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Irvine Housing Blog

Irvine Housing Blog

Link to Irvine Housing Blog

Predictions versus reality: Irvine Renter’s track record

Posted: 29 Mar 2011 03:30 AM PDT

Was I right, wrong, or somewhere in between. Let's review the data, and I will let you decide.

Irvine Home Address ... 184 PINEVIEW Irvine, CA 92620
Resale Home Price ...... $196,000

I believe I can see the future
Because I repeat the same routine
I think I used to have a purpose
Then again, that might have been a dream

Nine Inch Nails -- Every Day is Exactly the Same

Groundhog Day is one of my favorite movies. Every day is exactly the same. One of the reasons I enjoy Southern California so much is because I rarely change my outdoor plans due to the weather. Every day is beautiful. Yesterday was, and tomorrow will be as well.

It will feel like groundhog day here over the next few years as we work through the inventory issues. I will offer the same advice: don't buy unless you plan a long-term hold. I will say that until the number of foreclosures gets down near zero, and the backlog of unprocessed bad loans is complete. I don't know how these bad loans will be resolved. I believe foreclosure will resolve most of them, but we may see some form of principal forgiveness become more common before this crisis is truly behind us. I hope not.

My beginning at the IHB

Many of you may not remember that I was not an original writer at the IHB. Zovall and IrvineSingleMom were the two first writers. When they asked me to write, I just started, and I haven't stopped. I don't know where the energy or inspiration comes from, but I do enjoy exploring this artform... or is it a news media...

Back on February 27, 2007, I loudly proclaimed we were at the top of the market and that prices were going to crash. I wasn't offering a weak warning that prices might go down a little bit, I was boldly stating prices were going to crash -- hard. It was going to be a catastrophe. It was important news.

Of course, when i made these proclamations, I was roundly criticized as a fool who didn't know what he was talking about (read some of the old comments). In order to provide some credibility to my assertions, I wrote a series of analysis posts:

The final post in that series aired on 11 March 2007. Predictions for the Irvine Housing Market contained the chart below.

In that post, I went on to list the main factors that will influence the timing and the depth of the decline:

  1. Percentage of Income Put Toward Housing Payments
  2. Interest Rates
  3. Foreclosures
  4. Adjustable Rate Mortgage Time Bombs
  5. Government Intervention

I wrote that back in early 2007 before we had any of the following:

  1. loan modifications which focus on DTI ratios,
  2. federal reserve buying mortgage paper to influence interest rates,
  3. foreclosures that reached maximum market absorption levels,
  4. ARM resets contributing to delinquencies which are now in shadow inventory, and
  5. The federal government nationalizing the housing market by taking the GSEs into conservatorship.

On August 25, 2008, I revisited my prediction in I Was Wrong, It’s Worse… It had the updated results through April of 2008.

The initial stages of the crash were surprising in the rapidity of the declines. Irvine's real estate market had experienced patches of weakness, but it avoided most of the 18% statewide decline in the early 90s. Predicting any decline ran the risk of stubborn seller and sticky prices preventing a decline. By mid 2008, even the most stubborn bulls realized they had no idea what they were talking about back in 2006. They weren't just a little wrong, they were debt-up-to-their-eyes wrong about the direction of house prices.

How wrong was I?

I just obtained the updated median home sales prices for Irvine to see how my predictions compared to what really happened.

Prices did not fall as much as I predicted, not because my reasoning was flawed, but because unforeseeable and unprecedented efforts by bankers and the government delayed the drop, and may have averted a much deeper drop.

I say these events were unforeseeable and unprecedented, but some may argue that such extremes were inevitable. I have no way to counter that point. However, I can say that few predicted those events in advance of when the rumors became news. Any forecaster out there who foresaw those events and accurately gaged their impacts is far better than I am.

What happened in 2008 to slow the drop in prices?

Two events in 2008 marked important turning points for the market. First, in early 2008 nearly every housing market in the country reached and exceeded its capacity to absorb foreclosures without pushing prices lower. And second, in late 2008, the Treasury department when against 40 years of government statements and took over the GSEs and backstopped the GSEs bad debts. The public was absorbing the losses of private enterprise just like with AIG.

In the last housing bubble on the late 80s-early 90s, lenders foreclosed on delinquent borrowers without delay. There was no shadow inventory. The number of foreclosures did push prices lower, but they were not so overwhelming that prices crashed. In early 2008, the number of foreclosures simply overwhelmed the number of buyers, and prices plummeted. Banks had a decision to make: 1. keep foreclosing and push prices back to the 90s, or stop foreclosing and accumulate a shadow inventory of delinquent mortgage squatters. They chose the latter.

In late 2008, in response to a balance sheet in tatters and mounting losses, the Treasury Department took over the GSEs. by the end of the year, between the FHA and the GSEs, the federal government controlled about 98% of the mortgage market.

Once the government controlled the delivery mechanism for home loans, the only thing they needed was someone willing to buy those loans at high prices, and they could support prices at levels higher than a free market would bear. The patsy to buy home loans in a depreciating market turned out to be the Federal Reserve.

What happened in 2009 to slow the drop in prices?

When the Federal Reserve began its program to buy $1.2 trillion in mortgage-backed securities, it knew it was buying toxic crap, but the with an infinite balance sheet from the ability to print money, they are uniquely suited to absorb these losses -- losses their member banks cannot afford to take. In essence, they printed enough money to paper over what was destroyed through lender losses.

Since 2009, the government has been in total control of the housing market. They remain in control to this day. There is talk in Washington about reform, but since any subsidy removal will lower prices and increase bank losses, any transition will happen slowly.

I was wrong: It's better

I was clearly wrong. Prices did not fall as far as I said they would. But how wrong was I?

If prices only fell 2/3 of the amount I projected, was I 1/3 wrong? If prices are 50% below expectations, how wrong am I. Was I at least 66% right?

46% off at the low end

Whatever becomes of the median, it is clear that prices of low-end properties have fallen dramatically. The owner who paid $342,000 for this property in 2006 certainly didn't think it would be worth less than $200,000 in 2011. He was wrong too. However wrong I am, it isn't as painful for me as it is for this former owner.

Irvine House Address ... 184 PINEVIEW Irvine, CA 92620  

Resale House Price ...... $196,000

House Purchase Price … $342,000
House Purchase Date .... 5/17/2006

Net Gain (Loss) .......... ($157,760)
Percent Change .......... -46.1%
Annual Appreciation … -11.3%

Cost of House Ownership
$196,000 .......... Asking Price
$6,860 .......... 3.5% Down FHA Financing
4.79% ............... Mortgage Interest Rate
$189,140 .......... 30-Year Mortgage
$39,619 .......... Income Requirement

$0,991 .......... Monthly Mortgage Payment

$170 .......... Property Tax (@1.04%)
$0 .......... Special Taxes and Levies (Mello Roos)
$41 .......... Homeowners Insurance (@ 0.25%)
$285 .......... Homeowners Association Fees
$1,487 .......... Monthly Cash Outlays

-$92 .......... Tax Savings (% of Interest and Property Tax)
-$236 .......... Equity Hidden in Payment (Amortization)
$13 .......... Lost Income to Down Payment (net of taxes)
$24 .......... Maintenance and Replacement Reserves
$1,195 .......... Monthly Cost of Ownership

Cash Acquisition Demands
$1,960 .......... Furnishing and Move In @1%
$1,960 .......... Closing Costs @1%
$1,891 ............ Interest Points @1% of Loan
$6,860 .......... Down Payment
$12,671 .......... Total Cash Costs
$18,300 ............ Emergency Cash Reserves
$30,971 .......... Total Savings Needed

Property Details for 184 PINEVIEW Irvine, CA 92620
Beds: 1
Baths: 1
Sq. Ft.: 934
Property Type: Residential, Single Family
Style: Two Level
View: Water
Year Built: 1990
Community: Northwood
County: Orange
MLS#: S646955
Source: SoCalMLS
Status: Active
On Redfin: 49 days
Irvine Single Family Attached Home. 2 Story with large living room, tile flooring, new wall paint, new kitchen appliances, new furnace, new carpet, and more. TURNKEY! Upstairs Bedroom and Bathroom. Rear Patio and laundry closet for full sized washer and dryer. Close to restaurants, shopping, schools, and more. HOA dues include trash and water. Carport # 199.


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