What the bubble?!?

[irvinehomeowner]

Looking at prices in an era of low interest rates is not the right way to look at it.  Regardless of long term soundness or reasonableness, the basis of a bubble is affordability.  More specifically, whether the monthly payments + costs are affordable.  If they are, it's not really a bubble, just inflated prices. 

At the current interest rates, you are paying 25-30% less as compared to 5-8 years ago on a monthly payment basis. 

Also, super strict lending standards and FCBs dramatically mitigate the risks of a bubble. 

That makes sense but remember, people were leveraging O-ARMs back then and their rates were the same as what rates are now... so "affordability" was the same. But more people could qualify back then so the uptick in prices were supported by the ninja financing.

With none of that tricky credit in play now, why are prices almost the same (or higher) than back then?

I guess this is more personal for me because back then when we were in the market, the prices for homes were actually *less* than they are right now. I actually have to spend more today, than back during the uprun of the bubble... gah.

 

[Irvinecommuter]

Looking at prices in an era of low interest rates is not the right way to look at it.  Regardless of long term soundness or reasonableness, the basis of a bubble is affordability.  More specifically, whether the monthly payments + costs are affordable.  If they are, it's not really a bubble, just inflated prices. 

At the current interest rates, you are paying 25-30% less as compared to 5-8 years ago on a monthly payment basis. 

Also, super strict lending standards and FCBs dramatically mitigate the risks of a bubble. 

That makes sense but remember, people were leveraging O-ARMs back then and their rates were the same as what rates are now... so "affordability" was the same. But more people could qualify back then so the uptick in prices were supported by the ninja financing.

With none of that tricky credit in play now, why are prices almost the same (or higher) than back then?

I guess this is more personal for me because back then when we were in the market, the prices for homes were actually *less* than they are right now. I actually have to spend more today, than back during the uprun of the bubble... gah.

1)  Affordability is the same initially but the foreclosures came when those ARMs re-set or when the buyers couldn't refinance or sell the property to keep the affordability.  Most of the loans now are fixed so you won't have the same issues. 

2)  Prices are higher because of supply and demand.  There was almost no supply for awhile.  FCBs came in and bought up most of the inventory leaving many to try and get into whatever houses they can.  The influx of new homes provided an outlet for those people but it will still not enough.  I think it's going to flatten out for a while and going to remain flat in the foreseeable future, especially if rates go up.  Price is not going to be an issue since I believe the bulk of the people who bought are going to stay in their houses for a long time.

3)  What timeframe are you comparing to?  I doubt that your monthly payments would be higher now (even with inflated prices) than before.

 

[irvinehomeowner]

1)  Affordability is the same initially but the foreclosures came when those ARMs re-set or when the buyers couldn't refinance or sell the property to keep the affordability.  Most of the loans now are fixed so you won't have the same issues. 

I don't think this was actually true. By the time resets/recasts came about (which is usually 5 years after), interest rates were low so the reset/recast would be near your starting rate. We had an O-ARM on one of our properties and there was no "sticker-shock" as was predicted on the IHB. Our payment was actually lower because of the interest rate freefall and then we refi'ed that property into a fixed loan (which was actually a higher payment than the O-ARM but we wanted to stabilize the cost on that property).

2)  Prices are higher because of supply and demand.  There was almost no supply for awhile.  FCBs came in and bought up most of the inventory leaving many to try and get into whatever houses they can.  The influx of new homes provided an outlet for those people but it will still not enough.  I think it's going to flatten out for a while and going to remain flat in the foreseeable future, especially if rates go up.  Price is not going to be an issue since I believe the bulk of the people who bought are going to stay in their houses for a long time.

Supply now is as high back in early 2012 when prices were significantly lower.

3)  What timeframe are you comparing to?  I doubt that your monthly payments would be higher now (even with inflated prices) than before.

I think it would actually be a bit higher because 80% of a higher priced home now even at a lower interest rate is more than 80% of a lower priced home back then (comparing 2005-06 to now and also comparing <$729k loan vs > $729k because of the higher prices).

Am I the only one who thinks prices are as high or higher now than they were during the bubble? So I still ask, why is this not considered a bubble based on fundamentals?

 

[Irvinecommuter]

IHO:

1)  You had a reasonable ARM.  Many of the people were buying homes on 1% teaser rates, I/O payments, and second loans.  Many of the adjustable rate loans were short term (i.e. 1 year) so when it adjusted, the rates jumped 1 to 2%.  Most people were buying their max anyways. 

There were also many people who were buying on made up incomes and didn't realize the true cost of homeownership. 

2)  Supply is back up in early 2012 but in mid to late 2012, supply was down to 1-2 month inventory.  FCBs also started showing up around that time.  If you go look at the raise in prices, it was pretty much October-November 2013 through summer 2013. 

3)  That's not true.  A $850,000 house with 20% down is $680,000...which results in a monthly payment of about $4,000 at 4%.    A $750,000 with 20% down is $600,000...which results in a monthly payment of about $4,300 at 6%.  I know the comparison is not quite right because jumbo versus non-jumbo but the idea is that you can get a lot more house with a lower rate.

Prices are a little higher than 2005/2006.  Juliet's Balcony was going for about $1.3 million in 2005 for about 3800 sq. feet.  That's about where Sausalito is at right now.

 

[bones]

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[OpenSky]

 

[irvinehomeowner]

1)  You had a reasonable ARM.  Many of the people were buying homes on 1% teaser rates, I/O payments, and second loans.  Many of the adjustable rate loans were short term (i.e. 1 year) so when it adjusted, the rates jumped 1 to 2%.  Most people were buying their max anyways. 

There were also many people who were buying on made up incomes and didn't realize the true cost of homeownership. 

I would like to think "many" also got reasonable ARMs and weren't lying on their applications.

3)  That's not true.  A $850,000 house with 20% down is $680,000...which results in a monthly payment of about $4,000 at 4%.    A $750,000 with 20% down is $600,000...which results in a monthly payment of about $4,300 at 6%.  I know the comparison is not quite right because jumbo versus non-jumbo but the idea is that you can get a lot more house with a lower rate.

Try comparing a $900k to a $1.2m... and not more house... the same house.

Prices are a little higher than 2005/2006.  Juliet's Balcony was going for about $1.3 million in 2005 for about 3800 sq. feet.  That's about where Sausalito is at right now.

Like others have said, it depends where right? Juliet's Balcony is larger than Laguna Altura Cortona yet how much are those going for $/sft?

 

[irvinehomeowner]

Depends on where I think.  Obviously, there will be some exceptions like: some people bought those attached condos (Paloma) in PS for $900k+.  They sure haven't gone back to those levels in pricing.  Also, sometimes on Redfin, homes for sale are asking for less than what they bought it for back in the bubble.

I agree... but also on Redfin, sales are *closing* for more than what they were priced at in the bubble.

 

[bones]

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[irvinehomeowner]

I don't know how many of you do this, but I play with Redfin quite a bit and I parse it down to a certain area/hood and do a comparison of Solds (all time) and what is selling now.

I look at the date of the Solds and in certain areas, the prices are close. Not only are they sometimes higher than what was sold in 05-06, but the jump was in the last 12 months.

So that's what I mean, inventory has moved up since late 2012, so there is some supply... and in reaction to the run up in sale prices, more inventory has hit the market... but what's keeping it up?

 

[OpenSky]

 

[irvinehomeowner]

To clarify, I'm not saying we are in the same kind of bubble as the last one... but as others have responded on the poll, it feels like a mini-bubble.

 

[nosuchreality]

Relatively speaking, the market is absolutely on fire and supply is limited.

Keep in mind Sept 2003, Irvine had 283 sales, in Sep 2004 - 211, Sep 2005 - 265, Sep 2006 - 155

Jump ahead to Sep 2013 - 352.

Granted Irvine's population in 2005 was a bit less, right under 180K people, today, call it around 240K.

So that Sept 2013 sales pace, is per capita, the same as 2005, and actually much faster than 2004 or 2003.
http://www.irvinehousingblog.com/blog/comments/more-irvine-sales-trends-home-grown


So we're wrong, demand isn't down in any sense of the word.  Now, who can tell us what were the total number of homes for sale on the MLS  in September of 2005?

found it, courtesy of Dr Housing Bubble

Now we see, compared to 2005, we have the same per person number of sales, but 1/4th the volume of homes for sale on the MLS.

 

[irvinehomeowner]

This still goes back to how much people were arguing that $400-$500/sft in Irvine was ridiculous and did not support fundamentals... thus defining a bubble.

Why is it okay now?

 

[Irvinecommuter]

This still goes back to how much people were arguing that $400-$500/sft in Irvine was ridiculous and did not support fundamentals... thus defining a bubble.

Why is it okay now?

Because you are still looking at total price and not affordability.  Also, a lot more FCBs now. 

 

[nosuchreality]

This still goes back to how much people were arguing that $400-$500/sft in Irvine was ridiculous and did not support fundamentals... thus defining a bubble.

Why is it okay now?

Time value of money.

In fall of 2005, Mortgage interest rates were 6%.

Since fall 2005, inflation has been around 2% that's Government official CPI.

Today, call it 4% for the mortgage.  So collectively, that $400/sft today, is like $265/sft in 2005.

Plus, see above, buying a house is like going to the store and seeing 3 apples left on the shelf, normally for your $1.79/lb you like a nice apple, they're a little beat up, but there's only 3 of them left.

Seriously, I think there is a substantial price premium being paid because buyers are frustrated with not being able to buy. 

We are literally going on a decade of deferred housing plans due first to the bubble, then the recessionary and now the hyper competitive buying market.

 

[irvinehomeowner]

This still goes back to how much people were arguing that $400-$500/sft in Irvine was ridiculous and did not support fundamentals... thus defining a bubble.

Why is it okay now?

Because you are still looking at total price and not affordability.  Also, a lot more FCBs now. 

I'll give you the responses that were thrown around back then:

1. Who in Irvine can afford these prices if average household income is reported at less than $100k?

2. There aren't any more FCBs now than there were then.

I feel like Larry. Where are all the bears now?

 

[irvinehomeowner]

So 5-8 years ago $400-$500/sft was not okay... but today it is?

But only for Irvine... because that's not what it is in Santa Ana.

Stupid Unicorn.

 

[nosuchreality]

This still goes back to how much people were arguing that $400-$500/sft in Irvine was ridiculous and did not support fundamentals... thus defining a bubble.

Why is it okay now?

Because you are still looking at total price and not affordability.  Also, a lot more FCBs now. 

I'll give you the responses that were thrown around back then:

1. Who in Irvine can afford these prices if average household income is reported at less than $100k?

2. There aren't any more FCBs now than there were then.

I feel like Larry. Where are all the bears now?

Irvine's income is continuing to skew upward.  In 2012, the prior twelve months of income showed 25% of households made more than $150K.    A full 13.8% made north of $200K.

In 2006, that was 21%. In 2005 it was lower.  That's a percentage of total households.

In 2006, there were 7478 households with income above $200K.  In 2012, there were 11,395.  For the $150K-$200K crowd that number grew from 6495 to 10357.

Respectively, that's 3917 more at $200K+ and 3862 more at $150K-200K or basically, an entire years worth of sales at the blistering sales rate we have in each group alone.

If you look at family units, the growth in high end is more pronounced.


Sources: http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ACS_12_1YR_S1901&prodType=table
http://www.irvinehousingblog.com/blog/comments/irvine-income-data/

 

[irvinehomeowner]

That doesn't mean that a fixer upper that was built in the 1970s should expect to get that pricing - that's ridiculous.  But a properly maintained home built 2000 or later seem to get that pricing.

Turtle Rock is ridiculous then. Many closings over $500/sft, even over $600/sft... and most built in the 70s with tons of work needed to be done.

Maybe I'm just closer to this because I'm shopping in these places with over inflated prices.