5% interest rate

R

rickr

New member
As interest rates rise, will TIC need to start lowering the prices on these new models?

At 4.25% I did not mind paying $605K for a Sevilla plan 3 but at 5%, no thank you.

Running my numbers and taking into account putting 20% down, a model going for $605K needs to have the price dropped by $50K to make up for the bump up in the rate.
 
You're first sign of price adjustment due to rate rises should be in the resale market. Homes there turn over faster - 30/60 day escrows - wheras the builders have much more time to wait and see. If foot traffic slows, I'd expect to see more "Broker Co-op" ads, then "Special Financing" ads come out before we see any 7 to 10% price reductions.

The March/April resale home data (April/May reporting) should indicate if Helicopter Ben's going to call for another round of Mortgage Backed Securities purchases. There already is a whisper here and there about terminating QE2, but just as much chatter about QE2 lite/QE3 for Municipal Bonds and perhaps MBS's.

My .02c

Soylent Green Is People.
 
rickr said:
As interest rates rise, will TIC need to start lowering the prices on these new models?

At 4.25% I did not mind paying $605K for a Sevilla plan 3 but at 5%, no thank you.

Running my numbers and taking into account putting 20% down, a model going for $605K needs to have the price dropped by $50K to make up for the bump up in the rate.
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As it's been discussed numerous times on this thread, the downward pressure on price will not be proportional to the payment hike based on 20% down.  There are way too many buyers putting down 50%+, including Full cash buyers.  It's unfortunate for younger buyers who have not had time to save up, but it's the reality in Irvine housing market.
In near future, I think only a flood of foreclosed homes will have a real significant downward pressure on housing price.  But, we have been waiting for those for many years now.  Maybe 2011 will be the year, maybe the next housing boom will come before the foreclosure boom.  We will only know when we are past it.
 
Just hold onto your money. The knife catching hasn't dulled yet. Phase II of Sevilla is already having problems selling. Woodbury has brand new town homes that have yet to sell (after 2- 3 months). Irvine or not, the market is weak. http://www.redfin.com/CA/Irvine/59-Towngate-92620/home/35652437

Don't believe the hype that you've missed some sort of window of opportunity because "rising rates won't cause Irvine home prices to
proportionally weaken", that's simply not true.

It took about 10 years for prices to bubble up, and we're only about 3.5 years into the downturn. Patience is a big virtue in this market, and the ability to not let TIC convince you that you're buying gold with every detached condo they put up for sale.
 
This is the same as when gas prices go up (very fast) and when they come down (very slow). It will take a while for the builders and resale to accept that their home is less affordable to the general public and if they really want to sell their house they will need to cut the price.
 
qwerty said:
This is the same as when gas prices go up (very fast) and when they come down (very slow). It will take a while for the builders and resale to accept that their home is less affordable to the general public and if they really want to sell their house they will need to cut the price.
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Pretty much. The worst part about it is a lot of these owners who have inflated mortgages have horribly large carrying cost too. I can't imagine paying a monthly check, and paying on 1.7% tax every 12 months on a home that is worth $100,000 less than when I bought it, like this guy:http://www.redfin.com/CA/Irvine/95-Alhambra-92620/home/12257811

It's not a short sale either, so this guy is eating $100,000 of his own skin (on his down payment or otherwise). Seriously, ouch. I wonder if he uses the TIC Woodbury Brochure to dry his tears.
 
So the million dollar question is what happens when rates go back to historical levels of 7-7.5%?

A lot of people on this board claim Irvine is immune and all the FCB will keep pouring money into homes here. I might tend to agree if there was no land left for development. But with all these new developments going up and more to come (Great Park), I am having my doubts.

Econ 101, supply and demand right. Eventually the demand will dry up and they are way overbuilding the supply.
 
7% would actually be healthy. That's what rates were close to in the 90s when housing was affordable based on median incomes.
 
rickr said:
So the million dollar question is what happens when rates go back to historical levels of 7-7.5%?

A lot of people on this board claim Irvine is immune and all the FCB will keep pouring money into homes here. I might tend to agree if there was no land left for development. But with all these new developments going up and more to come (Great Park), I am having my doubts.

Econ 101, supply and demand right. Eventually the demand will dry up and they are way overbuilding the supply.
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With people having such a recent memory of 4.25% rates they are going to have a hard time swallowing 7% to 7.5% rates. Just as current sellers remember the bubble prices and ask for inflated selling prices, buyers have memories of affordability based on sub 5% rates and will want a lower price to offset the jump in rates.  Its one thing for buyers to pay 700K for a new detached condo at 4.75%, but i imagine not many will be willing to pay 700K at 7%.  Will see who has more patience.
 
IndieDev said:
irvinehomeowner said:
IndieDev said:
7% would actually be healthy. That's what rates were close to in the 90s when housing was affordable based on median incomes.
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You don't remember the 90s bubble?
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I remember the 90s crash.  ;)
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What I was getting at was even when rates were near 10%... housing prices were still high. Rates went down... and so did prices... so what happened?

So while there may be a small relationship between rates and prices... it's not a directly inverse proportional one historically (I think even you said that).
 
irvinehomeowner said:
IndieDev said:
irvinehomeowner said:
IndieDev said:
7% would actually be healthy. That's what rates were close to in the 90s when housing was affordable based on median incomes.
Click to expand...
You don't remember the 90s bubble?
Click to expand...
I remember the 90s crash.  ;)
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What I was getting at was even when rates were near 10%... housing prices were still high. Rates went down... and so did prices... so what happened?

So while there may be a small relationship between rates and prices... it's not a directly inverse proportional one historically (I think even you said that).
Click to expand...

Housing was far more affordable in Irvine during the 90s bubble, than 2010, this was when rates were hovering near 8%. During the 90s bubble, people could afford homes in Irvine based on under writing standards(28/36) with a 20% down payment. Not so today, and that's why you see a lot of regular middle class families putting down 50% in Irvine, they simply couldn't buy a home if they didn't put down that much. What changed between 1995 - 2010? Under writing standards changed which increased the amount of credit people could access, which in turn artificially increased the amount of house people could buy. Do you really want to pay for people's credit debt? Because that's what you're doing if you buy a home based even on 2010 prices in Irvine.

Here's a previous post where I actually compared affordability in Irvine between the 1995 "bubble" and 2010.

I can understanding buying because it makes sense for someone's personal situation.  Some people just need to have the best 4 walls money can buy. Some need luxury cars with 600 horsepower, but comparing 1995 Irvine to 2010 Irvine is like comparing a rowboat to the Titanic. The disparity between incomes and home prices in 1995 was close to "normal" affordability. Median household income $60,000, and the average SFR cost $228,000 (3.8 LTI). In 2010, the average Irvine home price is $546,500, the median household income is around $110,000 ( a 5.0 LTI).

Rents back then were comparable to now (inflation adjusted), not surprising since those numbers are driven by income rather than access to credit.
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As for interest rates moving proportionally to prices, I've never made that claim. I do have a problem with people claiming there is a missed window of opportunity because the way interest rates are rising will make housing less affordable because the decrease isn't going to be proportionate. That belies economic fundamentals which makes sense since the people presenting these theories have purchased over priced albatrosses.

All I've ever claimed is that interest rates do have an effect on affordability which will have an effect on the buyer pool (demand). Historically, but most important, fundamentally, income, supply, and demand are the biggest factors that have an effect on housing prices. That's not me, that's Adam Smith, Hume, and a lot of other dead white guys who figured all of this out long before me.
 
To be clear, I wasn't saying you "claimed" anything... just that you've said previously that prices don't exactly follow rates but rates do affect affordability. The "directly inverse proportional" wasn't pertaining to you... so I agree with you on that part.
http://www.talkirvine.com/index.php?topic=1286.msg16905#msg16905
IndieDev said:
They don't follow rates, but interest rates have an effect on affordability which in turn has an effect on prices over time. Your graph actually proves this for the time period it covers.  ;)
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As for missed windows belying economic fundamentals... the problem with that is much of what sets housing prices is non-fundamental... or Irvine would be much lower than it is now. This is just my opinion but I don't think any owner (or even TIC) will lower prices immediately by 20% to account for a 20% decrease in affordability based on higher interest rates. The overall economic fundamental pressure that would eventually cause that moves much slower than the rate hikes... and in non-fundamental bubbly areas... that would have a smaller effect.

Edit: Added link for clarity.
 
Oh... and 7% interest rates would only be healthy if unemployment rates were lower. But you know how that goes:

zx5q1d.jpg
 
irvinehomeowner said:
To be clear, I wasn't saying you "claimed" anything... just that you've said previously that prices don't exactly follow rates but rates do affect affordability. The "directly inverse proportional" wasn't pertaining to you... so I agree with you on that part.
http://www.talkirvine.com/index.php?topic=1286.msg16905#msg16905
IndieDev said:
They don't follow rates, but interest rates have an effect on affordability which in turn has an effect on prices over time. Your graph actually proves this for the time period it covers.  ;)
Click to expand...

As for missed windows belying economic fundamentals... the problem with that is much of what sets housing prices is non-fundamental... or Irvine would be much lower than it is now. This is just my opinion but I don't think any owner (or even TIC) will lower prices immediately by 20% to account for a 20% decrease in affordability based on higher interest rates. The overall economic fundamental pressure that would eventually cause that moves much slower than the rate hikes... and in non-fundamental bubbly areas... that would have a smaller effect.

Edit: Added link for clarity.
Click to expand...

I agree, the Irvine market, while in decline, doesn't seem to be following fundamentals. People are buying homes worth 5x their yearly income based on large down payments, TIC is a marketing machine, and immediate price drops are small and deliberate.

But there is a reason economist use the term bubble; it is something that is fragile in construction, slow to deflate, and can pop at anytime.  ;D
 
That might work. Just depends on how much you "believe" in the Irvine Brand (thank you Mike). The more you believe, the more resilient and powerful it becomes. For some, it is an unstoppable force of motorcourts, detached condos, and 85 degrees. Yes, you will believe, and if you don't, just get an asian milk tea and pastry in Garden Grove.  ;)
 
Here is what happens (in order) as sales down for home builders:

1.  Increase broker co-op commission
2.  Begin to offer incentives to buyers (credit for closing costs and credits for the design center to do upgrades)
3.  List the properties on MLS
4.  Offer special financing packages through their lender if rates go up too high, too fast
5.  If 1-4 doesn't work, the price will be lowered

If demand really drops off a cliff, it would be interesting to see what would happen to pricing of the new homes because TIC is the one that provides pricing guidelines for their builders. 
 
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