The Irvine/OC price premium

NEW -> Contingent Buyer Assistance Program
Since Janet did loans she can verify that the front and back end ratios of properties went through the roof during the housing bubble. If I recall correctly people generally stretched to buy homes under Alt-A programs. There will be mass layoffs in the housing industry so a lot of us will indeed feel the pain of this housing crunch. Look at the office buildings if you don't believe New Century, DiTech, Ford Credit, and Ameriquest had major operations here. All will see major layoffs. I have a strong suspicion Downey will go under. So yes employment will get worse before it gets better.





How many loans has Janet qualified straight up jumbo with 28/36 front and back end ratios full documentation in the OC. I suspect not many. When I talk to loan brokers their clients are making minimum payments on option ARMs. What if that product disappears? What if lenders decide to curtail programs without 70-80% LTVs? The OCC has already given strong guidance on stated products so I suspect that innovation will largely go the way of the dodo. So in a market with more stringent guidelines and less rosy employment growth is a housing correction unlikely?





The median in Irvine in 2000 was $316,800 and median incomes were $72,057. In 2005 median incomes were $82,827. Using the same ratio the median house should have been $364,150 in 2005. So I am conservative in saying $450k in 2011 will be the median.





I pulled one subdivision in Irvine built in 2004 priced in the 500-600k range and the average LTV on purchase was 99.73%. 2 people had below 100% LTV in the subdivision. One was at 40% LTV so that likely was a move up buyer.
 
<p>Bishie,</p>

<p>Yes, people have had higher DTIs these past few years - that's a personal choice.</p>

<p>It would be interesting to see what $316,800 would have gotten you in Irvine in 2000.</p>

<p>As I said, I paid $560,000 for a condominium not much after 2000.</p>

<p>I don't think it will be impossible to find housing at $450,000 - I just don't think you will like it very much.</p>

<p>So there's no confusion: a correction is happening.</p>

<p> </p>

<p> </p>
 
<p>Please share?</p>

<p>That is fine - you are pulling from a first-time buyer product, where everyone is a recent homeowner.</p>

<p>That can be in our pool - just not all of it.</p>
 
<p>Look - I am not trying to get into a death-match here.</p>

<p>I just don't think it will behoove anyone to jump on a theory that may be incorrect.</p>

<p> </p>
 
Both Janet and I know that the older more established areas will have less foreclosures since the owners are less leveraged (hopefully) and are bigger beneficiaries of Prop 13. We both probably feel guidelines will be tighter than in 2005 in 2011. Interest rates could be 8% to purchase a $700,000 house in 2011. That we cannot predict. You may be better off buying at a higher price at a lower interest rates as your payments may be less. So we are both in agreement on quite a bit. She just sees a less narrow correction than me.





I know for a fact that Class B+ apartments in Irvine went from a 8% cap in 2000 to a 5% cap in 2006. In SFR it probably was closer to a difference of 5% cap in 2000 to 3% cap in 2006. I know that a $600,000 house prebubble rented for $4000/month. That same house now rents for $4300 a month and transacted for $1,200,000. That suggests most of this bubble was either lending standards or interest rates.
 
<p>Thanks Bishie.</p>

<p>I really don't want to guess what size a correction might be - I seriously don't know.</p>

<p>Economically speaking, we are in for some serious turbulance.</p>

<p>For housing, I think the biggest factor will come down to financing options, both product availability-wise, and rate-wise.</p>
 
<p>Ah, prop 13.</p>

<p>I wonder how many people will contest their valuations?</p>
 
CK,





<em>"IR -- do you think the 2010 median is $300k, $450k, or $600k + (as ocbust suggests)?"</em>





I like Bishie's number of $450K in 2011, although I do think we might even dip below $400K if the foreclosure numbers are as bad as it looks like it is going to be.





Janet,





"<em> For housing, I think the biggest factor will come down to financing options, both product availability-wise, and rate-wise."</em>





Yes. This will be the single most important factor in the unwinding of the bubble, after all, it was the single most important factor in creating it in the first place.





It will also be the most important factor determining the timing of the collapse. I was not expecting the cycle of tightening we are seeing right now to happen so quickly. If credit is as tight as lendingmaestro and others are claiming, the entire market will seize up this fall and crash very hard this winter when foreclosures start to become more prevalent. Also, it will be a downward spiral because the tightening credit will cause foreclosures as people are unable to refiance out our their ARMs. These are signs that the drop will be quick and violent in 2008.
 
Probably quite a few. There are also some people with depraved low valuations.





1516 E Oceanside Newport Beach, CA 5/4 3083 SF


<dl class="infoList"><dt>2006 Property Tax: $2,638</dt></dl>1520 E Oceanside Newport Beach, CA 4/4.5 2014 SF


<dl class="infoList"><dt>2006 Property Tax: $53,696</dt></dl>Yes both of these are on the beach side and are 2 doors down from each other.
 
<p>WOW!</p>

<p>I've always wondered: where exactly is all that money going?</p>

<p>The last two homes I've owned have had mello-roos, so it's not going into my neighborhood.</p>

<p>What could they possibly be spending it on?</p>
 
<p>Maybe we'll start to see sham marriages, adoptions, etc.! </p>
 
<p>I was going to say "I wish I came from old money" </p>

<p>But then I thought about how relatively "new" California is, and a quick search found this term .<a href="http://en.wikipedia.org/wiki/Nouveau_riche">Nouveau riche - Wikipedia, the free encyclopedia</a> Appropriate, no ? </p>

<p>Look at some of the "examples" at the bottom of the definition.....sound like some of your neighbors? ;) </p>
 
<p>Hey IR,</p>

<p>I'm a little confused about something:</p>

<p>When you said an appropriate premium would be 30%, and the national median is currently $220,000, that would put the median for us at $286,000.</p>

<p>Since we can also presume the national median may also decline, wouldn't that put our median even less than $286,000?</p>

<p>I'm not trying to argue - I just want to understand our assumptions.</p>
 
(Even the $450,00 some are predicting is more than a 100% premium.)
 
<p>I have no ill will.</p>

<p>I am trying to understand the fundamentals, just like everyone else.</p>

<p>IR previously mentioned rent support levels at a much higher psf number (I can't recall exactly, but I think it was close to $250-300 psf).</p>

<p>How could we then see $180 psf?</p>

<p> </p>
 
I've always heard that home prices take quite some time to drop. IMO, it will be quite some time before you can find a decent condo for 300K and a starter SFR for 500K. So mortgage payments should be at least $2,000 for a condo and $3000 for a SFR. And although that's still double pre-2000 payments, I don't think it'll get any lower anytime soon. Although that may seem high to some people, I think it's relatively affordable for many. Also, if you look at rents, nothing decently-sized rents for less than $2,000/month - so wouldn't that be the minimum you would expect to pay to own? Besides, I know a lot of people who are willing and able to buy a decent condo for 300K or a decent house for 500K. So buyers will come in to stabilize prices when we get to that point. I strongly believe that prices will drop, but I realize that OC residents are rather accepting of high mortgage/rental payments.
 
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