Real Estate Myths

[irvinehomeowner]

So there are the few standbys like:

"Real estate always goes up!" (although one can argue that because of inflation, it does)

and

"Now is the best time to buy!"

But how about some new ones:

1. Interest rates are going to skyrocket soon!

2. Once the OptionARMs reset or recast, there will be a tidal wave of foreclosures.

3. Once the tons of shadow inventory hits the market, prices will plummet even more.

4. There's nothing the government can do to slow or stop the price drops.

5. Irvine prices will drop to 1999 levels.

and conversely...

6. Irvine prices will never drop.

Of course, hindsight is 20/20... but that's the nature of a myth.

Any RE myths you want to share?

 

[usctrojancpa]

Here are a few priceless ones i've heard from other agents...

"This one will not last long"

"You'll never find a house like this one"

"Seller has put $XXXXXX in upgrades into the house"

 

[rkp]

What about outright lies?  I was in an open house in VoC and the agent told the prospective buyer that MR is higher in Woodbury and all the new developments of Irvine. 

 

[irvinerealtor]

#7. "You can always refinance."

 

[sgip]

I'm surprised there isn't a BS Detector App created for your IJebus by now. If you can tell it to key off of certain catchphrases like the aforementioned "now's the time to buy" and "seller put $xxxxx in upgrades into the home" then give a weighted score of truthfulness, 2/3rds of the agents out there would be out of the industry.

Had an escrow company put me on hold last week as they were researching something on a transaction we were closing. The on hold message must not have been changed since 2005. I heard the familiar slop of: "You know, Real Estate values almost double every 10 years... let us help you find the home of your dreams..." Bleh.

My .02c

 

[irvinehomeshopper]

The last opportunity to buy in the last coastal Canyon.
I never used my in law or parents money to buy a home.
You will love your friendly neighbors in this diverse city.
This house is one of a kind it has stainless steel appliances and granite countertop.
Must buy now to avoid a bidding war.
Don't buy old because new homes have no problems.
You are very lucky I have one just fell out of escrow.

 

[davenlei]

"There is another offer being submitted very soon, you should offer today at full price to have a chance."

"There are multiple offers, you should offer above asking to even be considered."

 

[irvinehomeowner]

Most of the myths being listed are more like Realtor Myths... and I guess that's my fault because my opening post had a few similar in there.

I was more referring to what "experts" have been saying the last few years and they haven't happened or aren't as true as they would like them to be. Maybe it should be called Failed Real Estate Predictions.

Stuff like:

- There is no bubble
- Home prices will rise next year (happens every year)
- This year was the bottom (also happens every year)
- There is no way The Irvine Company can sell 700 new homes in 2010
- The 2011 Irvine Pacific Collection will be more successful than the 2010 New Home Collection (I believe Dan Young said that)

 

[qwerty]

Myth - IHO's belief that an interest rates will not impact irvine home prices proportionately.

I belief this is a myth, but I guess we will have to wait 20 years to find out who is right since rates seem like they are never going to go up

 

[irvinehomeowner]

Myth - IHO's belief that an interest rates will not impact irvine home prices proportionately.

I belief this is a myth, but I guess we will have to wait 20 years to find out who is right since rates seem like they are never going to go up

So you think interest rates do impact prices proportionately? Can't you just look at past rates and prices to find out?

 

[qwerty]

Myth - IHO's belief that an interest rates will not impact irvine home prices proportionately.

I belief this is a myth, but I guess we will have to wait 20 years to find out who is right since rates seem like they are never going to go up

So you think interest rates do impact prices proportionately? Can't you just look at past rates and prices to find out?

That's too much work. It's common sense. Let's say one year from now rates go from 4 to 6%.  Do u think your wages are going to go up an equivalent amount for the house value you are looking to buy to remain the same? That rate increase is roughly a 400-$500 increase in payment per month. Are u going to take the entire hit as the buyer?

 

[irvinehomeshopper]

Interest rate and selling price are the variables that dictate the selling price. What would drive prices down is an artificial "no demand". Learn from the used car salesman as soon as the customer walk off the lot salesman lower the deal. You do not want the developers to know that you are interested. Remember those cards you filled out and how you were contacted for the consumer focus group. That info and card counts give the developer a sense how desperate you are. Prices currently are already lower than 2010 collection. Developer will maintain the same selling price but in the process of sweetening up the deal by giving away a driveway for the future $600 k products. Waiting and Patience are the key. Interest rate will be low for a while and there are still plenty of land.

 

[irvinehomeowner]

Myth - IHO's belief that an interest rates will not impact irvine home prices proportionately.

I belief this is a myth, but I guess we will have to wait 20 years to find out who is right since rates seem like they are never going to go up

So you think interest rates do impact prices proportionately? Can't you just look at past rates and prices to find out?

That's too much work. It's common sense. Let's say one year from now rates go from 4 to 6%.  Do u think your wages are going to go up an equivalent amount for the house value you are looking to buy to remain the same? That rate increase is roughly a 400-$500 increase in payment per month. Are u going to take the entire hit as the buyer?

Actually... it's not that much work.

I've looked at the graphs and there doesn't seem to be a *proportional* move in price compared to interest rates. Sure, there are times when they are opposite, but there also points where they parallel each other.

While what you're saying is common sense, there is more than just buyer affordability at work here. Seller psychology doesn't really care what a buyer can afford. And in Irvine, where large down payments or all-cash sales are common (documented, not just conjecture), wages don't have to go up to make up the difference. Sure... they may lower the price, but not *proportionate* to the difference per a rise in interest rate based on 80% LTV... do you think anyone selling their house looks at the latest rate and says "Hmm... need to drop that price a bit."?

One thing that demonstrates that is rates are currently at record lows yet prices keep dropping (esp outside of Irvine). Based on the whole "price converse to rate theory", shouldn't prices be going up? In the late 80s to early 90s, rates were near double digit and that was peak for that bubble, and when they started dropping... prices dropped too.

And again, there is some corollary but like I've said... I doubt it will be **proportional** as the comparison is actually at loan amount vs interest rate rather than just home price vs interest rate.

 

[qwerty]

Myth - IHO's belief that an interest rates will not impact irvine home prices proportionately.

I belief this is a myth, but I guess we will have to wait 20 years to find out who is right since rates seem like they are never going to go up

So you think interest rates do impact prices proportionately? Can't you just look at past rates and prices to find out?

That's too much work. It's common sense. Let's say one year from now rates go from 4 to 6%.  Do u think your wages are going to go up an equivalent amount for the house value you are looking to buy to remain the same? That rate increase is roughly a 400-$500 increase in payment per month. Are u going to take the entire hit as the buyer?

Actually... it's not that much work.

I've looked at the graphs and there doesn't seem to be a *proportional* move in price compared to interest rates. Sure, there are times when they are opposite, but there also points where they parallel each other.

While what you're saying is common sense, there is more than just buyer affordability at work here. Seller psychology doesn't really care what a buyer can afford. And in Irvine, where large down payments or all-cash sales are common (documented, not just conjecture), wages don't have to go up to make up the difference. Sure... they may lower the price, but not *proportionate* to the difference per a rise in interest rate based on 80% LTV... do you think anyone selling their house looks at the latest rate and says "Hmm... need to drop that price a bit."?

One thing that demonstrates that is rates are currently at record lows yet prices keep dropping (esp outside of Irvine). Based on the whole "price converse to rate theory", shouldn't prices be going up? In the late 80s to early 90s, rates were near double digit and that was peak for that bubble, and when they started dropping... prices dropped too.

And again, there is some corollary but like I've said... I doubt it will be **proportional** as the comparison is actually at loan amount vs interest rate rather than just home price vs interest rate.

i agree that a seller wont look at an interest rate going up and say "i need to reduce the price accordingly" - but it will start to to take longer and longer for homes to sell and prices will have to move down to sell the house.  home prices are like bonds, interest rates go up, home prices go down. rates go down, home price goes up.  as to why prices are going down while interest rates are low, that is easy.  the bubble from 2000-2006 or 2007, was due to two things, interest rates dropping, and very relaxed underwriting standards (0% down, etc). Currently, i think we are still seeing the dust settle from tightened lending standards (20% down, etc), so that is the first phase of the price drops. Phase two would be if interest increased, then you would see continued price declines.  With that said, i dont see interest rates moving up in the next 5 years so we may not be around to see who is right or wrong.

 

[irvinehomeowner]

But in your scenario, the reactionary time is so slow that other variables will kick in that prevents the drops from being *proportional*.

Again, because it's not just price:interest ratio... it's more loan:interest ratio... the amount the price has to drop to match the increase in payment is variable depending on the buyer's financing. With down payments in Irvine significantly higher than 20%, the difference won't be one-to-one.

I actually wish you are right... but I'm not going to wait until rates skyrocket (a myth that the IHB was guilty of pushing) to find out. Even IR has changed his tune, whereas he was always condoning buying only when rates are high... he can't ignore the affordability that low interest now gives us and is on the "buy" side when it comes to real estate partly due to the record low interest. He was lobbying for legislature that would allow investors to capitalize on low rates.

Your posts are a bit vague when it comes to the thing I've been highlighting... do you think the price drops will be "proportional"? I agree with you that higher interest rates will force prices lower but I don't think that a X% rise in interest rate/finance cost will equal X% drop in prices.

Let's use real numbers (hopefully my calcs are right):

Home Purchase Price: 781k
Loan: 624k (so we are jumbo conforming)
Monthly at 4%: ~$2979
Monthly at 6%: ~$3741
Monthly at 8%: ~$4579

Difference in payment: $762 = 26%

For 6% to get the same payment, the loan has to be $497k. Say we use the same down payment of $157k, the new sales price to be proportionate to the rise in interest rate would be:

$654k... from $781k

That's a 16% drop in price!

If you only use 20% down, it would have to be $621k. That's a 20% drop... you entire down payment!!!

It's even worse when you go from 4% to 8%, you have to go down to a $406k loan to have the same $2979 payment which brings the house price to $508k (or $562k if you use your full DP for $781k).

Of course all these number can change depending on a huge number of variables but just taking raw price vs. loan amount vs. financing cost into consideration,  while it would be great to see a proportional drop in pricing... but I just don't see that happening.

 

[irvinehomeshopper]

Qwerty, why are you still arguing just rip out your bat.

 

[qwerty]

But in your scenario, the reactionary time is so slow that other variables will kick in that prevents the drops from being *proportional*.

Again, because it's not just price:interest ratio... it's more loan:interest ratio... the amount the price has to drop to match the increase in payment is variable depending on the buyer's financing. With down payments in Irvine significantly higher than 20%, the difference won't be one-to-one.

I actually wish you are right... but I'm not going to wait until rates skyrocket (a myth that the IHB was guilty of pushing) to find out. Even IR has changed his tune, whereas he was always condoning buying only when rates are high... he can't ignore the affordability that low interest now gives us and is on the "buy" side when it comes to real estate partly due to the record low interest. He was lobbying for legislature that would allow investors to capitalize on low rates.

Your posts are a bit vague when it comes to the thing I've been highlighting... do you think the price drops will be "proportional"? I agree with you that higher interest rates will force prices lower but I don't think that a X% rise in interest rate/finance cost will equal X% drop in prices.

Let's use real numbers (hopefully my calcs are right):

Home Purchase Price: 781k
Loan: 624k (so we are jumbo conforming)
Monthly at 4%: ~$2979
Monthly at 6%: ~$3741
Monthly at 8%: ~$4579

Difference in payment: $762 = 26%

For 6% to get the same payment, the loan has to be $497k. Say we use the same down payment of $157k, the new sales price to be proportionate to the rise in interest rate would be:

$654k... from $781k

That's a 16% drop in price!

If you only use 20% down, it would have to be $621k. That's a 20% drop... you entire down payment!!!

It's even worse when you go from 4% to 8%, you have to go down to a $406k loan to have the same $2979 payment which brings the house price to $508k (or $562k if you use your full DP for $781k).

Of course all these number can change depending on a huge number of variables but just taking raw price vs. loan amount vs. financing cost into consideration,  while it would be great to see a proportional drop in pricing... but I just don't see that happening.

in general, i dont think we ever get true 100% proportionate pricing due to changes in interest - however banks indirectly control that with there DTI ratios. the gist of my argument is that higher interest rates will do a number on affordability and drive home prices down by a decent amount - as shown by your calculations.  yes, irvine has higher down payments but it will still have a significant impact over time. im sure initially selling irvinites may try to still ask for their ridiculous asking prices, surrounding areas will get hit, which will cause prospective irvine buyers to buy in the cheaper surrounding areas putting more downward pressure irvine untile prices start to move.  eventually everything reverts to the mean, including irvine prices.

 

[qwerty]

Qwerty, why are you still arguing just rip out your bat.

If IHO doesnt stop soon i just may have to!!

 

[IndieDev]

I'll just leave this here:

 

[momopi]

In area that had hit low bottoms, the RE prices have bounced back a bit.  i.e. Riverside County area, Phoenix AZ area, etc.

I'm in the market to buy investment RE, and the competition for limited supply in certain areas is fierce.  I lost several bids last year to all cash investors, and the short sale that I'm working on now, I think I just got lucky on it because I was the backup bid, and the primary flaked.

But I will say that, unlike 2004-2005, the supply of over-priced homes are in abundance ("you want a million dollars for that?!").  ;p


[youtube]http://www.youtube.com/watch?v=A3RMa0GCD2U&feature=related[/youtube]
Random non-KPOP MV