Observations from the front lines of the Irvine housing market?

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USCTrojanCPA said:
Homes sales in Jan. 2011 actually increased by over 17% from the same time last year (110 sales vs. 94 sales).  Inventory levels have been essentially flat for the entire month of January, but you can bet they will be increasing once we move into the Spring.  Then we have all the new home developments that will be popping up from Portola to Stonegate to Laguna Crossing.  Prices still seem to be flat in January with home prices settling around what recent comps closed around.  The big wild card will be what happens if interest rates on the 30-year mortgage cross into the 5s from the 4s.  Currently we are on the edge of 4.875% and 5%.  It'll be interesting to see what happens if rates creep into the mid-5s as we move into the Spring and Summer.  Will builders start to throw incentives at perspective buyers to lure them in?  Will sellers of re-sale homes begin to lower their prices as inventory and interest rates increase?  It'll be very interesting to see what happens.
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im curious to see the rate impact myself. I keep a spreadsheet of properties that interest me and the wife and i went back to run the payments that were previously calculated using 4.25% with current rates of 4.75% and the payment jumps 150-200/month.  For those folks stretching themselves already its just going to make it that much tougher. It will exert downward pressure - IHO will try to convince us otherwise.
 
qwerty said:
It will exert downward pressure - IHO will try to convince us otherwise.
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I don't doubt the downward pressure, I just don't think the decrease will be **directly** proportional to the change in payments based on the rate increase. At least that's what my math says.
 
After Friday's run up of bond yields, we are into the 5s and the only way to get into the 4s on a 30-year fixed is to buy the rate down. 
 
IndieDev said:
Beat me to it. We might see mid-5s this year. A return to normalcy.
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I'm as fast as lightening man.  Btw, I think one of my buddy's might have seen you at the Sevilla Phase 2 release earlier this morning...were you there?
 
I was there during opening day. One of the few white/asian couples in a sea of asian/asian. I kind of liked the floor plans for 2 & 3, but then I found out only 4 or 5 lots would have a driveway. That kind of sunk it for me.
 
Been a bit busy with tax season the past few months, but here is my data for Feb. and March 2011.  We remain in a neutral market with about 5-6 months of inventory.  Inventory levels continue to grow slowly but surely as we enter the selling season. Pricing is still flat to slightly down.  A handful of homes that my buyers have their eyes on had sellers who listed at very optimistic prices so it's a waiting game until those sellers realize that they'll need to lower their prices in order for them to sell their homes.  The attached condo market remains weaker than the SFR market.  One example is 25 Torrey Pine in Northwood II which sold for about $15k-$20k over comps and had 12 bidders.  So the homes with good floorplans and locations continue to sell quickly if they are prices at or near comps.  I'm sensing that the pace of the new home sales is not going to be as successful as the previous year without the tax incentives.  Sales for Feb. and March 2011 were both below the 2010 figures but we won't get an apples-to-apples comparison until July since that's when the tax credits ended.  Interest rates dipped back down below 5% and are hovering around 4.75-4.875% rate for a 30-year mortgage. By the summertime, I think that Irvine Pac...errr TIC will begin to offer broker co-ops and buyer incentives to sell their homes.

 

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Here is my data for April and May 2011.  We remain in a neutral market with about 5-months worth of inventory.  April 2011 sales vs. April 2010 sales were flat at 195 while May 2011 sales vs. May 2010 sales were down about 16%.  Inventory is continuing to inch up slowly but the quality of the new inventory isn't that desirable.  Also, it seems like many of the new listings are sellers asking WTF prices which will likely remain on the market collecting dust.  Makes me wonder if those sellers even want to seller their homes or whether they are looking for a sucker to pay their outrageous price.  We have seen that sales of new TIC homes has gone slower than they had expected with them offering broker incentives.  The pace of sales of their new homes over the next few months will dictate how kind of other buyer incentives they will throw at potential buyers to get them under contract.  On the mortgage front, mortgage rates for a 30-year fixed mortgage have come down from 5% to 5.125% down to 4.375% to 4.50% last week which may provide a little tailwind for perspective buyers. 
 

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Attached you'll find the Irvine sales data for June 2011.  June sales were up about 17% from last month and basically flat from the prior year, hitting over 200 for the first time since June of last year.  Inventory levels came down about 4% from the end of May.  The market is still neutral but if sales continue to be as strong as they were in June and inventory levels remain flat or fall slightly we'll be back in a seller's market.  I would say that prices have softened a bit since last year as overpriced listings just linger on the market collecting dust.  Properties that are priced right/attractively like 2 Miners Trl and 5 Copper Hill get multiple offers (including cash offers) within the first week.  The pace of new home sales over at Stonegate and Portola Springs seem to be going OK while new home sales at Laguna Altura are sucking wind (probably due to the high pricing.  There are plenty of buyers out there looking for Irvine homes but some of them are waiting for the right property to come out at the right price.  In terms of mortgages, we are back to 4.375% to 4.50% after a blip up last week.  If the European debt crisis continues, we may see 4% for the 30-year fixed again in short order.  I do have a handful of buyers who are considering alternative financing options such as 7-year ARM loans (around 3.25%) and 5/5-year ARM loans (around 3.25%) versus going with the traditional 30-year fixed loan option.
 

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Multiple times, IndieDev has posted a Redfin chart with the prices for Irvine trending down and he always adds that it's going lower... I read in the OCReg that prices have actually gone up a little this month and so I checked Redfin and found this:

MEDIAN_HOUSE_SQ_FT_BY_TIME.png


Now I'm not calling a bottom or saying that prices are going to go up (personally, I still think they will go down)... I'm just trying to illustrate how difficult it is to predict pricing, even armed with the finest fundamental know-how in the universe.
 
irvinehomeowner said:
Multiple times, IndieDev has posted a Redfin chart with the prices for Irvine trending down and he always adds that it's going lower... I read in the OCReg that prices have actually gone up a little this month and so I checked Redfin and found this:

MEDIAN_HOUSE_SQ_FT_BY_TIME.png


Now I'm not calling a bottom or saying that prices are going to go up (personally, I still think they will go down)... I'm just trying to illustrate how difficult it is to predict pricing, even armed with the finest fundamental know-how in the universe.
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I wouldn't doubt it...you had strong sales along with lower inventory levels coupled with mortgage rates coming down from the highs in March/April.  The numbers don't lie and neither does the fact that when my buyers bid on properties that are priced right they have to deal with multiple counter offer situations.  The Irvine market has and remains very resilient and that's due to a strong demand.  Can that change over time?  Sure, but it's not the case today.
 
Here's the Irvine sales data for July and August 2011.  July sales were down slightly at 2% from last July but down over 22% from June 2011.  However, looks like there was a rebound in sales in August....August 2011 sales came in at 190 which was 13% higher from July 2011 and about 9% higher than last August.  Is this a result of buyers wanting to lock in the higher jumbo conforming loan limits that are set to expire shortly or taking advantage of the drop in mortgage rates?  I guess we'll find out in the next few months.

Inventory levels came down about 4% from the end of August 2011.  The market is still neutral at around 4.5 months worth of supply but there is some evidence of some price softening here and there.  That being said, properties that show well and have good floor plan priced around comps are still going to escrow quickly and/or getting multiple offers.

In terms of mortgages, we are now near 4% for conforming (417k or lower) 30-year fixed loans while 5 and 7 year ARM loans can be had in the mid-to-high 2% range.  If the European debt crisis continues to get worse, we may get a 30-year fixed rate with a 3 in front of it.  Several of my buyers are considering 5, 7, and 10 year ARM loans versus the 30-year fixed loan as they aren't too concerned about higher interest rates in the future.
 

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I would think people would be afraid of ARM loans after the housing crisis? I think rates will stay the same or perhaps go a little lower over the next two years but eventually one would expect them to rise as our economy eventually rebounds. I know when I move out there in the next month or two, I'll be going with a fixed APR loan. I just think an ARM is too much of a risk.
 
AliceT said:
I would think people would be afraid of ARM loans after the housing crisis? I think rates will stay the same or perhaps go a little lower over the next two years but eventually one would expect them to rise as our economy eventually rebounds. I know when I move out there in the next month or two, I'll be going with a fixed APR loan. I just think an ARM is too much of a risk.
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ARM loans have been around for many, many years before the housing bubble.  When some buyers hear about ARM loans, they think about those toxic Option ARMs where it gave people the option to pay less than the interest amount each month while increasing the loan balance.  It was this and loose credit (i.e. giving anyone who has a pulse a loan) that was one of the main reasons for the housing bubble.  One of the things that buyers have to consider is what their future expectation of inflation/fed fund rates might in determining whether they get an ARM or not.  The reality is that people on average sell their homes every 6-7 years so why get a 30-year fixed mortgage and pay a higher interest rate if you'll never benefit from it?  There are pros and there are cons with ARM loans and buyers need to determine their comfort level and risk tolerance with those loans.  You'd be surprised to know that most buyers don't really understand how ARM loans work and because of that they automatically default to selecting a 30-year fixed mortgage.  Btw, good luck on the move to California?  Where are you moving from?
 
USCTrojanCPA said:
One of the things that buyers have to consider is what their future expectation of inflation/fed fund rates might in determining whether they get an ARM or not. 
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You'd be surprised to know that most buyers don't really understand how ARM loans work and because of that they automatically default to selecting a 30-year fixed mortgage. 
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I think you summed up part of the problem in your post.  How many buyers have the ability to understand inflation expectations, much less how it will affect their ARM rate in the future?  Yet the people most likely to get ARM loans, and in fact would probably not have qualified if not for teaser ARM rates, were probably the ones who least likely understood them. 

ARM loans have their place, but only for educated buyers.  That means they should probably be relegated to a niche product, not a mainstream loan product, and the banks should stop marketing them as an affordability product.
 
oakcreekrenter said:
USCTrojanCPA said:
One of the things that buyers have to consider is what their future expectation of inflation/fed fund rates might in determining whether they get an ARM or not. 
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You'd be surprised to know that most buyers don't really understand how ARM loans work and because of that they automatically default to selecting a 30-year fixed mortgage. 
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I think you summed up part of the problem in your post.  How many buyers have the ability to understand inflation expectations, much less how it will affect their ARM rate in the future?  Yet the people most likely to get ARM loans, and in fact would probably not have qualified if not for teaser ARM rates, were probably the ones who least likely understood them. 

ARM loans have their place, but only for educated buyers.  That means they should probably be relegated to a niche product, not a mainstream loan product, and the banks should stop marketing them as an affordability product.
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You're making some incorrect assumptions about my buyers.  All of those buyers educated themselves on the pros and cons of getting the ARM loans and know exactly what they got themselves into...eyes wide open.  One buyer will pay off the loan in 5-8 years, another buyer got a starter home and will sell the home in 7-8 years, and another buyer is taking the additional savings and investing it.  All of the my buyers who got the ARM loans easily qualified for loans at the higher 30-year fixed rate...trust me when I say that none of them had to stretch financially to make their purchase.  Other developed countries banks do not offer 15-year or 30-year fixed loans and the only thing you can get are shorter term ARM type loans.  Most ARM loans re-set based upon a 1-year LIBOR rate plus 2.25% (with a cap) so the adjustments will not be based upon longer term interest rates in the futures but more where Fed Funds rates are.
 
freedomcm said:
It sounds as if your buyers are "educated buyers" that oak describes as good prospects for ARMs, no?
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Yeah, they educated themselves and I assisted them in putting together scenario analysis spreadsheets by showing best case, status quo, bad, and worst case.  I had a ultra conservative buyer who opted for a 7-year ARM who I'd never would guessed would be interested in an ARM loan.  The key for all those folks was to analysis the "risk" versus the "reward" of going with an ARM loan versus a fixed rate loan.  I do agree with Oak that ARM loans are not for everyone and if you are using to qualify for a purchase because you can't get their using a 30-year fixed loan then you shouldn't be getting an ARM loan.  The RE crash has gave ARM loans a bad name when it was really the Option ARM loan that was the toxic loan program.  Regular amortizing ARM loans are just not that scary when you understand how they work.
 
how come ARMs are becoming more popular these days with more conservative buyers?  with 30-year fixeds so cheap, i dont understand the sudden interest in a 7 year ARM.  i know ARMs became more mainstream as affordability products but now it seems like conservative folks are going for them and they are still advertised heavily.
 
I know for myself I figure why pay 4.5% when I can pay 3% and will be putting that extra 1.5% down on principal (so basically making the same payment I would have made anyways.  I know for some, they would rather take that difference and invest that because they think they will get a better rate on their money.  I'm not saying they won't, its just not my thing.

For the adjustment risk, like Trojan said above, you have to evaluate yourself.  My goal is to get a much smaller loan than I can afford from the start and therefore pay it off quicker.  Say I am in year 5 or 6 and rates are starting to go higher and higher than I would probably even put more into principal  Therefore, when it does come time to adjust hopefully the balance will be quite small so interest won't really matter that much (since its calculated based on principal)

edit: I shouldn't say I am getting a much smaller loan than I can afford since that is pretty subjective.  I should say much smaller than i could qualify for. IMO I could probably qualify for a loan that is higher than i could afford.
 
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