HELOC abusers to profile on a daily basis. The owners of today's featured property more than doubled their mortgage in the twelve years they owned this house. Whatever equity they had was spent.
The owner's paid $271,000 on 10/15/199. They used a $257,450 first mortgage and a $13,550 down payment.
On 1/10/2001 they refinanced with a $257,600 first mortgage and a $48,300 stand-alone second. They obtained their first $35,000 in HELOC booty.
On 5/22/2003 they refinanced with a $316,500 first mortgage.
On 1/13/2006 they obtained a $100,000 HELOC.
On 4/15/2008 they managed to get the Credit Union of Socal to give them a $500,000 first mortgage and a $25,000 HELOC. What was the credit union thinking?
Total property debt is $525,000.
Total mortgage equity withdrawal is $267,550.
Perhaps doubling the mortgage wasn't a good idea. I think adding to a mortgage is a bad idea. Doubling it… well, I still can't believe how common it was.
The best Townhome living has to offer! Private location, with Tons of natural light, formal living room, dining room and living room. Tile Entry, 10 Ft+ High Ceilings W/ rounded Corners, Winding Staircase, Miniblinds & Valences, Mirrored Wardrobes, Closet Organizers. 2 car garage with a huge storage area under the home, plus the carports in the area are reserved for owners but are not assigned. Walking distance to the movie theather, shops, target etc.
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Proprietary IHB commentary and analysis
theather? Since photons have no mass, I don't know how one gets “Tons of natural light.”
Resale Home Price …… $449,900
House Purchase Price … $271,000
House Purchase Date …. 10/15/1999
Net Gain (Loss) ………. $151,906
Percent Change ………. 56.1%
Annual Appreciation … 4.3%
Cost of Home Ownership
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$449,900 ………. Asking Price
$15,747 ………. 3.5% Down FHA Financing
4.59% …………… Mortgage Interest Rate
$434,154 ………. 30-Year Mortgage
$95,274 ………. Income Requirement
$2,223 ………. Monthly Mortgage Payment
$390 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$94 ………. Homeowners Insurance (@ 0.25%)
$499 ………. Private Mortgage Insurance
$340 ………. Homeowners Association Fees
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$3,546 ………. Monthly Cash Outlays
-$359 ………. Tax Savings (% of Interest and Property Tax)
-$562 ………. Equity Hidden in Payment (Amortization)
$27 ………. Lost Income to Down Payment (net of taxes)
IHB: Distressed sales reset market pricing. Delusional sellers with WTF asking prices don't count. Further, if sales were robust and demand were strong, distressed properties would not need to be discounted in order to sell. In a weak demand market, all sales will be below recent comps. Lowering price is the only way to generate sufficient buyer interest to sell property.
