Government efforts to prop up the market have only served to reduce sales volumes and eliminate an important component of the move up market.
Irvine Home Address … 4 HAGGERSTON AISLE Irvine, CA 92603
Resale Home Price …… $749,000
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Some folks drive the bears out of the wilderness
Some to see a bear would pay a fee
Me, I just bear up to my bewildered best
And some folks even see the bear in me
So meet a bear and take him out to lunch with you
And even though your friends may stop and stare
Just remember that's a bear there in the bunch with you
And they just don't come no better than a bear
Lyle Lovett — Bears
Every Green Bay Packer fan in Wisconsin knows how to keep bears out of their yard. Put up a goalpost, and bears won't go anywhere near it. (Sorry, Chicago Bears fans. Maybe your offense won't be so pathetic this year.)
Being bearish on housing in California over the last several years has largely put me out of sync with the collective kool aid view of unbridled bullishness. Of course, I had the luxury of being right while the bulls were wrong, and I have made many new friends since I began writing about it.
As we get closer to the bottom, I see markets like Las Vegas that excite me greatly and make me very bullish on owning real estate. If prices fall a little lower here, I might even get lukewarm on Orange County. Lukewarm is probably as bullish as I will get here unless we see a real catastrophe like they had in Las Vegas.
The Bears and the State of Housing
By DAVID LEONHARDT
Published: September 7, 2010
Of all the uncertainties in our halting economic recovery, the housing market may be the most confusing of all.
That's a nice opening, but there really isn't much confusion about it. Prices are too high, and government meddling has caused prices to remain too high. The only confusion is caused by the intentional obfuscation of those who don't want to reveal this simple truth.
At times, real estate seems to be in the early stages of a severe double dip. Home sales plunged in July, and some analysts are now predicting that the market will struggle for years, if not decades.
Others argue that the worst is over. As Karl Case, the eminent real estate economist (and the Case in the Case-Shiller price index), recently wrote, “Buying a house now can make a lot of sense.”
Beware the hidden assumptions and what is not being said. Karl Case made a broader argument for home ownership, he was not saying people should buy because the bottom is in and rapid appreciation is coming back.
I can’t claim to clear up all the uncertainty. But I do want to suggest a framework for figuring out whether you lean bearish or less bearish: do you believe that housing is a luxury good and that societies spend more on it as they get richer? Or do you think it’s more like food, clothing and other staples that account for an ever smaller share of consumer spending over time?
If you believe housing resembles a luxury good, then you’ll end up thinking house prices will rise nearly as fast as incomes in the long run and that houses today aren’t terribly overvalued. If housing is a staple, though, prices will rise more slowly — with general inflation, as food tends to.
The difference between these two views ends up being huge, and it’s become the subject of an intriguing debate.
His argument here is not clearly defined. During the bubble, people actually argued that people were putting more income toward housing because it was a great investment. That argument has been thoroughly defeated, so now the argument is being framed as a choice between spending the same percentage of income as past generations — what the author calls luxury good spending — and putting less income toward housing as we do with consumer staples. As he has framed the argument, I agree with his contention that people will tend to put the same amount toward housing; therefore, housing prices should rise with wage inflation.
After digging into it, I come down closer to the luxury good side, which is to say the less bearish one. To me, housing does not rank with unemployment, the trade deficit, the budget deficit or consumer debt as one of the economy’s biggest problems. But you may disagree.
Yes, I am going to disagree. It isn't that those other items are not important, but both unemployment and consumer debt are related to the housing market. Most of the unemployment is in the real estate sector, and HELOC abuse is at the core of California's debt addiction.
No one doubts that prices rose roughly with incomes from 1970 to 2000. The issue is whether that period was an exception. Housing bears like Barry Ritholtz, an investment researcher and popular blogger, say it was. The government was adding new tax breaks for homeownership, and interest rates were falling. These trends won’t repeat themselves, the bears say.
As evidence, they can point to a historical data series collected by Mr. Case’s longtime collaborator, Robert Shiller. It suggests that house prices rose no faster than inflation for much of the last century.
The bears are right on every count. The government has stimulated the housing market to the degree possible, and couple that with falling interest rates, and you have a recipe for a once-in-a-generation boost in home prices.
The pattern makes some intuitive sense, too. As people become richer, they spend a shrinking share of their income on the basics. Think of it this way: someone who gets a big raise doesn’t usually spend it on groceries. You can see how shelter seems as if it might also qualify as a staple and, like food, would account for a shrinking share of consumer spending over time. In that case, house prices should rise at about the same rate as general inflation and well below incomes.
That isn't going to happen. Even if kool aid were totally purged from our collective consciousness, people will put the maximum amount lenders allowed toward housing. People like and want nice houses, and they will pay what is necessary to get them.
Here’s the scary thing, at least for homeowners: if this view is correct, house prices may still be overvalued by something like 30 percent. That’s roughly the gap between average household income growth and inflation over the last generation.
It’s also the overvaluation suggested by Mr. Shiller’s historical index. Today, it is around 130, which is way down from the 2006 bubble peak of 203. But it’s still far above the 1890 to 1970 average of 94.
In effect, the bears are arguing that housing was in a multidecade bubble and has now entered a multidecade slump.
He is making a bearish argument I have never heard a housing bear make — and I read them all. As a society, we are not going to suddenly start putting less and less toward housing. That just isn't going to happen. However, the Case-Shiller index will eventually make its way back to its historic relationship with inflation. The only reason we are temporarily stalled at 130 nationally is because we have record low interest rates which makes high prices somewhat affordable. We may be entering a multidecade period of lowered appreciation, but we are not likely to repeat the Japanese experience and witness 15 years of nominal price decreases.
The second, less bearish group of economists doesn’t buy this. This group includes Mr. Case, Mark Zandi of Moody’s Analytics and Tom Lawler, a Virginia economist who forecast the end of the housing boom before many others did. They say they believe that house prices rise nearly as fast, if not quite as fast, as incomes, and that real estate is no longer in a bubble.
Wait a minute. First, nobody forecast the bottom before the NAr. They forecast it every few months. Second, Tom Lawler is not some kind of forecasting genius, he is a guy who made a bad prediction who was made temporarily right by government interference in the market. Further, if his analysis says that housing prices are now in line with incomes, his analysis is faulty for most markets.
This side can also make a case based on history. Mr. Case points out that all pre-1970 housing statistics are suspect. By necessity, Mr. Shiller’s oft-cited historical index is a patchwork that relies on several sources, like Labor Department surveys. These sources happen to paint a more negative picture of past house prices than some other data.
Is Karl Case throwing Robert Shiller under the bus?
For example, the Census Bureau has been asking people since 1940 how much they think their houses are worth, as Mr. Lawler noted in one of his newsletters. The answers suggest that house values rose faster than general inflation — and about as fast as incomes — not just from 1970 to 2000, but from 1940 to 1970, as well.
Likewise, Mr. Case has dug up sales records for houses in the Boston area that were built in the late 19th century and are still around. The records show prices rising 2.5 percentage points a year faster than inflation, which is just about what income has done.
IMO, this shows how much we have understated our measures of inflation. Notice the hidden assumption here is that our measures of wage inflation has been accurate. Further, the character and desirability of the neighborhood may have changed significantly over time as well. House prices track wage inflation very closely over the long term.
Perhaps most persuasive is a statistic that Mr. Shiller sent me when I asked him about this debate. It shows that the share of consumer spending — and, by extension, of income — devoted to housing has not fallen over time. It has hovered around 14 or 15 percent for the last 60 years. The share of spending devoted to food, by contrast, has dropped to 13 percent, from 25 percent.
Yes, that is a very convincing argument. We spend the same percentage of income on housing over time.
These numbers make a pretty strong argument that the post-1970 period is not one long aberration. As societies get richer, they do spend more and more on housing.
No, that is not what the data shows. That sounds like bubble talk. We may spend more nominal dollars, but as a percentage of income, the expenditure is remarkably consistent. His statement sounds like we are spending more as a percentage of income, and that is not accurate.
Some of this spending, Mr. Shiller notes, comes in the form of bigger, more expensive houses. These houses don’t do anything to lift the value of a smaller, older house — which is what matters to individual homeowners. But McMansions are not the only factor.
To see this, you can look at the share of consumer spending devoted to things inside houses, like furniture. As with houses, they have become fancier. But they haven’t become so much fancier that they make up anywhere near as large a share of consumer spending today as in the past. That’s a strong clue that the upgrading of houses themselves isn’t enough to explain the increased spending on housing.
What is? The value of the underlying land. Those Boston-area houses that Mr. Case studied did not change much over time. Yet their value did.
For a house whose location has any value — in a major city or a nearby suburb, where a builder can’t simply put up a similar house down the street — the land is a big part of the equation. Over time, Mr. Zandi says, the value of that land should grow almost as fast as the local area’s economic output or, in other words, with incomes.
I don't think this guy understands that land value is a residual effect. Land value doesn't make prices go up. Prices going up increases land value. Changes in land value are always the result or the effect of changes in price. It is never the other way around.
The best advice for homeowners and would-be buyers may be to think of a house not as an investment, first and foremost, but as a place to live. If there is a good chance you will move in the next three years or so, you should probably rent. The hassles of buying and the one-time costs are just too big. Plus, house prices are not low in most places today.
Shevy and I tell people this every day. We have killed deals and talked many people out of buying because they were planning to move.
The ratio of median house price to income is about 3.4, compared with a prebubble average of about 3.2. Given the economy’s weak condition and the still high number of foreclosures, prices may well fall more in the next year or two. They look especially high in places where rents are comparatively cheap, like San Diego and San Francisco. And maybe income growth will remain weak for years, holding down home-price growth.
Those statements are all true as well. Notice he specifically called out some of our California markets where it is still much cheaper to rent.
But if you can imagine staying much longer than a few years, you should take some comfort in the fact that the bubble seems mostly deflated. Sometime soon, prices should begin rising again. They may not quite keep up with incomes, but they will probably outpace the price of food and clothing.
Now, if only it were possible to be as sanguine about the economy’s other problems.
With exception of the beach communities in California and their high-end cousins, the bubble is mostly deflated. There are only two kinds of markets in a bubble bust: (1) those where prices have crashed, and (2) those where prices have not crashed yet.
How the government props weakened the market and delayed the recovery 
When prices go down, the first segment of the market to disappear is the move-up market; or to be more specific, that segment of the market that must sell their own home to buy another. Over the last four years very few sales have taken place where the buyer's offer was contingent upon selling an existing home. This key move-up component of the market is absent when prices are moving lower, partly because there is less equity to move and owners submerge, but mostly because sellers refuse to accept an offer they know is going to be mired in the buyer's feeble attempts to sell their property at above market prices to pay for the next property. Unemployment gets much of the blame for our anemic sales rates, but the lack of a contingent-upon-sale market accounts for much of the malaise as well.
When the government and lenders tried to engineer a bottom, stories began to surface about the resurgence of a move-up market where buyers already had equity from their purchases at the bottom they were moving into the next house. Of course, these stories were nonsense, but this component of the market is necessary for normal function, so everyone involved in engineering a bottom (Obama administration, Federal Reserve, NAr, NAHB, and so on) was eager to tout the equity gains from those who bought at their illusory bottom.
The fact is that house prices have not appreciated enough since the engineered bottom to cover the commission on a resale. Further, sellers are still not accepting offers where the sale is contingent on the buyer's sale. That segment of the move-up market is still dead.
Since prices are still too high, and since the contingent-sale move-up market is dead, the market is weaker than is should be, and rather than bottoming this winter — which it likely would have without all the intervention — the market is poised to sputter for another two or three years while it gropes for a bottom built almost entirely upon first-time homebuyers.
If the powers-that-be had done nothing, prices would almost certainly be lower today, and the market picture would look very grim (think Las Vegas), but the market always looks the worst at the bottom. It's only through widespread market despair that we find a true bottom. The sooner we reach bottom, the sooner the contingent-sale market recovers and the sooner the whole market regains its strength and vigor.
Everyone who supported the government props was wrong. Of course, none of them will admit it, and few will even recognize the truth, but meddling in the market clearly has made matters worse, and it cost us billions in taxpayer dollars as well.
A Grade D HELOC abuser
In the post HELOC Abuse Grading System, I described a Grade D HELOC Abuser this way:
The transition between a grade C and a grade D is somewhat subjective, but it is hinged to an idea; once borrowers start knowingly increasing their loan balance to spend appreciation as a matter of habit, once they start expecting appreciation and HELOC money as a reliable source of income, they have moved from what some may consider legitimate use of HELOCs to Ponzi Scheme financing and ultimately a foreclosure implosion. This Ponzi borrowing limit is an invisible threshold borrowers do not realize they have crossed, but once they accept using debt to pay debt as a concept, they have crossed over to the Dark Side.
The top of the range of D graded HELOC abusers is the limit of each borrowers self delusion when it comes to how much appreciation they feel comfortable spending without losing their homes. People who earn a D still planned to keep their homes, they were merely misguided by their own ignorance and the incessant Siren's Song of kool aid intoxication. These are the sheeple; like the rats St. Patrick cast into the sea, each borrower followed the Piper to their underwater mortgage and a watery foreclosure.
This particular owner has managed to avoid foreclosure, mostly due to the fact that he bought in an area where the banks decided squatting was preferable to lowering prices.
- This property was purchased on 8/29/1997 for $308,000. The owner used a $246,300 first mortgage and a $61,700 down payment. He waited a few years to get his down payment back and start down the road to HELOC abuse.
- On 8/14/2001 he obtained a $75,000 HELOC.
- On 4/18/2003 he refinanced with a $340,000 first mortgage, and he got a $50,000 HELOC.
- On 7/18/2005 he refinanced the first mortgage for $425,000 and obtained a $50,000 HELOC.
- On 2/20/2007 he got an Option ARM for $491,000.
- Total mortgage equity withdrawal is $244,700.
He still stands to walk away with a check for about $150,000 after paying off the debt.
You have to figure he will do this again in his next house, if he is given the chance.
Irvine Home Address … 4 HAGGERSTON AISLE Irvine, CA 92603 
Resale Home Price … $749,000
Home Purchase Price … $308,000
Home Purchase Date …. 8/29/1997
Net Gain (Loss) ………. $396,060
Percent Change ………. 128.6%
Annual Appreciation … 6.6%
Cost of Ownership
————————————————-
$749,000 ………. Asking Price
$149,800 ………. 20% Down Conventional
4.34% …………… Mortgage Interest Rate
$599,200 ………. 30-Year Mortgage
$143,648 ………. Income Requirement
$2,979 ………. Monthly Mortgage Payment
$649 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$62 ………. Homeowners Insurance
$448 ………. Homeowners Association Fees
============================================
$4,139 ………. Monthly Cash Outlays
-$704 ………. Tax Savings (% of Interest and Property Tax)
-$812 ………. Equity Hidden in Payment
$236 ………. Lost Income to Down Payment (net of taxes)
$94 ………. Maintenance and Replacement Reserves
============================================
$2,953 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,490 ………. Furnishing and Move In @1%
$7,490 ………. Closing Costs @1%
$5,992 ………… Interest Points @1% of Loan
$149,800 ………. Down Payment
============================================
$170,772 ………. Total Cash Costs
$45,200 ………… Emergency Cash Reserves
============================================
$215,972 ………. Total Savings Needed
Property Details for 4 HAGGERSTON AISLE Irvine, CA 92603
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Beds:: 3
Baths:: 3
Sq. Ft.:: 2045
$0,366
Lot Size:: –
Property Type:: Residential, Condominium
Style:: Two Level, Traditional
Year Built:: 1991
Community:: Turtle Rock
County:: Orange
MLS#:: S631397
Status:: ActiveThis listing is for sale and the sellers are accepting offers.
——————————————————————————
Welcome to a quiet & private location within the newest townhome community in Turtle Rock. This popular floorplan hasn't been available for sale in 4 years! Fabulous $50,000 remodeled kitchen is at the heart of this home and has been designed by a chef – redesigned space includes maple cabinetry w/ custom pulls, lots of deep, full extension drawers, dual pantries, granite counters w/ stainless steel trim, Viking gas cooktop, built-in Sub-zero frig, double ovens, wine refrigerator-it's impressive. Soaring ceilings and fireplace in living room. Separate dining room with access to outdoor patio. Separate family room open to kitchen. Master suite w/ private balcony and soaring ceilings, walk-in closet w/ organizers, bright master bath. Upstairs loft which could be used for a home office/study/reading area, and second bedrooms each with volume ceilings. It's light and bright. Steps away from community pool and nearby park. Tucked away in the hills of Turtle Rock yet 10 min. close to it all!
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