When is the best time to buy??????????

[irvine_home_owner_IHB]

I expect those 1.2-1.4 homes to sell for $500k-588K ASSuming the owners can get financing under whatever Freddie and Fannie caps are at that time. Jumbos will shortly be extinct. And it puts it right back into the 160x rent multiplier assuming $3200 a month for rents on an equivlent property.

Wow... I see you guys saying this all the time. When I first read it I couldn't believe it -- but after further reading... it does seem to point that way. Will we really be able to buy a 3200+ Woodbury house for $550k in less than 5 years? Even the Quail Hill ones (those are the ones I'm waiting for)?

A question of mine did not get answered in another thread... back in 1989, during our last peak, what were the prices of of new Irvine homes then and what did those same homes sell for in 1996? If there is some thread or blog article with this info... please point me in the general direction.

 

[freedomCM_IHB]

IHO,

remember the last bubble was only 50% over 'value', while this one went 250%-300%. so the last one, the drop was 25-30% from 89 to 96, while in this one, it should be more like 60-70% to return to 'value'. e.g. the $200k house build in 1985 rose to $300k house in 1989 dropped to $225k in 1996, which then rose to $675k in 2006, and so should drop to $250k in 2011.

 

[IrvineRenter_IHB]

The problem with cap rates is the same as the problem with comparable sales: it is merely a reflection of what people in the market are paying. There is nothing magical about cap rates. They fluctuate wildly with prices. People bid up prices, and thereby bid down cap rates, due to their false assumptions about future appreciation. A 6% cap rate on real estate is crazy, and all of those people who bought with those cap rates will get burned. If you want to see this in a historical perspective, look at what happened to cap rates during the S&L disaster. During the S&L boom, investors used S&Lsto insure their deposits (investment capital) and then used the leverage of the banking system to bid up prices of commercial real estate into the stratosphere. Cap rates fell down to the 4% - 6% range we are seeing today. When that Ponzi Scheme fell apart, investors in commercial properties went from getting cash-out at closing to needing 30% down. Cap rates rose back to their historic norms of 12%. This cut the value of commercial real estate in half. The same is happening now with houses. Why would a rational investor accept a 6% return on an investment as volatile and as illiquid as real estate when there are other more stable and more liquid investments returning more? The only justification for low cap rates on real estate is a belief in appreciation. Take away that fantasy, and the investment has to be justified on its cashflow alone. When you do that, cap rates go back to 10%-12% which cuts prices in half.

An argument could be made that the minimum cap rate for an individual property is the financing cost. That would make the cap rate no less than 5.875% based on current financing options for a 30-year fixed rate loan. Remember, if the rent rates don't change then a lower cap rate would imply a greater value for the property. Historic norms as described above were reflective of the financing cost. See if this passes the logic test as you're looking at property prices and financing costs. If financing costs go up 0.25% you would now value the property less because your minimum cap rate just increased. Rental rates didn't change but you're offer will. As a crude (i.e. not completely accurate) exercise take the annual rent that you're currently paying and divide it by 5.875%. Is that price higher or lower than the current market for purchasing a comparable property? What if you did that same calculation for a place that you like more (i.e. you're willing to pay higher "rent")?

It is true that financing rates do impact cap rates. Very low interest rates justify lower cap rates because alternative investments do not pay well. This has been particularly true for the last 25 years while we have had a steady decline in long-term interest rates. The declining interest rates and cap rates have created financing appreciation which has justified even lower cap rates. However, there is a time when this trend will reverse. We are at that time. When interest rates start to climb, alternative investments become more attractive, and financing appreciation disappears. The illiquidity of real estate becomes a particularly nasty problem in a rising interest rate environment. Now, if you believe that long term interest rates can or will drop from current levels, then you may find some justification for current pricing on a rental cashflow basis. Unfortunately, interest rates cannot go below zero, and there is not much more room for interest rates to decline. The mispricing of risk and the enormous losses being sustained by lenders foretells of a period of rising interest rates soon to follow. This will blow out cap rates and cause real estate values to plummet.

The primary cause for appreciation is inflation. An asset, like housing or oil, doesn't change it's basic usefulness unless there is a rezoning or a new, more valuable use for oil is discovered. As the purchasing power of the dollar decreases (the definition of inflation) the cost of items such as real estate and oil will be re-priced accordingly. With the act of purchasing a property you're "locking in" the current cost for housing. It's assumed that rental rates are true representations of income but that isn't always true. Sometimes rental rates grow faster than income other times they grow slower. If you own, you have less uncertainty and increases to your income can be used for other purposes.

The primary cause of increases in the fundamental value of real estate is wage inflation translating into higher rental rates. The primary cause of appreciation in California's residential real estate is irrational exuberance and loose financing. The typical ownership period in the United States is 7 years. This isn't enough time to see a significant savings from inflation. If you overpay up front, you are falling behind a renter's cost for several years, and it takes even longer to make up the difference and see a return. I crunched all of these numbers in the post The Investment Value of Residential Real Estate. I recommend you look them over.

 

[irvine_home_owner_IHB]

IHO,

remember the last bubble was only 50% over 'value', while this one went 250%-300%. so the last one, the drop was 25-30% from 89 to 96, while in this one, it should be more like 60-70% to return to 'value'. e.g. the $200k house build in 1985 rose to $300k house in 1989 dropped to $225k in 1996, which then rose to $675k in 2006, and so should drop to $250k in 2011.

I understand for older homes, this math would be correct.

But I'm trying to keep within the same framework here.

The house that was built *new* in Irvine 1989 for $300k... did it drop to $225k in 1996? For example, my parents bought a brand new house south OC in 1989 for ~$350k... by 1996... it sold for $300k. That's only a 15% loss.

What were the typical losses for Irvine new construction from in 1989 compared to their 1996 prices? The reason I ask is although there was a bigger jump in pricing from 1996 to 2006... will other factors prevent new houses built in 2006 from plummeting to half their value by the time we hit bottom? It just seems like a big drop to me and it would seem like taking a brand new house that sold for 1.2 in 2006 to $600k by 2011 will put almost the entire neighborhood of Woodbury underwater. I don't live in Woodbury... but I almost bought there so this has me very curious.

 

[no_vaseline_IHB]

And for the record, I've never smoked before, and I've never taken recreational drugs outside of alcohol. No bluts, no cigars, no cigarettes, no meth, no nothing. I have led a remarkably squeaky clean life.

Wow, really No_Vas. Growin' up in the IE, all we had to occupy our time was recreational drugs and getting into mischief... Meth got me through the SAT after a long night of partying before.

I grew up on a family farm. My dad put me to work full time afterschool and on weekends when I was 9. I lived more than 10 miles one way from town, our nearest neighbor lived 1/4 mile as the crow flies from our house. To get there required you to walk through a wet field or travel about a mile and a half to get there on the road.

I didn't have a lot of oppourtunity to screw off, but I did get to see what a "credit cruch" looks like up close and personal when Pops tried to go broke in the "Farm Crisis" of the early 1980's. I had one pair of shoes for church and one pair of shoes for everything else for about 15 months when I was 12 becasue we had to choose between shoes and the grocery bill. Pops got lucky and got in trouble a year ahead of everybody else when he had a fluke crop failure. Had he gotten distressed when everybody else did he'd of been toast because nobody was doing ag lending under any circumstances in 1983.

It took him 20 years to get back to the same place (monitarily) he was in 1981. Probablly half the neighbor farmers weren't so lucky and lost everything.

 

[no_vaseline_IHB]

It just seems like a big drop to me and it would seem like taking a brand new house that sold for 1.2 in 2006 to $600k by 2011 will put almost the entire neighborhood of Woodbury underwater. I don't live in Woodbury... but I almost bought there so this has me very curious.

You can see that right now in the Villages of Columbus. They're off 30% right now, and I expect them to go another 30% because it's the worst housing stock in the city.

To answer your question, yes, I wholly expect to see that situaiton you descrbe happen. Which is exactly why I didn't buy during the bubble. I was a nutter then, now everybody just hates my guts.

 

[IrvineRenter_IHB]

IHO,

remember the last bubble was only 50% over 'value', while this one went 250%-300%. so the last one, the drop was 25-30% from 89 to 96, while in this one, it should be more like 60-70% to return to 'value'. e.g. the $200k house build in 1985 rose to $300k house in 1989 dropped to $225k in 1996, which then rose to $675k in 2006, and so should drop to $250k in 2011.

I understand for older homes, this math would be correct.

But I'm trying to keep within the same framework here.

The house that was built *new* in Irvine 1989 for $300k... did it drop to $225k in 1996? For example, my parents bought a brand new house south OC in 1989 for ~$350k... by 1996... it sold for $300k. That's only a 15% loss.

What were the typical losses for Irvine new construction from in 1989 compared to their 1996 prices? The reason I ask is although there was a bigger jump in pricing from 1996 to 2006... will other factors prevent new houses built in 2006 from plummeting to half their value by the time we hit bottom? It just seems like a big drop to me and it would seem like taking a brand new house that sold for 1.2 in 2006 to $600k by 2011 will put almost the entire neighborhood of Woodbury underwater. I don't live in Woodbury... but I almost bought there so this has me very curious.

It is difficult to get your mind around such a dramatic drop in prices. There is no factor that will prevent 2006 prices from cutting in half. The new financing environment will make it happen because people will not be able to bid prices up any higher. Now we may not see a full 50% drop because wages and rents should rise between now and 2011, but if the recession is long and deep, we might see 50% off in 2011. Woodbury, Quail Hill, and Northwood II will be completely underwater. Every homeowner there will have a property worth less than they paid. Depending on their financing, most will be underwater as well.

 

[irvine_home_owner_IHB]

It is difficult to get your mind around such a dramatic drop in prices. There is no factor that will prevent 2006 prices from cutting in half. The new financing environment will make it happen because people will not be able to bid prices up any higher. Now we may not see a full 50% drop because wages and rents should rise between now and 2011, but if the recession is long and deep, we might see 50% off in 2011. Woodbury, Quail Hill, and Northwood II will be completely underwater. Every homeowner there will have a property worth less than they paid. Depending on their financing, most will be underwater as well.

How will this impact the Irvine economy? I guess because of Irvine's high income profile, most will hold until they get back up again but it seems like the next time an election rolls around I better be saving up for diving gear because I want to sea rescue one of those Quail Hill McMansions.

 

[WestparkRenter_IHB]

I think there will be a big drop bail out or not because in the 1990s, prices did not rise as quickly as in 2000s.Shiller does not call it irrational exuberance for no reason.

 

[no_vaseline_IHB]

http://kcet.org/socal/2008/09/foreclosure-alley.html

You won't have to look far.

 

[No_Such_Reality_IHB]

I'm sorry, but NSR, are you going to even bother with someone who cites Wiki for cap rates? I would break down how to really break down cap rates for our new member here, but I'm tired and I have done it once or twice before. I will say you don't start with the rate first, you need to figure it out before you get the rate, and it is the first mistake in the list of OMG I can't believe someone is so naive about cap rates they would actually post that crap.

There is much that was wrong, but my point was to illustrate the bias and obvious temporary nature of cap rate. I could rail on the errors, difference between rent, gross rent, net rent and NOI but why bother. Just the baseline numbers in their own source, which is often very good by the way for non-politicized information, debunks their point. I use wiki primarily as a method to find quick baseline info and links to reputable sources. In this case it's footnoted to the WSJ and Fed Reserve.

If the house is only minimally over priced in an environment demanding cap rates around 6%, a return to a 8.5% environment leaves the home nearly 50% over valued and such a change in investor sentiment would leave the owner looking at a 30% loss if they need to sell. That's just a return to 2001 or 2002 style rates.

An of course what are the primary drivers of investment sentiment for expected CAP rates? Risk premium, default premium, loss, expenses, unemployment, cost of funds, etc. All of which in this environment are pointing to higher for returns demanded which means higher demand CAP rates. Which means lower offered prices.

 

[IrvineRenter_IHB]

It is difficult to get your mind around such a dramatic drop in prices. There is no factor that will prevent 2006 prices from cutting in half. The new financing environment will make it happen because people will not be able to bid prices up any higher. Now we may not see a full 50% drop because wages and rents should rise between now and 2011, but if the recession is long and deep, we might see 50% off in 2011. Woodbury, Quail Hill, and Northwood II will be completely underwater. Every homeowner there will have a property worth less than they paid. Depending on their financing, most will be underwater as well.

How will this impact the Irvine economy? I guess because of Irvine's high income profile, most will hold until they get back up again but it seems like the next time an election rolls around I better be saving up for diving gear because I want to sea rescue one of those Quail Hill McMansions.

This is going to be very problematic to the local economy and California's economy in general. It took years for us to recover from the bubble of the late 80s. We had the same inefficient allocation of resources, and many people saw most of their high wages going to burdensome house payments due to the insanely high DTIs used. The economy in California from 1991-1996 is what we will see from 2008-2013, perhaps a little worse.

 

[irvine_home_owner_IHB]

A question of mine did not get answered in another thread... back in 1989, during our last peak, what were the prices of of new Irvine homes then and what did those same homes sell for in 1996? If there is some thread or blog article with this info... please point me in the general direction.

Sorry to pester... but I can't seem to find this info here. Any help? (Or a picture from no_vas?)

 

[IrvineRenter_IHB]

The Irvine median peaked at $250,000 in June of 1991. It bottomed at $204,000 in March 1996.

If you take the 3 month moving average of the median to smooth out the noise, the peak was $246,000 in July of 1991, and the bottom was $219,500 in April 1996.

 

[columbussquare.com_IHB]

This is going to be very problematic to the local economy and California's economy in general. It took years for us to recover from the bubble of the late 80s. We had the same inefficient allocation of resources, and many people saw most of their high wages going to burdensome house payments due to the insanely high DTIs used. The economy in California from 1991-1996 is what we will see from 2008-2013, perhaps a little worse.

Today I had lunch with another investor. He stated that the current economic environment is, "the worst I've seen in my lifetime" and he predicted that it will take another two years to work itself out. The biggest impact on housing right now is due to deleveraging not a return to value as expressed on this site. Despite all this when asked about the cap rates for apartments he stated that 5.5% is viable. Additionally, when asked if buying a SFR property with 30-yr financing at 5.875% based on a 30% drop from the peak he agreed that this will be a good investment long-term. It might drop in the next 24 months but since there is no guarantee of financing at current levels he would still consider now a buying opportunity. This viewpoint is for both SFR & Residential Income (Apartments)

 

[ipoplaya_IHB]

This is going to be very problematic to the local economy and California's economy in general. It took years for us to recover from the bubble of the late 80s. We had the same inefficient allocation of resources, and many people saw most of their high wages going to burdensome house payments due to the insanely high DTIs used. The economy in California from 1991-1996 is what we will see from 2008-2013, perhaps a little worse.

Today I had lunch with another investor. He stated that the current economic environment is, "the worst I've seen in my lifetime" and he predicted that it will take another two years to work itself out. The biggest impact on housing right now is due to deleveraging not a return to value as expressed on this site. Despite all this when asked about the cap rates for apartments he stated that 5.5% is viable. Additionally, when asked if buying a SFR property with 30-yr financing at 5.875% based on a 30% drop from the peak he agreed that this will be a good investment long-term. It might drop in the next 24 months but since there is no guarantee of financing at current levels he would still consider now a buying opportunity. This viewpoint is for both SFR & Residential Income (Apartments)

Yeah, the beginning of deep ugly recessions are always a good time to buy... Fed has effectively nationalized mortgage lending to keep our economy from crashing spectacularly, do you and your "investor" buddy really think they are going to allow rates to climb materially over the next twelve months?

 

[Daedalus_IHB]

Today I had lunch with another investor. He stated that the current economic environment is, "the worst I've seen in my lifetime" and he predicted that it will take another two years to work itself out. The biggest impact on housing right now is due to deleveraging not a return to value as expressed on this site. Despite all this when asked about the cap rates for apartments he stated that 5.5% is viable. Additionally, when asked if buying a SFR property with 30-yr financing at 5.875% based on a 30% drop from the peak he agreed that this will be a good investment long-term. It might drop in the next 24 months but since there is no guarantee of financing at current levels he would still consider now a buying opportunity. This viewpoint is for both SFR & Residential Income (Apartments)

IMO you and your friend are of a special, though perhaps not very unique, breed of "investor". You're making a case to purchase assets which, under the best assumptions of nothing going wrong, will return less than the cost of capital AND which might become cheaper in the next 24 months? I appreciate civil discussions and differing viewpoints, but reading these kinds of posts is difficult to say the least. To me you're completely ignoring basic, sound business principles and are instead relying on hopes for better times years from now to justify today's decisions. Buy now, or be priced out [of lending] forever?

 

[graphrix_IHB]

Seeing as how this thread has changed course, and how I refuse to be lumped into some category of being someone who doesn't provide facts, I decided to post some gems from the 90s that were found in this thread that I found by using the search button myself.

http://www.kiso.net/images/ihb/irvine-2.jpg

More can be found here.

Here.

Here.

Here.

Here.

When you're more awake feel free to actually discuss the points. The example was given with two point of data solving for a third. It's a good place to start considering it was intended to be a limpness (should be litmus test) test of a proposed purchase price. Cite your list or don't post. As a "moderator" you should know the way you show someone to be "naive" is to prove them wrong. But apparently this is the type of conversation that is modeled here at the IHB. Well done.

So there is a start. More about cap rates later, as well as some more facts, stats, and other uber nerdy goodness that I am well known for, rather than the assumed can't back it up with facts kinda person some are being made out to be. Be prepared, be very prepared for a bunch of numbers, stats, and historical references that make most people's head spin.

 

[irvine_home_owner_IHB]

Awesome Graph... that's what I'm talking about.

I actually remember some of these now as I've model toured the ones in Harvard, West Irvine and WestPark.

(is that guy on the left in the lab getting ready for a no_vas picture?)

The Irvine median peaked at $250,000 in June of 1991. It bottomed at $204,000 in March 1996.

If you take the 3 month moving average of the median to smooth out the noise, the peak was $246,000 in July of 1991, and the bottom was $219,500 in April 1996.

It peaked in 91? Isn't that almost 2 years after the rest of LA/OC (I'm just going off a graph I saw somewhere here)?

What I'm trying to determine is for new homes built in Irvine during a peak (circa 1990)... are they a bit more resistant than older homes and the rest of OC to devaluation?

I understand that I can't really apply the 10% drop during the last boom to the current one due to the over extension and that probably most of the homes built prior to early 2000s should lose anywhere from 30-40% but those numbers and time from trough to rise again seem to be different than the rest of OC.

(any flyers from 89/90?)

 

[IrvineRenter_IHB]

This is going to be very problematic to the local economy and California's economy in general. It took years for us to recover from the bubble of the late 80s. We had the same inefficient allocation of resources, and many people saw most of their high wages going to burdensome house payments due to the insanely high DTIs used. The economy in California from 1991-1996 is what we will see from 2008-2013, perhaps a little worse.

Today I had lunch with another investor. He stated that the current economic environment is, "the worst I've seen in my lifetime" and he predicted that it will take another two years to work itself out. The biggest impact on housing right now is due to deleveraging not a return to value as expressed on this site. Despite all this when asked about the cap rates for apartments he stated that 5.5% is viable. Additionally, when asked if buying a SFR property with 30-yr financing at 5.875% based on a 30% drop from the peak he agreed that this will be a good investment long-term. It might drop in the next 24 months but since there is no guarantee of financing at current levels he would still consider now a buying opportunity. This viewpoint is for both SFR & Residential Income (Apartments)

Deleveraging is how the market is returning to value. Think about it; people should never have been given the loans they have. Lenders were giving people 8-10 times their annual income. When lending returns to 3-4 times annual income, that is deleveraging, and that is returning to value. The main supposition I have been making with regard to the markets is that financing was going to collapse due to irresponsible lending and there would be a credit crunch leading to traditional financing terms. To say that deleveraging is not a return to value is to completely miss the point.

If your investor friend is putting his money into 5.5% cap rate apartments and other real estate right now, he is going to lose money. Daedalus said it well above.