Realtorspeak Must Die

Realtors have developed their own language and sales techniques to manipulate buyers. The practice is so widespread that most accept this indoctrination as being the way real estate is sold. Does it have to be that way?

8 Chardonnay kitchen

Asking Price: $440,000

Address: 8 Chardonnay #16, Irvine, CA 92614

Try Again — Aaliya feat. Timbaland

What would you do?
To get to me
What would you say?
To have your way
Would you give up?
Or try again

If any of you have every perused a typical realtor website, they attempt educate and inform like the IHB does. The main difference is they are not attempting to elucidate the truth, they are attempting to indoctrinate people into the nonsensical tenets of realtorspeak and kool aid intoxication. Realtors attend sales seminars and learn from other agents how to manipulate buyers through emotional appeals. The art and science of real estate sales is largely a study in the psychology of exploitation. Those that master these techniques make more money than those who do not.

During the bubble, buyers got caught up in the crazy fantasies of kool aid intoxication. Buyers wanted to believe the nonsense; they demanded it. A realtor or mortgage broker who attempted to talk a buyer out of overpaying for a particular property would lose the business to someone selling the fantasy. Making a living telling the truth and behaving morally is more difficult in financial manias. There is no reward for being realistic when nobody wants to live in reality.

The dynamics of a financial mania tend to drive good people out of the business. What you end up with are those who prospered during the mania by manipulating buyers and behaving in a completely self-centered manner. Is it surprising to see these same people call the bottom every few months? They don’t care about buyers, they only care about their next commission. That leaves us where we are today with an entire industry so completely imbued with bullshit that few recognize the truth any longer and even fewer speak it.

Realtorspeak must die. The general public is waking up to the fact that they have been lied to for far too long. If people desired duplicity, the websites and blogs of realtors would be getting much more traffic. Instead, people come to the IHB to experience an alternate reality; the truth.

Everyone was worried last week that the solitary voice of truth and reason was lost. Nothing has been lost. We would rather stick to our principles and fail than change who we are. Judging by the popularity of the IHB, now that the bubble has popped, the world is ready for a change of direction. We will lead it.

8 Chardonnay kitchen

Asking Price: $440,000

Income Requirement: $110,000

Downpayment Needed: $88,000

Monthly Equity Burn: $3,666

Purchase Price: $unknown

Purchase Date: 9/29/1995

Address: 8 Chardonnay #16, Irvine, CA 92614

Beds:	1
Baths:	3
Sq. Ft.:	1,362
$/Sq. Ft.:	$323
Lot Size:	1,362 Sq. Ft.
Property Type:	Condominium
Style:	Contemporary
Year Built:	1980
Stories:	2
Floor:	1
Area:	Woodbridge
County:	Orange
MLS#:	S570058
Source:	SoCalMLS
Status:	Active
On Redfin:	6 days

Beautiful atrium features an in-ground Jacuzzi spa with waterfall
framed by bricks. Sundeck off loft overlooks atrium. Two story living
room with fireplace. Master bedroom boasts a soaring ceiling, mirrored
closet doors and ceiling fan. Scraped ceilings, plantation shutters
throughout, ceiling fans in loft and dining room. Main floor powder
room with custom beach mural. Attached 2 car garage with new roll up
garage door. Woodbridge offers residents 22 swimming pools, 15
beautiful parks, paddle boat & canoe rentals at the Beach Club, and
rental facilities for events.

One of the reasons I chose this property today was because of the well-written description above. The realtor described the property accurately, featured its positive qualities, and used a minimum of flowery adjectives. There are no exaggerations, the punctuation is generally correct (There are sentence fragments), the words are spelled right, and it doesn’t employ any of the cheezy sales techniques I ridicule daily. It is possible to write a good property description without using realtorspeak; this description proves it.

I don’t know what is going on with this floorplan. Is there really only 1 bedroom and 3 baths? I think that is a mistake, but I don’t know.

Is it just me, or does anyone else think that mural is really tacky?

The owners of this property bought in 1995, but the final sales prices is not in my database. Here is what I do know:

On 6/16/1997 they opened a stand-alone second for $40,000.

On 11/3/1999 they refinanced their first mortgage for $201,000.

On 8/23/2000 they opened a HELOC for $20,000.

On 11/4/2002 they refinanced with a $234,000 first mortgage and a $10,000 second mortgage.

On 5/22/2003 they opened a HELOC for $40,000.

On 10/1/2004 they refinanced with a $325,000 Option ARM with a 1% teaser rate.

On 10/1/2004 they opened a HELOC for $50,000.

On 7/8/2005 they opened a stand-alone second for $77,000.

On 2/10/2006 they opened a stand-alone second for $135,000.

Total property debt is $460,000 ($325,000 + 135,000) plus negative amortization.

Total mortgage equity withdrawal is about $250,000. I can’t be sure of the amount.

These were typical Irvine homeowners who doubled their debt and now cannot afford their properties. It is a story we have seen dozens of times, and we will see it dozens more. If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $46,400.

{book6}

What would you do?
To get to me
What would you say?
To have your way
Would you give up?
Or try again
If I hesitated
To let you in
Now would you be yourself
Or play your role
Tell all the boys
I keep you low
If I saw no
Would you turn away?
Or play me off
Or would you stay, oh, oh

Try Again — Aaliya feat. Timbaland

A Deeper Drop

Many prognosticators are already calling the bottom. Most are market cheerleaders who will again be wrong. The deep price reductions we are seeing today suggests the bottom may be even lower than I originally predicted.

Asking Price: $429,900

Address: 8 Satinwood Way, Irvine, CA 92612

{book2}

Don’t Do Me No Favours — James Hunter

Y’know I fell on hard times
Bad luck fell on me
Pay day fell on Friday
And that’s a distant memory

When I predicted where the bottom will occur in Predictions for the Irvine Housing Market, I was not factoring in the impact of a severe economic recession, rampant job losses and astronomical foreclosure numbers. I did mention these factors in the post How Bad Could Bad Get? but I have been reluctant to embrace an even more bearish outlook on prices largely due to the extreme kool aid intoxication present in the market. The technical factors certainly point to a much deeper trough, but the psychological factors are still working to buoy prices. It is difficult to predict where the equilibrium between these competing forces will occur. Right now, I am hedging to the downside.

When I first suggested prices might drop 40% back in early 2007, people
thought I was crazy. Here we are a little over 2 years later, and we
are already seeing prices reflecting the percentage declines I foresaw. That tells me one thing; we should overshoot my predictions to the downside. We should not be seeing prices this low at this stage in the decline. The fact that we are does not bode well for future pricing.

As a refresher, I predicted median prices would fall from a price point near $700,000 to near $400,000 over a 5 year period.

Today’s featured property was $700,000 in 2005, and it is asking $429,900 today. That is a 38% price reduction. This property made the entire journey I outlined above, but it dropped that far in 2 years rather than 5.

The predictions I made were for the median rather than for individual properties. It is possible for the prices of individual properties to drop more than 40% while the median does not. One of the weaknesses of using the median is that it only reflects what is being spent in the market; it does not tell what was obtained for the money spent.

It is difficult to say what this property is worth due to the downward pressure on rents, but I would estimate this is quickly approaching rental parity. Assuming $2,500 a month rent, rental parity would be around $400,000. We have seen many low-end apartments condos at or below rental parity, but this is one of the first near-median properties (3/2 with 1,700 SF) we have seen to date.

It isn’t very likely that the market will bottom sooner than anticipated. There are too many homeowners with too much debt that have to be purged from the system. It is far more likely that we will reach a lower bottom than I originally estimated because if REOs are going this low now, how low will prices need to get to clear out the tsunami that is coming? We have already seen REOs from $45/SF to $100/SF all over Riverside County; that is what subprime did. Wait until the Alt-As and Option ARMs do their damage here. How low will it go here in Irvine? You tell me.

Asking Price: $429,900

Income Requirement: $107,475

Downpayment Needed: $85,980

Monthly Equity Burn: $3,582

Purchase Price: $700,000

Purchase Date: 8/10/2005

Address: 8 Satinwood Way, Irvine, CA 92612

Beds:	3
Baths:	3
Sq. Ft.:	1,749
$/Sq. Ft.:	$246
Lot Size:	2,560 Sq. Ft.
Property Type:	Condominium
Style:	Contemporary
Year Built:	1966
Stories:	2
Floor:	1
Area:	University Park
County:	Orange
MLS#:	S570675
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Two Story – 3 Bedrooms, 2.5 Bathrooms. Beautiful home in Universty
park. Home has spacious yard with a green belt on the other side of the
fence. Hardwood floors throughout the First Floor. Balcony of the
Master Bedroom..

This was a simple transaction. In 8/10/2005, the owner paid $700,000 using a $560,000 first mortgage, a $140,000 second, and a $0 downpayment. Just when you thought we had seen all the 100% financing deals purged from the system, you realize, there are still more out there. The lender only bid $461,588 at the auction, and they got the property anyway. They have listed it for $429,900, probably in hopes of a bidding war.

If this property sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $295,894. This property is listed for 38% off its peak purchase price.

{book3}

Y’know I fell on hard times
Bad luck fell on me
Pay day fell on Friday
And that’s a distant memory
But don’t do me no favours
Just you let me live and learn
Don’t you do me no favours
That I can’t do in return

So don’t do me no favours
Just you let me live and learn
Don’t you do me no favours
That I can’t do in return

Don’t Do Me No Favours — James Hunter

BTW, I will not be near a computer today, so I will not be participating in the comments. Sorry.

Understanding Riverside County's RE Market

Our open thread this weekend contains a brief analysis of the Riverside County housing market. All of Southern California’s real estate markets are interconnected by commuters. What happens over the hill impacts pricing here in Irvine.

Here is a great article from the LA Times: HUD’s Dollar Homes falls short of mission.

I would like to share with you some interesting blog posts I read this week at The Housing Chronicles Blog,

Declines in the Case-Shiller Index not uniform

Apartment rents falling in Southern California

“Shadow inventory” of foreclosures remain hidden from the market

And related to today’s topic:

Signs of life in the hardest-hit housing markets

They say an end can be a start
Feels like I’ve been buried yet I’m still alive
It’s like a bad day that never ends
I feel the chaos around me
A thing I don’t try to deny
I’d better learn to accept that
There are things in my life that I can’t control

If I Ever Feel Better — Phoenix

Will prices ever stop falling in Riverside County? Will their real estate market in the Inland Empire rise like a Phoenix from the ashes? Prices will not rise any time soon, but there will be an increased activity among cashflow investors absorbing the inventory of foreclosures. Eventually, all of the houses from the bubble will be recycled, and the new homeowners will not have near as much debt as the previous ones. The economy will recover, and life will go on.

Cashflow Investing

Riverside County and parts of San Bernardino County are collectively known as the Inland Empire. It is a mess. Unemployment is high, house prices are already down 50%, and they are still falling. Prices will continue to fall until real estate savvy cashflow investors loaded with cash enter the market and begin absorbing the inventory. Call it opportunistic, vulture investing, value buying, or whatever term you think appropriate, but the people who invest in this manner are the ones who will create the bottom with their buying activity.

In every disaster there is opportunity. Uncertainty in any market negatively impacts pricing; however, there is a price point where investors believe they are being properly compensated for the risks they are taking on. Even now, there are properties in Riverside County that warrant serious consideration from cashflow investors.

Think about it, let’s say you find a property where the cashflow value with a 10% return is $180,000. However, you are worried that you will have difficulty finding tenants for the next two or three years. How much income might you lose? $10,000? $20,000? Discount the property to account for the difference. There is generally a price point where an investment makes sense.

Cashflow investing is a process of determining value, evaluating risks and discounting as appropriate. Whoever has the most aggressive set of assumptions will acquire a property in the open market. Those who are too aggressive will lose money, and those who are too conservative will never transact. That is how markets work.

The Inland Empire

I want to thank Boyd Martin of Market Profiles for providing the information presented today. He provides an analysis of New Home prices in various sub-markets across California. Like many in my industry, I receive his quarterly updates. I called him on Thursday to obtain his permission to reproduce his study from the 4th quarter of 2008 for the Inland Empire.

Market Profiles
714-546-3814

bmartin@marketprofilesinc.com
wscott@marketprofilesinc.com

NewHomesMatch.com

I mentioned a couple of weeks ago the BIA website NewHomesMatch.com. They have every floorplan of every new home in Southern California in their database. It is a really cool service.

All of the data presented today is accurate for new homes. These prices are not reflective of resale home prices. New home prices are a much better indicator of market strength and direction. The active builders do not live in denial because they must sell their inventory to stay alive. If that means prices must be lowered, then they will lower prices. At whatever price levels new home bottom, resale homes will bottom out even lower usually 2 or 3 years later because the less expensive new homes puts tremendous pressure on resale prices. This deep recession may put our resale market bottom back from 2011 to 2012 or 2013.

The Inland Empire’s Local Markets

Market Profiles 4th quarter new home sales prices

Above is the grahpic from his update. I have used his graphic to provide a general overview of the Inland Empire markets:

As you might expect, the sub-markets in the Inland Empire can be broadly grouped by their proximity to Orange and LA Counties. The growth in these markets began as a “cost push” of housing as people sought less expensive homes. This still goes on today.

The first of these sub-markets is the eastern edge of Orange County and Corona. The next level is the Riverside and Lake Elsinore Markets. Further inland you arrive at Moreno Valley, Perris, and Murrieta. The extreme fringe of this market is Banning, Beaumont, San Jacinto and Hemet.

The further out on the fringe you go, the less expensive pricing becomes, and the more risk you take on as an investor. As prices crash, people migrate to the west. This leaves the eastern fringe markets with excess supply and problems with vacancy. Properties on the eastern fringe require major price reductions to compensate for the risks of vacancy and declining incomes. These are also more difficult to manage. Since the extreme eastern markets are also the markets that saw the most construction during the bubble, there is a huge turnover of homes due to foreclosures. However, this is also an opportunity; this is where you can pick up a house that is less than 5 years old for prices well under construction costs. In short, they almost are giving them away.

East OC and Corona

OC Edge Corona

As you can see from the graphic, new home prices in Corona declined in price about 10% last year. They are also still building a lot of McMansions (3,409 average square footage). What do you think this does to pricing in Orange County? Some people are going to go to Corona and buy a new McMansion for $150/SF, particularly when the Irvine Company still wants to get $385/SF. (Here is one for $109/SF) There is no way OC pricing holds up when new homes are available that close for that much less. Yes, I know, none of us want to go live there, but we are the Irvine Housing Blog; we do not represent a typical market cross section. Many people will go over the hill to buy these houses. Prices there have probably not bottomed, particularly for new homes, but their market is closer to the bottom than to the top.

Riverside and Lake Elsinore

Riverside Lake Elsinore

This next market segment could probably be separated into two different markets as Riverside and Lake Elsinore have very different market dynamics. Riverside has more of an economic base than Lake Elsinore does because it is a more established community. Lake Elsinore more than doubled in size during the bubble whereas Riverside saw a much smaller percentage increase in its population. That being said, I lump these together because they both represent an additional 20-30 minute drive from the OC and LA markets.

As you can see, the pricing in Lake Elsinore is getting hammered. If you really want to see carnage/opportunity, take a look at nearby Wildomar. How does $31/SF for a 2006 home grab you? (Most are near $70/SF) There isn’t a pooper-scooper big enough for some of these markets. The general pattern to look for in Riverside county is to find concentrations of houses built during the bubble, and you will find entire neighborhoods of REOs and very low prices.

I consider these markets some of the better cashflow investment opportunities. Even though the current inventory is high, it will be easier to attract and keep renters here because you have two other markets even farther to the east you can attract renters away from. These markets will be less damaged by the westward migration than will the extreme fringe markets.

Moreno Valley, Perris and Murrieta

Moreno Valley Perris Murrieta

The third level inland is a high-risk market. There is little economic activity out there because it is dependent upon real estate. Market conditions will get worse here, and coditions will stay bad for quite some time. There are cheap houses here too. This one is $45/SF. However, based on current pricing across the area, this is the market slice I find least attractive. IMO, prices not low enough to compensate investors for the risk. I foresee continued downward pressure on prices across this entire market swath.

You can already see the brutal beating the Moreno Valley market is getting. Prices are down 20% YOY there.

Banning, Beaumont, Hemet and San Jacinto

Banning Beaumont San Jacinto Hemet

This last market is utter chaos. When Jim Cramer talked about “plowing under the Inland Empire,” this is the area he was talking about. The sleepy little communities in this area exploded with housing developments from 2003-2006. Everything out there is new. Now, with the collapsing prices to the west, everyone is abandoning their homes and moving closer to work and cutting their housing costs in half. This area is a disaster zone. It will be the last to recover. However, for those with a long-term market view and a lot of nerve, this is where the home-runs will be hit. There will likely be many properties less than 5 years old transacting near $40/SF. Here is one at $42/SF. At those prices, you could almost let it sit empty for three years and just factor in the vacancy loss to your calculations (maybe not that long, but you get my point). There is a price point where these properties become attractive. Anyone thinking about investing out there needs to be fully aware of the risk. There is a reason the prices are so low.

Notice that in none of this discussion did I mention appreciation. These properties are cashflow investments; appreciation is not a consideration. Sure, if California blows up another massive housing bubble some of these properties may provide a convenient exit point by offloading it to some fool caught up in a financial mania. But realistically, prices are not going up in Riverside County for a very long time. If you want to buy an “investment” property in these markets because you think pricing is going to recover soon, you are a fool.

Bull or Bear?

For those of you that want the IHB to remain permanently bearish, I am sorry, but I am not a permabear. I am still very bearish on Irvine and most of Orange County. I am still somewhat bearish on pricing in the Inland Empire, but price levels in many areas do cashflow. This is a fact. There are risks in this market: (1) prices might drop further, (2) rents may decline, (3) jobs might disappear, and (4) incomes may go down. But an objective analysis of many properties in Riverside County shows that buying them and renting them out currently provides returns superior to other investment classes. It is what it is.

Does reporting this fact make me bullish? No, it makes me a reporter of market conditions. Only an investor who weighs the risks and rewards and has an accurate idea of what they want can determine whether they are bearish or bullish on any given asset class. Some people will look at these properties and conclude prices must drop further; others may not. No investment is without risk–a fact that escaped everyone who was speculating on the sure thing during the bubble.

Where Did You Spend the Eve of the Millennium?

Where did you spend the eve of the Millennium? I proposed to my wife on December 31, 1999, in today’s featured property.

6 Rocky Knoll St kitchen

Asking Price: $815,000

Address: 6 Rocky Knoll St #3, Irvine, CA 92612

{book6}

Millennium — Robbie Williams

Live a life of solitude
till we find ourselves a partner someone to relate to
Then we slow down,

I moved to California in 2001. But prior to that I was invited to come to California by the owner of today’s featured property to visit for a week, and I could bring a friend if I wanted. He had just purchased this place in 11/1/1999, and he got it remodelled in time for the Millenium. We enjoyed our time spent in Irvine, and on the eve of the Millennium I proposed to the woman who became my wife. It really was a special day. This is the only property in Irvine other than the places I have lived that I have any real connection to.

Of course, we had no idea we would end up in Irvine when we came to visit. I lived in Florida at the time, and I had no thoughts of moving. We always remembered the great time we had here and what a wonderful place to raise a family Irvine is. As life worked out, we decided to move to California, and we finally ended up here.

Now before you flood the comments with questions, this is not listing I am associated with in any way, I am not doing this owner a favor (we are no longer close), and I do not think anyone should go out and buy this property.

This owner works in an industry related to mine, so I know times are not particularly good. He was not very responsible with his mortgage, but this is not a short sale either. My guess is that he will do what he needs to do to sell the property. This one will not sit on the market for months with a WTF asking price. The property is priced in the large spread between current asking prices and recent transactions. This is the least expensive property in the area, and it is also priced over recent comps. It is a crazy market.

6 Rocky Knoll St kitchen

Asking Price: $815,000

Income Requirement: $203,750

Downpayment Needed: $163,000

Monthly Equity Burn: $6,791

Purchase Price: $415,000

Purchase Date: 11/1/1999

Address: 6 Rocky Knoll St #3, Irvine, CA 92612

Beds:	4
Baths:	3
Sq. Ft.:	2,855
$/Sq. Ft.:	$285
Lot Size:	–
Property Type:	Condominium
Style:	Mediterranean
Year Built:	1979
Stories:	3+
Floor:	1
View:	City Lights, Greenbelt
Area:	Turtle Rock
County:	Orange
MLS#:	S569602
Source:	SoCalMLS
Status:	Active
On Redfin:	7 days

Lowest price per square foot in Turtle Rock!! This is NOT a short sale
or bank owned!Fabulouse entertainment home. 2 fireplaces – large
dining,living,family and kitchen. Thousands of dollars spent on
lighting thru out home. Dramatic designer paint colors thru out.
Beautiful wood paneling in dining, living and entrance. 2 large decks
with city light view. Travetine and wood floors in main floor. The
grassy knoll is behind home. The TR Vista has more greenbelts than any
other association in Irvine.Walking distance to Turtle Rock Grammar,
University High School and UCI.

Fabulouse?

thru out? Has that error become so common that it becomes correct through usage?

Did you notice that a house that is neither REO or a short sale is a selling point? That says much about the market, doesn’t it?

The pictures on the MLS are crap.

Since I do know this owner, I am not going to give the details on this property; it would make it too personal. Suffice to say, he did what everyone else was doing, and now he has to sell his house. If he can manage to get his selling price, he will escape with a few dollars to start over. Somebody will catch this falling knife and help him out.

Live for liposuction
Detax for your rents
Overdose for christmas and give it up for lent
My friends are all so cynical refuse to keep the faith
We all enjoy the madness cause we know were gonna fade away.

So where were you on the eve of the Millennium? and what were you doing?

I hope you have recovered from this stressful week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

🙂

{book7}

Weve got stars directing our fate
And were praying its not too late
Millennium

Some say that we are players
Some say that we are pawns
But weve been making money since the day that we were born
Got to slow down,
Cause well low down.

Round and round in circles
Live a life of solitude
till we find ourselves a partner someone to relate to
Then we slow down,
Before we fall down.
Weve got stars directing our fate
And were praying its not too late
cause we know were falling from grace
Millennium

Millennium — Robbie William

I Will Not Call a Bottom

Many of you have told me you are waiting for me to call the bottom. I am not going to do that. The bottom will not need to be called because when it is time to buy, the numbers will tell you so.

59 Emerald kitchen

Asking Price: $843,900

Address: 59 Emerald, Irvine, CA 92614

{book4}

Time — Pink Floyd

You are young and life is long and there is time to kill today
And then one day you find ten years have got behind you
No one told you when to run, you missed the starting gun

I will never call a bottom. For any of you waiting for the big announcement on the IHB that the bottom is here, that announcement will never come.

I have written about the market bottom on a number of occasions including: The Market Bottom and Fundamentals at a Market Bottom, and I have predicted where the bottom will occur in Predictions for the Irvine Housing Market, and I followed up with I Was Wrong, It’s Worse… But today, I want to talk about what will happen when we get near the bottom of the market and why I will not need to call it–and no, it isn’t because I am afraid to. It is because it is unnecessary.

I will profile properties, and I will
discuss what I believe the value of these homes are based on rental and
income numbers. At some point, probably 2 years from now, asking prices and comparable sales prices should be at or below reasonable valuation
levels based on rent and income. It will not be a call to buy, it will
merely be a comparison of value to current pricing. When current
pricing is below values based on cashflow, it is an implied buy signal. It
doesn’t mean property values might not decline further, but it does
mean that even if that occurs, you are still saving money owning versus
renting and declining values are not going to hurt (as much).

For instance, right now in several markets, there are properties
trading at a discount to rental parity or even cashflow investor
levels. Go to Redfin and look at some of the properties in Riverside
County. They are everywhere. If I were to do a cashflow analysis of
these properties and show price levels of rental parity and cashflow
positive investment value, you would see that the current comparable
sales are trading below these levels in many instances. That is a buy
signal. At some point in the future, not now, the same analysis will
point to buying in Irvine’s market.

I have been experimenting to find a simple way to communicate these ideas in a report people can easily understand. The chart to the left is my attempt. Let me explain what everything means:

Each property is subjectively evaluated to determine its desirability as a long-term residence. This is a subjective evaluation. For instance, today’s featured property would be an excellent long-term home. It is a large home in a good neighborhood with few negatives. If the best properties in the entire market would rank a 1, and if the very worst would rank as a 5, this one, IMO, is a bit better than a 2. The little green dot represents my subjective evaluation of this property.

The black dots represent different important price points every buyer should be aware of. The first is the “value,” if you want to call it that, of comparable sales in the market. This has nothing to do with cashflow, and it is based totally on what people are currently paying for similar properties in the market. As we all know, we are still deflating from a massive housing bubble, so this comparable sales value in Irvine is currently well above any reasonable cashflow metric. The Comparable Sales Value floats up and down this chart based on whatever people are currently paying.

The next black dot on the list is the asking price. This can also be just about anywhere. The frequent WTF listing prices I profile here would be off the top of the chart. Hopefully, if anyone is actually considering buying in this market, they would at least try to pay less than current comparable sales.

The next black dot on the list is the Maximum Cashflow value of the property. Do you remember the post, Investment Value of Residential Real Estate? As I begrudgingly described in that post, there is a legitimate financial reason to pay more than rental parity for blue-chip properties a buyer plans to own for 10 years or more. This is not a large premium over rental parity. The calculations in that post demonstrate you can pay up to 10% more than rental parity on a long-term hold because you obtain the benefit of the inflation hedge. This is not a price point for homes you know you will want to move up and out of in a few years.

The next black dot on the list is the oft-described rental parity. One of the better discussions of this concept is contained in Rent Versus Own. This is the price level most properties in Irvine should reach at the bottom of the market. At this price point, the cost of ownership is equal to the cost of a rental. In theory, a buyer considering only financial concerns would be indifferent between renting and owning at this price point.

The zone between rental parity and cashflow investor levels is the gray area where all the less desirable properties fall. This would include most condos, any two-bedroom properties and what are commonly known as “starter homes.”

The final black dot is the cashflow investor level. This is the price point where an investor can acquire a property, rent it out, and turn a monthly profit from owning the property. This is the bottom of the line for Irvine properties, and it is usually about 25% below rental parity. Many of the crappy condos that have been leading the charge to the bottom will find support at this price point.

The final number on the chart would be those properties nobody wants to live in. Does everyone remember Dr. Housing Bubble’s series Real Homes of Genius? Those are the properties I am talking about. What they really need is a bulldozer.

So with that lengthy preamble, let’s examine what a good deal would look like. Take a look at this listing in Corona, California. I have not pulled comps for sales and rentals, but just by looking at the property and the price, I can make a barely educated guess about the dynamics of the property. To me, this looks like a nice median Corona property. The pricing should be at rental parity; however, looking at this asking price and the comps, it certainly appears as if both comparable sales and the asking price are below rental parity. This would be a property to buy, assuming you want to live in Corona (I am not endorsing buying this specific property as I have not researched it in detail). A person looking at a property like this one in Corona would see a chart like the one at the left.

You see, there is no need to “call a bottom.” I only have to identify good deals. Over time there will be an
emergent trend where each day here at the IHB we see more and more
properties trading at or below rental parity. When that occurs, the
bottom, although not called by anyone, will be under our feet.

59 Emerald kitchen

Asking Price: $843,900

Income Requirement: $210,975

Downpayment Needed: $168,780

Monthly Equity Burn: $7,032

Purchase Price: $639,000

Purchase Date: 6/24/1996

Address: 59 Emerald, Irvine, CA 92614

Beds:	4
Baths:	3
Sq. Ft.:	2,794
$/Sq. Ft.:	$302
Lot Size:	5,500 Sq. Ft.
Property Type:	Single Family Residence
Style:	Contemporary
Year Built:	1985
Stories:	2
Area:	Woodbridge
County:	Orange
MLS#:	S570083
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

lite-brite

Rare find. Light, Bright and Spacious Home in Woodbridge. 4 Bedrooms
plus a den with 3 Baths. Vaulted ceilings, Sunken Living Room,
Breakfast Area, Fireplace in Family Room and Master Suite. Private Pool
in the Backyard. Woodbridge features 2 Lakes and Private Beaches, lots
of Parks, Pools, and Tennis Courts. Walk to schools and close to
Freeways and Shopping.

This property was purchased for $639,000 on 6/24/1996. The owner used a $500,000 first mortgage and a $139,000 downpayment. Just for giggles, I calculated the compound rate of return this property witnessed between 1996 and 2009. It works out to 2.16%.

	2.16%
1996	$ 639,000
1997	$ 652,818
1998	$ 666,936
1999	$ 681,358
2000	$ 696,093
2001	$ 711,146
2002	$ 726,524
2003	$ 742,235
2004	$ 758,286
2005	$ 774,684
2006	$ 791,437
2007	$ 808,552
2008	$ 826,037
2009	$ 843,900

So much for the rampant appreciation of the bubble. At least this owner cashed out. She got a $750,000 first mortgage and a $300,000 second from Lehman Brothers back in 2006.

If this property sells for its asking price, if a 6% commission is paid–and this one probably will as it is priced below neighborhood comps–the trusties for the Lehman Brothers bankruptcy will lose $256,734.

This price isn’t at rental parity, and it isn’t at maximum cashflow value either, but it is making significant progress toward affordability. Wait, prices will get better.

{book5}

Ticking away the moments that make up a dull day
You fritter and waste the hours in an off hand way
Kicking around on a piece of ground in your home town
Waiting for someone or something to show you the way

Tired of lying in the sunshine staying home to watch the rain
You are young and life is long and there is time to kill today
And then one day you find ten years have got behind you
No one told you when to run, you missed the starting gun

And you run and you run to catch up with the sun, but its sinking
And racing around to come up behind you again
The sun is the same in the relative way, but youre older
Shorter of breath and one day closer to death

Time — Pink Floyd