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This months OC Metro has a cover story talking about how “homebuilders are working hard to bring buyers in the door.”

Some blame for the rapid appreciation is placed on speculators but I didn’t notice anything mentioning the suicide loans.

” All the speculation had a variety of disruptive effects on the market, he says, including an “artificial demand” that fuels price increases, as well as “a less-engaged community.

“Neighborhoods get homes that sit empty until buyers can resell,” he says. “And that’s not good for (buyers) who are striving for a great place to live.” ”

There are some quotes from a few of the builders, Taylor Woodrow, Centex, Standard Pacific, and Brookfield Homes, that are worth reading.

” Forsum, whose firm offers homes ranging from the $200,000s in Corona and $600,000s in Buena Park to the multi-millions in Newport Coast, said that foot traffic at the company’s developments “has not really been the problem. It’s really a lack of urgency on the part of prospects – how to get them to buy.” So the firm has been offering some “targeted incentives” that range from mortgage help to design upgrades to a reduction in lot and view premiums – but not, he stresses “wholesale discounts.”

Those don’t appear necessary, “because things have picked up, and we’re very encouraged. There’s a market out there for sure, a demand by customers, and we’re in a position to give it to them. We can sell a clear and present value proposition.” ”

It seems like the builders don’t think they’ll have to lower prices any more. I’ve definitely noticed that foot traffic has increased since 2007 started (due to the price cuts). The quote above makes it sound like there are a lot of people looking but not necessarily buying. But then it says that things have picked up. So… what is the dealio?
 
Foot traffic has picked up and the modest (but notable) reductions in price have pulled in some marginal buyers.

My opinion is that for each group that jumps at a $15k reduction, there's another group that requires an additional $15k reduction to kick them off the fence. As long as inventory (new and resale) continues to build, this will continue for some time.

The effects of tightening credit (blowing up of subprimes) is just going to start hitting the market soon. Don't be surprised if some of the folks that went into escrow in the last 2 months find out they couldn't seal the deal a few months from now when escrow is supposed to close, due to the sea change underway (not finished) in the loan market.

A few folks on the boards have offered the dead cat bounce theory, and I think there's definitely some of that going on.

Just like NASDAQ 2000, pundits o'plenty will continue to call "the" bottom the whole way down.

SCHB
 
"Some blame for the rapid appreciation is placed on speculators but I didn’t notice anything mentioning the suicide loans."

Even now, most poeple/economists still think that the subprime foreclosure resulted from suicide loan will be limited to certain communities but not throughout California. I listened to NPR yesterday they were saying the risky loans are popular amongst African American (minority) buyers and thus the downturn limited to African American community.

In a true housing mania bubble, rent should not go up. In places like Irvine we have seen significant rent increases in last 7 years or so. So while I agree there are artificial demand from speculators, I think there's defintely a healthy fundamental that supports housing price in Irvine. This should put a floor during the downturn. This is what will be interesting to see in the next few months.

"My opinion is that for each group that jumps at a $15k reduction, there's another group that requires an additional $15k reduction to kick them off the fence. As long as inventory (new and resale) continues to build, this will continue for some time."

I think most other potential buyers are not necessarily waiting for further price drop. I think majority of buyers just want to see if price will stabilize before they jump in.
 
Red - I totally disagree. I believe that I am one of many buyers who are waiting for further price drops, not just waiting to see if prices will stabilize.
 
irvinesinglemom - I agree there are 'bubble sitters' who would wait for further price drop before jumping in. But I am not so sure 'bubble sitters' are the majority buyers. I think after 15% price drop in the new home market, and with the prevalance of IO -only loan, and the high rental (apartment) price in Irvine, many buyers start to seriously consider jumping in but still somewhat afraid about price instability.
 
" In a true housing mania bubble, rent should not go up."

Historically, rents have increased during bubbles and decreased of flattened in the aftermath. Of course, we have never had a crash without a recession before, so there may be other factors at work, but rents absolutely do go up during a price bubble.
 
IrvineRenter,

That's why some people insist that 'housing bubble' is a myth. But they believe in housing price correction. Just semantics I guess.

Why There's No Such Thing As a Housing Bubble

from SeekingAlpha.

What I meant to say is the rental cost somewhat reflect the fundamental, i.e. you would never call rental price up and dowm as 'bubble'. So if this home price hikes is purely 100% just a mania or speculation like the 'tulip bubble', then the rent would stay flat.
 
Red - Rent has been flat when adjusted for inflation. Yes the last few years have been around 6% for rent increases but if you look at the bigger picture of historical rents they match inflation. Sometimes beating and sometimes losing to inflation whereas home prices have soared beyond inflation by over 100% the last five years. Also consider that national inflation last year was 2.6% and that OC's was 4.3% so that 6% increase isn't all that great. If the national inflation rate was the same as OC's then the Fed would be hiking rates by another 2% or more.

As for NPR's assestment of sub-prime lending is flawed and drawn to the focus of minorities. What I have seen in the business and what NPR didn't want to say because it isn't politically correct is that minorities are getting duped into bad loans by the same minority group that they are in. Let me give you an example. The girl who cuts my hair is Hispanic asked me to take a look at the loan she was getting since she knew I used to be in the business.

She said "that the LO told her the rate was 4.2% and was fixed for ten years.

(every other line is me)" I thought that rate is way below market and say "what is the payment? How is your credit?"

"Around $2200 a month. My credit was 760 something."

"That doesn't include taxes and insurance does it? For a 500k+ loan?"

"Oh she (the LO) said I had to have the taxes and insurance included."

"WTF? I can tell you off the top of my head that payment is a pay option arm."

Yep it was a pay option loan loaded with junk fees and the lender was making about $25K on it as a whole. They fraudlently made up a job for her, lied to her about the rate and committed various other violations. By the way this LO was Hispanic and that is why she was trusted. The worst part was that because the LO had maxed out what they could make on the loan the underlying interest rate was around 9.4%. The loan would reset in less than two years and her payment would jump to $4800 a month. Luckily she talked to me in time and she cancelled her loan. This happens all the time within many different ethnic groups because they trust each other. I have examples of people from India, Vietnam, Mexico, etc. and people who are African American where they are put into bad loans regardless of their credit score, education or financial well being. This is where the problem is and this is one of the many frustrating reasons why I left the business. I also saw and had many caucasian borrowers who had bad credit and of the African American clients I had the majority had great credit.

Sorry for the rant but there is always more to the story than what the media tells you. Red - How about this if prices are down by 8% or greater by end of the year when adjusted for inflation you buy me lunch and if they are not I buy your lunch? Fair enough?
 
graphrix, I've seen the same thing with real estate agents as well. The buyers misplace their trust in an agent just because they are from the same ethnic community. The agent is just a greedy bastard and will put the buyers in a home that makes the agent a lot of money.

When you see homes on MLS that are offering more than 3% (I've seen 5%, 6%, and once even 10%!) to an agent to bring a buyer.. well, that seller is hoping that an unscrupulous agent will produce a Greater Fool (GF).
 
Red,

Thank you for posting the article from Yahoo. I must say it is one of the worst written to express the bullish argument I have seen to date. This is the kind of junk written as the market falls off a cliff. Look at these passages:



"One thing we noticed about the sources the news media quotes is that they are almost universally from Wall Street stock analysts and rarely from within the real estate industry."

Yes, the MSM is no longer looking to real estate shills with a reason to lie for all of its information. The impartial observers from Wall Street are failing to toe the line.

"The concept that there is or was a “housing bubble” is simply the nonsensical and fancifully imaginative story of Wall Street Stock Analysts, who have been chanting this exact same “mantra” since the late 1990’s in an effort to divert investment activity back into the stock market."

It must be a grand conspiracy by Wall Street Analysts to get the money the used to be flowing into real estate. Anyone who starts proposing grand conspiracy theories has already lost all credibility. Also notice the condescending terms "simply the nonsensical and fancifully imaginative story." Sounds more like the BS this author is peddling. I guess if you can't make a rational argument it is better to resort to mocking and condescension.

"In the process of conducting the research for this report, we noticed that none of the other reports contained actual analysis of pertinent data and facts. More typically we find musings and circular reasoning about business cycles, speculation about “speculators” etc., all peppered with anecdotal stories of historical boom and bust, peaks and troughs, as though they were substantive, informative, conclusive and otherwise inescapable.... This surprising lack of industry data caused us to independently collect actual data and develop our own comparative financial models to analyze the data, to identify facts, causes, trends and forecasts."

Here the author is telling a lie (there is plenty of good industry data) to debunk the good information out their in favor of the complete nonsense the author is about to present.

"They would have us believe that the public suddenly and simultaneously woke up/sobered up and realized/decided that home prices were just “over-inflated” and simply bailed-out, resulting in a “burst bubble!” The facts are, however..."

This is a straw-man argument. The author has incorrectly presented the bubble argument and then goes on to refute the bogus argument he just made.

"Additionally, it should be noted that the preponderance of commentaries on the “Housing Market” are authored by Stock Market Analysts with a myopic view that whatever is affecting the business and stock performance of Toll Brothers (NYSE: TOL - News), Pulte (NYSE: PHM - News), Lennar (NYSE: LEN - News), DR Horton (NYSE: DHI - News), Centex (NYSE: CTX - News), and the like are the true indicators of the condition and future of the housing market."

Here the author presents the correct argument, and simply labels it myopic without presenting any reason why the argument is wrong. The worst part is the authors argument here is self-defeating because the stocks of the homebuilders have been rising which would actually make the bullish case. Unfortunately since the author set up Wall Street analysts as grand conspirators, he was not in a position to utilize this bullish information.

"Indeed these publicly traded companies are likely to be the hardest hit, already taking hundreds of millions of dollars (most likely billions when the dust settles) in write-offs from the cancellation of their speculative land options. Additionally they have and are making substantial price adjustments to reduce the glut of speculative inventory upon which they now sit."

How exactly is this bullish? Would the builders be doing this if they saw an imminent recovery?
 
"So what is the “cause?” In order to apply logic and the law of causality (that every effect must have an antecedent cause) to the housing market we must fully understand the “effect” before we can even hope to identify the cause."

Can any of you make any sense of this statement. Doubletalk in the first degree. Notice the terms "apply logic and the law of causality." It makes the author sound smart and authoritative.

"The State of Market Values – A Look at the Regional Data

Throughout this report we will be looking at all of the data (comparatively) from January 2004 through December 2006 in twelve quarterly segments. All data are based on “averages,” so there are transactions both above and below the average prices used for evaluation.

Northern Virginia home prices appreciated at an unprecedented rate during this period.

Single Family Home prices appreciated 33.2% in 2004 & 2005 before the 2006 adjustment of -7.03% for an average net increase of 26.2%. (Average Sold Price difference Q1-04:$552,985 to Q4-06:$697,839.)

Peak period, average price: $753,569 Sold Q3-05 & Settled Q4-05.

Townhome & Duplex prices appreciated nearly 38.4% in 2004 & 2005 before the 2006 adjustment of -5.3% for an average net increase of 33.13%. (Average Sold Price difference Q1-04: $348,044 to Q4-06: $463,344.) Peak period, average price: $489,035 Sold Q3-05 & Settled Q4-05

Condominium prices appreciated 31.8% in 2004 & 2005 before the 2006 adjustment of -7.7% for an average net increase of 24.07%. (Average Sold Price difference Q1-04: $258,604 to Q4-06: $320,870.) Peak period, average price: $340,569 Sold Q3-05 & Settled Q4-05 ..."

Were you suitably dazzled by all those meaningless statistics? If you can't dazzle them will brilliance, baffle them with BS.

"It appears clear that the Fed’s rate hike in August, 2005 to 3.5% was the primary catalyst that spurred the shrinking demand for housing purchases."

Would that have been #13 of 17 or perhaps it was #14 of 17? There were 17 consecutive 1/4 point interest rate increases. To pick out one of them as the catalyst is ridiculous. The cumulative impact of these increases certainly hurt the market, but the cause and effect the author identifies is clearly erroneous. Does make his "analysis" look deep though.

"According to major lenders as well as FNMA and FDIC, ARM products comprise over 50% of newly originated home loans in our region. So it’s not difficult to see that since half the potential buyers have lost over 30% in buying power, demand has synchronistically been reduced, and home purchase prices have been steadily re-aligning with purchaser’s ability to pay."

This is a really dumb statement. Taken at face value (without going in to the use of ARM's and affordability in general), wouldn't a 30% reduction in home prices be in order to rebalance the market. Yikes!

"It was not until the current quarter (Q4-06) that average list prices began to decline to meet buyer’s affordability. From Q3-05 through Q3-06 we witnessed nearly half of the available properties were either withdrawn from the market, or converted into rental properties. This pattern has begun to ease the large inventories of competing homes and re-direct the trend toward balance of supply and demand."

No, this is a bunch of flippers choosing to rent at a loss in order to delay the inevitable sale. These houses will be added to inventory, it's just a matter of when. Any balance this author is identifying will be short lived.

"Where is equilibrium and market balance, and when will it occur? We know of no credible source that knows precisely, but we can use the data compiled and results of our analysis to make a rational, educated assessment."

Notice the author's feeble attempt to set himself up as the "rational, educated" expert? Laughable.

"It’s also important to note that arrival at “market balance” will always remain somewhat of a moving target, but as we come into that range, the “normal” annual rates of appreciation will slowly return, although in the 7% to 10% range (not the 14%-20% that the last 5 years delivered.)"

Always nice to finish with a little wishful thinking.

This article was complete BS. It was poorly researched, poorly argued, it failed to account for the real bearish arguments (resetting ARMs, foreclosures, lack of affordability, etc.). It is the worst kind of crap peddled by the bulls.
 
graphrix,

It seems that rent in TIC apartments in IRVINE has increased more than 6% in last few years. I dont have the data unfortunately. But as an example: a 3 bedroom townhome in a Oak Creek is $2800-2900 now. What was the rent in 2000?

Yes, I agree there's some speculation in home price, but I am just pointing out that there must also be a strong fundamental in Irvine as more and more people want to move here and are willing to pay the high rent or high home price. How much of it are speculation is hard to say. and no I am not interested in a lunch bet. If i"m wrong, I will suffer enough financial loss already . Thanks for the offer though.

Also, home ownership cost is more affordable recently due to historically lower mortgage rate and IO-only. It seems that IO-only loan will not go away anytime soon??? And the 5/1 , 7/1, 10/1 ARM will also wont go away especially if the 30-year fixed rate hikes.

As I pointed out in another thread, brand-new Woodbury Place APT now offer a 2 bedroom townhome at $2400-2600. And in my experience they always offer a teaser rate (or a month off etc) but the next year they will bump it up more than others.

On the other hand, you can buy a detach 2 bedroom condo in Woodbury and PS (Bowen Court and Vientos) which is priced at mid $400k. Both Woodbury Place and Bowen Court/Vinetos are CalPac homes I beleive. So if you have some downpayment (10-20%) and are willing to pay 10/1 IO-only, the net cost of onwership is comparable to rent in that same neighborhood.
 
Hi Red,

Oak Creek is near UC Irvine and the area is more expensive. You could rent a 3 bed town home elsewhere in Irvine for less.

In 2001-2002, the Oak Park (Oak Creek) plan 1, which is 1 bed, 1.5 bath, 870 sq ft, 2 car (tandem) garage, patio, etc. rented for $1200-$1250. By 2006 the same unit was renting for $1450, which is actually a bargain to my tenants because if you rent from TIC at Oak Glenn, a 1/1 apartment with 734 sq ft will cost $1605-1660, and at Quail Meadows a 1/1 with 821 sq ft will cost $1800/mo. That's somewhat comparable to downtown Fullerton prices, where a 1/1 will cost you $1700/mo.

If you go to West Irvine area near Tustin, the rent is a lot cheaper. Back in 2000 you could rent a 2 bed for 1400 and 3 bed for 1700. The Sheridan plan 3 unit, which is a 3/3 townhouse with 1670 sq ft, 2 car garage, plus side yard, rented out for $2400/mo in 2006. However the neighborhood is not as nice as Oak Creek, and buyers weren't allowed to rent it out during 1st year of ownership. No Gelsons/Ralphs within walking distance, no Ranch 99/Costco/Spectrum/Hospital down the street...
 
Red - Using TIC as an example for market rent is interesting. I lived in a TIC apt. for three years and the total increase was 4% or 1.3% per year which is way below inflation. If you calculate what the rate of increase has been since I lived there to what the current rent is it is 4.5% per year. This is above national inflation but right there with OC's and the place has been completely remodeled so it should be higher. I remain friends with the one of the leasing consultants and the manager there and their vacancy rate was a little higher than they want. So they are going to lower the rent. Go check out craigslist.org you can find some really good deals. Vientos is a cool product but the payment 100% I/O financing with taxes/HOA make it double what market rent is and even with the tax break it doesn't make sense.

You are right ARMs are not going away they have been around since the 80's. But to qualify for the I/O arms is going to be more difficult especially if you need a second since no one on the MBS market wants to touch them. Also I have stated this before that rates are based on MBS pricing. 30 year fixed rates right now are the best compared to ARMs. Why? Because they are in a lower risk class. The I/O ARMs are a higher risk class and the pricing is looking pretty nasty. Not all the lenders have figured this out yet and have kept there rates down. Watch out when they go to sell them and they find out that they will be taking a loss. Then they will raise rates to make up for the loss. You said that you are in escrow for a new home and that it was going to close in about six months right? You also said you were looking into ARMs so my advice to you is to lock that loan now otherwise you may be looking at the lower fixed rate loan.

Too bad on the lunch it would cost you a lot less if prices do go down by 8% when adjusted for inflation.
 
Graphrix,

Yes I have heard that if you stay in the same TIC unit for years you will definitely get a much better rate. Also yes, you can find good rental deals when vacancy rate is higher than normal. But to some degree this is also true with home searching, sometimes you can find a good deal out there.

I used the Woodbury Place as an example as they are brand new thus pricing is up-to-date and they are somewhat comparable to Vientos. I blv the new apt in PS (Portola Place) might even be pricier - the largest 2/2 flat (not townhome) in Portola Place will rent at $2375. But again yes I agree, if you have to purchase with 100% financing then you're probably better off renting.

For our situation, we need a 4 bedroom with at least 1bed/bath downstair and a good-size backyard. So TIC apt is not an option although we might consider a 3 bedroom townhome. And last time we look for a decent 4 bedroom rental in Irvine, it can easily cost us $3000 per month not to mention the hassle of renting a personal property.

Regarding my loan, I was thinking about waiting until a couple months before COE before locking the rate. We prefer 30-year fixed but we dont mind the 7/1 or 10/1 ARM if it is significantly lower. We might do I/O because our income varies: on a good year we can easily afford 30-year P&I but on a bad year, sigh... we might have to stretch just to afford the interest payment. That's why we have savings for bad years. In any case, I appreciate your advice about locking the rate now and will talk to my lender.
 
BTW - I am curious why do you guys keep saying the cost of ownership is double the market rent? Do you really mean this or is it a hyperbole just to scare people off from buying?

Using Vientos Plan2 at $450k, with 10% down, 10/1 ARM IO payment is ~$2200. Tax/Mello Roos/HOA is ~$1000. Tax break is ~$800. So net cost of onwership is ~$2400 monthly for the next 10 years.

And to get a comparable rental unit in Woodbury Place or Portola Place you probably spend ~$2400 per month, not too mention the rent increase for the next 10 years.

Yes, you dont get the CD or investment return from your $40k downpayment but in 10 years, if your home price increase by 10%, that's 100% return on your $40k downpayment.
 
"Double" is meant as a rough approximation of the overall market. Some places are more and some less; the fact that you can find some deals that are less does not invalidate the statement. No hyperbole or sinister motives involved.

I personally tend to agree that it does seem that a lot of the newer construction in Irvine is a better deal than the what you find in the resale market; no doubt that's part of the reason why the builders here are getting a lot of interest.

BTW, comparable units to the 1075sf Vientos Plan 2X at Portola place are $1960 - 2115 with $1000 off first month. Woodbury place is indeed a bit more, but we are talking about Portola here, right?
 
If you decide to go "old school" and get a 30 year on a $405K loan at 6.25%, that is $2500, plus $200 a month in down payment opportunity cost. Plus the $1000 Tax/Mello/HOA gets us to $3700/month.

So yes, this is not quite double, even before tax breaks. But it's in the ballpark, so at least you can see why people would say that.

One more thing. When they say "double" a lot of bears are talking about peak 2005 prices. Prices have softened quite a bit since then. Early 2006 I was paying $1650/month to rent a place that was purchased for $490K. I think if one runs the numbers there you can see that "double" easily applies.
 
Personally, when I refer to the cost of ownership being double the cost of rental, I am referring to the total after-tax out-of-pocket monthly cashflow utilizing a conventional, fixed-rate 30-year mortgage. Some of that money comes back to you in the form of paid loan principal, and some comes back from the mortgage interest deduction (assuming you don't get hit with the AMT). If you don't figure in a downpayment, the cost of ownership is double even after getting that money back. When you figure in a 20% downpayment, the cost of ownership, even at todays prices is still 60% greater than the cost of rental. Prices still have to drop about 30%-35% before a 30-year mortgage with a 20% downpayment equals the cost of rental. That is where the bottom will begin to form.

The only reason I am "priced out" of the market is because I am unwilling to use an interest only or negative amortization loan. This is renting from the bank or worse. I would not do this unless I was very sure prices would not decline because they were at their fundamental value. Even then, I probably would not do this. Call me crazy if you wish, but I have an issue with "thowing my money away" on interest. Rent doesn't bother me, but interest does. I would rather pay things off and know none of my income was being drained by interest. That always felt like a ball and chain to me. I just say no. I would do it if it saved me money over renting, but otherwise, forget it. To each his own.
 
Bigmoney -

Vientos Plan2X is a 2-story DETACH townhome (with studio and half bath downstair) while the Portola Place plan with the same sqft you pointed out is attached flat (with someone above or below you I suppose). So they are not really comparable IMO. I think there's a 2-bedroom townhome in Woodbury Place that are DETACH but I blv it rents a little higher close to $2600 (before any concession).

In any case, thanks for the clarification - I was just curious because it doesn't seem like the cost of ownership is that out of whack in my calculation. I was just making sure my brain isn't out of whack
 
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