Each month I publish the OCHN Market Newsletter. It provides the most detailed and accurate view of the housing market available without the realtor spin. I believe potential homebuyers should have the best information possible to make reasonable and rational decisions regarding the purchase of a home. Despite how bearish I have been, my strictly mechanical reports have been issuing strong buy signals since last fall. Now that house prices have turned positive, rents are still going up, interest rates are trending down, affordability is at record highs, and houses are undervalued by historic norms, the report is very bullish. And as I noted recently, I am turning bullish too.
Notice the downside overshoot in the chart below. It may be artificially induced by low interest rates, but it is a real phenomenon all the same. Anyone buying today is getting a bargain relative to the long-term cost of ownership in Orange County. And as I noted in an earlier post, the monthly cost of home ownership down over 50% from 2006.
The monthly report focuses on the valuation of cities and certain zip codes relative to historic norms. Although many cities are still priced well above rental parity, they are undervalued compared to the last period of price stability from 1993 to 1999.
This has sent my ratings solidly into the green.
And as I demonstrated in a post in early September, these ratings are seldom green. (please see OC housing market ratings and historic city values.)
Anyone using the OCHN rating system would have avoided buying when they were likely to end up underwater. The system even warned about buying in 2009 when everyone else was calling the bottom. Since interest rates have declined along with prices and rents have gone up, affordability is at record highs, and the OCHN rating system is issuing a strong buy signal. The last such strong buy signal was in 1998, the bottom of the last housing bust.
Anyone remember Dennis Miller?
Do any of you remember Dennis Miller? Perhaps some of you still listen to his radio show. Dennis Miller became famous as a liberal who would go on acerbic rants. I used to enjoy watching his show back in the day. Then suddenly, and without much warning, he turned conservative. It was very jarring to his audience, and he has faded from view every since. Am I the next Dennis Miller?
I became known as a housing bear. I like to think I am an impartial market observer who was bearish when the conditions were bearish; however, I’m sure many don’t see me that way. Many of you may come here to get a dose of bearish market news, and my recent change of opinion may be jarring to you. For as much as I would like to please all my readers, I must be true to who I am and my view of the housing market. Although I still see many reasons to be concerned about the future of our housing market — and I will continue to write cautionary posts — I see more reasons to buy than I see reasons to wait. As I always have, I will continue to call ‘em like I see ‘em.
Perhaps I am just late to the party. I spent most of the summer criticizing the chorus of bottom callers. Perhaps I was wrong. It took Bernanke’s promise of unlimited housing stimulus to finally convert me. Perhaps it is my cautious nature, but seeing the bottom in the rear-view mirror and having sufficient reason to believe it will endure finally won me over.
I don’t know how this will effect my blog posts. Only time will tell. I will continue to focus on housing and post my interpretations of the most recent housing news and the occasional in-depth analysis post. We’ve entered a new era. The bust is over, and the recovery has begun.
The former owners of today’s featured property went Ponzi, but not to the same degree many in their circumstances did. They increased their $174,193 mortgage from 1998 to $288,500 in 2006. It likely appraised for much more than $288,500 at the peak. In fact, Fannie Mae thinks they can sell the house today for $368,900 and turn a $100,000 profit from when they acquired it at auction in January. It does make you see why the banks are not in a hurry to liquidate. Once prices start going up, the longer they wait, the more they recover.
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Proprietary OC Housing News home purchase analysis
13661 EUCLID St Garden Grove, CA 92843
$368,900 …….. Asking Price
$180,000 ………. Purchase Price
9/24/1998 ………. Purchase Date
$188,900 ………. Gross Gain (Loss)
($14,400) ………… Commissions and Costs at 8%
============================================
$174,500 ………. Net Gain (Loss)
============================================
104.9% ………. Gross Percent Change
96.9% ………. Net Percent Change
5.1% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$368,900 …….. Asking Price
$12,912 ………… 3.5% Down FHA Financing
3.38% …………. Mortgage Interest Rate
30 ……………… Number of Years
$355,989 …….. Mortgage
$91,260 ………. Income Requirement
$1,575 ………… Monthly Mortgage Payment
$320 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$92 ………… Homeowners Insurance at 0.3%
$371 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,358 ………. Monthly Cash Outlays
($231) ………. Tax Savings
($572) ………. Equity Hidden in Payment
$13 ………….. Lost Income to Down Payment
$112 ………….. Maintenance and Replacement Reserves
============================================
$1,680 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,189 ………… Furnishing and Move In at 1% + $1,500
$5,189 ………… Closing Costs at 1% + $1,500
$3,560 ………… Interest Points
$12,912 ………… Down Payment
============================================
$26,849 ………. Total Cash Costs
$25,700 ………. Emergency Cash Reserves
============================================
$52,549 ………. Total Savings Needed
The property above is available for sale on the MLS.
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36 Responses to “Despite rising prices, Orange County still more than 20% undervalued”
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It would take at least $50,000 to correct and remove all the ugliness that’s been added to this cramped, dingy little house. I’d deduct $100,000 to compensate for the time and trouble in addition to the materials required to make this place halfway livable. The price for a “comparable” isn’t really relevant if the comp is attractive and in good condition.
A house this small with 5 bedrooms is probably occupied by immigrants. It’s not uncommon here to see multiple families or multiple generations sharing a house, particularly in these low-end neighborhoods. If someone spent $100,000 fixing it up, it would outshine the surrounding properties.
I have noticed a lot more inventory coming up in Las Vegas and Asking prices are being reduced great news for buyers in that market.
Actually, since price depreciation is not factored-in as an additional monthly cost vs renting, OC remains overvalued.
Since prices are going up now, is it reasonable to factor in price depreciation? It certainly was appropriate from 2007 to 2011, but how much further could prices fall and for how long?
Some OC prices are up, but not across all tiers; still seeing YoY re-appraisals lower in many cases. Also, since cheap money is flowing directly into speculation, volatility will remain sky high—the death knell for price stability.
Better to be safe than sorry, no?
I think prices will be very volatile over the next year. The low inventory is causing some to make stupid bids for properties. Any are that sees a release of inventory is prone to air pockets, and if overall inventory levels pick up more than demand, the whole market could see another downward adjustment.
The cheap money is now so cheap that good deals are at least possible. Active buyers need to be patient to not overpay. I could easily foresee people overpaying today only to see deals next year in their neighborhood for 5% or 10% less. But any future drops will likely be air pockets caused by a few too many properties being released while buyer demand is still weak.
We stopped by Laguna Altura yesterday (405 & 133). The biggest homes are Toscana and they’re sold out at these prices:
Plan 1:
2,806 sq ft
$1m-$1.3m
Plan 2:
2,947 sq ft
$1.2m-$1.4m
Plan 3:
3,123 sq ft
$1.2m-$1.5m
These homes are square boxes with no front yard (literally 5′ from sidewalk). The backyards are more like thin rectangles (50′ by 15′). Crazy…
The Irvine Company is really doing well now that nothing else is available on the MLS. The move-up buyers who didn’t spend their bubble equity are cashing out now that first-time buyers can finance such large sums. The number of move-up buyers is still small relative to the size of the market, but as first-time buyers get more active, the move up market will slowly return.
IR: Since the current price model is based on the continuance of negative real rates, increased leverage + the market is essentially inorganic (aka kabuki theater), and the fact that OC wages are not indexed to inflation …smart money will anticipate OC home prices to fall another 10-15% over the next 5yrs.
Thus, factoring-in an avg 2.5% depreciation rate per year on a $550K home (for example) = $13,750. Divide that sum by 12 months equates to an additional monthly cost to own of $1145.83 vs renting.
Now, let’s get those rental parity models updated ‘stat’ to include a price depreciation element
I would not pay any premium to live in this illegal infested overtaxed dump. The middle class are abandoning California because it does not justify the cost anymore.The negatives far outweigh the positives.
California still has a lot of good paying jobs. Unfortunately, it has such high house prices that most of that added income goes toward housing payments. Without mortgage equity withdrawal, most Californians would enjoy less disposable income than residents of most other states.
There are two types of people that do well in California – the graduate degree professionals and the public employees. If you’re outside of those two groups, it’s rough here.
I always find that odd about Irvine. Whenever you see a tradesman who works in Irvine, you know they likely don’t live here. The maids and maintenance workers all come from the outside, and retail workers are high school or collage students.
The Great California Exodus:
California has been sending more people to other American states than it receives from them. Since 1990, the state has lost nearly 3.4 million residents through this migration.
http://www.manhattan-institute.org/html/cr_71.htm#.UHLepaB173B
Asking Prices Up, Rent Prices Rising Faster than Home Prices: Trulia
If current trends persist, this year may be the first year since 2006 the housing market records an annual price increase, according to a report released Thursday by Trulia.
At the current rate of change, the year could close with a 4 percent price annual price increase.
Asking prices rose 2.5 percent year-over-year in September. When foreclosure sales are excluded, prices were up 3.5 percent.
Month-over-month, asking prices were up 0.5 percent in September.
“The timing of the housing price rebound couldn’t be better for President Obama,” said Jed Kolko, chief economist at Trulia.
He points out that asking prices are rising in most swing states, which will help Obama’s campaign.
North Carolina is the only swing state to record a year-over-year price decline in September, and that was less than a 1 percent decline.
Nevada posted the greatest increase among the swing states, 7 percent, closely followed by Florida with a 6.9 percent increase.
Colorado posted a 5.5 percent increase, Iowa, a 3.2 percent rise, Missouri a 2.4 percent gain, and Virginia posted a slight 0.4 percent increase.
Meanwhile, rent prices not only continue to rise but also are rising faster than home prices. Trulia recorded a 4.8 percent rise in rental prices year-over-year in September.
In a survey of the 25 largest rental markets, Trulia found Houston and Miami experienced the steepest price gains year-over-year in September with rent in Houston rising 15.9 percent and rent in Miami rising 10.4 percent.
On the other hand, San Francisco, which recorded a 14.5 percent rent price gain in June, posted a 7.2 percent gain in September.
Really Trulia? they are the digital NAR. Trulia is just a realtards digital business card and tool so they dont have to advertise on shopping carts. Dont trus it. Everything on it is overpriced.
I think it was Trulia that said even San Francisco was below rental parity. LOL!
Unemployment falls to 44-month low
Experts across the country wasted no time in responding to Friday’s unemployment report, and the responses ranged from celebration to healthy skepticism.
According to a report from the Bureau of Labor Statistics (BLS), the unemployment rate in September fell to a 44-month low of 7.8 percent.
The White House pointed to the data as a sign of a recovering economy. In an interview with Bloomberg Television, Alan Krueger, chairman of the White House Council of Economic Advisors, said that while “there’s a lot more work to be done … we are digging our way out of a very deep hole.”
Republican presidential candidate Mitt Romney, on the other hand, downplayed the significance of the September data, criticizing “the results of President Obama’s failed policies.”
“This is not what a real recovery looks like,” Romney said in a statement. “If not for all the people who have simply dropped out of the labor force, the real unemployment rate would be closer to 11 percent.”
The elevated unemployment rate has plagued the president’s administration for most its tenure and become a focal point for pundits and political rivals. A rise or fall in unemployment in the final months leading up to November’s election may prove to be a turning point for undecided voters.
Capital Economics focused its view less on politics and more on its own breakdown of the data, noting that while the growth was modest, the overall report was encouraging.
“This means the unemployment rate has now fallen by 0.5 percent in two months,” wrote Paul Ashworth, chief U.S. economist. “That probably doesn’t qualify as the ‘substantial’ improvement the Fed is looking for, but it would do in the unlikely event that this rate of decline continued.”
Meanwhile, as pundits and online commentators clashed over the validity of the report and the possibility of “cooked numbers” leading up to an election, Wall Street had its own reaction.
The S&P 500 Index— stood on the back of BLS’ report to rise to its highest closing level since 2007. Meanwhile, Bank of America and Citi led advances among financial companies-jumping at least 1.1 percent, Bloomberg noted-while the Philadelphia Housing Sector Index showed strong gains in construction and residential housing companies.
While stocks jump around as investors place bets on employment, mortgage professionals and borrowers may be keeping their eyes on mortgage rates. With BLS’ report indicating a somewhat healthier (though still weak) employment situation, it’s unclear so far how the market will react.
Low paying part time jobs are replacing the higher paying full time jobs that were lost. I’ve spoken to many people that are working two 25-30 hour a week jobs because so few are looking for full time employees.
We are literally going to be Japan with 4.5% UE and 40% of our workforce only able to find part time work.
By refinancing out all the good loans, the loans remaining in old RMBS pools are showing higher delinquency rates.
Pre-2005 Vintages More Vulnerable to Delinquency: Fitch
Performance on vintage prime residential mortgage-backed securities (RMBS) continues to degrade, Fitch Ratings revealed in a report.
The ratings agency announced a downgrade on 6 percent of its rated prime RMBS classes, many of which fall into the pre-2005 category. Fitch attributed the downgrade to increased delinquency rates in certain pools.
“The deterioration in performance in pre-2005 RMBS has been driven by adverse selection in the small remaining mortgage pools,” Fitch said in a release. “Record-low mortgage rates driven by the Federal Reserve and sustained by economic uncertainty have led most pre-2005 borrowers to refinance. Consequently, the remaining mortgage pools are increasingly concentrated with borrowers unable to refinance due to credit obstacles.”
As delinquency rates increase in older prime pools, performance has improved for Alt-A, subprime, and more recent vintage prime pools. The rate of remaining pre-2005 borrowers rolling into delinquency is 1.5 times higher today than three years ago, and total delinquency is roughly 1.3 times higher than 2011 levels.
Fitch placed 15 percent of all rated prime RMBS classes on Rating Watch Negative in September, citing much of the same data. As of the most recent review, approximately 14 percent of all classes remain on negative watch and are at risk for a further 1-2 rating category revision.
IR, thanks for calling em like you see em. I agree that Bernanke announcement of QE3 and unlimited housing support was the straw that broke the camel’s back. Purely crunching the numbers, it is a good time to buy in many price points (especially sub 600K). If buying with 20% down has a cheaper monthly payment than an equivalent rental, it’s time for most people to get off the fence. As we have all witnessed, it’s much better to be an “owner” than renter in our society. Prices should have been allowed to fall further, but they weren’t allowed to. Keep on callin em like you see em!
I refuse to let the power be taken away from me and will not be getting off the fence. I choose to leave the state instead so any amount of arm twisting by the Fed will not work.
0% interest rates literally force people out of savings to chase higher returns = reflating the housing bubble.
Cash is being forced into real estate when interest rates are at all time lows and prices are artificially high as a result. Those using financing can borrow SIGNIFICANTLY more money and bid prices higher.
Cash should be waiting for 20% interest rates to come in and mop up the blood running in the streets, as the saying goes. FED is not letting this happen and is creating massive distortion in market as a result. 1% fed rates caused the housing bubble and 2008. 0% fed rates is inflating the bond bubble, reflatiing the housing bubble, and the fallout is going to dwarf, yes DWARF, 2008.
Anyone calling recovery is going to be mistaken.
IR,
I don’t see you going ‘Dennis Miller’ on us anytime soon and the reason is simple: you show your work. You don’t just spout crap, you tell us what you think and show us what makes you think that way. That shows respect for your audience, thank you. Also another thing to keep you honest is your “astute observers” who don’t hesitate to call bs…
Very true. Thanks for the feedback, and thanks for your continued readership.
I’m going to have to step out and say this is the mother of all head fakes.
Printing money to reflate the housing bubble and stocks will have disastrous consequences. This is not a ‘get out of jail free card’.
You guys are missing the forest (the economy) for the trees (nominal real estate prices). Recovery this is not.
They may be able to print nominal prices higher: gas, cattle, corn, gold, silver, etc.
Is IR unable to call this for what it really is: a smoke and mirrors recovery? What about the bigger bubble currently inflating – the bond bubble?
I don’t think you are wrong at all. I think inflation adjusted home prices will likely fall further because at some point, we are going to have a lot of inflation from printing all this money.
I think Bernanke is making a conscious choice between nominal price stability and inflation. He is apparently willing to accept the consequences of inflation in order to keep nominal house prices from falling further. I see no other way to interpret his decision to buy unlimited mortgage backed securities indefinitely.
I dunno about inflation these days, even though I’ve heard the inflation hawks screaming “Doom is around the corner” these last 5+ years it’s clearly not there in the gummint bond markets –
Maturity Yield Yesterday Last Week Last Month
3 Month 0.08 0.08 0.06 0.08
6 Month 0.12 0.12 0.12 0.12
2 Year 0.25 0.25 0.23 0.25
3 Year 0.34 0.34 0.30 0.32
5 Year 0.66 0.67 0.61 0.64
10 Year 1.71 1.74 1.62 1.67
30 Year 2.92 2.97 2.81 2.82
& it sure ain’t there in the interest my bank pays me. (BTW I had interest-bearing accounts back in 1977, I know what inflation looks like) I’ve been reading quite a bit about Modern Money Theory the last few years and IMHO the results that theory gets seem to match today’s reality (at least the slice that I see) better than any other economic theories I know about. There will certainly be price & commodity inflation but wage inflation? Hardly. I’ve found some good links which I can supply but in a nutshell, trying to manage a floating currency using gold-standard tools is highly problematic at best.
buying in 2009 was probably the best time.
prices were lower back then, and the ability to refinance at today’s lower rates with 2009′s lower prices would mean better affordability.
having said that, 2012 is not a bad time to buy, assuming you can find something you like with this low inventory.
i hate this mutant RE market. prices are juiced up by the government.
doctorhousingbubble had a good article yesterday.
it shows payments are about 49% of what they were at the peak ($1138/month in 2006 vs $557/month today). in large part due to lower rates.
despite this incredible increase in affordability, sales are still below average. makes you wonder why they are still low.
“makes you wonder why they are still low.”
It doesn’t matter how low rates are if all you have is a shitty part time job. That’s the problem. All these new jobs are low paying part time positions.
Plus, even those who find good new jobs still have to wait to buy a house. Lenders demand some employment history, and many who were unemployed for a long time have debt left over from surviving the recession.
When I first started posting here, el O encouraged me to “stick around” as I might learn something from the blogger. That was a year ago. Now it would seem the tables have turned, and it’s el O who will hopefully learn something from our blogger. It’s ok to let go of your entrenched position if the facts on the ground have changed.
I went from being a bear in ’07-08 to a bull starting in late ’09. The tax credit that expired in April 2010 made me bearish to start that year, and I advised others to wait until that gunk was out of the system before entering the market. I followed my own advice and purchased in Fall 2010 with very little competition. I suppose a better deal could have been had in 2011 if you could find something worth buying, but I was happy to be purchasing for cheaper than I could rent.
IR – One of the reasons I didn’t participate on IHB was that I perceived you to be a permabear. I’m glad to see that I was wrong about that. (The other reason was that Irvine doesn’t especially interest me, but you have remedied that as well.)
Very interesting graph. The up-leg doesn’t happen until all the down is washed out of the system. And the trend is still down. So its not time to jump in yet for appreciation. Comparing this lull to the one in ’98, it was OK to wait a few more years after the bottom was well defined and still do well up untill 2004.
Why is San Juan Capistrano blazing the path this time? Note the number of 10′s this time around. Does the 2 and 3 year lead time of some of the communities mean the belt of green will be thicker once it finally appears?
The cosmetic improvements made by flippers makes me mad. For example, a house my girlfriend bid on was bought cash by a speculator. Thats fine, and I told her it’d be 30k to fix the driveway, etc etc anyway but 2 mo’s later lo and behold here it is back on the market 75k more and the driveway’s still cracked a/c still r-22 and roof shows busted ridge shingles, but inside’s pretty. What the hell? 30k was not invested. Um, was short sale.
I say market still trending down, she’s not so sure. But it is. Now I’m watching some of these properties we’ve appraised together and we’ll see who was smarter. If they sell and make the 75k, bless their heart. But it is past season already and I know there is still loads of shadow inventory.
Thank you IR! Love your data.
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