Married in 2006, my wife and I have been riding out the housing bubble, and the bursting, in an Irvine apartment rental.
We've been touring models since 2005 comparing price sheets collected from dozens and dozens of places over the past several years and it's always been interesting to watch the prices drop precipitously between the same price sheets collected a year or more apart. Price lists from La Casella in Woodbury have shown declines just between the price list we got this summer and the prices currently on the website.
There is one question that really stands out for me though. When I see the buying activity over the past summer, using Woodbury as just an example...who exactly are these buyers?
In 2007, the median household income for a family in Irvine was $111,000 a year, roughly (Wikipedia). I can't imagine three years of a poor economy have done much to improve that number. Assuming the classic 3X rule, plus the sunshine premium, shouldn't the median home price in Irvine be somewhere between $333,000 and $450,000, roughly? Heck, I'll go to $500,000. Yet I see dozens of sales in the $700K, $800K and $900K range.
The only way this is possible (now that the creative financing bubble is dead), is with large cash down payments or people making significantly more than the median income for Irvine. I don't think those making significantly more, which would have to be $200,000 a year+ would choose to live in Irvine, nice as it is. Even if I am wrong, it could only be a few people.
That leaves large cash down payments. The savings rate was negative for several years recently and the average family debt is still very high, so I think it's safe to say there can't be that many people with the $233K to $300K in cash that the average Irvine family would need to buy these homes. And by "need" I mean to make it affordable. I know an FHA loan requires very little down, but that would just make the monthly payment higher, so to make the monthly payment affordable, these families "need" to put down a lot of cash.
Also, keep in mind Irvine property tax, HOA dues, Association Fees (sometimes two of them per property), higher utility bills, homeowners insurance and maintenance costs. Factoring in all of these costs and the mortgage and interest...I would think no Irvine family making the average income would qualify with any bank. So this again would point towards large cash down-payments.
So my list of possible reasons homes are still selling is:
1. Banks Making Bad Loans
2. Move-Up Buyers
3. Asian buyers
4. Bubble Sellers
5. Foreign Investors
1. Is it possible that considering all of the costs I listed above, the average Irvine family can't actually afford the homes they are buying here, but the banks, through the government FHA, are enabling them to buy homes they can't afford, which will eventually become the foreclosures of the future?
2. I had a conversation with one of the sales people during a model home tour in Irvine. Their answer was that home owners who bought long before the bubble in areas like Newport Beach and Laguna Beach and had since paid off their house took out a loan against the property and used it as a very large cash down-payment on their Woodbury home. They then rented their first home out covering the mortgage on that property's loan. This would seem to work except for two problems...
A) Why would they want to move from Newport or Laguna to Irvine?
B) How many people that could do this, and would want to do this, could there really be? A handful of people maybe?
3. That most of the buyers are Asian. Pardon the stereotypes, but I want to float this anyway for feedback and I mean nothing negative by it, so bear with me. Most Asians are savers, at least more of them are than your typical American. Most Asians here in Irvine were not born here, but have since had children here. In other words, Asians in Orange County have not had enough generations born here to adopt the "spend every penny" mentality we have. Also, those who immigrate here from other countries (not just Asians) tend to be those who were wealthier to begin with in the country they came from. It takes a lot of money to come here, so those who do generally have the money, education and skills that allow them to afford the move and adapt to a new career here using their existing skills and education. They are also ambitious, as they are willing to leave the safety and comfort of the familiar and gamble on greater potential gains in a different country. The children of those that came here are brought up with the same values. This helps explain why Asians have higher FICO scores, qualify for mortgages more often, have higher incomes, etc... than your average white person.
Over time, intermarriages and exposure to American culture in school, on TV, etc... will dilute this, but my guess is that not enough time has passed for that to happen yet. As a result, the parents either have a lot of cash to help their Asian children buy these homes and/or the children have saved most of their earnings and as such have their own large cash down-payments.
As a side note, I don't know if anyone else noticed this, but there was a subtle shift in the marketing emails and brochures. Years ago, the family pictures on the marketing materials were mostly white, with a black couple and an Asian couple thrown in. Then the black couple disappeared completely and it was just white and Asian. Now...it's either all Asian people/families or mostly Asian, at any rate. The website seems to be a general mix of everything, so I might be completely off...but that is what it seems. And I don't mean anything negative by this, all I am saying is you market to your audience, so if it is truly mostly Asian families buying, then that's what you put on the brochure.
Also, I was touring the new models in Woodbury East a few weeks ago, and I only saw one other white couple compared to a few dozen Asian families. In at least one of the models, all the family photos were of Asians.
Obviously all of this is pure subjective observation since I don't have enough facts to know if what I think is happening is true, or if it's just a causation fallacy. Which is why I am posting this topic for any feedback.
4. People who were smart enough (or just accidentally lucky enough) to sell their home at the top of the bubble, then rent and let prices decline, and are now jumping back in with large cash deposits they made from the gains in selling at the top of the bubble and then retained by renting. Again, that can't be many people...a handful at most.
5. Foreign investors. I don't think this is very many of the purchases but it's a possibility nonetheless.
I believe #3 is the bulk of the buying, but I look forward to any feedback on any of these possibilities or something new I haven't considered.
We've been touring models since 2005 comparing price sheets collected from dozens and dozens of places over the past several years and it's always been interesting to watch the prices drop precipitously between the same price sheets collected a year or more apart. Price lists from La Casella in Woodbury have shown declines just between the price list we got this summer and the prices currently on the website.
There is one question that really stands out for me though. When I see the buying activity over the past summer, using Woodbury as just an example...who exactly are these buyers?
In 2007, the median household income for a family in Irvine was $111,000 a year, roughly (Wikipedia). I can't imagine three years of a poor economy have done much to improve that number. Assuming the classic 3X rule, plus the sunshine premium, shouldn't the median home price in Irvine be somewhere between $333,000 and $450,000, roughly? Heck, I'll go to $500,000. Yet I see dozens of sales in the $700K, $800K and $900K range.
The only way this is possible (now that the creative financing bubble is dead), is with large cash down payments or people making significantly more than the median income for Irvine. I don't think those making significantly more, which would have to be $200,000 a year+ would choose to live in Irvine, nice as it is. Even if I am wrong, it could only be a few people.
That leaves large cash down payments. The savings rate was negative for several years recently and the average family debt is still very high, so I think it's safe to say there can't be that many people with the $233K to $300K in cash that the average Irvine family would need to buy these homes. And by "need" I mean to make it affordable. I know an FHA loan requires very little down, but that would just make the monthly payment higher, so to make the monthly payment affordable, these families "need" to put down a lot of cash.
Also, keep in mind Irvine property tax, HOA dues, Association Fees (sometimes two of them per property), higher utility bills, homeowners insurance and maintenance costs. Factoring in all of these costs and the mortgage and interest...I would think no Irvine family making the average income would qualify with any bank. So this again would point towards large cash down-payments.
So my list of possible reasons homes are still selling is:
1. Banks Making Bad Loans
2. Move-Up Buyers
3. Asian buyers
4. Bubble Sellers
5. Foreign Investors
1. Is it possible that considering all of the costs I listed above, the average Irvine family can't actually afford the homes they are buying here, but the banks, through the government FHA, are enabling them to buy homes they can't afford, which will eventually become the foreclosures of the future?
2. I had a conversation with one of the sales people during a model home tour in Irvine. Their answer was that home owners who bought long before the bubble in areas like Newport Beach and Laguna Beach and had since paid off their house took out a loan against the property and used it as a very large cash down-payment on their Woodbury home. They then rented their first home out covering the mortgage on that property's loan. This would seem to work except for two problems...
A) Why would they want to move from Newport or Laguna to Irvine?
B) How many people that could do this, and would want to do this, could there really be? A handful of people maybe?
3. That most of the buyers are Asian. Pardon the stereotypes, but I want to float this anyway for feedback and I mean nothing negative by it, so bear with me. Most Asians are savers, at least more of them are than your typical American. Most Asians here in Irvine were not born here, but have since had children here. In other words, Asians in Orange County have not had enough generations born here to adopt the "spend every penny" mentality we have. Also, those who immigrate here from other countries (not just Asians) tend to be those who were wealthier to begin with in the country they came from. It takes a lot of money to come here, so those who do generally have the money, education and skills that allow them to afford the move and adapt to a new career here using their existing skills and education. They are also ambitious, as they are willing to leave the safety and comfort of the familiar and gamble on greater potential gains in a different country. The children of those that came here are brought up with the same values. This helps explain why Asians have higher FICO scores, qualify for mortgages more often, have higher incomes, etc... than your average white person.
Over time, intermarriages and exposure to American culture in school, on TV, etc... will dilute this, but my guess is that not enough time has passed for that to happen yet. As a result, the parents either have a lot of cash to help their Asian children buy these homes and/or the children have saved most of their earnings and as such have their own large cash down-payments.
As a side note, I don't know if anyone else noticed this, but there was a subtle shift in the marketing emails and brochures. Years ago, the family pictures on the marketing materials were mostly white, with a black couple and an Asian couple thrown in. Then the black couple disappeared completely and it was just white and Asian. Now...it's either all Asian people/families or mostly Asian, at any rate. The website seems to be a general mix of everything, so I might be completely off...but that is what it seems. And I don't mean anything negative by this, all I am saying is you market to your audience, so if it is truly mostly Asian families buying, then that's what you put on the brochure.
Also, I was touring the new models in Woodbury East a few weeks ago, and I only saw one other white couple compared to a few dozen Asian families. In at least one of the models, all the family photos were of Asians.
Obviously all of this is pure subjective observation since I don't have enough facts to know if what I think is happening is true, or if it's just a causation fallacy. Which is why I am posting this topic for any feedback.
4. People who were smart enough (or just accidentally lucky enough) to sell their home at the top of the bubble, then rent and let prices decline, and are now jumping back in with large cash deposits they made from the gains in selling at the top of the bubble and then retained by renting. Again, that can't be many people...a handful at most.
5. Foreign investors. I don't think this is very many of the purchases but it's a possibility nonetheless.
I believe #3 is the bulk of the buying, but I look forward to any feedback on any of these possibilities or something new I haven't considered.
