Forget escrows, here's what prices in Irvine are doing...

[irvine_home_owner_IHB]

I remember that in 1994 the dollar weakened significantly and short term interest rates spiked, almost doubling it looks like. Could this have adversely lengthened out the stabilization period to five years, 1993-97 ? Without that, would the stabilization period have been shorter ?

I have been looking at this same question. Why did prices continue to decline from 1994 to 1997?

When you look at the economic indicators, prices should not have fallen during this period. Unemployment peaked in 1993, and from 1994 through 1997 the economy was improving and people were going back to work. These conditions are supposed to produce increased demand and home price increases. Why didn't it?

When I have a good answer, I will write a post. A glimpse at this time period will foreshadow the next 3 years in our market.

The spike in interest rates in 1995 may have killed off the rally started in 1994 when the market in Irvine saw its lowest monthly median price (if you smooth out the numbers, the low is in late 1996). Interest rates rise when the economy picks up, so the 5% interest rates we are seeing now will go away just as the low interest rates in 1994 went away.

There had to have been a point, perhaps in 1995 when interest rates went up, that people changed their view about the value of a house. The psychology change made the market overshoot fundamental valuations to the downside in 1996 and 1997. What made the market psychology change? Was it 5 years of declining prices?

I want to understand what went on during this period because if history repeats itself, 2010-2012 will be much like 1994-1997.

Was there any changes in lending? More lax for first time home buyers? Was there always a 3%-5% down loan for noobs prior to the mid-90s?

My memory sucks so I did some Google-Fu and it looks like there were HUD/FHA changes in 95 but I have no idea what all that gooblygook means. Could that have had an effect?

 

[xoneinax_IHB]

But it doesn't look like interest rates are going to go up significantly in the short to medium term.

Really, why ? The Fed is conduction a Grand Experiment to mediate the greatest credit and housing crisis in 80 years; I have no idea how things will play out short or medium term.

As Merle Hazard says : "Inflation Deflation, tell me if you can"

 

[Geotpf_IHB]

But it doesn't look like interest rates are going to go up significantly in the short to medium term.

Really, why ? The Fed is conduction a Grand Experiment to mediate the greatest credit and housing crisis in 80 years; I have no idea how things will play out short or medium term.

As Merle Hazard says : "Inflation Deflation, tell me if you can"

The economy will still be shaky until the medium term, and, despite heavy government spending, inflation looks unlikely due to the questionable economy, so the Fed won't raise rates, so interest rates overall will stay low. Maybe in three or four years, after the economy is more sound, the Fed might increase rates-which might kill any budding recovery in housing prices then, since prices should start to creep up about that time. But until then, interest rates should remain low, IMHO.

 

[awgee_IHB]

Interest rates will rise. And it is a fallacy that rising interest rates are dependent upon an rising economy. Interest rates will rise and price inflation will increase due to supply push, not demand pull.

 

[Geotpf_IHB]

Interest rates will rise. And it is a fallacy that rising interest rates are dependent upon an rising economy. Interest rates will rise and price inflation will increase due to supply push, not demand pull.

Housing costs are parts of inflation too. If you are saying inflation is likely, you are basically saying that housing costs probably will increase as well. It is illogical for Irvine housing prices to continue to drop in an inflationary period-that's deflation, not inflation.

 

[freedomCM_IHB]

Interest rates will rise. And it is a fallacy that rising interest rates are dependent upon an rising economy. Interest rates will rise and price inflation will increase due to supply push, not demand pull.

Housing costs are parts of inflation too. If you are saying inflation is likely, you are basically saying that housing costs probably will increase as well. It is illogical for Irvine housing prices to continue to drop in an inflationary period-that's deflation, not inflation.

hah, did you read what you wrote?

house prices can drop so long as the other stuff rises, and you will still have inflation. housing is only ~20% of cpi.

 

[etheran_IHB]

How do rent behave in an inflationary environment? If rent goes up it should eventually pull house values up. This obviously depends on how far we are from parity.

Next question is, with weak US dollar, high inflation, and slow economic growth, where do you invest? Real assets appear to be the place to go and that includes real estate - albeit maybe in non-US. I still have a hard time buying hold since I can not associate it with any real economic value. Rather own oil, nat gas, or other metals.

Opinions?

 

[awgee_IHB]

Interest rates will rise. And it is a fallacy that rising interest rates are dependent upon an rising economy. Interest rates will rise and price inflation will increase due to supply push, not demand pull.

Housing costs are parts of inflation too. If you are saying inflation is likely, you are basically saying that housing costs probably will increase as well. It is illogical for Irvine housing prices to continue to drop in an inflationary period-that's deflation, not inflation.

No, I am not saying that, and it is only illogical if one ignores the psychology of asset markets and price trends. The price increases in consumer staples and energy without a concurrent increase in wages will cause folks to have less to spend on REAL ESTATE, including Irvine. Price inflation will be due to supply push, not demand pull.

Consider, have energy prices gone up? Have commodity prices gone up? And what have wages done? What has happened with employment?

 

[CapitalismWorks_IHB]

Interest rates will rise. And it is a fallacy that rising interest rates are dependent upon an rising economy. Interest rates will rise and price inflation will increase due to supply push, not demand pull.

Housing costs are parts of inflation too. If you are saying inflation is likely, you are basically saying that housing costs probably will increase as well. It is illogical for Irvine housing prices to continue to drop in an inflationary period-that's deflation, not inflation.

No, I am not saying that, and it is only illogical if one does not include the psychology of asset markets. The price increases in consumer staples and energy without a concurrent increase in wages will cause folks to have less to spend on REAL ESTATE, including Irvine. Price inflation will be due to supply push, not demand pull.

Consider, have energy prices gone up? Have commodity prices gone up? And what have wages done? What has happened with employment?

Awgee is dead on.

One must consider the source of inflation. The most likely sources of inflation in the not too distant future are the dramatic increases in money supply (dollar devaluation), cost push inflation in the commodities complex due to both constrained supply and increasing demand from the em block, and under-funded government liabilities in the form of social security and medicare (current expansion of deficits as well). Rising wages, given constrained future GDP growth, slowing rates of technological innovation (read labor productivity), and limited marginal benefits to capital expeditures bodes for limited wage growth. Since wages are what support the cost of carry on mortgages, it seems fairly evident that house price growth will be muted at best.

 

[WaitingToBuyByAndBy_IHB]

Geotpf,

Data doesn't lie, but it is often misinterpreted. So you have a graph that shows price per square foot (from sold houses) showing a flat line. The question is what does it mean? You suggest it means prices have bottomed. What are some other scenarios that might produce the same graph. For example, supposing public sentiment is that housing has bottomed and many are quick to purchase (and willing to offer higher than asking). That would affect the descent of home prices. Or suppose seasonal buying madness has affected prices (think families who need to buy now in order to move within a timeline). Or what if the mix of sold homes has changed and more houses with higher price/sq. foot ratios are selling versus low price/sq. foot houses?

You are free to call a bottom, and hopefully your post will still be here three years in the future so you can laugh at me (and others). On the other hand, by the end of the year it may become more clear that prices continue to fall.

IrvineRenter,

I would suggest the over-correction in home prices from 94-97 was due to "buyer saturation" and housing being off the radar. The buyer saturation part is everybody who could and would buy a home ended up buying a home. As Graphrix pointed out in an earlier post, many who bought at the peak had a hard time with the payments, but back then people sacrificed to make it work since they had skin in the game. These folks were trapped in their homes. Others who wanted to buy could pick up foreclosures or other distressed sales. At the same time, housing was no longer a focus of anybody except those who needed to move to a bigger home or what have you (natural sales). There were ads for new home builders, but there was no media circus obsessing on the price of housing or mortgage rates (at least as I recall).

One thing that may be different this time is related to this idea of "buyer saturation". I rented a condo from 97-99 from a women who was renting because she could not sell the condo for what she paid for it in 1991. In the current environment, I speculate that there are few 100% financed buyers who bought at peak yet are willing to sacrifice to make it all work out. Instead, they walked, their credit was dinged, and they rented (yes, some smart ones bought a more affordable home just before walking and are living there now). All of those walkaways who do not own a home are probably not going to be happy until they do, and at some point they will be able to buy again. Is that time now? Whenever it is, will that not increase competition for housing? What is that going to do to the market? I have never believed the myth of "pent up demand", but once the damaged credit falls off the radar, it seems logical to assume these folks that used to own a home will likely try to buy one again. This could fly in the face of the natural conclusion that the market will overcorrect again as it did in 94-97.

One of the problems I see with the current environment is that people still don't get it. I'm seeing bank stock prices take off, and the word on the Google finance discussion groups is that these are buyers who want to get on the train before it leaves the station now that the crisis is over. Likewise, investors are jumping into the homebuilders and even the mortgage insurers! Is the crisis over? I mention this because people are likewise jumping back into the housing market as if it were the bottom and prices are heading up. Are they really? I may have to revisit your "Bubble Psychology" chart. If this is indeed a "bull trap" it is awfully low on the bubble descent (where you would expect despair to kick in).

You didn't ask, but writing this post makes me consider what might have been the "spark" that fired up the most recent housing boom we otherwise know as The Great Housing Bubble. As I recall, there was a one year period in 1998 in which about 40% of the condos in our neighborhood changed hands (before we were forced to move due to the sale of the condo we were renting). There was our landlord. There were all the young families on the street ready to move up. Then there was that family that owned a two-bedroom condo. They had a 14-year old boy and a 9 year-old girl that shared one room. They moved out as soon as they could afford to sell the condo for what they paid for it.

What I'm essentially getting at is that "froth zones" are like future time bombs. These people were trapped and then jumped at the first opportunity to move up and out. If this was happening in a lot of areas across OC, the general sales numbers would have increased, this probably attracted investors and speculators who jumped in and helped raise prices through flipping, etc. I'm not saying my condo complex was at the epicenter of the bubble, I'm just pointing out that I remember seeing a lot of sales activity from '98 to '99 and the initial catalyst may have been those who were trapped by the previous bubble getting out of their homedebtor prisons. In this regard, the current bubble may not have this same time bomb effect (since again, there appear to be fewer folks trapped in their homes at peak prices).

 

[xoneinax_IHB]

but once the damaged credit falls off the radar, it seems logical to assume these folks that used to own a home will likely try to buy one again. This could fly in the face of the natural conclusion that the market will overcorrect again as it did in 94-97

But how long will those with credit damaged by foreclosure and short sale have to wait ? I am thinking that most of these people will not suddenly be able to save for 5 years and then put 50% down to mediate their damaged credit. They will have to wait for at least a few years, perhaps 7 ?

 

[Geotpf_IHB]

Interest rates will rise. And it is a fallacy that rising interest rates are dependent upon an rising economy. Interest rates will rise and price inflation will increase due to supply push, not demand pull.

Housing costs are parts of inflation too. If you are saying inflation is likely, you are basically saying that housing costs probably will increase as well. It is illogical for Irvine housing prices to continue to drop in an inflationary period-that's deflation, not inflation.

Consider, have energy prices gone up? Have commodity prices gone up? And what have wages done? What has happened with employment?

Oil prices are down from the peak (although are up from the low). Wages are down due to a lack of work from the recession.

I still don't see high inflation or high interest rates happening within five years. After that, who knows?

 

[no_vaseline_IHB]

Have commodity prices gone up? And what have wages done? What has happened with employment?

I would argue that commodity prices have NOT gone up outside of the ones folks decide to speculate on (oil and gold come to mind). Nat gas and milk are in the dumpster. Recycled steel is 1/5 what it was 18 months ago. My diesel bill is 40% per gallon (60% off) this time last year.

While last year might of been the best year to be a grower since Eisenhower was in the White House, this year, well.........it's not the worst year, but it's certainly in the top five, and it all has something to do with commodity prices and global demand drying up. I understand Awgee's point, but I don't see any inflationary pressures from the demand side. In fact, I see quite the opposite.

 

[ipoplaya_IHB]

Based on a couple of recent closes in my former area, prices appear to be pretty much flat with where I sold at in July 2008...

Maybe just a couple of percent down total over the past 13 months at most.

Not continuing to be a homeowner for the past year has cost me over $5K.

 

[xoneinax_IHB]

Below its 1997 sales price; maybe they mean 2007 ?

weird

 

[IrvineRenter_IHB]

but once the damaged credit falls off the radar, it seems logical to assume these folks that used to own a home will likely try to buy one again. This could fly in the face of the natural conclusion that the market will overcorrect again as it did in 94-97

But how long will those with credit damaged by foreclosure and short sale have to wait ? I am thinking that most of these people will not suddenly be able to save for 5 years and then put 50% down to mediate their damaged credit. They will have to wait for at least a few years, perhaps 7 ?

The timing of this is what will likely make a recovery drag on for quite a while (once we hit bottom). People did not really start going into foreclosure until 2007. The earliest of these people flushed through the system will not be buyers again until at least 2012 and probably later. The very buyers the market needs to put in a bottom are going to be excluded due to credit problems. I don't see the "pent up demand" of those coming off a personal credit moratorium as providing any support for the market. If anything, the removal of these buyers may be the reason we repeat the 1994-1997 experience.

 

[Mcdonna1980_IHB]

Not continuing to be a homeowner for the past year has cost me over $5K.

Aren't you renting a SFH that is at least 1,000 sq ft bigger? How much would it be to rent your previous detached condo?

 

[graphrix_IHB]

Not continuing to be a homeowner for the past year has cost me over $5K.

Aren't you renting a SFH that is at least 1,000 sq ft bigger? How much would it be to rent your previous detached condo?

I was thinking the same thing. It's like saying... "Dude, the lease payments on my 5-series bimmer, even after the tax breaks, cost me $5k more a year than making loan payments on my 3-series bimmer." Gotta compare apples to apples, not apples to oranges.

Things to consider, how much more would it have cost to own an equivalent larger place? I bet it would be a lot more. IIRC, one of the reasons why IPO decided to rent was to upgrade in size, and he did. Well... you pay more for more square footage, whether you rent or own... DUH! Me thinks he just wants to be cranky since all those purdy foreclosure pics I posted didn't really flood the market like I said the would. I plead the hoocoodanode on the moratoriums, that so may others who plead on, well... subprime and New Century, and Bear Stearns going down. I think I should get one free pass.

Ipo, when it boils down to it, I ask you this... Putting your job situation aside for the moment and the importance of saving/having cash, and not listening to bloggers about a market collapse aside as well... Since you upgraded in size, which your family clearly needed, and it is something you wanted, would you still be mentioning the $5k in savings? How much more or less would it have cost you to own an equivalent place? Honestly, do you really regret $5k for your family to have a larger place? Yeah... your job situation is looking grim, but what if it wasn't? You upgraded from your old place, and you know it would cost you more to own that kind of place even with the tax breaks. I could be wrong, but the one thing you and I have in common is that we love to analyze the numbers. I think you might have saved a bit, or at worse broke even when you compare the 3-series detached condo you were making mortgage payments on with the 5-series house you are leasing. The two aren't the same, you made an upgrade.

 

[irvine_home_owner_IHB]

Man... that's like 2 posts from graph that I can't argue with... THE END OF THE WORLD IS NIGH!!!!

IPO: I still owe you a few drinks if that helps.

 

[ipoplaya_IHB]

Not continuing to be a homeowner for the past year has cost me over $5K.

Aren't you renting a SFH that is at least 1,000 sq ft bigger? How much would it be to rent your previous detached condo?

I was thinking the same thing. It's like saying... "Dude, the lease payments on my 5-series bimmer, even after the tax breaks, cost me $5k more a year than making loan payments on my 3-series bimmer." Gotta compare apples to apples, not apples to oranges.

Things to consider, how much more would it have cost to own an equivalent larger place? I bet it would be a lot more. IIRC, one of the reasons why IPO decided to rent was to upgrade in size, and he did. Well... you pay more for more square footage, whether you rent or own... DUH! Me thinks he just wants to be cranky since all those purdy foreclosure pics I posted didn't really flood the market like I said the would. I plead the hoocoodanode on the moratoriums, that so may others who plead on, well... subprime and New Century, and Bear Stearns going down. I think I should get one free pass.

Ipo, when it boils down to it, I ask you this... Putting your job situation aside for the moment and the importance of saving/having cash, and not listening to bloggers about a market collapse aside as well... Since you upgraded in size, which your family clearly needed, and it is something you wanted, would you still be mentioning the $5k in savings? How much more or less would it have cost you to own an equivalent place? Honestly, do you really regret $5k for your family to have a larger place? Yeah... your job situation is looking grim, but what if it wasn't? You upgraded from your old place, and you know it would cost you more to own that kind of place even with the tax breaks. I could be wrong, but the one thing you and I have in common is that we love to analyze the numbers. I think you might have saved a bit, or at worse broke even when you compare the 3-series detached condo you were making mortgage payments on with the 5-series house you are leasing. The two aren't the same, you made an upgrade.

Since I am a numbers dude graph, I of course accounted for the size difference between places in my $5K figure. We spent $890 per month more on an after-tax basis when we sold/rented/moved, so $10,680 more over the first year. Discounting that to the market rent for my same-sized place in my old area, the additional spend would have been around $400/per month for a 12-month total of around $5K. Yes, I also accounted for the interest earned on the equity extracted. I even accounted for no longer needing a storage unit since we are in a larger place I was able to fill the garage up with our junk... How dare you doubt the veracity of my analysis!?!

All the above being said, what's done is done and we made the decision then for the right reasons after much thought and consideration. When I forecast it out then, all I wanted was 5% depreciation to make the sell/rent scenario a break-even from a pure financial perspective over the first 12 months. I am amazed that we didn't get even this much... It is indeed nice to have the flexibility of a rental given my job situation. Then again, it would have been nice to have a lower net cost of living given that we're going to be down an income for a while. We did need the additional space and our sale was a way to force us to make the move to bigger digs. It could have gone the other way, i.e. large depreciation, and the gamble would have paid off in spades. Unfortunately for me it didn't work out that way.

Oh well, you win some, you lose some. I thought for sure the market would tank after I sold. I was wrong. You were wrong too. We all were. I can't remember any posters saying "bad financial choice IPO, prices will be flat over the next year"... I showed my wife the maps of all the foreclosure filings back then and explained how it would be practically impossible for prices to not fall given the bloated inventory sure to come from this pipeline. Wrong again. Inventory is 25% lower in Irvine than it was a year ago. I'd have guessed back then, and you as well, that it would have been 25% higher instead. If my forecasts at work were that far off, I'd have lost my job years ago!