Trying to buy in Irvine is NO Fun

[edhne]

Hmm..how to define fundamentals.
Comps? Recent comps...across the street..sold for 820. a little more sqft but much much older...nothing updated.

Only if you want to throw money away. Buying an asset at an inflated price for a "little less" inflated price only means you are still buying outside of fundamentals.

Rental parity? Then they rented out the place across the street for 3700~3800 a month as is.

Rental parity is a good one, but sometimes difficult to collect reliable data upon. No offense to you and your "anecdotal" data, but your one point of unconfirmed data doesn't define what rental parity for an area is.  That's what Patrick.net is attempting to do, and they are building the data sets for numerous areas. Based on Riddle Drive's location, and the data points collected by Patrick.net, buying at $839,000 for that house is a HUGE loser.

Replacement value?
Usually homes in TRock are +80% land value because of age of homes. Try building a 2000 SQFT home there for under $200 sq/ft. So 400k in building costs. I doubt you can buy this lot for 400k.

No, replacement value is never used, at least by serious investors/appraisers to determine value. It does have a small effect on cost, but it's a small part of the picture, and most smart construction companies build homes that end up out pace their construction cost, even in places like Santa Ana, doesn't have to be a "prime area".

200k over fundamentals? That would put this house at 2003 prices based on zillow estimates. So in 8 years, if prices appreciated at exactly 3.5% per year from your 2003, this house would be ..drum roll...840k.

Using Zillow estimates is a horrible way to do valuations and a sure fire way you'll end up losing money. Their heuristic is based on a computer's interpretation of curve and a few data points of "sold" homes. Not exactly a great way to judge fundamentals.

Regardless, your assumption fails instantly because you used 2003 as your starting point,  a year solidly in a bubble due to the financing fiasco created by banks.

What we do know is that the home sold for $285,000 pre-bubble (1996), and using ACTUAL inflation increases since 1996 based on BLS statistics, not some guesstimate of 3.5%, the actual inflation adjusted value of the house is around $402,000. Now accounting for a full remodel (which it looks like it was done within the past 5 years or so), you can throw in another $100,000 - $150,000 based on personal preference of the "updates". So I'm actually being a bit friendly with the $600,000+ valuation, but that's only because Turtle Rock is a somewhat coveted area.

But the main thing you should be looking at is this; did median incomes triple since 1996? Did rents triple since 1996? A solid no on both counts. So what changed? Easy access to crazy financing, which is exactly why that home in the 800s has been chasing the market down for 8 months. You have to have... umm... real money now to buy stuff.

That's fundamentals. 

I agree with all of your points, but the one additional thing that you do have to account for is the substantial drop in interest rates from 1996 to 2011.  In my eyes, a drop in rates or an increase in income is the same thing....higher affordability.  But yeah, even if you factor in the lower interest rates the home is still price too high.

@USC. A quick for you. what are rents in that area and what should this house be priced at since you believe it is too high.

If you were representing me, what basis would you tell me to avoid buying this house as overpriced?

 

[IndieDev]

So let me get this straight. Your definition of fundamental value is to pick a arbitrary point in time and then use the BLS inflation rate to come up with fundamental value basis....perfect.
As for my anecdotal evidence of rents, go look up rents for TRock 4/2 SFRs that are nicely done...or ask the numerous realtors on this site what rents are for that area.

No, the point I picked wasn't "arbitrary", I explained why I picked that exact point, why are you acting snarky? It was the last time the home sold before the financing bubble of the 2000s. I thought I made that clear, but in case it wasn't, there it is. It makes perfect sense to track an inflation adjusted price from that data point.

As for the rents in the area, I told you where I got my data from, a website that is one of the first to actually collect rental data points for the exact purpose we're discussing. Why would I go to a "realtor" website for that data? I'll just get more anecdotal information and heresay. I prefer raw, unmolested data.

 

[IndieDev]

Hmm..how to define fundamentals.
Comps? Recent comps...across the street..sold for 820. a little more sqft but much much older...nothing updated.

Only if you want to throw money away. Buying an asset at an inflated price for a "little less" inflated price only means you are still buying outside of fundamentals.

Rental parity? Then they rented out the place across the street for 3700~3800 a month as is.

Rental parity is a good one, but sometimes difficult to collect reliable data upon. No offense to you and your "anecdotal" data, but your one point of unconfirmed data doesn't define what rental parity for an area is.  That's what Patrick.net is attempting to do, and they are building the data sets for numerous areas. Based on Riddle Drive's location, and the data points collected by Patrick.net, buying at $839,000 for that house is a HUGE loser.

Replacement value?
Usually homes in TRock are +80% land value because of age of homes. Try building a 2000 SQFT home there for under $200 sq/ft. So 400k in building costs. I doubt you can buy this lot for 400k.

No, replacement value is never used, at least by serious investors/appraisers to determine value. It does have a small effect on cost, but it's a small part of the picture, and most smart construction companies build homes that end up out pace their construction cost, even in places like Santa Ana, doesn't have to be a "prime area".

200k over fundamentals? That would put this house at 2003 prices based on zillow estimates. So in 8 years, if prices appreciated at exactly 3.5% per year from your 2003, this house would be ..drum roll...840k.

Using Zillow estimates is a horrible way to do valuations and a sure fire way you'll end up losing money. Their heuristic is based on a computer's interpretation of curve and a few data points of "sold" homes. Not exactly a great way to judge fundamentals.

Regardless, your assumption fails instantly because you used 2003 as your starting point,  a year solidly in a bubble due to the financing fiasco created by banks.

What we do know is that the home sold for $285,000 pre-bubble (1996), and using ACTUAL inflation increases since 1996 based on BLS statistics, not some guesstimate of 3.5%, the actual inflation adjusted value of the house is around $402,000. Now accounting for a full remodel (which it looks like it was done within the past 5 years or so), you can throw in another $100,000 - $150,000 based on personal preference of the "updates". So I'm actually being a bit friendly with the $600,000+ valuation, but that's only because Turtle Rock is a somewhat coveted area.

But the main thing you should be looking at is this; did median incomes triple since 1996? Did rents triple since 1996? A solid no on both counts. So what changed? Easy access to crazy financing, which is exactly why that home in the 800s has been chasing the market down for 8 months. You have to have... umm... real money now to buy stuff.

That's fundamentals. 

I agree with all of your points, but the one additional thing that you do have to account for is the substantial drop in interest rates from 1996 to 2011.  In my eyes, a drop in rates or an increase in income is the same thing....higher affordability.  But yeah, even if you factor in the lower interest rates the home is still price too high.

Of course, the interest rate is about 3% lower these days then it was during the mid-late 90s, but it's important to point out that the current interest rate is itself outside of fundamentals because it's FED influenced, not market influenced. Affordability is still completely different between 1996 and now though, home for home.

 

[usctrojancpa]

Edhne - First off, I would tell you that selecting a home that backs up to a major street like Culver will negatively effect your re-sale value...whether you are OK with it or not it will because that is at the top of the list of dealbreakers for most buyers.  Secondly, I would ask you if the upgrades are something that you would like because as we all know upgrades can be very subject in taste and what is nicer looking to some may be hideous to others.  Also, looks like the home had an addition to the back of the home which takes away part of the lot.  I may be alone on this, but I don't give full value for additions (in terms of comp price/sf in the area) as you have significantly altered the structure of the home.  In terms of price, I will need to look at comps and rental rates (I'll get back to you on this one later on).  The home should probably have no more than a 7 handle in front of the price from my gutt feeling.

 

[edhne]

So let me get this straight. Your definition of fundamental value is to pick a arbitrary point in time and then use the BLS inflation rate to come up with fundamental value basis....perfect.
As for my anecdotal evidence of rents, go look up rents for TRock 4/2 SFRs that are nicely done...or ask the numerous realtors on this site what rents are for that area.

As for the rents in the area, I told you where I got my data from, a website that is one of the first to actually collect rental data points for the exact purpose we're discussing. Why would I go to a "realtor" website for that data? I'll just get more anecdotal information and heresay. I prefer raw, unmolested data.

Ok so let's use patrick.net

Assume 800k purchase price.
Using 2.7% inflation BLS inflation rate used to derive fundamental value for rental appreciation and 1% for home price appreciation.
Use 40% margin tax rate.
use .1% insurance cost rate. (i don't who pays 4000 dollars on home owners insurance. I pay 800 a year)
Enter Trock property tax rate.
Use Patrick's exact rental data $3225.

Wow, "fundamental value" based on real world data and assumptions is ....842k. Below rental parity at 800k. at rental parity for 840k.

even with zero appreciation assumption, it is still at rental parity if you are only earning CD rates on your downpayment...

Yes, if you assume prices will continue to go down every year for the next 7 years, then its a loser...

 

[venkat]

Seems like a case of "hijack" of thread to defend "http://www.redfin.com/CA/Irvine/19181-Biddle-Dr-92603/home/4739523". Let us let the seller and their agent defend that property and its price!

I agree with Lucy on many factors (add SFR to the list) with buying in irvine, hence added Tustin Ranch to search criteria - bingo!

 

[IndieDev]

So let me get this straight. Your definition of fundamental value is to pick a arbitrary point in time and then use the BLS inflation rate to come up with fundamental value basis....perfect.
As for my anecdotal evidence of rents, go look up rents for TRock 4/2 SFRs that are nicely done...or ask the numerous realtors on this site what rents are for that area.

As for the rents in the area, I told you where I got my data from, a website that is one of the first to actually collect rental data points for the exact purpose we're discussing. Why would I go to a "realtor" website for that data? I'll just get more anecdotal information and heresay. I prefer raw, unmolested data.

Ok so let's use patrick.net

Assume 800k purchase price.
Using 2.7% inflation BLS inflation rate used to derive fundamental value for rental appreciation and 1% for home price appreciation.
Use 40% margin tax rate.
use .1% insurance cost rate. (i don't who pays 4000 dollars on home owners insurance. I pay 800 a year)
Enter Trock property tax rate.
Use Patrick's exact rental data $3225.

Wow, "fundamental value" based on real world data and assumptions is ....842k. Below rental parity at 800k. at rental parity for 840k.

even with zero appreciation assumption, it is still at rental parity if you are only earning CD rates on your downpayment...

Yes, if you assume prices will continue to go down every year for the next 7 years, then its a loser...

I don't know what you saved for your assumptions, but the numbers seem off.

At $800,000, this home is still a BIG loser against renting assuming a 30 year, 4.75% APR, 20% down, 33% income tax rate, including a $135 HOA + 1.0% tax rate (could be higher).

Also you're biggest assumption is "appreciation" at 1% for 7 years. No hedge fund manager, financial advisor, basically non-housing shill will tell you that we've hit a market level valuation that assumes "appreciation". We haven't had unmolested (i.e - non gov't cheese induced) home appreciation in the past 3 years except in very select markets, and almost never sustained YOY. In fact the biggest drag on core inflation was housing depreciation. You can't assume "appreciation" until the market has determined a price based on fundamentals.

Case in point:

You're still living under the 2000s bubble fantasy of "housing can only go up" which is a false, housing shill, propagated illusion. Housing in Irvine, yes Irvine, under went 6-7 years of slow depreciation from the end of the early 90s bubble to the beginning of the 2000s bubble, so it can, and has happened before.

Patrick's tool is working correctly, you're simply not using it correctly.

 

[davenlei]

Man.  If I realized that housing in Irvine would become this difficult I would have kept my home and timeshared it to others so they can enjoy the resort life of Irvine. 

I guess that is why I received about $420 a sq. ft. for it when I sold it. Cha Ching!

I moved out of Irvine and am very happy with South County (beach close) living now.  There is something to be said about not living in the same city you work in.  You can feel like you are getting away from all the things that remind you about your work day (lunchtime restaurants, metro'ish traffic, etc).

Thanks again USCTrojanCPA for making it happen!

 

[edhne]

So let me get this straight. Your definition of fundamental value is to pick a arbitrary point in time and then use the BLS inflation rate to come up with fundamental value basis....perfect.
As for my anecdotal evidence of rents, go look up rents for TRock 4/2 SFRs that are nicely done...or ask the numerous realtors on this site what rents are for that area.

As for the rents in the area, I told you where I got my data from, a website that is one of the first to actually collect rental data points for the exact purpose we're discussing. Why would I go to a "realtor" website for that data? I'll just get more anecdotal information and heresay. I prefer raw, unmolested data.

Ok so let's use patrick.net

Assume 800k purchase price.
Using 2.7% inflation BLS inflation rate used to derive fundamental value for rental appreciation and 1% for home price appreciation.
Use 40% margin tax rate.
use .1% insurance cost rate. (i don't who pays 4000 dollars on home owners insurance. I pay 800 a year)
Enter Trock property tax rate.
Use Patrick's exact rental data $3225.

Wow, "fundamental value" based on real world data and assumptions is ....842k. Below rental parity at 800k. at rental parity for 840k.

even with zero appreciation assumption, it is still at rental parity if you are only earning CD rates on your downpayment...

Yes, if you assume prices will continue to go down every year for the next 7 years, then its a loser...

I don't know what you saved for your assumptions, but the numbers seem off.

At $800,000, this home is still a BIG loser against renting assuming a 30 year, 4.75% APR, 20% down, 33% income tax rate, including a $135 HOA + 1.0% tax rate (could be higher).

Also you're biggest assumption is "appreciation" at 1% for 7 years. No hedge fund manager, financial advisor, basically non-housing shill will tell you that we've hit a market level valuation that assumes "appreciation". We haven't had unmolested (i.e - non gov't cheese induced) home appreciation in the past 3 years except in very select markets, and almost never sustained YOY. In fact the biggest drag on core inflation was housing depreciation. You can't assume "appreciation" until the market has determined a price based on fundamentals.

Case in point:

You're still living under the 2000s bubble fantasy of "housing can only go up" which is a false, housing shill, propagated illusion. Housing in Irvine, yes Irvine, under went 6-7 years of slow depreciation from the end of the early 90s bubble to the beginning of the 2000s bubble, so it can, and has happened before.

Patrick's tool is working correctly, you're simply not using it correctly.

I actually stated that even at zero assumption, you are still at rental parity. But your assumptions, my assumptions....Since you are so sure of your fundamental value proposition, let's put money where are internet mouths are. I will bet you $1000 dollars that in 7 years, we will be closer % wise to 800k for this house than we are to 600k.

If you want to take the wager and put $ to your convictions, then let's work out the details.

 

[akim997]

Hmm..how to define fundamentals.
Comps? Recent comps...across the street..sold for 820. a little more sqft but much much older...nothing updated.

Only if you want to throw money away. Buying an asset at an inflated price for a "little less" inflated price only means you are still buying outside of fundamentals.

Rental parity? Then they rented out the place across the street for 3700~3800 a month as is.

Rental parity is a good one, but sometimes difficult to collect reliable data upon. No offense to you and your "anecdotal" data, but your one point of unconfirmed data doesn't define what rental parity for an area is.  That's what Patrick.net is attempting to do, and they are building the data sets for numerous areas. Based on Riddle Drive's location, and the data points collected by Patrick.net, buying at $839,000 for that house is a HUGE loser.

Replacement value?
Usually homes in TRock are +80% land value because of age of homes. Try building a 2000 SQFT home there for under $200 sq/ft. So 400k in building costs. I doubt you can buy this lot for 400k.

No, replacement value is never used, at least by serious investors/appraisers to determine value. It does have a small effect on cost, but it's a small part of the picture, and most smart construction companies build homes that end up out pace their construction cost, even in places like Santa Ana, doesn't have to be a "prime area".

200k over fundamentals? That would put this house at 2003 prices based on zillow estimates. So in 8 years, if prices appreciated at exactly 3.5% per year from your 2003, this house would be ..drum roll...840k.

Using Zillow estimates is a horrible way to do valuations and a sure fire way you'll end up losing money. Their heuristic is based on a computer's interpretation of curve and a few data points of "sold" homes. Not exactly a great way to judge fundamentals.

Regardless, your assumption fails instantly because you used 2003 as your starting point,  a year solidly in a bubble due to the financing fiasco created by banks.

What we do know is that the home sold for $285,000 pre-bubble (1996), and using ACTUAL inflation increases since 1996 based on BLS statistics, not some guesstimate of 3.5%, the actual inflation adjusted value of the house is around $402,000. Now accounting for a full remodel (which it looks like it was done within the past 5 years or so), you can throw in another $100,000 - $150,000 based on personal preference of the "updates". So I'm actually being a bit friendly with the $600,000+ valuation, but that's only because Turtle Rock is a somewhat coveted area.

But the main thing you should be looking at is this; did median incomes triple since 1996? Did rents triple since 1996? A solid no on both counts. So what changed? Easy access to crazy financing, which is exactly why that home in the 800s has been chasing the market down for 8 months. You have to have... umm... real money now to buy stuff.

That's fundamentals. 

mmmm.....  i think you have decent things to say, but i have to disagree with you on this one...    fundamentals are great, and shouldn't be ingnored, but take a step back and read what you wrote...    big picture...    reality...    im not disagreeing that pricing will go down, i think prices may drop 5-10%.    But to think we will somehow revert to '96+inflation pricing doesn't seem reasonable, and actually absurd.  Sometimes, the wall street Ivy league b-schoolers, focus only on the quant valuations and strict financial models...  that's why we ignore wall street haha...    you go with what you know and what is real.  Your back of the napkin value of $402+150= 552 or ~$300/ft is just ridiculous.  You can't apply a generic model and apply it to all real estate everywhere.    I know a realtor (Lucy) who has worked in Turtle Rock for ages and my boss lives there...  she's seen all the transactions, knows all the houses/tracts, and she will tell you, prices WILL NOT drop to those price levels.  I will bet money on that (I actually will).  If that happens, then prices in Newport/ Eastbluff should drop as well according to your arguments, but I wont hold my breathe that I will be able to buy a nice SFR in Eastbluff for $800K anytime soon.    Just because the economy is down, doesn't mean that everyone is poor and noone can afford housing...    real estate markets are supply/demand driven vs. fundamentals.  sure we may see regression towards reasonable valuations, but not to your doomsday scenario...

 

[IndieDev]

I will bet you $1000 dollars that in 7 years, we will be closer % wise to 800k for this house than we are to 600k.

If you want to take the wager and put $ to your convictions, then let's work out the details.

A 7 year bet? Is that even a serious offer? No thanks. This website may not even exist in 7 years. If I knew what anything would cost in nearly a decade, I'd have at least a trillion dollars in the bank.

Let's do a real bet, one where we may actually get our money this year.

You claimed this:

On price per sq/ft basis, it is expensive compared to newer villages but compared to TRock comps, a solid comp.

I will bet you that the home won't transact within $10,000 of the "Solid comp" price you claimed ($839,000). If it does, I'll pay you $100 for every thousand dollars within that $10,000 buffer up to $1,000. So if it transacts at $834,000, I'll pay you $500, if it sells at $839,000, you get the full $1,000. However, for every thousand it it sells below the $10,000 buffer, you give me $100 up to $1000. So if it sells at $819,000 and below, I get a full $1,000.

That's a much more realistic bet to observe on whose fundamentals are in check. You game?

(USCTrojan, or IrvineRealtor can handle the holding of the checks)

 

[IndieDev]

Hmm..how to define fundamentals.
Comps? Recent comps...across the street..sold for 820. a little more sqft but much much older...nothing updated.

Only if you want to throw money away. Buying an asset at an inflated price for a "little less" inflated price only means you are still buying outside of fundamentals.

Rental parity? Then they rented out the place across the street for 3700~3800 a month as is.

Rental parity is a good one, but sometimes difficult to collect reliable data upon. No offense to you and your "anecdotal" data, but your one point of unconfirmed data doesn't define what rental parity for an area is.  That's what Patrick.net is attempting to do, and they are building the data sets for numerous areas. Based on Riddle Drive's location, and the data points collected by Patrick.net, buying at $839,000 for that house is a HUGE loser.

Replacement value?
Usually homes in TRock are +80% land value because of age of homes. Try building a 2000 SQFT home there for under $200 sq/ft. So 400k in building costs. I doubt you can buy this lot for 400k.

No, replacement value is never used, at least by serious investors/appraisers to determine value. It does have a small effect on cost, but it's a small part of the picture, and most smart construction companies build homes that end up out pace their construction cost, even in places like Santa Ana, doesn't have to be a "prime area".

200k over fundamentals? That would put this house at 2003 prices based on zillow estimates. So in 8 years, if prices appreciated at exactly 3.5% per year from your 2003, this house would be ..drum roll...840k.

Using Zillow estimates is a horrible way to do valuations and a sure fire way you'll end up losing money. Their heuristic is based on a computer's interpretation of curve and a few data points of "sold" homes. Not exactly a great way to judge fundamentals.

Regardless, your assumption fails instantly because you used 2003 as your starting point,  a year solidly in a bubble due to the financing fiasco created by banks.

What we do know is that the home sold for $285,000 pre-bubble (1996), and using ACTUAL inflation increases since 1996 based on BLS statistics, not some guesstimate of 3.5%, the actual inflation adjusted value of the house is around $402,000. Now accounting for a full remodel (which it looks like it was done within the past 5 years or so), you can throw in another $100,000 - $150,000 based on personal preference of the "updates". So I'm actually being a bit friendly with the $600,000+ valuation, but that's only because Turtle Rock is a somewhat coveted area.

But the main thing you should be looking at is this; did median incomes triple since 1996? Did rents triple since 1996? A solid no on both counts. So what changed? Easy access to crazy financing, which is exactly why that home in the 800s has been chasing the market down for 8 months. You have to have... umm... real money now to buy stuff.

That's fundamentals. 

mmmm.....  i think you have decent things to say, but i have to disagree with you on this one...    fundamentals are great, and shouldn't be ingnored, but take a step back and read what you wrote...    big picture...    reality...    im not disagreeing that pricing will go down, i think prices may drop 5-10%.    But to think we will somehow revert to '96+inflation pricing doesn't seem reasonable, and actually absurd.  Sometimes, the wall street Ivy league b-schoolers, focus only on the quant valuations and strict financial models...  that's why we ignore wall street haha...    you go with what you know and what is real.  Your back of the napkin value of $402+150= 552 or ~$300/ft is just ridiculous.  You can't apply a generic model and apply it to all real estate everywhere.    I know a realtor (Lucy) who has worked in Turtle Rock for ages and my boss lives there...  she's seen all the transactions, knows all the houses/tracts, and she will tell you, prices WILL NOT drop to those price levels.  I will bet money on that (I actually will).  If that happens, then prices in Newport/ Eastbluff should drop as well according to your arguments, but I wont hold my breathe that I will be able to buy a nice SFR in Eastbluff for $800K anytime soon.    Just because the economy is down, doesn't mean that everyone is poor and noone can afford housing...    real estate markets are supply/demand driven vs. fundamentals.  sure we may see regression towards reasonable valuations, but not to your doomsday scenario...

I understand why you think it's a Doomsday scenario, a lot of people even now, with all the evidence presented in the current market think similarly to you, but wouldn't you say the run up to 2006 peaks was equally as unfathomable?

My $600,000 evaluation for the home in question is based on today's fundamentals. In 7 years, maybe incomes will increase, employment will become more stable, and rents will rise with salaries where the price for that home will be supported. But I can tell you today without doubt, based on median salaries, comparable rents, based on a typical 30 year mortgage, $600k would be a fair price for the home in question. Yes people will over pay, or stretch themselves to purchase something they really want, but suicidal lemmings don't define a market.

I remember late last year when I was having these same debates with people on various messageboards, Irvine cheerleaders I know in person, and even people on this board saying OC is different, then it became, Irvine itself is different. Now I'm hearing "Turtle Rock within Irvine is different." These were the same people who claimed that the most that Irvine could continue to drop would be 5-10% more and that's it.

Well guess what, 2011 isn't even over, and Irvine has already lost 8% since that time (4% YOY), and we've got over 7 more months in 2011:

I'm not here to make 7-10 year predictions, you can go to a fortune teller for that, but I know considering all the fundamental factors in the market today, that house is way over priced.

 

[edhne]

Hmm..how to define fundamentals.
Comps? Recent comps...across the street..sold for 820. a little more sqft but much much older...nothing updated.

Only if you want to throw money away. Buying an asset at an inflated price for a "little less" inflated price only means you are still buying outside of fundamentals.

Rental parity? Then they rented out the place across the street for 3700~3800 a month as is.

Rental parity is a good one, but sometimes difficult to collect reliable data upon. No offense to you and your "anecdotal" data, but your one point of unconfirmed data doesn't define what rental parity for an area is.  That's what Patrick.net is attempting to do, and they are building the data sets for numerous areas. Based on Riddle Drive's location, and the data points collected by Patrick.net, buying at $839,000 for that house is a HUGE loser.

Replacement value?
Usually homes in TRock are +80% land value because of age of homes. Try building a 2000 SQFT home there for under $200 sq/ft. So 400k in building costs. I doubt you can buy this lot for 400k.

No, replacement value is never used, at least by serious investors/appraisers to determine value. It does have a small effect on cost, but it's a small part of the picture, and most smart construction companies build homes that end up out pace their construction cost, even in places like Santa Ana, doesn't have to be a "prime area".

200k over fundamentals? That would put this house at 2003 prices based on zillow estimates. So in 8 years, if prices appreciated at exactly 3.5% per year from your 2003, this house would be ..drum roll...840k.

Using Zillow estimates is a horrible way to do valuations and a sure fire way you'll end up losing money. Their heuristic is based on a computer's interpretation of curve and a few data points of "sold" homes. Not exactly a great way to judge fundamentals.

Regardless, your assumption fails instantly because you used 2003 as your starting point,  a year solidly in a bubble due to the financing fiasco created by banks.

What we do know is that the home sold for $285,000 pre-bubble (1996), and using ACTUAL inflation increases since 1996 based on BLS statistics, not some guesstimate of 3.5%, the actual inflation adjusted value of the house is around $402,000. Now accounting for a full remodel (which it looks like it was done within the past 5 years or so), you can throw in another $100,000 - $150,000 based on personal preference of the "updates". So I'm actually being a bit friendly with the $600,000+ valuation, but that's only because Turtle Rock is a somewhat coveted area.

But the main thing you should be looking at is this; did median incomes triple since 1996? Did rents triple since 1996? A solid no on both counts. So what changed? Easy access to crazy financing, which is exactly why that home in the 800s has been chasing the market down for 8 months. You have to have... umm... real money now to buy stuff.

That's fundamentals. 

mmmm.....  i think you have decent things to say, but i have to disagree with you on this one...    fundamentals are great, and shouldn't be ingnored, but take a step back and read what you wrote...    big picture...    reality...    im not disagreeing that pricing will go down, i think prices may drop 5-10%.    But to think we will somehow revert to '96+inflation pricing doesn't seem reasonable, and actually absurd.  Sometimes, the wall street Ivy league b-schoolers, focus only on the quant valuations and strict financial models...  that's why we ignore wall street haha...    you go with what you know and what is real.  Your back of the napkin value of $402+150= 552 or ~$300/ft is just ridiculous.  You can't apply a generic model and apply it to all real estate everywhere.    I know a realtor (Lucy) who has worked in Turtle Rock for ages and my boss lives there...  she's seen all the transactions, knows all the houses/tracts, and she will tell you, prices WILL NOT drop to those price levels.  I will bet money on that (I actually will).  If that happens, then prices in Newport/ Eastbluff should drop as well according to your arguments, but I wont hold my breathe that I will be able to buy a nice SFR in Eastbluff for $800K anytime soon.    Just because the economy is down, doesn't mean that everyone is poor and noone can afford housing...    real estate markets are supply/demand driven vs. fundamentals.  sure we may see regression towards reasonable valuations, but not to your doomsday scenario...

I understand why you think it's a Doomsday scenario, a lot of people even now, with all the evidence presented in the current market think similarly to you, but wouldn't you say the run up to 2006 peaks was equally as unfathomable?

My $600,000 evaluation for the home in question is based on today's fundamentals. In 7 years, maybe incomes will increase, employment will become more stable, and rents will rise with salaries where the price for that home will be supported. But I can tell you today without doubt, based on median salaries, comparable rents, based on a typical 30 year mortgage, $600k would be a fair price for the home in question.

I remember late last year when I was having these same debates with people on various messageboards, Irvine cheerleaders I know in person, and even people on this board saying OC is different, then it became, Irvine itself is different. Now I'm hearing "Turtle Rock within Irvine is different." These were the same people who claimed that the most that Irvine could continue to drop would be 5-10%.

Well guess what, 2011 isn't even over, and Irvine has already lost 8% since that time:

I'm not here to make 7-10 year predictions, you can go to a fortune teller for that, but I know considering all the fundamental factors in the market today, that house is way over priced.

I call BULLSHIT. That is exactly what you are doing...making 7 to 10 year predictions to come up with your "fundamental" value. Patrick.nets valuation is entirely based on projections. Even the small increases in rental appreciation or housing depreciation/appreciation makes a huge different one the "value" the house delivers. It is all about ASSUMPTIONS which is making a PREDICTION about what the future holds that are used to derive this fundamental value you are saying Patrick.net.

And all that aside, it seems there are now two offers of putting money where your mouth is. Seems like "fundamental" value doesn't have much "fundamental" belief to back it up.

 

[IndieDev]

I'm perfectly willing to make a bet with you based on the "current" market, but what you're asking is for a fortune teller duel.  ???

You're asking me to predict the next 7 years in the market. I can't do that anymore than I could do it in 1996, before the bubble. TARP II could be rolled out, an economic "shock" could make home values chaotic, 7 years is a really long time.

The worst part of it is you're asking me to make a bet based on the "nominal" price from 2011 and apply them to prices in 2018. Do you realize how ridiculous that is? It makes it apparent that you simply don't understand basic economic concepts, or you're really trying to skew the bet in your favor which really isn't a bet at all (i.e - I'll fight you by the bike rack after school with my 10 friends).

Now if you want to do an inflation adjusted bet based on those same terms you proposed, then you've got a bet, but I warn you in advanced, you're certainly going to lose unless the U.S becomes the next Democratic Republic of the Congo.

 

[edhne]

I'm perfectly willing to make a bet with you based on the "current" market, but what you're asking is for a fortune teller duel.  ???

You're asking me to predict the next 7 years in the market. I can't do that anymore than I could do it in 1996, before the bubble. TARP II could be rolled out, an economic "shock" could make home values chaotic, 7 years is a really long time.

The worst part of it is you're asking me to make a bet based on the "nominal" price from 2011 and apply them to prices in 2018. Do you realize how ridiculous that is? It makes it apparent that you simply don't understand basic economic concepts, or you're really trying to skew the bet in your favor which really isn't a bet at all (i.e - I'll fight you by the bike rack after school with my 10 friends).

Now if you want to do an inflation adjusted bet based on those same terms you proposed, then you've got a bet, but I warn you in advanced, you're certainly going to lose unless the U.S becomes the next Democratic Republic of the Congo.

haha. how about if we change the bet and see who has more economics education, you or me. I don't know you from jack but I am willing to change the bet to simply state that my undergrad in finance, my mba in finance and my CFA better qualify me a tad bit more to talk about "economic concepts" than you. But who knows, maybe you are a Ph'D in economics!

But back to the bet at hand. Your fundamental value from Patrick.net is nothing more than a prediction model of future rents, future appreciation, future tax rates, future returns on your down payment, future insurance rates, future maintenance rates. The only part this locked is the mortgage balance and interest rate.

So here on one hand you say the fundamental present value is 600k based on Patrick.net's future forecasts of all those things but in the same breadth you say you can't predict the future? lol What happened to all the talk of "grinding down." Now it is, I can't tell the future? Well for people with no concept of economics like me, I read somewhere you can use weighted probabilities to come up with something called expected value.

My expected values says one thing. Your expected values says something else. So let's see who's expected values are more accurate with a financial wager.

We can even make the bet in 2011 dollars per your suggestion. Let's see if in 2018 the prices are closer to 600k in 2011 dollars vs. 800k in 2011 dollars. We will take the prices in 2018 and discount then using the BLS core inflation adjuster as the denominator. Does that work for you?

 

[irvinehomeowner]

Econ battle!

 

[irvinerealtor]

One point of clarification... even if one or the other of you does have the better valuation method, the rubber hits the road when the buyer decides to make an offer, and the seller decides to accept or reject it.  Even if it is an apparently "great" offer, it's only valid when the seller agrees to it.  In individual cases the buyer and seller's motivation levels are the key driver to what the home will or won't sell for.

What it "should" sell for gets dangerous without knowing that info...

Mr. Buyer - here is the list of comparable recent sales in the neighborhood.  How much is the home worth to you, and what would you like to offer?
Mrs. Seller - here is the list of comparable recent sales in the neighborhood.  This offer will net you approximately $xxx.  Does this get you to where you want to be, and if not, what would you like to propose as a counteroffer?

How much the realtor (or anyone else*) thinks it is worth is immaterial.
-IrvineRealtor

*except maybe the lender, who might choose to make financing difficult, or get you a better negotiating stance later on...

 

[LAtoOC]

This thread is cracking me up.

Since people are listing qualifications, I would like it known that I am 6'6, have a body that makes Michael Phelps jealous, a CFA, MBA, CFP, CFS, CIMA, CAIA, Series 6, 7, 63 and 65.

If anyone wants to doubt me,  you can meet me at the DJ checkout stand.

 

[socal78]

I will bet you that the home won't transact within $10,000 of the "Solid comp" price you claimed ($839,000). If it does, I'll pay you $100 for every thousand dollars within that $10,000 buffer up to $1,000. So if it transacts at $834,000, I'll pay you $500, if it sells at $839,000, you get the full $1,000. However, for every thousand it it sells below the $10,000 buffer, you give me $100 up to $1000. So if it sells at $819,000 and below, I get a full $1,000.

That's a much more realistic bet to observe on whose fundamentals are in check. You game?

(USCTrojan, or IrvineRealtor can handle the holding of the checks)

Just for giggles... have your "escrow man" (Scott or Martin) tell me how this pans out and I'll make sure a proper victory cup (TI mug) is waiting for ya, too.

 

[IndieDev]

haha. how about if we change the bet and see who has more economics education, you or me. I don't know you from jack but I am willing to change the bet to simply state that my undergrad in finance, my mba in finance and my CFA better qualify me a tad bit more to talk about "economic concepts" than you. But who knows, maybe you are a Ph'D in economics!

I'm not here to get into a contest about who has the biggest e-dick, I'm discussing the simple fundamentals of how much the property is worth taking into account 1) The median salary of the area, and 2) comparable rents. You can be a CFA, or a PhD, it makes no difference to me, but I do find it somewhat interesting that with all your claims of being a skilled and well educated economist, and the best house you could afford happens to be on one of the most undesirable, and busy thoroughfares in Irvine. Even a laymen could've told you that buying a house on the residential equivalent of a 4 lane freeway is just dumb, but I digress.

But back to the bet at hand. Your fundamental value from Patrick.net is nothing more than a prediction model of future rents, future appreciation, future tax rates, future returns on your down payment, future insurance rates, future maintenance rates. The only part this locked is the mortgage balance and interest rate. So here on one hand you say the fundamental present value is 600k based on Patrick.net's future forecasts of all those things but in the same breadth you say you can't predict the future? lol What happened to all the talk of "grinding down." Now it is, I can't tell the future?

See, you can't blame me for your incorrect assumptions. I specifically told you that home appreciation cannot be assumed, especially in light of what has transpired in the past 4 years. I made my calculation using no assumption of appreciation or depreciation (0% for that field), and the property that you claimed was a "good solid comp" still came up as a big loser. Any expectation of 7 or 10 year predictions is entirely your own expectations.

We can even make the bet in 2011 dollars per your suggestion. Let's see if in 2018 the prices are closer to 600k in 2011 dollars vs. 800k in 2011 dollars. We will take the prices in 2018 and discount then using the BLS core inflation adjuster as the denominator. Does that work for you?

Yup. We'll settle that one in 7 years.

Now about your "good solid comp"? You want to take my bet that your good solid comp is actually a shitty, dumb, comp? Or do you want to go ahead and back away from that claim Mr. MBA/CFA?