Have you ever pondered the interesting relationship we have? I give up a little bit of my time each day to observe the real estate market and ramble on about it, and you give up a little bit of your time each day to read it.
When I started writing, I did not think about readership. I wanted my voice to be heard, but like any concerned citizen shouting when there is an emergency, it wasn’t the voice, it was the message. As you tuned in each day to read, we have formed this relationship.
Writing and having a readership creates a responsibility. I like images and ideas for posts that are edgy, and sometimes I do cross the line for some people, but that comes with the territory if posts are going to be interesting (and fun for me to write). I have to carefully measure and manage this edge, and if I suddenly and without warning cross the line — start posting inflammatory speech and images — I would deservedly lose readers.
Writing is an enjoyable responsibility. Gaining readership is addicting. I had lunch with a fellow blogger a couple of months ago, and he was very excited about having readers. He printed out charts and talked about the various ways to measure readership (it isn’t very easy), and he was elated about traffic spikes when he was linked by a larger blog. It was easy for me to relate. He knows the heartfelt the joy of his voice being heard. I was excited for him because I know that joy in my own life. Thank you for reading each day.
I have been examining this relationship in my own terms. Have I become attached to having readers? Am I now a slave to a new master? These are issues I will wrestle with on my own. As long as I have a little bit to give, I will.
Back to our regularly scheduled losing property in Irvine….
Beds 4 Baths 3 full 1 part baths Size 2,300 sq ft ($380 / sq ft) Lot Size n/a Year Built 2005 Days on Market 4 Listing Updated 11/4/2009 MLS Number S594878 Property Type Condominium, Residential Community Woodbury Tract Wdst
Fantastic Model 3 on Spanish Lace right across the street from the park. Large Gourmet Kitchen with Stainless Steel Appliances, Upgraded Cabinets, Center Island and Double Oven. Caesar Stone tiles in all bathrooms. Crown Molding and Can lights along with a built-in Surround Sound speaker system throughout the house. Custom Media Niche in living room. Enclosed patio area great for entertaining comes with a fountain and built-in Lynx BBQ. Master suite is very large and includes built-in dressers. Woodbury amenities include pool, tennis courts, sport courts and many parks.
When I was filling in the cost details for this property, I noted about $4,400 in special levies, taxes and fees.
*** SPECIAL ASSESSMENT USER FEES*** BA MOSQ,FIRE ANT ASSMT (800)273-5167 $3.04 B3 VECTOR CONTROL CHG (800)273-5167 $0.67 C7 MWD WATER STDBY CHG (866)807-6864 $10.08 E0 IRVINE USD-ASMT (949)250-8300 $54.19 MY 1915 AD BOND MY (866)807-6864 $2,214.86 N1 LNDSCP & LTG #1 (866)807-6864 $89.98 R2 MELLO-ROOS R2 (800)858-8233 $622.45 R6 MELLO-ROOS R6 (800)858-8233 $1,410.12
The combined HOA expense is $230 per month as well. Despite these high costs, low interest rates have pushed affordability up to 5.3 times income. The historic norm at the bottom is 4.0 for several years.
This property was purchased for $958,500 on 4/12/2006. The owners used a $766,443 first mortgage and a $192,057 downpayment. If they get their asking price, they will recover a little bit over $50,000 of their downpayment.
The owners are pleading with the market for their downpayment money, “So give a little bit… Oh give a little bit…“
I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing
the Irvine home market and combating California Kool-Aid since
September 2006.
This owner should not be selling. Prices are well off the peak, and the knife-catching bulls are chanting in bloody unison, “Prices have bottomed. Buy now or be priced out forever.”
Apparently, this owner does not believe the bullish tale, or perhaps he has other reasons for selling, but here he is priced to take a loss five years after buying.
Beds 3 Baths 2 baths Size 1,425 sq ft ($321 / sq ft) Lot Size n/a Year Built 1989 Days on Market 4 Listing Updated 11/3/2009 MLS Number P709645 Property Type Condominium, Residential Community Northwood Tract Nv
Wonderful Northwood Villa’s main level home boasts a very functional floor plan. Third bedroom is currently used as a office. Home was been recently updated & upgraded. Living room is extra spacious with a cozy fireplace. Designer kitchen is complete with upgraded cabinets, granite counter tops, and tile floors. Dining area is adjacent to kitchen with sliding doors that lead you out to the back patio. Tasetefully upgraded floors is gorgeous wood. Enjoy designer tone paint & crown molding. Nice size back patio is perfect for entertaining & BBQ’s. Enjoy the convinience of 2 garages; 1 car attached and 1 car detached. Attend award winning Northwood Schools. Home is conviniently located near dining, shopping, & much more.
Tasetefully? convinience? conviniently?
This property was purchased on 12/2/2004 for $468,000. The owner used a $374,400 first mortgage, a $93,600 second mortgage, and a $0 downpayment. The owner refinanced in 2007, but did not take out any money. Now he will likely be shorting the second mortgage. With the beating his credit is going to take, he should have maxed out the HELOC back in 2006. The responsible do not get rewarded.
Most people vastly overestimate the actual long-term appreciation of real estate. Today, we will look at a condo purchased originally in 1990 that has appreciated at 4% per year to reach today’s still-inflated pricing.
Looking out at the road rushing under my wheels I don’t know how to tell you all just how crazy this life feels I look around for the friends that I used to turn to to pull me through Looking into their eyes I see them running too
Running on – running on empty Running on – running blind Running on – running into the sun But I’m running behind
Appreciation seems to be running on empty, or has the Federal Reserve permanently refilled our tank?
{book4}
I covered the various methods of predicting where prices would bottom in The Great Housing Bubble. The chart below comes from Future House Prices – Part 1:
Figure 37: Irvine, CA, Projections from Historic Appreciation Rates, 1984-2026
The story for the most inflated markets such as Irvine, California,
is much the same as the national forecast. If the 4.4% rate of
appreciation seen from 1984-1998 is repeated, then prices will decline
45% from the peak, bottom in 2011 and return to the peak in 2023. Since
prices peaked in 2006, this method of price projection shows an 18 year
peak-to-peak waiting time: not a comforting forecast for Irvine
homeowners.
Most people assume California real estate appreciates 6%-10% per year with some years being even better. This fuzzy thinking becomes an obvious absurdity when projecting large rates of appreciation because the prices quickly become so large that people could not make payments with a 100% DTI. Trees cannot grow to the sky, and prices cannot exceed income growth in the long term.
Of course, most people don’t really analyze the implications of what they say or think, they just accept the conventional wisdom of the masses even when this information is wrong. Worse yet, people then act on this information, buy overpriced property, and end up losing money or waiting a very long time for prices to come back. Knowledge is power.
IHB Library
For those of you who have not discovered our library, we have all the analysis posts I have written for this blog in one organized location:
And for those who missed the announcement, I have uploaded the full content of the Great Housing Bubble to the IHB:
Beds 1 Baths 1 bath Size 710 sq ft ($275 / sq ft) Lot Size n/a Year Built 1978 Days on Market 5 Listing Updated 11/2/2009 MLS Number S594735 Property Type Condominium, Residential Community Northwood Tract Lk
GREAT UPPER UNIT WITH LAKES VIEWFROM YOUR LIVING ROOM .ONE BEDROOM,ONE BATH CONDO WITH FIRE PLACE,BALCONY,INSIDE LAUNDRYWITH STACKABLEWASHER/DRYER AND GOOD WALKING CLOSET.
ALL CAP
This property records for this post show the 1990 purchase to illustrate the long-term rate of appreciation. The property was most recently purchased from a lender on 9/30/2009 for $160,000. This is a quick flip to make about $30,000.
The owners who were foreclosed on had a more interesting story. They purchased this property on 4/17/2003 for $183,000. They used a $173,850 first mortgage and a $9,150 downpayment. Then the fun begins….
On 11/30/2004 they refinanced the first mortgage for $213,750.
On 11/7/2005 they refinanced again for $260,000.
On 3/31/2007 they refinanced again with a $244,000 Option ARM and a $30,500 HELOC.
Total property debt is $274,500.
Total mortgage equity withdrawal is $100,650.
This borrower gave up in late 2008…
Foreclosure Record Recording Date: 07/10/2009 Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Foreclosure Record Recording Date: 04/03/2009 Document Type: Notice of Default
One hundred thousand dollars is a good HELOC take from this property.
In case you missed this great post over at Housing Doom yesterday…
Bubble bloggers were for the most part, regular folks who saw an insane real estate market and said, “It’s going to crash, and someone should say something“. Some, like HousingPanic, Ben Jones and Patrick had inspired a national audience, others were smaller and more local.
There was a lot of comradery in those days. We’d check each others
posts, and add each other to the blogroll. We had fun taking potshots
at the likes of Lereah and Mozillo and watched the data in our local
markets.
Sure you’ve heard it all before He’ll be the risk in the kiss Might be anger on your lips Might run scared for the door But in seasons of wither We’ll stand and deliver Be strong and laugh and
This owner should have known they were in trouble when the purchase price of the property was $666,000. It contains the Number of the Beast. It was certainly beastly to these owners. They are going to lose over $150,000 of their own money.
Beds 3 Baths 2 full 1 part baths Size 1,481 sq ft ($364 / sq ft) Lot Size n/a Year Built 1999 Days on Market 9 Listing Updated 11/3/2009 MLS Number P709388 Property Type Condominium, Townhouse, Residential Community Northwood Tract Grvl
Beautiful 3 bedroom townhome in a gated community. Extra Large corner lot with wooden deck for entertaining & grassy area for gardening. Open floor plan and south facing windows gives lots of light through-out the house. Generous size kitchen with granite counters and tile floors. Formal dinning room looks out to back patio,gorgeous wood floors in living & dinning room. Upgraded berber carpet covering stairs and upstairs. Charming master bedroom with celing fan. Spacious master bath with dual sinks. Travertine in all bathrooms and entryway. Extra features include recessed lights, designer paint and more.
When this property was purchased on 9/7/2005, the current owner paid $666,000. She took out a $170,000 first mortgage and a $496,000 downpayment. There was a refinance later for $320,000, and the husband was later added to title, but this property still have significant equity. As it stands, they are going to lose about $160,000.
I imagine they wished they had abused their HELOC….
Why do I believe there are market fundamentals? And how do I calculate these numbers? Today we will look at the history of Irvine median home prices, IHB Current Cashflow Value, IHB Fundamental Value from 1975 to present.
Why do we spend so much energy thinking about tomorrow’s house prices? Well, Timing Does Matter.
I have felt an angst about how current cashflow value suggests prices are in a stable range when we know that real fundamental value is significantly lower. Also, Shevy recently challenged me with feedback he has been receiving about our reports. When we are showing people IHB Current Cashflow Value, we have been calling it IHB Fundamental Value. People were upset that perhaps we were taking advantage of interest rate manipulation by the FED to suggest prices were a good value. Shevy was upset with me because he said it is not who we are, and he felt our reports were not accurately reflecting our opinion of Fundamental Value. He was right.
In today’s post, I am going to fix this problem by parsing terms of value, and I will demonstrate the power of these analytical tools by examining the long history of home prices and fundamental value since 1975. Also, I will show two updated pages of our IHB Reports.
{book4}
IHB Value
To better understand the distinctions in value I am making today, I need to clean up and define some terms for you.
Base Payment is current rent (or 31% of income) minus expenses of ownership. Base Payment is the amount of debt service available to repay a loan.
IHB Current Cashflow Value is the value of the property derived from Base Payment applying current interest rates.
IHB Fundamental Value is the value of the property derived from Base Payment applying a long term average of interest rates. The number I am using is 8.99%, the average interest rate since 1971.
For instance, (31 Deer Creek — IHB Fundamental Value Report for Owner Occupant.pdf) if the current rent (IHB reports use comparable leases from the MLS) is $2,850, the Base Payment yields a IHB Current Cashflow Value of $690,000 and IHB Fundamental Value of $516,300. The difference between the value at a 5% interest rate and a 9% interest rate is remarkable.
History of Home Price and Value
The long history of home prices and values is a harmonic dance with the measures tethered in an ever more volatile relationship. It begins in the mid 1970s during a rough time for the economy, but a stable time for the relationship between Median Home Price, IHB Current Cashflow Value and IHB Fundamental Value.
Irvine, California, has endured three real estate bubbles since
1975. The first occurred from 1978 to 1981 when prices skyrocketed in an
inflationary spiral. As usual, lenders were willing to fuel the fire.
Prices stabilized briefly in the mid 80s before taking flight again.
Valuations declined below Current cashflow value and bottomed at
Fundamental Value in the late 90s. The fact that prices bottomed here for so long suggests there is durable market support at this price level.
Besides the statistical accuracy of Fundamental Value, I favor it because
there is concrete reasoning for this level to be so strong — owning is
less expensive than renting on a stable cashflow basis. There is an
identifiable microeconomic event creating the macroeconomic effect we are looking for — bottoming activity.
(There is much information in the notes on the charts below, so examine them carefully.)
In 1978, inflation was running 14% per year. Lets say you borrowed
with an astronomical 60% debt-to-income ratio. That first year, you
would be eating Rice-a-Roni, but since you would be getting a 10% raise
next year, and the year after that, and so on, your debt-to-income
ratio is falling rapidly. By 1982 your income is 50% higher, and your
DTI is now down to a very manageable 30%. This was the inflation
calculus of yesteryear.
This big inflation hurdle explains why so many people think it is
wise to really stretch to get into that first house. Back in 1978, that
stretch meant three to five years of pain because inflation bailed
everyone out. Now, if you stretch like that, you have 20 years or more
of indentured servitude waiting for you. Just ask some Japanese
landowners from their bubble how much fun that is. All those people
working years to clean up the mess a number of foolish bankers made 30
years ago. We are traveling the same road.
The market bottomed after the first bubble from 1985 to 1987 when prices traded below both the Current Cashflow Value and the Fundamental Value. Prices took flight again in the summer of 1987, and they went up about 50% by summer of 1990 when prices became very high relative to cashflow measures. This rally was almost entirely psychological. People feared being priced out. The market bottom again from 1994 to 1999, while prices traded below Current Cashflow Value and at Fundamental Value for several years. Is that our future?
In examining these charts, I noticed something interesting that does have value for today’s market. From 1975 to 1999, market pricing fell below current cashflow value on three different occasions — just as it is doing today. The first time was 1985, and the intersection occurred while pricing was also below fundamental valuation. The time of crossover represented a bend in market direction; in 1985 it went from flat to up.
When prices went cashflow positive again in 1992, the market was heading downward steeply, and once it became less expensive to own, the rate of price decline slowed just as it has in today’s market. The market did not bottom in 1992 because prices were still elevated from fundamentals. Interest rates went up in 1994 bringing cashflow value down again. When cashflow value went positive again later that year, the market bottomed and began creeping higher. No real estate recovery has begun with rapid appreciation.
Prices matched Fundamental Value very closely from 1994 to 1999, then conditions changed, and we inflated The Great Housing Bubble.
The precipitating factor for the housing bubble was the lowering of interest rates to combat the 2000-2001 recession. As interest rates went down, prices went up to match the new financing available. This increase in prices was rapid enough to excite irrational exuberance and already inflated prices went much higher. Lenders enabled the next push higher by eliminating loan qualification standards and peddling Option ARMs far and wide. The rest can be read in our library.
What is interesting for today is the current relationship between prices, Current Cashflow Value and Fundamental Value. We are at a price level that nearly matches Current Cashflow Value of $561,837 but is well elevated from the Fundamental Value of $375,885 — which is the bottoming value I am most recently credited with predicting. The current market pricing intersecting with Cashflow Value is what has
caused prices to fall more slowly or even tick up a bit this summer. As long as the Federal Reserve continues to backstop interest rates and keeps current cashflow values high, prices will hold at current levels pending the timing and quantity of future inventory processing and release.
Will the FED ease off and give us a protracted decline in a very wide “U” shape typical of housing market bottoms? Will inflation force the FED to allow interest rates to go higher? These are titanic forces beyond my ability to comprehend much less foresee. For now, it looks like a protracted “U” shape bottom perhaps at price levels above previous fundamental valuations. I will revise my projections as more data comes in.
Hedging is no fun. It was easier when the market gave unambiguous bearish signals….
IHB Fundamental Value Reports Revisited
With that lengthy preamble, I introduce a new page to our report and a new front cover.
Notice at the bottom in our summary area, we now have the Current Cashflow Value and the IHB Fundamental Value. My concern is that the report is becoming a mess of confusing numbers, but for those with that want to get into the financial details, it is all there including…
We have also added two new sections taking up a full page to show the impact interest rates will have on resale value and a comparison of FHA versus conventional financing as these are the most commonly requested scenarios. People are generally surprised that it is more expensive to own through FHA. Equity is cheaper than debt, so borrowing 96.5% is maximizing your expensive interest costs to minimize your inexpensive opportunity costs.
Beds 4 Baths 1 full 1 part baths Size 2,125 sq ft ($329 / sq ft) Lot Size 5,400 sq ft Year Built 1976 Days on Market 211 Listing Updated 11/4/2009 MLS Number S570571 Property Type Single Family, Residential Community El Camino Real Tract Dc
MODEL PERFECT FAMILY HOME WITH CUSTOM FEATURES AND UPGRADES THROUGHOUT. CUL-DE-SAC LOCATION WITH PRIVACY AND SPACE. NEW PAINT, CROWN MOLDING, WOOD FLOORS, NEW DUAL-PANE WINDOWS, NEW SOLID DOORS, NEW MASTER BATH, BRAND NEW SECOND BATH, NEW FRONT PORCH, NEW GARAGE DOOR AND OPENER. CORIAN KITCHEN COUNTERS AND MAPLE CABINETS. LARGE 15X30 STORAGE AREA ABOVE GARAGE WITH PULL-DOWN LADDER. THIS HOME HAS OVER $150K IN UPGRADES AND IS READY TO MOVE IN TO AND ENJOY!
I hope you find these enhancements to our reports, and I hope the
interesting look at the history of home prices and values gives you
insights into how this will all play out. The collective wisdom of the
IHB community will come to the correct answer. I am in awe of power of
astute observations to widen and deepen the conversation. So where do
you think prices are heading? Are fundamental values still a market
bedrock?
I want to invite you to our IHB Block Party from
6:30-10:00 tonight at JT Schmids at the District.
The story for the most inflated markets such as Irvine, California,
