When did the bubble start?

NEW -> Contingent Buyer Assistance Program

stepping_up_IHB

New member
As I understand it, real estate was undervalued for much of the '90's in an overcorrection. So, when was the last time that property was in line with the fundamentals? I'm guesstimating that it was around Jan of '02. Is that fair, or am I off?



And yes, I posted this in OC real estate rather than Irvine because it is an OC real estate question. I don't like going to the Irvine section to see things that are not Irvine specific. I think a number of folks are wishing that the forums were expanded, so if you want to discuss OC in general, post here.
 
I moved to SoCal in September of 2001 (yeah, I know, great timing).



The house acros the street from the one I rented sold for $275K and was a model match for the one I rented for $1600 (a multiplier of 170x). When I moved out in 2006, the same house happened to sell again for............$675K. My rent had increased to $1800.



For those of you playing the home game, that's a GRM of 375x. To live in Chino Hills and fade 3 hours of commute daily between there and Irvine. Insanity.



Anyway, it didn't pencil in mid 2001 (we rented the place in June) and it hasn't since.
 
Speaking only from my personal experience I would say you are correct with the timing of the bubble explosion. I bought a 2 bedroom house in Washington Square in Santa Ana for 250K in 2001 and I thought that I was paying WAY too much, yet I sold it in 2004 for 500K, once again emphasis on 2 bedroom and in Santa Ana. The price doubled in less than 3 years, I don't think we'll see that happen again in our lifetimes.
 
Hmm, I answered your title question.



For fundamental parity, the last pencil out I saw was 1998-1999ish depending on OC area.



That of course though is with the heightened prices and rents caused by the distorted market since 1978.
 
I have a hard time believing that it's been distorted since '78. For 21 years it's been off? Free markets don't have a distort for that long... A much lesser percent of our incomes are needed for food, clothing, appliances, etc... since '78, so maybe we pay more for housing? I paid rent here in the mid to late '90's and thought rent was high, but never looked at cost to own. Mom wanted me to buy a condo in 2000 and looking back, it was a good deal compared to rent. i.e it was less to own than to rent in 2000. So, when did the bubble begin? When did cost to own exceed cost to rent? 2001, 2002? and approximatlely what month?
 
[quote author="stepping_up" date=1231762387]I have a hard time believing that it's been distorted since '78. For 21 years it's been off? Free markets don't have a distort for that long... A much lesser percent of our incomes are needed for food, clothing, appliances, etc... since '78, so maybe we pay more for housing? I paid rent here in the mid to late '90's and thought rent was high, but never looked at cost to own. Mom wanted me to buy a condo in 2000 and looking back, it was a good deal compared to rent. i.e it was less to own than to rent in 2000. So, when did the bubble begin? When did cost to own exceed cost to rent? 2001, 2002? and approximatlely what month?</blockquote>
I honestly think it happened when the dot.com bubble was beginning to burst in the fall of 2000. Money went from chasing internet stocks to chasing real estate.
 
If you look at a graph of the case-shiller LA area cpi adjusted, prices were 5-10% under from 94 to 98, then started to shoot up. By 2002 (as you say above), they were 30% overvalued (the same as the bubble from 1988-1992 peak in 1990).
<fieldset class="gc-fieldset">
<legend> Attached files </legend> <a href="http://www.talkirvine.com/converted_files/images/forum_attachments/225_kwP2QiQ9LzIEVVuR0oR9.jpg"><img src="http://www.talkirvine.com/converted_files/images/forum_attachments/225_kwP2QiQ9LzIEVVuR0oR9.jpg" class="gc-images" title="casecpi87208.jpg" style="max-width:300px" /></a> </fieldset>
 
[quote author="stepping_up" date=1231762387]I have a hard time believing that it's been distorted since '78.</blockquote>


I think there have been three cycles since 1977.



1977-1981->busto

1986-1992->busto

1998-2006->busto



The most recent one being bigger and dumber than the first two.
 
[quote author="no_vaseline" date=1231767482][quote author="stepping_up" date=1231762387]I have a hard time believing that it's been distorted since '78.</blockquote>


I think there have been three cycles since 1977.



1977-1981->busto

1986-1992->busto

1998-2006->busto



The most recent one being bigger and dumber than the first two.</blockquote>


I agree with this, the biggest contributor being easy money.
 
[quote author="no_vaseline" date=1231767482][quote author="stepping_up" date=1231762387]I have a hard time believing that it's been distorted since '78.</blockquote>


I think there have been three cycles since 1977.



1977-1981->busto

1986-1992->busto

1998-2006->busto



The most recent one being bigger and dumber than the first two.</blockquote>


I totally agree with 1998.



I also like the timing of the cycles:

1977-1981: 5-year UP cycle

1981-1986: 5-year DOWN cycle

1986-1992: 6-year UP cycle

1992-1998: 6-year DOWN cycle

1998-2006: 8-year UP cycle

2006-2014: 8-year DOWN cycle.
 
I'd say that the bubble started around 1997-1998 and popped around 2005-2006.



If you "buy, live, sell" and repeat, you could have doubled your money if you bought in 1998 & sold in 2002, then repeat for 2002-2005. Live in the property for 2+ years and the profits is tax free.



It was an amazing run and many people made money, at the expense of the knife catchers who came in late.
 
1862 when the entire Irvine ranch was offered a nickel per acre.



The Americans took California away from Mexico with the Treaty of Guadalupe Hildago. It officially became the 31st State to join the Union on September 1, 1850. With that came disputes of land ownership. In order for the families who owned land to keep it, they had to show valid proof of their land holdings, as well as maps and documentation. Many families could not show their proof of ownership, since the Spanish and Mexicans parceled out land freely. These families lost their land holdings and it reverted to the State, which then sold it at a very cheap price to ranchers and farmers. Sometime in the 1860's there was an awful drought that killed much of the cattle and livestock that was being raised in Orange County and the entire Southland for that matter. Many of the ranchers and farmers went bankrupted, and they were forced to sell their land to pay off their debts.



One individual who came at an opportune time to take advantage of this situation was James Irvine. He came to California during the Gold Rush to mine for gold. However, he became disillusioned and went to San Francisco to enter the grocery business. He earned a considerable amount of money, with which he was able to invest in real estate. So along with Benjamin and Thomas Flint and Llewellyn Bixby, James Irvine was able to acquire much of the huge Rancho San Joaqu?n in the center of the county, totaling 120,000 acres or about a fifth of Orange County. He gained sole ownership of the ranch in the 1860's. On his ranch he grew a variety of plants that were more drought resistant, and the Irvine Ranch became a very successful enterprise.



There is one interesting story that comes to mind involving James Irvine. In the 1880's when railroad building was very rapid, Collis P. Huntington (owner of Southern Pacific Railroad) wanted the right of way to build his railroad through Irvine's vast ranch, connecting Los Angeles with San Diego. His previous attempt though the Temescal Valley in Riverside County was unsuccessful, as a flood washed the tracks away a few years after they were completed. However, Irvine refused to grant the railroad owner permission to build through his land (this was a very audacious thing to do, since most communities actually paid the railroads to build through their land, and right of way was usually given).



Apparently the reason for Irvine's refusal dates back to the late 1840's, when he and Huntington were on the same ship to San Francisco. A disagreement ensued and they have been on unfavorable terms since. In the mid-1880's, James Irvine I died, but his son James Irvine II also opposed Southern Pacific's wishes to build. So one Saturday when the courts were closed, Southern Pacific sent workers to begin construction through the Irvine Ranch. They workers were met with Irvine's ranch hands armed with shotguns. The workers became scared, left, and never returned.



Eventually, Irvine allowed Southern Pacific's rival, Atchison, Topeka, and Santa Fe, to build their railroad through the Irvine Ranch. Other people came with a different intention in mind: to settle the land. Orange County was still a part of Los Angeles County at that time, and there were several individuals who bought land and offered it to settlers for a cheap price.



(Courtesy of UC Berkeley)
 
[quote author="IrvineRealtor" date=1231835437]1492. (back then you could get an island for a bunch of beads.)</blockquote>


<img src="http://images.google.com/url?source=imgres&ct=tbn&q=http://files.list.co.uk/images/2007/01/03/apocalypto1.jpg&usg=AFQjCNFvZnc-Nvm9exFu8_vxP_y6GPEHUA" alt="" />



"We don't need no beads!"
 
Even in '97 when I bought my first house, it was still a bit more expensive to buy than to rent. I bought a similar house to the one I was renting (a bit larger though) and in a similar area and my mortgage was $1800 versus $1200 for the rental. Of course I also paid 10% down and had to deal with property taxes and insurance so there really is no way that during that time renting and owning could be compared although it was much closer than it became. I find it interesting now because I am seeing some "regular people" with "regular incomes" actually buying houses again with "regular mortgages".
 
The passage of Prop 13 in the midst of a bubble locked in a market distortion that affected both rents and prices by establishing a disportionate advantage over other investments. California has higher pricing partly due to the greater tax impacts than elsewhere. The subsequent shift to higher income and sales taxes further exacerbates the distortion.



Courtesy of Piggingtons:

<img src="http://piggington.com/images/primer/lapricetoincome.gif" alt="" />



Because of the distortion, Californian's voluntarily pay more for both rents and purchasing compared to elsewhere in the country as a percentage or multiple of their income.
 
Back
Top