Real Estate Price Predictions in Los Angeles City (Burbank, Mission Viejo: renting, refinance)

[greggd]

There is an article in the LA Times today about housing. The Mission Viejo area, which I am not too familiar with aside from the fact that it looks like tract housing near laguna hills.

Buyer purchased a home for roughly $680,000 in 2004 mid 80s construction, about 2300 sq ft and is now looking to sell because her rate jumped 25% and they cant afford it. Question is: did they know they couldnt afford this price when they signed the loan and were they planning on selling anyways. Did they have a plan to earn more income within 3 years to pay for the adjustment? At current list, they are willing to take a low of $725,000 which is about 2% increase per year from purchase price.
So were now looking at a real case scenario of a home at $700,000 range
where a homeowner is selling because of the increase in mtge payments.

This was in line with my original question. I originally read about his happening in outlying areas. Now i see an article about this same scenario on the southern end, not so far out east or riverside/san bern areas.

[JackSparrow]

Originally Posted by greggd

Question is: did they know they couldnt afford this price when they signed the loan and were they planning on selling anyways.

Answer: Irrelevant if they planned on selling. They are responsible for the loan. They should have been aware on what they would owe (what they could afford) regardless of their pie-in-the-sky ideas about "flipping."

[greggd]

From the article I dont think this homeowner's intention was to flip the property within the 3 years. They own no other real estate in California.
It doesnt say why they are selling or if they planned to sell anyways. At this point, after expenses, I dont think they will make much more than having lived in a house for 3 years and a small amount of income from the sale.

I suspect several people have purchased homes without considering what they will do as the mortgage adjusts. This lack of planning is expected on the lower priced homes/first time buyers, english as 2nd language cases, but as the values increase over a million will this pattern cease as more affluent owners expected and planned for adjustements or will we see a surplus in that arena as well.

If this person makes nothing or close to nothing on their sale, I would think anyone holding a home in the area for purposes of flipping will either ride it out or sell and get out without losing money. This will increase the supply which would traditionally reduce prices.

[JackSparrow]

Originally Posted by greggd

From the article I dont think this homeowner's intention was to flip the property within the 3 years. They own no other real estate in California.
It doesnt say why they are selling or if they planned to sell anyways. At this point, after expenses, I dont think they will make much more than having lived in a house for 3 years and a small amount of income from the sale.

I suspect several people have purchased homes without considering what they will do as the mortgage adjusts. This lack of planning is expected on the lower priced homes/first time buyers, english as 2nd language cases, but as the values increase over a million will this pattern cease as more affluent owners expected and planned for adjustements or will we see a surplus in that arena as well.

If this person makes nothing or close to nothing on their sale, I would think anyone holding a home in the area for purposes of flipping will either ride it out or sell and get out without losing money. This will increase the supply which would traditionally reduce prices.

Great post. Many many people have purchased homes either WITH or WITHOUT considering what happens once the mortgage adjusts. It is still their responsibility to repay, and I think we're going to see a LOT of defaults.

[Axiom]

Originally Posted by longbeachhomes

Sorry to butt in. If you are talking about southern California, prices really depends on where you are. In some areas the demand is just not there so sellers are lowering their prices. 40%? You gotta be outta your mind! With the demand for housing here compared to other states, there is no way we will see that kind of drop. Back in 1997 the worst drop was about 33%! Still, there is always the unpredicatability of the market.

Yes, but what about the unprecedented price run-ups of the past few years in So Cal? You absolutely cannot look to history to explain house prices doubling in a 5 year period, so who is to say that just because it has never happened before, it can't happen now? (talking about unprecedented drops here)

Of course I'm of the opinion that the price increases had everything to do with lax financing standards.

I had a CA RE agent tell me that only the very rich or folks who bought prior to 1995 or so and were trading up could really afford to buy in So CA in any kind of real world scenario; for anyone else, they just had to view house prices as "funny money numbers" and look for creative financing. Unfortunately I'm guessing plenty of folks bought into that line of thinking.


In response to the question about the folks in Mission Viejo: I think plenty of folks in similar situations had no intention of selling when their rates adjusted, nor did they have any reason to believe their incomes would adjust upward enough to cover the higher payments; rather they just assumed real estate prices would keep rising at an insane pace, and as such... even with 100% financing and living far beyond their means, they could always just pillage the equity built up just by virtue of increasing prices.
Since that is not happening, my guess is there will be plenty of folks in that same sinking ship. While it looks like the problem might indeed be worse in areas with more affordable homes and more 1st time buyers, I bet the more affluent areas will not be immune.

[TrojanDLA]

Affordability simply does not match the price levels in LA/OC. Basic economic principles tell us that you have to price your products to match the income of your buyers or you'll sell nothing. An entry level home at $500,000 means the average buyer of that home must make over $120,000. That's the problem right there. Housing prices must come down in order for a family income of $80,000 to afford to buy an "entry" level home.

Of course, being a state full of renters is fine, but housing prices will stagnate and wait for wages to catch up.

[JackSparrow]

Originally Posted by TrojanDLA

Affordability simply does not match the price levels in LA/OC. Basic economic principles tell us that you have to price your products to match the income of your buyers or you'll sell nothing. An entry level home at $500,000 means the average buyer of that home must make over $120,000. That's the problem right there. Housing prices must come down in order for a family income of $80,000 to afford to buy an "entry" level home.

Of course, being a state full of renters is fine, but housing prices will stagnate and wait for wages to catch up.

On $120k/yr I could buy much more than $500k

Also remember the rules of supply and demand. People with money (not working class) are willing to spend more. So, as prices rise, we see less fortunate people leave, and more well to do people in their place.

Basically, the middle class is going away. Not entirely, but in LA, yes.

[JackSparrow]

Originally Posted by Axiom

I had a CA RE agent tell me that only the very rich or folks who bought prior to 1995 or so and were trading up could really afford to buy in So CA in any kind of real world scenario; for anyone else, they just had to view house prices as "funny money numbers" and look for creative financing. Unfortunately I'm guessing plenty of folks bought into that line of thinking.

This is the dumbest thing I have read so far today. So what you're essentially saying is that your RE agent knows that since I didn't buy before 1995, I can't afford my place?

Man, I wish he/she would have told me about my situation before I got into it!

[Axiom]

Originally Posted by JackSparrow

This is the dumbest thing I have read so far today. So what you're essentially saying is that your RE agent knows that since I didn't buy before 1995, I can't afford my place?

Man, I wish he/she would have told me about my situation before I got into it!

I'm sure he was not speaking specifically about YOU.

I have no idea what your situation is... maybe you're one of the folks who resisited the urge to spend far more than they could really afford on housing.
Many did not.

You honestly don't think that attitude was prevalent when housing prices were skyrocketing at rates unprecedented any time/place I know of?
Personally I think it was a pretty honest statement about the situation at the time.

I'm confident there were builder sales reps, RE agents, financing folks, etc. who looked the other way or encouraged clients to get into far more house than they could legitimately afford. Is that not what the whole sub-prime mess is all about?

I'm of the opinion that blame ultimately rests with borrowers who made poor financial decisions, but I can see how one could get caught up in the whole "this is the only way to afford housing in So Cal and everyone does it" spiel.

Yes, there are folks who bought post '95 in CA who can legitimately afford their homes. The thing is; like TrojanDLA said, if you look at the numbers objectively... I've got to believe a whole lot of folks are in houses they would never have been able to afford had more conservative financing standards been applied.

The thing is I believe many of those folks assumed continued record rates of appreciation would keep them in said homes. Risky assumption if you ask me. Yes, long term housing has always been a safe investment. It's not a given though and certainly not if you're banking on it short term.

[JackSparrow]

Originally Posted by Axiom

I'm sure he was not speaking specifically about YOU.

I have no idea what your situation is... maybe you're one of the folks who resisited the urge to spend far more than they could really afford on housing.
Many did not.

You honestly don't think that attitude was prevalent when housing prices were skyrocketing at rates unprecedented any time/place I know of?
Personally I think it was a pretty honest statement about the situation at the time.

I'm confident there were builder sales reps, RE agents, financing folks, etc. who looked the other way or encouraged clients to get into far more house than they could legitimately afford. Is that not what the whole sub-prime mess is all about?

I'm of the opinion that blame ultimately rests with borrowers who made poor financial decisions, but I can see how one could get caught up in the whole "this is the only way to afford housing in So Cal and everyone does it" spiel.

Yes, there are folks who bought post '95 in CA who can legitimately afford their homes. The thing is; like TrojanDLA said, if you look at the numbers objectively... I've got to believe a whole lot of folks are in houses they would never have been able to afford had more conservative financing standards been applied.

The thing is I believe many of those folks assumed continued record rates of appreciation would keep them in said homes. Risky assumption if you ask me. Yes, long term housing has always been a safe investment. It's not a given though and certainly not if you're banking on it short term.

TO be honest, I have no idea what other people do. And too bad for them if they didn't count the cost. I would like to believe that many people will suffer financially from higher rates, but not completely go under. I would also like to believe that people will be responsible and pay what they purchased.

And no, I didn't get in over my head. I am prepared to pay my mortgage for years to come.