IHB: Home Price Drop Sudden and Dramatic

[irvinehomeowner]

Not sure if IrvineRenter is referring to Irvine or the general housing market in his latest post:
http://www.irvinehousingblog.com/blog/comments/home-price-drop-sudden-and-dramatic/

Now that we are 2-3 years out... I'm wondering how everyone feels about the Irvine prices and where they are going... esp now that some of the incentives are gone.

I've always felt that Irvine had some immunity to drops but to be honest, after looking at all the data, even I didn't think it would be this stubborn. Some still think there are more drops to come... but I don't think they want to admit that those drops will be as significant as they thought.

I remember back on the IHB forums, everyone was claiming a 40%+ drop in prices and that homes would roll back to 2003 or 1999 prices (raw prices... no inflation adjustment). But here we are in 2010 and homes in newer areas are still quite a bit above their 03/04 prices.

I remember specifically being told that homes in the $900k range would be selling for $700k in a few years (that's only a 20% drop) yet I don't see much of that happening.

So here's a chance to course correct. Will prices in Irvine continue to drop? And how much? Will we eventually see those huge drops that have been foretold despite the Legend of the FCB?

I await your kpop... err... responses.

 

[kayochan]

"I remember specifically being told that homes in the $900k range would be selling for $700k in a few years (that's only a 20% drop) yet I don't see much of that happening."

I think the SP's Beaugenvilla (sp?) and Paloma were selling in the high 800k (close to 900k) and went down quite a bit to the 700k.  I also think the Stonetrees in WB were pretty high back then as well (high 800k, maybe 900k with upgrades?) but are now lower.

 

[irvinehomeowner]

Maybe I should have said "SFRs" instead of "homes".

 

[qwerty]

a couple of months on doctorhousingbubble.com, i had read that inflation in california was 32% during the decade ending in 2010, so i was curious how much Irvine had gone up compared to the inflation number and i did a quick analysis of about 10 homes that were built in 2000/2001 in the northern part of irvine and they had increased about 90%. I compared this to Serrano heights (the area that we like) and that was at about 40-45%, I think SH was just as expensive as irvine during the peak, so Irvine is definitely defying my logic. But given that huge disconnect to surrounding areas i cant help but think that Irvine prices need to come down another 15-20%.

Im guessing that further price drop needs a couple of factors to take place: higher interest rates, more inventory probably being the two biggest factors. When and/or if that happens is TBD. The prices in irvine dont seem logical but who knows, they may not drop any further.

 

[Talyssa]

Will prices in Irvine continue to drop? Maybe!
And how much? SOME! (possibly)
Will we eventually see those huge drops? yes and no - some segments of the market (attached products) did see those drops, mostly the stuff that was so crazy out of control beyond affordability for the type of people who'd want to buy it, like those crappy conversions that are now in the 200k range but were selling for mid to high 3s before (ridiculous).    But like I said elsewhere, stuff seems to be selling in the middle-high end (like the 700-800 range?), even at those prices, due to what is APPARENTLY and according to others a brand name effect (Suckers!)  -- I really don't think those have a huge drop in store. 

 

[iacrenter]

I still have faith in the market place. Despite the billions spent by Obama and Fed, housing is taking another leg down. Ultimately foreclosures are going to be the only way to wash away all the bad loans. We kicked the can down the road almost 2 yrs ago and look where that has got us? Nowhere! We have tons of shadow inventory and the banks are just hanging on to these non performing loans.

Given that Republicans are poised to take the House, I predict two years of DC gridlock. That means no more extend and pretend programs. There isn't anymore political appetite to spend the trillions of dollars required to rescue all the upside downers. This will ultimately spell doom for the banking cartel.

I fully expect more declines in Irvine--though maybe not as much as surrounding OC cities. Huge drops of >25% unlikely, but I expect a 10-20% price drop going forward.

 

[irvinehomeowner]

Fundamentals say we should expect more drops... but since when has Irvine (and the hordes of FCBs) followed fundamentals?

If you want to take a straight data stance (where is graphrix?)... I do think we should look at percentage of distressed homes in Irvine compared to other cities. In working on the down payment data for IR2... it just seems that because many of the homes have such high downs, that they are less prone to foreclosure.

As for shadow inventory, OArm resets/recasts are not as threatening as long as rates stay low... some of them are settled in at the low teaser rates they started at... and banks seem to keep delaying the "premium" auctions... or flippers will pounce on them quickly.

The big thing perma-bears seem to ignore is the demand for Irvine. When the 2010 Collection opened, they all said there was no way Irvine could sell 700+ homes at their benchmark prices (even I was skeptical). Is there some other city in the OC that could have done that? Maybe Newport or Tustin Ranch? Is that why every time I mention the sales pace of Woodbury on the IHB... everyone ignores me? I, too, was of the opinion that Irvine still had a ways to drop... but the sales pace of WB is undeniable and has me wondering if Irvine really is immune... at least brand spanking new homes in Irvine.

 

[usctrojancpa]

I still have faith in the market place. Despite the billions spent by Obama and Fed, housing is taking another leg down. Ultimately foreclosures are going to be the only way to wash away all the bad loans. We kicked the can down the road almost 2 yrs ago and look where that has got us? Nowhere! We have tons of shadow inventory and the banks are just hanging on to these non performing loans.

Given that Republicans are poised to take the House, I predict two years of DC gridlock. That means no more extend and pretend programs. There isn't anymore political appetite to spend the trillions of dollars required to rescue all the upside downers. This will ultimately spell doom for the banking cartel.

I fully expect more declines in Irvine--though maybe not as much as surrounding OC cities. Huge drops of >25% unlikely, but I expect a 10-20% price drop going forward.

I was as bearish on the Irvine real estate market as the next uber-bear on IHB but when I saw what the market was going with my very own eyes I got less bearish.  Unless something really bad happens in the economy or interest rates go above 6% I think the worst downside risk for Irvine prices will be 10% or so.  Banks are going to take many, many years to bleed in the REO inventory onto the market so don't hold your breathe hoping for that tidal wave of foreclosures (it's the bottlenecks on the operations side that make it possible for only so many homes to get foreclosures and listed at any given time).  I think home prices are range bound for the next 5+ years (5% up to 5% down). 

 

[iphb]

I still have faith in the market place. Despite the billions spent by Obama and Fed, housing is taking another leg down. Ultimately foreclosures are going to be the only way to wash away all the bad loans. We kicked the can down the road almost 2 yrs ago and look where that has got us? Nowhere! We have tons of shadow inventory and the banks are just hanging on to these non performing loans.

Given that Republicans are poised to take the House, I predict two years of DC gridlock. That means no more extend and pretend programs. There isn't anymore political appetite to spend the trillions of dollars required to rescue all the upside downers. This will ultimately spell doom for the banking cartel.

I fully expect more declines in Irvine--though maybe not as much as surrounding OC cities. Huge drops of >25% unlikely, but I expect a 10-20% price drop going forward.

I was as bearish on the Irvine real estate market as the next uber-bear on IHB but when I saw what the market was going with my very own eyes I got less bearish.  Unless something really bad happens in the economy or interest rates go above 6% I think the worst downside risk for Irvine prices will be 10% or so.  Banks are going to take many, many years to bleed in the REO inventory onto the market so don't hold your breathe hoping for that tidal wave of foreclosures (it's the bottlenecks on the operations side that make it possible for only so many homes to get foreclosures and listed at any given time).  I think home prices are range bound for the next 5+ years (5% up to 5% down).

Like many others, I have always, and continue to believe, that the slow bleed of foreclosure inventory onto the market isn't just due to the backlog of work on the part of the banks, but is also part of the banks' strategy to slow foreclosure sales so they won't have to immediately write down their losses. The banks are clearly gaming the system in many ways, like how BofA is quickly restarting foreclosures to try and sweep public backlash under the rug. They know they're operating at capitalization levels with precariously low margins, so they're trying to control the situation as much as they can. A huge rush of REO inventory onto the market may seem unlikely at this point, but I would never rule it out given the current state of the banks and whether they can continue to operate as they are.

Beyond rising interest rates and REO shadow inventory, there are several other factors that could put some downward pressure on RE prices in the future, whether in Irvine or elsewhere. Some evidence suggests that there are many, many homeowners out there that are waiting for the first signal of a recovery to put their homes on the market, as has happened this year. There's also the baby boomers that will want to sell and downsize over the next few years as they retire. Then you have the interest tax deduction for mortgages. It's long considered a sacred cow for politicians and an important factor favoring homeownership over renting. But with the enormous deficit we're facing, and in today's political climate with the strong aversion to raising tax revenue, spending cuts are likely, including tax breaks, and it seems to be a good chance the interest tax deduction will at least be on the table.

 

[irvinehomeowner]

Then you have the interest tax deduction for mortgages. It's long considered a sacred cow for politicians and an important factor favoring homeownership over renting. But with the enormous deficit we're facing, and in today's political climate with the strong aversion to raising tax revenue, spending cuts are likely, including tax breaks, and it seems to be a good chance the interest tax deduction will at least be on the table.

If the gub gave millions in "bailout" credits to prospective homeowners so easily... I doubt they will take money away from current ones. It would be easier to change the whole system to a flat tax than to remove the interest tax deduction.

 

[iacrenter]

Then you have the interest tax deduction for mortgages. It's long considered a sacred cow for politicians and an important factor favoring homeownership over renting. But with the enormous deficit we're facing, and in today's political climate with the strong aversion to raising tax revenue, spending cuts are likely, including tax breaks, and it seems to be a good chance the interest tax deduction will at least be on the table.

If the gub gave millions in "bailout" credits to prospective homeowners so easily... I doubt they will take money away from current ones. It would be easier to change the whole system to a flat tax than to remove the interest tax deduction.

You know Obama loves to tax higher income folks and this deduction favors those who buy expensive homes. I can easily see him proposing a phase out of interest deduction for those who make $250K and above.

 

[irvinehomeowner]

You know Obama loves to tax higher income folks and this deduction favors those who buy expensive homes. I can easily see him proposing a phase out of interest deduction for those who make $250K and above.

While that may seem easier for the "common" homeowner to get behind... the lobbyists backed by the people who make over $250k will get their respective politicians to squash it.

 

[iphb]

You know Obama loves to tax higher income folks and this deduction favors those who buy expensive homes. I can easily see him proposing a phase out of interest deduction for those who make $250K and above.

While that may seem easier for the "common" homeowner to get behind... the lobbyists backed by the people who make over $250k will get their respective politicians to squash it.

There's also talk of scaling down the amount of mortgage eligible for the interest deduction from the current $1,000,000, and/or eliminating second residences from the tax deduction eligibility. I don't think we can continue to have our cake and eat it too -- low taxes and big deductions...something's going to have to give eventually.

 

[qwerty]

I cant remember if i read or heard this (i think i read it), but someone had a good suggestion for phasing out the mortgage interest deduction. It was based on the value of the mortgage, not based on income, which seems a bit more fair. It seems that way at least you have the option of whether you want to buy a million dollar home and not get the full interest deduction vs if you make over $250K you wont get a deduction at all. the recommended cutoff was for loans over $500,000 (currently it is $1million). I could get behind something like that. I cant get behind losing the deduction for those making over $250K.

 

[sonoma]

You know Obama loves to tax higher income folks and this deduction favors those who buy expensive homes. I can easily see him proposing a phase out of interest deduction for those who make $250K and above.

While that may seem easier for the "common" homeowner to get behind... the lobbyists backed by the people who make over $250k will get their respective politicians to squash it.

There's also talk of scaling down the amount of mortgage eligible for the interest deduction from the current $1,000,000, and/or eliminating second residences from the tax deduction eligibility. I don't think we can continue to have our cake and eat it too -- low taxes and big deductions...something's going to have to give eventually.

I have a better idea...why don't the Warren Buffetts of the country donate their money to our government instead of to the various charities?  That way, Warren Buffett can't complain that he doesn't pay as much as his secretary.  Besides, wasn't he the one that endorsed Obama? 

 

[Talyssa]

That wouldnt' solve the problem long term sonoma, it would be a one time infusion versus long term smaller infusions year over year. 

I woudl think that rather than phasing out the deduction for people who make over a certain amount, phasing it out for people who buy homes over a certain amount makes more sense.

Although, I mean HONESTLY - does it make sense to have ANY kind of mortgage interest deduction?  All that does is support NEW home buying and refinancing your house out for longer nad longer and longer.  It doesn't really do anything to support responsible home buying or to support people staying in their homes long term.    It is basically only beneficial to people who make loans or sell homes.  What is it doing for America at large?

 

[iacrenter]

Fundamentals say we should expect more drops... but since when has Irvine (and the hordes of FCBs) followed fundamentals?

If you want to take a straight data stance (where is graphrix?)... I do think we should look at percentage of distressed homes in Irvine compared to other cities. In working on the down payment data for IR2... it just seems that because many of the homes have such high downs, that they are less prone to foreclosure.

This seems to be true for purchases since the financial meltdown. But there are plenty of folks that bought homes, even in Irvine, with little to no money down and liar loans. And even those who did have a large down payment, HELOC'd themselves into oblivion.

As for shadow inventory, OArm resets/recasts are not as threatening as long as rates stay low... some of them are settled in at the low teaser rates they started at... and banks seem to keep delaying the "premium" auctions... or flippers will pounce on them quickly.

Yes the banks continue to pretend their mortgages are worth something. All this delay will only come back to bite them in the a$$. Seeing your neighbor sit rent free for 2 years in their million dollar home only encourages others to strategically default. As the economy continues to drag and unemployment persists, this phenomenon will only feed on itself.

The big thing perma-bears seem to ignore is the demand for Irvine. When the 2010 Collection opened, they all said there was no way Irvine could sell 700+ homes at their benchmark prices (even I was skeptical). Is there some other city in the OC that could have done that? Maybe Newport or Tustin Ranch? Is that why every time I mention the sales pace of Woodbury on the IHB... everyone ignores me? I, too, was of the opinion that Irvine still had a ways to drop... but the sales pace of WB is undeniable and has me wondering if Irvine really is immune... at least brand spanking new homes in Irvine.

As I've said in other posts, I believe TIC was smart to take advantage of a temporary phenomenon in the new construction market. Due to the down economy and tight credit market, almost all new construction in OC dried up. TIC did their homework and found there was still demand for new construction if priced right. They suckered folks in with phase I pricing, excellent marketing, and "Bag of Chips" design.

TIC got in most of the sales while the going was good. Now the federal tax credits have ended, demand has fallen off a cliff and unemployment is still high in California. Now there is more competition in the market with other firms starting new construction. It will be difficult for TIC to replicate the same sales pace as the 2010 Collection going forward.

 

[irvinehomeowner]

Fundamentals say we should expect more drops... but since when has Irvine (and the hordes of FCBs) followed fundamentals?

If you want to take a straight data stance (where is graphrix?)... I do think we should look at percentage of distressed homes in Irvine compared to other cities. In working on the down payment data for IR2... it just seems that because many of the homes have such high downs, that they are less prone to foreclosure.

This seems to be true for purchases since the financial meltdown. But there are plenty of folks that bought homes, even in Irvine, with little to no money down and liar loans. And even those who did have a large down payment, HELOC'd themselves into oblivion.

I am certain the data was similar prior to the meltdown too. Despite the constant barrage of listings IR puts on the IHB that demonstrates HELOC abuse.... I believe those are the minority and percentage-wise, Irvine probably has a higher number of zero or low balance mortgages than other cities in the OC. I posted a while back about inventory numbers compared to overall population and the logic follows that you will get more distressed listings right now because the people who are not underwater don't need to sell.

As for shadow inventory, OArm resets/recasts are not as threatening as long as rates stay low... some of them are settled in at the low teaser rates they started at... and banks seem to keep delaying the "premium" auctions... or flippers will pounce on them quickly.

Yes the banks continue to pretend their mortgages are worth something. All this delay will only come back to bite them in the a$$. Seeing your neighbor sit rent free for 2 years in their million dollar home only encourages others to strategically default. As the economy continues to drag and unemployment persists, this phenomenon will only feed on itself.

But you are missing what I'm saying. One of the big reasons why IR said more homes will foreclose and hit the market is because people would not be able to afford the OARM recasts/resets. The only problem here is interest rates went down, not up... so people could afford them. If rates were still at 7%, I'm sure more people would be defaulting or looking for mods.

The big thing perma-bears seem to ignore is the demand for Irvine. When the 2010 Collection opened, they all said there was no way Irvine could sell 700+ homes at their benchmark prices (even I was skeptical). Is there some other city in the OC that could have done that? Maybe Newport or Tustin Ranch? Is that why every time I mention the sales pace of Woodbury on the IHB... everyone ignores me? I, too, was of the opinion that Irvine still had a ways to drop... but the sales pace of WB is undeniable and has me wondering if Irvine really is immune... at least brand spanking new homes in Irvine.

As I've said in other posts, I believe TIC was smart to take advantage of a temporary phenomenon in the new construction market. Due to the down economy and tight credit market, almost all new construction in OC dried up. TIC did their homework and found there was still demand for new construction if priced right. They suckered folks in with phase I pricing, excellent marketing, and "Bag of Chips" design.

TIC got in most of the sales while the going was good. Now the federal tax credits have ended, demand has fallen off a cliff and unemployment is still high in California.

It's easy to say that now... but back then... TIC was criticized for poor design, small lots, high benchmarks (yes... even Phase 1 pricing was to high), Woodbury density and that in this economy EVEN with tax credits, there was no way they could sell all those homes in 2-3 years time. So what happened?

Perma-bears stated that liar loans, 0 downs and loose credit guidelines allowed everyone and their mom to get a loan so that's why so many people could "afford" to buy. With unemployment as it is, how was everyone and their mom able to buy these new 700+ homes with I would estimate an average of more than 20% down?

Now there is more competition in the market with other firms starting new construction. It will be difficult for TIC to replicate the same sales pace as the 2010 Collection going forward.

I'm not sure I would bet against TIC again. If they opened up another neighborhood with 2000-2700sft SFRs that ranged $650k-$875k, they could probably sell hundreds of those alone. The slowdown they are experiencing now is that they have priced themselves above the top tier of perceived affordability (which is why the lower priced products are still moving).

If Orchard Hills or Laguna Crossing opened now they would be swarmed... that's why they are saving them for later... so they can build out their "value" villages (I kid about "value").

 

[LAtoOC]

I am more on the neutral side now. As for the 2010 Collection - Santa Barbara is just about sold out and that was post tax credit; will be interesting to see what Esplanade's pace is.

 

[iphb]

I don't see TIC slowing down very much, if at all, for 2011. Even if the market slows next year they can reduce their pricing and still make plenty of money. That'll p*ss off 2010 homebuyers, but isn't that part of the reality of buying into an uncertain real estate market?