Everyone wants a comfortable family home; a safe place to share family
love and memories. The question becomes should you create this
environment in a home you rent? or a home you own?
Irvine Home Address … 8 Blue Ridge Rd Irvine, CA 92620
Resale Home Price …… $675,000
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Such a feelins comin over me
There is wonder in most everything I see
Not a cloud in the sky
Got the sun in my eyes
And I wont be surprised if its a dream
Top of the World — The Carpenters
There is an excitement in the air. People believe the recession is over, there is not a cloud in the sky, and possibilities are endless. Now where is that HELOC money so we can get back to living?
The mainstream media is dominated by articles full of wishful thinking. The optimism is blinding people to the realities of the commercial real estate bust and the residential ARM resets yet to be written down. We still have two major deflationary events in front of us, and there is scarcely a mention of it in the MSM.
What is fueling optimism in the real estate market — other than residual kool-aid intoxication — is a host of government market props. These include (1) an $8,000 tax credit to qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009, (2) the Federal Reserve buying agency debt so the GSEs and the FHA can continue to underwrite loans no investors want in order to hold down mortgage interest rates, and (3) withholding of product inventory to create artificial shortages.
Buy? or Rent?
Buyers believe the government props will sustain the market long enough for free-market conditions to support current price levels. In short, buyers believe we are at the bottom. Renters believe the local market will fall off a cliff once the government market props have been removed. Who is right? Is the market “on ice” like buyers believe? or is it “on fire” like the renters believe?
The Federal Reserve’s Dilemma
The Federal Reserve is not charged with re-inflating the housing bubble and returning our economy to HELOC borrowing for personal consumption. As Barney Frank put it, “It (expanding FHA) was
an effort to keep prices from falling too fast. That’s a policy.” Do you understand the implication of his official policy statement? The US Government — and the FED — are charged with making sure prices do not fall too fast. Once prices stop falling in an uncontrolled death spiral, the props will be removed.
The FED does not want to be a market prop, but they do not feel like they have much choice in the matter. Each market that crashes deflated hundreds of billions of dollars of lender collateral, or as is more common now, lender property. Lenders would love to maintain the illusion of high prices in Coastal California.
Once prices start to fall sharply, cure rates fall off and people walk away from their properties. This tipping point is reached when the downward spiral takes over; foreclosures lower prices which creates more foreclosures. The lenders are desperate to prevent this.
The Federal Reserve is under pressure to wind down special programs and market supports and return the economy to a regulated free market (do you like that oxymoron?) If the Federal Reserve keeps these programs in props in place, it will be very inflationary, and it may even result in a big inflation spike in 2011. Eventually, the market props will need to be phased out.
With the Federal Reserve trying to balance its competing priorities, sustained appreciation in the real estate market is not very likely, particularly in markets like ours where the downward spiral has not crushed prices yet. The FED will attempt to hold mortgage interest rates low by buying agency paper until such time they don’t need to. They will do this until inflation forces their hand and makes them stop. If they are able to succeed, they may be able to flatten the market and ease interest rates back up while the market fundamentals catch up.
The Lost Decade
The chart above shows median home prices in Irvine stabilizing at
$450,000 in 2010 as interest rates bottom at 4.5%. The average interest rate since the early 1970s when the GSEs
started keeping records is 8% (7.99% actually). I further assumed
interest rates will rise once this economic crisis is over from an
unprecedented 4.5% to the long term average of 8%.
None of us knows what will happen next. The best we can do is take an objective look at the information and try to make a good decision. Right now, in the fall of 2009, the circumstances favor renting unless you are buying with a 7-10 year timeframe. There is too much potential downside risk and very limited upside potential. If you are buying today in Irvine because you expect appreciation, you will be disappointed in the short and medium term. In the long term, we are all dead.
Irvine Home Address … 8 Blue Ridge Rd Irvine, CA 92620
Resale Home Price … $675,000
Income Requirement ……. $124,236
Downpayment Needed … $135,000
Home Purchase Price … $865,000
Home Purchase Date …. 7/18/2007
Net Gain (Loss) ………. $(230,500)
Percent Change ………. -22.0%
Annual Appreciation … -7.9%
Monthly Mortgage Payment … $2,899
Monthly Cash Outlays ………… $3,780
Monthly Cost of Ownership … $2,830
Redfin Property Details for 8 Blue Ridge Rd Irvine, CA 92620
Beds: 4
Baths: 2.5
Sq. Ft.: 2,509
$/Sq. Ft.: $269
Lot Size: 5,998 Sq. Ft.
Property Type: Detached, Single Family Residence
Stories: 2
Year Built: 1979
Community: Northwood
County: Orange
MLS#: K09059907
Source: MRMLS
Status: Active
On Redfin: 137 days
Irvine home built in 1979 4 Bedroom 2 1/2 Bathroom boasting 2,495 sq ft in Living Space.
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Check out this listing price history:
| Date | Event | Price |
|---|---|---|
| Oct 14, 2009 | Price Changed | $675,000 |
| Oct 13, 2009 | Price Changed | $600,000 |
| Oct 13, 2009 | Relisted | — |
| Jun 04, 2009 | Delisted | — |
| Jun 01, 2009 | Listed | $550,000 |
This is an unforeclosed short sale from what I can tell in the property records. Either the lender is getting greedy to recover more of its lost loan money or this seller is delusional. It could be a bit of both.
This property was purchased on 7/18/2007 for $865,000. The owners used a $778,500 first mortgage and a $86,500 downpayment. It didn’t take them long to give up on the property.
Foreclosure Record
Recording Date: 12/15/2008
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2008000573928
Foreclosure Record
Recording Date: 08/20/2008
Document Type: Notice of Default
Document #: 2008000396611
There must be more to this story. A couple who put in a significant downpayment gave up paying about a year after move in? I doubt they felt they were so far underwater it was hopeless. This may be a job loss or other family issue.
I assume the people must still live there and they are handling this as a short sale. If so, they haven’t made a payment to anyone for their housing for the last year. Free housing during the Great Recession is this family’s compensation for losing their home.
OK, OK, the debt is big. So what?
