Does rising rates really equal lower prices?

Rates will have to go a lot higher than 6-7% for a 30-year fixed mortgage for it to significantly effect Irvine real estate home prices. I will confidently say that Irvine is one of the most desirable locations in all of Southern California to live, let alone Orange County. Irvine has something that most other cities don't have...a brand name which TIC has successfully built. I have several buyers who will not buy anywhere but Irvine for various reasons (schools and location being at the top of the list). Having viewed over 100 Irvine homes in the past 6+ months, I can say that there is a strong buyer demand out there for these Irvine homes (mostly FCB and non-FCB Asian buyers). You guys should see how many buyers swarm to a new listing of a 4bed home the first few days...it's like moths to a light.

In the perfect world, if interest rates rise real estate prices should fall assuming all other things remain equal. However, a rising interest rate environment generally happens in an inflationary environment which would also suggest that wages would also rise (at least nominal wages). That being said, I just don't see mortgage rates being above 6%-7% in the foreseeable future and I could totally see interest rates stay in the 4.75% to 5.50% range for the next few years. There isn't sustainable inflation out there (only asset inflation due to the flood of money chasing returns in the various markets) because capacity utilization is still very low or in other words there's a lot of slack and over capacity out there that needs to be absorbed before real inflation can take hold.

I totally agree with you CK, many folks like IR and Graph have underestimated the power of the gov't to manipulate the real estate market. Also, banks can hold out a lot long in releasing their REO inventory than most people with families care to wait to buy a home. The REO tidal is NOT COMING...the banks will keep slowing bleeding their REOs into the market which will be quickly absorbed by the market in low inventory environments like we have now. The only possible way the banks will speed up the process is if the gov't and regulators force them too (I highly doubt that will happen). So what do I think will happen? Depending on what happens with the economy, I think that unfortunately the downside risk for Irvine real estate is probably about 5-10% from today's levels. The only way I would change that prediction is if the economy takes a huge dump (causing employment to surge) and/or the number of listings increase 2x+ from today's levels. *SORRY PANDA*
 
The elasticity of house prices seems to be rather stubborn. Based on anecdotal evidence, the time between a NOD and a visit by the Sheriff is too long - this was not factored into these bearish predictions. Another variable is the financial hardship buyers are willing to assume when purchasing in Irvine. Again, from anecdotal evidence, there are families that will sacrifice any whiff of a luxury to afford a house (so much so that lunch at In-N-Out is considered a luxury). It is hard to compete with a household willing to sink 50%-60% of their income in housing related costs. Assumption in the price projections is a price/wage ratio of 4.3 - we are still FAR from it.

Fundamentals are still way out of whack in Irvine. This is unsustainable in the long term - but still attractive to many buyers right now (this whole "anything to live in Irvine" mentality).


[quote author="ck"]We seem to be stuck at about January 2009, don't we? What happened in January 2009? I guess IrvineRenter didn't factor gov't intervention into his forecast. And he grossly underestimated how the desireability of Irvine increased since the 90's real estate bust.

I used to say things like this on IHB. And I was laughed out of the room. I'm sure BK can remember me stating on IHB how our friends and family from LA would swoon about us living in Irvine and how they were strategizing to come here, too. Of course that was always met with a chuckle and "that's just anecdotal, CK --- your friends won't save the market".

Looks like they have so far, at least since January 2009.[/quote]
 
[quote author="greencactus"]The elasticity of house prices seems to be rather stubborn. Based on anecdotal evidence, the time between a NOD and a visit by the Sheriff is too long - this was not factored into these bearish predictions.[/quote]
Forget about the time period between the NOD filing and the Sheriff knocking on the door with an eviction notice...I would argue that the time between when the first payment is missed and the NOD is filed is probably even longer....took about 15 months for that to happen to my friends. At this rate, they'll get over 2 years of free rent living before an investor or bank offers them cash for keys.
 
The 10% unemployment rate affected homeowners big time for not being able to pay their mortgage. Desperate resale affected comp big time in many communities. Irvine is insulated from this due to Asian homeowners. Asian unemployment rate is much lower than 10% and that could account for fewer desperate resales.

Another important factor often over looked is the family bond of Asian families. Relatives come to rescue relatives in financial despair by helping out with mortgage. The lack of supply in Irvine is evident for this reason.

White people see Chinese diners wrestle for the bill and that is kind of weird. What is really weird is relatives wrestle to pay for your mortgage if you are in financial trouble.

Chinese relatives may hate each other when their children did not score as high on the SAT like the kids cousins but they will set aside their differences and help another relative in need.

However, they will hold that favor over their head and savor the moment of superiority.
 
[quote author="graceomalley"]The 10% unemployment rate affected homeowners big time for not being able to pay their mortgage. Desperate resale affected comp big time in many communities. Irvine is insulated from this due to Asian homeowners. Asian unemployment rate is much lower than 10% and that could account for fewer desperate resales.

Another important factor often over looked is the family bond of Asian families. Relatives come to rescue relatives in financial despair by helping out with mortgage. The lack of supply in Irvine is evident for this reason.

White people see Chinese diners wrestle for the bill and that is kind of weird. What is really weird is relatives wrestle to pay for your mortgage if you are in financial trouble.

Chinese relatives may hate each other when their children did not score as high on the SAT like the kids cousins but they will set aside their differences and help another relative in need.

However, they will hold that favor over their head and savor the moment of superiority.[/quote]
That an interesting additional reason for the stubborn Irvine real estate prices. Eastern Europeans tend to do the exact same thing...it's all about the family and saving face/pride. The other thing I would add is that there are a LOT of rooms for rent in Irvine on craigslist...homeowners with families who are renting out one or two of their rooms. Those people will give up all the luxuries (cars, eating out, vacations, nice clothes) and even rent their rooms to stay in their Irvine homes.
 
[quote author="USCTrojanCPA"]Those people will give up all the luxuries (cars, eating out, vacations, nice clothes) and even rent their rooms to stay in their Irvine homes.[/quote]

Exactly! It is very hard to compete with this level of financial sacrifice.
 
Wow... this thread could never exist on the IHB forums.

There would be bunches of other posters who would keep pointing to data and graphs saying Irvine isn't different.

Now I don't mean to disrespect them because they all have tons of experience and knowledge but considering we've been stuck here in Irvine for over a year... and even moreso... seem to be going back up... you can't just blame fed intervention and bank knuckle dragging anymore... because EVERY area would be in limbo... but it seems that only some places are.

It would be nice for a bear to recognize the fact that there may be some non-fundamental factors going on that is making Irvine more stubborn than what the models predict.
 
[quote author="irvinehomeowner"]Wow... this thread could never exist on the IHB forums.

There would be bunches of other posters who would keep pointing to data and graphs saying Irvine isn't different.

Now I don't mean to disrespect them because they all have tons of experience and knowledge but considering we've been stuck here in Irvine for over a year... and even moreso... seem to be going back up... you can't just blame fed intervention and bank knuckle dragging anymore... because EVERY area would be in limbo... but it seems that only some places are.

It would be nice to a bear to recognize the fact that there may be some non-fundamental factors going on that is making Irvine more stubborn than what the models predict.[/quote]
The problem with the uber bears is that they won't allow themselves to take the intangibles into consideration. They see things as black and white by looking at charts and crunching numbers. I was almost as bearish as Graph and IR (I'm just as much a numbers cruncher as they are) until I started being more active in the Irvine real estate market. It was what I saw with my own eyes that changed my assessment. Maybe Graph should do some drive-bys of new Irvine listings sometime and check out the foot traffic of buyers for himself.
 
[quote author="greencactus"]
[quote author="USCTrojanCPA"]Those people will give up all the luxuries (cars, eating out, vacations, nice clothes) and even rent their rooms to stay in their Irvine homes.[/quote]

Exactly! It is very hard to compete with this level of financial sacrifice.[/quote]

The Chinese held a long tradition of financial sacrifices since the recruitment ship docked at Canton 1848's seeking tiny men willing to work long hours in the gold mine and railroad companies.

No other races can beat the Chinese for their goal of owning brands while depriving themselves of all other daily luxuries.

There is a middle age waitress of a Chinese restaurant that I went to for 10 years completely caught me off guard the other day while I was eating at another restaurant while a wedding banquet was partitioned off in another space.

She was a guest wearing a Chanel attire, Jimmy Choo and carrying an alligator Hermes.

How about another irony? An operator of a yogurt shop that does not have much business, struggling in an empty retail center and just bought a Carmel home.

Ancient Chinese secrets continue to be the mystery to the western world.

Success is not measured by how much you make but how little you make according to uncle Sam and how much you saved.
 
[quote author="USCTrojanCPA"]
The problem with the uber bears is that they won't allow themselves to take the intangibles into consideration. They see things as black and white by looking at charts and crunching numbers. I was almost as bearish as Graph and IR (I'm just as much a numbers cruncher as they are) until I started being more active in the Irvine real estate market. It was what I saw with my own eyes that changed my assessment. Maybe Graph should do some drive-bys of new Irvine listings sometime and check out the foot traffic of buyers for himself. [/quote]

Specific to IR and Graph, both have acknowledged there are other forces at play in Irvine. IR certainly through his flip to broker.

Graph has stated here and on other forums (and to me personally) that if one can truly afford the house --- and they truly love it --- they should go for it. He is very aware of the current dynamics of the Irvine market, and that it is not behaving as originally projected. A smart guy like that is always open to new ideas and revision of prior assumptions. I don't think in 2007 anybody could have foreseen the level of gov't intervention we have seen.

I just wish he came around here more to critique the home builders and designs in the 2010 collection. <!-- s:( --:mad:<!-- s:( -->
 
[quote author="ck"]
[quote author="USCTrojanCPA"]
The problem with the uber bears is that they won't allow themselves to take the intangibles into consideration. They see things as black and white by looking at charts and crunching numbers. I was almost as bearish as Graph and IR (I'm just as much a numbers cruncher as they are) until I started being more active in the Irvine real estate market. It was what I saw with my own eyes that changed my assessment. Maybe Graph should do some drive-bys of new Irvine listings sometime and check out the foot traffic of buyers for himself. [/quote]

Specific to IR and Graph, both have acknowledged there are other forces at play in Irvine. IR certainly through his flip to broker.

Graph has stated here and on other forums (and to me personally) that if one can truly afford the house --- and they truly love it --- they should go for it. He is very aware of the current dynamics of the Irvine market, and that it is not behaving as originally projected. A smart guy like that is always open to new ideas and revision of prior assumptions. I don't think in 2007 anybody could have foreseen the level of gov't intervention we have seen.

I just wish he came around here more to critique the home builders and designs in the 2010 collection. <!-- s:( --:mad:<!-- s:( --> [/quote]
Graph and IR were the more active bears on IHB. I give them all the credit for calling the fall because their stuff on IHB were one of the things that helped to open my eyes with what was going on (my eyes were clouded by working the banking industry). They are definitely not the die-hard bears like AZDavid. But yeah, you are right...no one could have foreseen what the measures that the gov't/Fed has taken to prop up the real estate market.
 
Oh No! No plan critiques. Mysterious hit man comes and take you away.

Graph loves to see many lambs getting slaughtered Halou style.

I guess those lamb wool ear muffs blocked the lambs from hearing the warnings.
 
I just wish graph would post here more. Period. He's not taking my bait any more and I know the other forum can't be as exciting as this one is because he can't hate on anyone like he can here.

In respect to gov intervention... that only goes so far. The rates and delay of foreclosures through "negotiating loan mods" are in effect EVERYWHERE... so why is Irvine still acting like there is no credit crunch and the number of shorts (at least in the SFR searches I have been looking at) are much smaller compared to surrounding cities.

I do a 3CWG search in Aliso and Laguna Niguel and I'll get 5 or more shorts in the less than $700k range... that same search in Irvine results in maybe 1 short but the rest are above $800k.

Name another OC city where a bunch of builders just opened 8 new home collections at $300+/sft and actually sold them?

When I posed that question 2 years ago that Irvine is different... I was told it was not. When I said that FCBs will make Irvine drop more slowly than others... I was told it will be no different than in the 90s. When I asked if in the 90s... did Irvine drop more slowly than other areas... I got crickets.

Clearly, something is amiss here. IR is now a broker, the bears are running out of ammunition and they can only point to data that affects the market as a whole but NOT Irvine specific. I honestly believe that the FCB buyers are much higher now then back in the early 90s. No one can tell me that the demographics back in 1989 or even 1996 is the same as it is now in 2010. Irvine looked more like South OC back then. Who has lived here as long as I have and can tell me different?
 
[quote author="irvinehomeowner"]
Name another OC city where a bunch of builders just opened 8 new home collections at $300+/sft and actually sold them?[/quote]
The only one I can think of in OC is S&S Homes over in Laguna Niguel and Toll Bros in the Vista Verde area of Yorba Linda.
 
I still think the prices are coming down, i think it just needs more time. Irvine is behaving differently than expected, but i cant imagine this being sustainable for the long-term, i could very well be completely wrong, we will see. The only way i would buy in irvine at current prices is with an FHA 3.5% down loan, that way if the market were to tumble we could just walk away. The only reason i would hesitate to walk away is that both my wife and i are in finance/accounting so i would hate to lose out on a job because of this on my credit report
 
[quote author="qwerty"]I still think the prices are coming down, i think it just needs more time. Irvine is behaving differently than expected, but i cant imagine this being sustainable for the long-term, i could very well be completely wrong, we will see. The only way i would buy in irvine at current prices is with an FHA 3.5% down loan, that way if the market were to tumble we could just walk away. The only reason i would hesitate to walk away is that both my wife and i are in finance/accounting so i would hate to lose out on a job because of this on my credit report

[/quote]
It'll all come down to the inventory levels...when you see inventory increase to over 1,000 homes or 5+ months of inventory price declines will be right around the corner (probably a 3-month lag). I would argue that Irvine home prices are less elastic than home prices in other cities due to several intangible factors about Irvine. Another factor that is propping up the Irvine market is that there are some of the buyers are households of 3-4+ income earners (two generation occupants).
 
Some people are missing an important variable here... While it is true that you would generally see a rise in rates coincide with inflation, the new dynamic is the government purchase program for MBS. When this ends in March, you will likely see a spike in mortgage rates (I've been told .75-1.5%). This has nothing to do with macro variable such as aggregate demand, inflation and wage pressure. When it comes to inflation, there does not seem to be enough force to create a highly inflationary environment for at least a year or two or three. With the jobless report and unemployment problems, it would be hard to expect any type of significant across the board wage pressure to push inflation. People have started to subscribe to this notion and cash holders and desperately seeking yield these days. New municipal offerings are oversubscribed and people are starting to buy out on the yield curve.
 
[quote author="akim997"]Some people are missing an important variable here... While it is true that you would generally see a rise in rates coincide with inflation, the new dynamic is the government purchase program for MBS. When this ends in March, you will likely see a spike in mortgage rates (I've been told .75-1.5%). This has nothing to do with macro variable such as aggregate demand, inflation and wage pressure. When it comes to inflation, there does not seem to be enough force to create a highly inflationary environment for at least a year or two or three. With the jobless report and unemployment problems, it would be hard to expect any type of significant across the board wage pressure to push inflation. People have started to subscribe to this notion and cash holders and desperately seeking yield these days. New municipal offerings are oversubscribed and people are starting to buy out on the yield curve. [/quote]
That would happen, but if we have days like we had in the market today...money will be fleeing out of stocks and commodities and looking for shelter in treasuries, MBS bonds, munis, etc....a flight to safety. The stock market still has a lot of hot air in it (sorta like the Irvine real estate market) so the question will be if the "hot" money decided to head for the door and pull the ripcord.
 
[quote author="USCTrojanCPA"]
[quote author="irvinehomeowner"]
Name another OC city where a bunch of builders just opened 8 new home collections at $300+/sft and actually sold them?[/quote]
The only one I can think of in OC is S&S Homes over in Laguna Niguel and Toll Bros in the Vista Verde area of Yorba Linda.[/quote]
Those are both smaller projects that have been opened over time. You can use Shea at Birchwood too for this example.

What I'm talking about is 8 spanking brand new neighborhoods at one time and seeing sales at each one.
 
[quote author="irvinehomeowner"]
[quote author="USCTrojanCPA"]
The only one I can think of in OC is S&S Homes over in Laguna Niguel and Toll Bros in the Vista Verde area of Yorba Linda.[/quote]
Those are both smaller projects that have been opened over time. You can use Shea at Birchwood too for this example.

What I'm talking about is 8 spanking brand new neighborhoods at one time and seeing sales at each one.[/quote]
Yeah, only a TIC + Irvine can pull that off in today's market.
 
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