If the home you wanted could be bought today at 30% off the peak price, would you buy?...

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<p>This flooding of liquidity world wide. It is just too hard to tell when the spigot will turn off. Our government knows we are now a credit based society and printing fiat money at a rate of 13% annually.</p>

<p>Subprime is an issue. Some things are clear. But like nirvinerenter said, if your credit is good and you put more than 5% down today, it is still easy to get a loan. </p>

<p>Is the credit market having problems? Yes. Is the spigot still turned on? Yes. Will it be turned off at some point? Maybe. I could see it either way.</p>
 
Only a fraction of the credit market is mortgage based. That said, it does seem that corporate credit is starting to slow down and the bond/credit market for M&A may be slowing down. The awful thing is that once credit expansions slow down or if credit starts to contract, history has shown that it will continue to contract no matter what any central bank or government tries to do; the most recent example being Japan.
 
Personally I could see 40-50% drops in Irvine being more than plausible. Median mortgage payments for condos in OC are 1.6x median rents to compensate buyers for the risk of further depreciation prices may have to fall greater than the 37% to bring this to parity. Given that TIC has been much more dovish on rent increases Owner's Equivalent Rent increases in Irvine are likely to be muted in the near future.





Lenders will move to sensible underwriting standards like: 33% Back end ratio (total amount going to mortgage, credit card debt, student loans, and other debt), 28% Front end ratio (amount of income going to just mortgage), no SIVA or SISA (stated income), no authorized users on bank accounts in determining FICO scores (AU credit cards are already no longer accepted), and borrower or lender mortgage insurance on loan balances in excess of 80% LTV on a remotely sensible appraisal.





Subprime should still exist but the spread to prime should be 3% which is the historical premium over prime (it was 1%). I personally see no problem with 2/28 products since many subprime borrowers may be able to improve their situation and credit score and desire to refinance to take advantage of this.





I would expect to see pay option products become extremely hard to get as will 95-125% LTVs. A 12-15% rate on the 95 to 125% slice would still be advantageous for some borrowers with high FICOs and verified income but high credit card or other high interest debt.
 
<p>I think this housing thing is going to be front-and-center during the next presidential race. I'm almost positive that we're going to see something in 2009 intended to stimulate demand, especially if we get a Democrat in the White House. Maybe some kind of modification to 401(k) law or other tax incentive to accumulate a down payment. </p>
 
<p>IR,</p>

<p>Thank you for the response. That was well put. Umm, what is your take on the influx of an additional 200,000 residents to Irvine? Also, with the Great Park opening soon. Furthermore, there are rumors in the financial market that the Fed might lower the rates at the end of the year. Would the afore-mentioned soften the blow on the price decline in Irvine?</p>
 
reason,





The additional residents in Irvine will be accommodated by additional construction by the Irvine Companies and the builders to whom they sell land. This influx of people will not create a shortage of supply which might put upward pressure on prices.





The financial markets always want the FED to lower interest rates. Lower interest rates are great for stock and bond markets. Recent activity in the bond markets -- they have been selling off -- are indicating an increase in interest rates. Investors are demanding higher returns to compensate them for increased inflation. In that kind of market environment, the FED will probably not be willing or able to lower interest rates, but even if they did, it will not cause a drop in mortgage interest rates.





The article in this link: <a href="http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+July+2007.htm?ref=patrick.net"><strong>Looking for Contagion in All the Wrong Places</strong></a>, is a bit long, but if you read it, you will gain a better understanding about the relationship between mortgage interest rates and the FED funds rate. Basically, the difference between these two rates -- called the spread -- is based on the market's perception of risk. If people are not defaulting on mortgages, the spread will be low, and mortgage interest rates will be very near the FED funds rate (which has been the case for the last 5 years); however, if people begin defaulting in large numbers (as is the case today) investors start demanding compensation for the increased risk, and the spread will increase. So if the spread increases from its current 1.5% to its historic average closer to 3% or 4%, mortgage interest rates will rise. So even if the FED lowers the FED funds rate, the increase in risk premium will drive up mortgage interest rates.





I know that answer is rather long, but I see mortgage interest rates as increasing over the next several years, and this will make the price decline in Irvine even worse. Mortgage interest rates declined 30% in the early 90's which did soften the drop. Interest rates dropped then (in spite of large numbers of foreclosures) because they were well above their historic norms in 1990. This time, the opposite is likely to happen because interest rates are well below historic norms.
 
<p>"what is your take on the influx of an additional 200,000 residents to Irvine?"</p>

<p>Huh? According to U.S. Census, there were less than 600,000 in population growth in the entire greater L.A. area over the past 6 years. That is less than 100,000 per year for the entire area. Where are you getting the 200,000 new residents in just Irvine? That may be the case in the next 15-20 years, but there certainly will not be a need for that much new housing in Irvine. Maybe you're saying that many new residents? That would be accompanied then by 195,000 moving out of Irvine. Again, not a significant need for new housing.</p>
 
<p>IR,</p>

<p>Thanks. As always, very informative.</p>

<p>Gepetoh,</p>

<p>Oops, I just re-read the OC Register article. It's actually will be reaching over 200k residents in the near future. </p>
 
<p>IR, </p>

<p>With stories like Bear Stearns, whereby they are taking properties from homeowners who are not making payments. And many other financial institutions doing the same. </p>

<p>As there will be an abundant of these properties on the market. Asides, from being affordable to those who have been waiting on the sideline. What other opportunities do you see in such a market? Would such a market be good for acquiring rental properties? </p>

<p> </p>
 
reason,





A foreclosure dominated market is great for picking up rental properties. I suspect there will be a lot of this activity as the bottom forms 3 to 5 years from now. The problem with this strategy right now is the prices are too high. For a property to cashflow positively, you need to buy it at around 120 times monthly rental rates. Prices are double that right now, so a steep decline will need to occur before cashflow investors are drawn into the market. These investors will sit on their hands for a few more years while prices drop.





I don't see any opportunities to profit from the market right now. Unfortunately, you can't sell a house short. I suppose you could try to play the Case/Shiller housing indexes to the short side, but I am not going to bother. As a securities trade there are better opportunities.





In all financial markets there is a right time to enter based on the market conditions. Most often this is when it looks the worst. People who bought houses in 1996-1997 were considered crazy by everyone who just watched housing prices drop for 6 consecutive years, but market fundamentals aligned with prices and sent a strong buy signal to anyone with the courage to act on it. The reverse can be said to anyone who sold last year -- everyone who just watched 6 years of rallying prices thought they were crazy, but the sell signal was loud and clear.





Please read <strong><a href="http://www.pimco.com/LeftNav/Global+Markets/Global+Credit+Perspectives/2007/U.S.+Credit+Perspectives-+5-2007.htm">Still Renting</a>.</strong> It is another long Pimco article, but it is a classic example of a trader who saw the market signal the top and who acted on the information.
 
I have noticed that there are alot of people losing their properties in Santa Ana. Either from taking out too much borrowing and can't pay back. Or those who have cashed out a few years back and now decides to dump their properties. Would this be a good city to purchase a rental property? Anyone know the market for this city?
 
<p>Any one here can tell me how to find out what is being planned east of Trabuco right across from Woodbury? Currently, there is a farm. Thanks</p>
 
reason - I don't know much about Santa Ana specifically, but right now is a lousy time to buy income property just about anyplace. The main factor to consider when purchasing Income property is cash flow, not appreciation.
 
<p>awgee, </p>

<p>Thanks for the advice. So with income properties, one should not place appreciation above cash flow?</p>

<p>Is there a formula that will show that a particular income property is a good buy or not? Is there such a thing?</p>
 
reason,





A conservative investor would not consider appreciation at all and would instead look only at the cashflow. It should be like interest at the bank: you put in so much money, and you get a periodic "interest" payment on your money. With an income property you should be getting better return than a bank because you are taking more risk. So if banks are paying 5%, you should be earning 10% on your money parked in a rental. The reason this is more conservative is because you are not concerned with the sale price of the asset. You can keep it forever because it positively cashflows.





It is when you start projecting increases in income or in asset value (appreciation) that you start to get into trouble. This phenomenon is called "reaching for returns." It happens at the end of a bull cycle. It usually does not turn out well for the investor; in fact, I would speculate that some of the 3% cap rate deals we have been seeing the market will turn out to be losers.
 
<p>IR,</p>

<p>Don't you think that lower cap rates are justified by the fact that real estate tends to appreciate at about the same rate as inflation? It seems like this should matter even for conservative investors. Unlike putting your money in a bank, your "principle" here is automatically increasing at the same rate as rents</p>
 
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