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Old 12-27-2013, 01:26 PM
 
Location: San Diego
306 posts, read 198,920 times
Reputation: 244
Quote:
Originally Posted by ExeterMedia View Post
Buying now I admit isn't quite a deal as 2009-2012 was, but those times will never, ever be back. I wish things were different and things were more affordable, but that's not in the interest of those who control policy.[/i]
You cannot have an investor driven cash buyer market...that is severely dysfunctional and it may work in the short term but in the long term this type of market will crash as it's not sustainable.

The market needs organic demand especially at the first time buyer segment. First time buyers are priced out in order of magnitude right now since the segment which should be at 3x or so median income (which is around $75k in Orange county) is 6-8 times currently.

I am not saying that things are going to come down immediately, what I am saying is that eventually things have to revert to mean, it may take 3 or 4 more years but it will happen. Interest rates will rise eventually, the fed will have to stop stimulus and prices will have to correct.

Investor psychology dictates that when prices reach a particular level amid a rising interest rate environment where there are better yields elsewhere than rental properties they will be very tempted to cash out and put their capital somewhere else. This suddenly creates a surge of supply and a downward spiral of prices. This causes further urgency to sell and get out of the market before prices fall further.

In addition there is another huge wildcard in all of this. There is no track record of these investors being landlords and this whole bet that they have taken to be in the rental business may be a huge flop. Being a landlord and collecting fat rents may seem like a great idea on paper but the overheads and market risk may be hugely underestimated... just like the investors thought that subprime mortgages were a sure thing, investors blinded by greed have made ridiculously poor choices in the past there is not reason to believe that their choices are going to pan out this time around.
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Old 12-27-2013, 02:19 PM
 
Location: Dana Point
1,224 posts, read 487,677 times
Reputation: 628
Quote:
Originally Posted by redrocket2 View Post
The market needs organic demand especially at the first time buyer segment. First time buyers are priced out in order of magnitude right now since the segment which should be at 3x or so median income (which is around $75k in Orange county) is 6-8 times currently.
No, it doesn't. This hasn't been the case in coastal OC for decades (Newport Beach, Laguna Beach, or Dana Point, etc). Median income is a horrible indicator for home prices in areas like this because people are buying homes with large amounts of cash. You can throw Irvine onto that list now as well. First time buyers do not buy SFHs in those markets. They go buy a house in Corona, Riverside, Rancho Cucamonga, Fontana, etc.

For instance according to census data, 3x the median household income (your measure) would be around $290,000 in Laguna Beach.
Laguna Beach (city) QuickFacts from the US Census Bureau

When was the last time you could buy a SFH in Laguna Beach for $300,000 and below? Maybe 1982? 1983?

Take a look at this graph:



Do you think people in 1986, 1996, and 1999 were saying the same things you were saying now?

Places change over time. Sorry to say, but housing prices in places like Manhattan, South Beach SF, Richmond SF, Nob Hill, Russian Hill, Cupertino, Los Gatos, West LA, San Marino, South Pasadena, and Coastal OC will never be determined by "median incomes". Too many people want to move there, and there isn't enough supply to satisfy all of that demand.

As for the more "normal" areas of OC, as long as rents continue to skyrocket in the OC, that will provide a stable floor for home prices.

2009 to 2012 was a very unique time where literally the third largest bank in the U.S failed because of how dire the economic situation was in the U.S. People should have bought then. That was a very small window were rent vs buy ratios were skewed heavily in favor of buying. Now, the ratio has evened out a bit, but rents will always be a floor for housing prices.

Quote:
In addition there is another huge wildcard in all of this. There is no track record of these investors being landlords and this whole bet that they have taken to be in the rental business may be a huge flop. Being a landlord and collecting fat rents may seem like a great idea on paper but the overheads and market risk may be hugely underestimated... just like the investors thought that subprime mortgages were a sure thing, investors blinded by greed have made ridiculously poor choices in the past there is not reason to believe that their choices are going to pan out this time around.
It's literally nothing like subprime mortgages. Subprime mortgages were speculative products that literally had nothing behind them except the promise of someone to pay back who usually had little income or no net worth. These homes are being rented to people who NEED somewhere to live, plain and simple. Builders are not building new homes, new housing starts are anemic. It's simply too expensive to build SFH housing in OC now because of land prices without jacking up prices to compensate (i.e - Irvine Company Homes). People keep coming to OC, and California keeps getting more and more people. Since 1993, Orange County has gotten over 700,000 new people. That's nearly the entire population of current day San Francisco, and OC isn't a huge place. Back in 1993, OC was already getting crowded in many areas.

In business there are few things better than a product for which there is high demand which grows with time, with very low supply that gets smaller and smaller over time, which you control. Just ask Donald Bren.

Take January to April 2012 for example. You could get a 3-4 bedroom home in a place like Aliso Viejo for around $450,000. Based on the interest rate at that time, at 20% down, your PITI would be around $2,100. With the interest and tax write offs, your actual out of pocket would be closer to $1,800!

I challenge you to find a 3-4 bedroom single family home in Aliso Viejo that you can rent right now for $1,800 to $1,900. You won't find it. It doesn't exist!

Also Blackstone is highly profitable, enough so that they spent an additional $2.5 billion on procuring rental properties over what they spent last year doing the same thing:
Blackstone Rushes $2.5 Billion Purchase as Homes Rise - Bloomberg

They have probably slowed down a bit since housing prices have jumped enough to make rent-vs-buy ratios more even, but that's the important part people keep forgetting. Rent-vs-buy does matter. People have to live somewhere.

Like I said, I wish it wasn't like that, but eventually places change and they get gentrified to some extent. The OC, especially South OC is becoming like this. A lot of people being priced out of South OC are moving more inland, to Riverside County, and the Inland Empire. This just didn't start recently either, it's been going on for a while now.

Last edited by ExeterMedia; 12-27-2013 at 02:46 PM..
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Old 12-28-2013, 09:54 AM
 
Location: Aliso Viejo, Orange County, CA
2,511 posts, read 2,189,425 times
Reputation: 1675
Quote:
Originally Posted by ExeterMedia View Post

Take January to April 2012 for example. You could get a 3-4 bedroom home in a place like Aliso Viejo for around $450,000. Based on the interest rate at that time, at 20% down, your PITI would be around $2,100. With the interest and tax write offs, your actual out of pocket would be closer to $1,800!

I challenge you to find a 3-4 bedroom single family home in Aliso Viejo that you can rent right now for $1,800 to $1,900. You won't find it. It doesn't exist!
Aliso Viejo has a very limited number of single family residences, and most homes in the market are actually condos/townhouses.

Still, it is interesting how things change. I just checked Redfin and there are 9 new listings (30 days or less) for SFR's in Aliso Viejo. Since the El Reposa and Nutcracker Lane listings are actually condos, eliminating these leaves 7 new SFRs listings.

The current (30 days and under) average list price for an unattached single family residence in Aliso Viejo is now $949,970.
Real Estate Search | Redfin

According to Redfin, the very low November housing inventory in AV is said to be down 7% from October 2013, but up 74% from November 2012; and sale-to-list is 99 percent. So, houses are moving here.
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Old 12-29-2013, 03:32 PM
 
Location: San Diego
306 posts, read 198,920 times
Reputation: 244
Quote:
Originally Posted by ExeterMedia View Post
For instance according to census data, 3x the median household income (your measure) would be around $290,000 in Laguna Beach.
Laguna Beach (city) QuickFacts from the US Census Bureau
Disagree. Median income multiplier has always been a good indicator in the past 40 years prior to the last bubble. Laguna Beach, Newport beach and other coastal "slivers" of land are outliers and using those cities is an example for what is happening in the entire county is seriously flawed. We are talking about a county wide median here which represents most middle class neighborhoods comprising of a mix of blue and white collar workers.

A 1500 sqft single family home in Buena Park now costs $475,000, that's what my friend's house is appraised for now (he bought it in 2012 for $350,000). Buena Park is a solidly blue collar neighborhood, most of the residents there are not high net worth individuals and households don't earn very much here. In addition nobody is racing with buckets of cash to buy in Buena Park because it is such a great amazing place to live. If people are buying there with cash it's mostly speculators trying to make a quick buck by flipping or betting on rental income.
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Old 12-30-2013, 01:45 AM
 
Location: Newport Beach
41 posts, read 18,887 times
Reputation: 23
It is true that downtrend is still continued even by the end of the year. Those who are looking forward to buying a real estate then i would say it is the best time to go for investment, which will give desired profit in years to come.
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Old 12-30-2013, 02:16 AM
 
Location: Dana Point
1,224 posts, read 487,677 times
Reputation: 628
Quote:
Originally Posted by redrocket2 View Post
Disagree. Median income multiplier has always been a good indicator in the past 40 years prior to the last bubble. Laguna Beach, Newport beach and other coastal "slivers" of land are outliers and using those cities is an example for what is happening in the entire county is seriously flawed. We are talking about a county wide median here which represents most middle class neighborhoods comprising of a mix of blue and white collar workers.

A 1500 sqft single family home in Buena Park now costs $475,000, that's what my friend's house is appraised for now (he bought it in 2012 for $350,000). Buena Park is a solidly blue collar neighborhood, most of the residents there are not high net worth individuals and households don't earn very much here. In addition nobody is racing with buckets of cash to buy in Buena Park because it is such a great amazing place to live. If people are buying there with cash it's mostly speculators trying to make a quick buck by flipping or betting on rental income.
A "good indicator" usually implies there is some accuracy. Can you name one city where 3x median income actually works, or has worked in the past 20 years? It doesn't work for coastal OC and it doesn't work for inland OC. For crying out loud, even in your example of Buena Park, it fails miserably. Buena Park isn't the most desirable area of OC but it's a good city for most, it's solidly middle class, lower than normal crime, but guess what? Your 3x median income theory doesn't pan out there either. It doesn't work for Santa Ana, Westminster, Garden Grove, Buena Park, Fullerton, Yorba Linda, or Placentia. Seriously, have you even looked at the stats? How many cities does 3x median income work for? When was the last time that it did?

Here are the facts, not anecdotal "my friend, his friend, her friend" stories. According to Redfin the median list price of a home in Buena Park is hovering near $470,000.

According to the latest census data, 3x the median household income in Buena Park is approximately $193,000.
Buena Park (city) QuickFacts from the US Census Bureau

Do you see any 3/2 single family homes in Buena Park for under $200,000? Unless you have a time machine to go back to 1992 or 1993, it simply hasn't existed for over 20 years unless we're talking about a rehab fixer, or tear down.

But hey let's look at OC as a whole, maybe that will make your theory fit better, right?

According to the census, 3x median household income for OC is $227,000.
Orange County QuickFacts from the US Census Bureau

Even at the lowest point of the economic crash that began in 2008, the OC median listing price never went below $400,000 for SFHs.
Asking Prices and Inventory for Homes in Orange County California | Department of Numbers

So when has 3x median income actually been true in Orange County? According to the numbers I could find, that measurement stopped being accurate around 1986, back when Reagan was in the middle of his second term.
Median Home prices 1982 - 2008: Historical Median Home Sales Prices From 1982
Median Household Income OC 1959 - 1999: Median Income for Households and Families and Per Capita Income - 1959-1998

There are a couple of fundamental things you are missing which is why your analysis isn't adding up with your 3x median income theory.

1) Most people buy houses based on a monthly payment. The 3x median income measurement made sense when interest rates were 7-10%, and supply was plentiful, back in the 80s and 90s. Today with constrained supply, and 4% rates, it makes zero sense to use 3x median income as a measurement. Absolutely none.

2) OC is changing, and gentrifying. More and more people are coming, and the amount of houses isn't increasing to meet demand. Just look at the number of housing starts in OC. It's anemic. The people who come here have to live somewhere. They rent or they buy, but in either case, unless an equal amount of supply balances the amount of demand, prices will go up, this is micro econ 101. Additionally, rents will always be a solid price floor for home prices as I covered in my last post.

Regardless, you can keep believing that the 3x median income measure is going to become magically true in OC when it hasn't been true for over 20 years. I have a lot of friends who were saying the same things in 2009-2012, and now they are wishing they would have listened and simply done a rent vs buy comparison so they wouldn't be looking for homes in 2013.

Last edited by ExeterMedia; 12-30-2013 at 02:38 AM..
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