The Irvine/OC price premium

NEW -> Contingent Buyer Assistance Program
G

garfangle_IHB

New member
<p>Since many readers of this blog have an interest in living in Irvine and OC generally, what would you consider an acceptable cost premium of a typical residence over the average American home? According to the National Association of Realtors the median price of a single family home is now $220,000 (a record high). For that price, I predict, you could comfortably get a 3/2.5, 1600 sqft, with a 2 car garage detached single family home in most of middle America (outside the coasts). From the asking prices IR has posted my example would start in the high $500Ks if one were looking to live in Irvine. Although the median Irvine household ($85K) makes a bit more than national average, the cost of being a homeowner is clearly unsupportable. Now that the bubble has popped, home prices will come down. But to what level? And how much of the OC premium will remain? How much of an Irvine/OC premium is justified in your opinion once things settle down?</p>

<p>For me, I could justify a 30% premium above what would be typical as in the above example ($220K => $286K or $137.5/sqft => $178.25/sqft).</p>

<p>Calculations:</p>

<p>$85K income, $60K net after taxes (~30%) = $5000K/mo.</p>

<p>$286K at 6.50% w/ 10% down ($28.6K) = $1626/mo. (30 yr fixed)</p>

<p>$1626/$5000 = 32.5% price/income ratio (just loan payment, excluding all misc. housing costs and fees)</p>

<p> </p>
 
<p>Some recent comparables found on ZipRealty from another growing college town: Austin, TX</p>

<p>4/3, 2139 sqft, built 2005, 78725 zip: $138K</p>

<p>4/3, 2711 sqft, built 2004, 78747 zip: $165K</p>

<p>4/3, 3170 sqft, built 1998, 78749 zip: $269K</p>

<p>4/3, 3482 sqft, built 2002, 78753zip: $219K</p>

<p>6/4, 4051sqft, built 2001, 78754 zip, $235K</p>

<p> </p>
 
I don't think a normal Southern CA family can make it on one 85k income these days. I make around 140k now, and I can't afford to buy anywhere in LA or OC unless I want a one bedroom condo. My wife also makes about the same number, two of us can probably afford a semi-decent SFH in a reasonable area these days assuming 3x income, 20% down rule.
 
<p>Those prices in Texas look great on paper, but the only problem is to get a house for that price, you actually have to live there. Nothing against Texas, and if that's your bag you are a lot better off there than here. Personally, I have tremendous career opportunities with my company in the Dallas area --- and have considered that option several times over the last few years as frustration with So Cal prices mounted. Each time I looked into it, however, I have come up with the same conclusion: The only problem with leaving California is that you have to leave California. </p>

<p>I don't have any statistical data to back myself up --- but if the median in Anywhere, USA is $220K, I would probably be willing to (and expect to) pay at least a 100% premium to live here. Might sound crazy to a lot of people, but that's what it's worth to me. But I have family considerations --- and like I said earlier, the lifestyle here is my "bag". Texas, not so much.</p>
 
<p>CK,</p>

<p>You may be willing and have the means to pay a 100% price premium, but the median Irvine/OC household doesn't have the cash flow to do it, especially first-time home buyers. The only current residents, aside from quick-triggered flippers, who made out during this past bubble were homeowners who bought before 1998. Without a new influx of first-time home buyers able to reasonably afford a home, inflation-adjusted prices must fall to the equilibrium point of equivalent rent plus a slight ownership premium. It cannot be 100%. The price of residential real estate is always transacted at the margin. By this I mean only a small subset of homes at any one time are sold and therefore the value of a home is determined by those transactions.</p>

<p>For example, you might believe a 2000 sqft home in Irvine is "worth" $650K, but when you go to sell it and "cash out" your capital appreciation from the home you bought in 1995 for $250K, if most comparables are selling at $450K you will never get your asked for price. If you are forced to sell because of a job loss or divorce, you will get what the market says your house is worth, not the peak bubble price. Therefore, it is stupid for a home buyer to be willing to pay such an absurd cost premium relative what the median household can afford and to the rest of the nation.</p>
 
I make more than 85K a year base, and only net 4450 a month. Perhaps it's because I contribute more to my retirement ? (10%, which I personally think is too low) and claim zero deductions for tax purposes? The 5000K net figure....is that assuming no contributions to a 401K ? Multiple dependants claimed ? Just curious....it seems a little high.
 
garfangle - My wife and I are first time buyers, so it would be an understatement to say that we don't like the prices here. That said, if you want or need to live here, the price difference is something you must live with. We make almost double the 85k median, and are very uncomfortable considering paying any more than about $550k. Since what we can get for $550k now does not suit us, we wait, because it will come back to us. If, as I suggested the Irvine median falls back to $450k, then I think we can find something in the 5's which will suit us nicely. I am well aware that price expectation is out of whack with what the rest of the country might think -- and I could get something beyond my wildest dreams in Texas for that price.



Also, with regard to rent fundamentals, I believe a $450k median might not be too far out of line. I pay $2400 for a 3 bed 2.5 ba now, and think that's probably about median for Irvine. I assume $2400 for rent would send those Austin college students into cardiac arrest?
 
Depends if you paid 10x income for your house then no you probably can't contribute to your 401k. If you pay a more manageable 3x income you probably can. I agree a 400-450k median is definitely plausible for Irvine.





The median rental for SFR in Austin in July 2007 was $1225 per month and the average was $1378 per month per Crossland's blog.





Source:http://crosslandteam.com/blog/2007/08/26/austin-rental-market-july-2007-stats-update/





<strong></strong><strong><strong>


</strong></strong>
 
<p>For perspective:</p>

<p>I bought my first home in Irvine - a 2,300 sq. ft. condominium - in April 2001.</p>

<p>I paid $560,000.</p>

<p>That's a lot to expect - to get a (decent) SFR at $450,000 (more than 7 years later).</p>

<p>Only complete calamity will get you there.</p>
 
<p>Can we stop and examine something for a moment?</p>

<p>Prices have been high here for many, many years.</p>

<p>If the median income is truly an indisputable measure, how have people survived all these years?</p>

<p>Clearly, something is flawed with it.</p>

<p>Could it be that many people have cash?</p>

<p>Could it be that we have so many renters (not a slight), that the median is greatly affected?</p>

<p>I am not trying to be all "rah rah" - this is an honest question.</p>

<p>Taking median income .v. median price clearly does not tell the picture.</p>
 
<em>>>If the median income is truly an indisputable measure, how have people survived all these years?</em>





Interest only, teaser rates, and negative amortization, just to name a few methods.
 
<p>I will buy, to some extent, I/O.</p>

<p>I believe teaser rates and neg-am are way, way overstated - IMHO.</p>

<p>Remember, I did loans!</p>

<p>Graph, Maestro?</p>
 
<p>CK,</p>

<p>Sorry but I think you a bit out of touch. Irvine median will not be falling to 450k. Prices here have historically been higher and will continue to command a premium. If anything, housing will simply not rise as quickly as before (flatten or decline slightly). </p>

<p>It kills me to read this board sometimes. I'm somewhat in the same boat as others here who prefer to rent then buy at the moment. But for some to believe a 30-40% correction is in the cards are in for a big surprise. Keep rooting for this type of correction, but if/when it does it will be likely due to broader economic issues(ie. recession, job losses, wages, etc.). As a result, you solveyour housing dilemma, but now you have host of other issues (ie. your JOB) you'll be scrambling for...</p>

<p>Also, don't know when/where you went to school but $2400 is a drop in the bucket for some. I went to a highly acclaimed public university in the midwest and it was very common to pay $500-800 for rent. And this was 10 years ago...!</p>
 
<p>I have an idea.</p>

<p>Let's find 100 random properties in Irvine. </p>

<p>We could find out the "value" .v. liens.</p>

<p>We could then find out the loan type(s).</p>

<p>That would be very interesting! I'd happily eat crow if I'm wrong.</p>
 
<p>Yes, I know that no matter the results, a tsunami could still come!</p>

<p>It would nevertheless be interesting.</p>
 
garfangle,<em>


</em>


I think your analysis to start this post is excellent. I think your 30% premium answer is probably close to what we will see here. The $180/SF estimate will be close to pricing at the bottom depending on size, location, etc.





Part of the reason there is a premium here has less to do with the "sun tax" than it does with the lack of subsidized affordable housing product. The cost of construction is higher in California than in other states because of regulatory and environmental issues. This makes it very difficult to provide housing as inexpensively as they do in Texas. When you eliminate the lowest tier of the housing market, it makes median prices and other measures of aggregate price look inflated. Add to that the psychological craze people in California have concerning real estate, and you have a recipe for perpetually bloated prices.





Ever since the first major bubble in California real estate in the late 70s, the median price/wage ratio of a house has been greater than 4. Prior to that, and currently everywhere else in the country, it hovers slightly below 3. A portion of the "sun tax" is a commodities market gambling premium more than anything else.<em>





</em>Janet,<em>





"If the median income is truly an indisputable measure, how have people survived all these years?"</em>





I have analyzed that question in some detail in <a title="Permanent Link to Your Buyer?s Loan Terms" rel="bookmark" href="http://www.irvinehousingblog.com/2007/05/07/your-buyers-loan-terms/" linkindex="12" set="yes">Your Buyer’s Loan Terms,</a> <a title="Permanent Link to The Anatomy of a Credit Bubble" rel="bookmark" href="http://www.irvinehousingblog.com/2007/05/14/the-anatomy-of-a-credit-bubble/" linkindex="13">The Anatomy of a Credit Bubble,</a> and <a title="Permanent Link to Appreciation is Dead" rel="bookmark" href="http://www.irvinehousingblog.com/2007/04/30/appreciation-is-dead/" linkindex="14" set="yes">Appreciation is Dead</a>. Basically, people have been doing it through a combination of lower interest rates and putting higher percentages of their income toward housing -- both of which are unsustainable trends.





<em>"Could it be that many people have cash?"</em>





This is certainly true for some move up buyers who didn't HELOC their equity, but most people in Southern California are spenders not savers. The percentage of downpayment declined steadily throughout the bubble rally, mostly due to 100% financing. This was a credit expansion rally, and it will be a credit contraction crash.
 
<p>IR,</p>

<p>Both valid points.</p>

<p>Interest rates, IMHO, are a huge factor.</p>

<p>Between purchase money loans, and refinance loans I've had since 2001 (changed properties a couple of times), the interest rates I have paid were all between 5.625% and 6.25%.</p>

<p>Those are good rates, to be sure, but are also not that far from where we are today.</p>

<p>Of course, if rates skyrocket, there will be a major adjustment.</p>
 
<p>Tourbillion said, "<em>I think in OC/LA, once you decide to buy a house, you pretty much have to stop contributing to your retirement fund". </em></p>

<p>Am I the only one that thinks that is insane ? </p>
 
You must log in or register to reply here.
Back
Top