When I first began writing about the housing bubble in early 2007, I believed prices would crash because the cost of ownership using conventional financing far exceeded people’s ability to pay. I predicted prices would fall about 40% as rents and incomes increased and prices went down. I originally predicted a bottom around $425,000 in 2012 (see below).
Assuming prices have bottomed, the lowest tick was $470,000 in March of 2012. The nominal price decline was not as bad as I predicted staying about 10% above my predicted number. However, my reasoning was based on the total cost of ownership, and that declined much more than 40%. In fact, in Irvine, the cost of ownership fell from $3,800 in June of 2006 to $1,750 today. That’s a whopping 54% decline. In reality, the cost of ownership overshot to the downside, but it didn’t happen by dropping nominal prices, the dramatic drop in the cost of ownership occurred because interest rates declined from 6.68% to 3.65% during the same period.
If interest rates cut in half and if prices drop 30%, the cost of ownership plummets. Below is a comparison of the cost of ownership in 2006 versus 2012 based on the median home price and prevailing interest rate.
2006 cost of ownership
$745,000 ………. Purchase Price
6/1/2006 ………. Purchase Date
Cost of Home Ownership
——————————————————————————
$745,000 …….. Asking Price
$149,000 ………… 20% Down Conventional
6.68% …………. Mortgage Interest Rate
30 ……………… Number of Years
$596,000 …….. Mortgage
$180,769 ………. Income Requirement
$3,838 ………… Monthly Mortgage Payment
$646 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$186 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$4,670 ………. Monthly Cash Outlays
($991) ………. Tax Savings
($520) ………. Equity Hidden in Payment
$429 ………….. Lost Income to Down Payment
$206 ………….. Maintenance and Replacement Reserves
============================================
$3,794 ………. Monthly Cost of Ownership June 2006
2012 cost of ownership
$500,000 ………. Purchase Price
6/1/2012 ………. Purchase Date
Cost of Home Ownership
——————————————————————————
$500,000 …….. Asking Price
$100,000 ………… 20% Down Conventional
3.65% …………. Mortgage Interest Rate
30 ……………… Number of Years
$400,000 …….. Mortgage
$92,445 ………. Income Requirement
$1,830 ………… Monthly Mortgage Payment
$433 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$125 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,388 ………. Monthly Cash Outlays
($289) ………. Tax Savings
($613) ………. Equity Hidden in Payment
$119 ………….. Lost Income to Down Payment
$145 ………….. Maintenance and Replacement Reserves
============================================
$1,751 ………. Monthly Cost of Ownership June 2012
($3,794 – $1,751) / $3,794 = 54% decline
Houses are more affordable than any time during the 00s.
The same math holds true for most areas in California. Orange County is actually 57% less expensive than it was in 2006. Riverside County is more than 60% less expensive, and some areas are more than 70% cheaper.
Much attention has been drawn to the lack of inventory as the driving force behind the recent strength in the housing market. And while its true distressed inventory is no longer pushing prices lower, it’s the unprecedented affordability from super low interest rates that allows buyers to raise their bids. If lenders keep withholding product from the market by allowing delinquent borrowers to squat, 2012 will be the nominal bottom, and prices may get pushed up higher as the market seeks a new equilibrium based on today’s borrower’s increased buying power. Lenders are determined to reflate the housing bubble, and they just might succeed in doing it.
Back on the market yet again
The former owner of today’s feature REO timed the market well. The bought at the bottom of the last cycle on 11/10/1997. They paid $222,500 using a $211,350 first mortgage and an $11,150 down payment. Off that tiny investment, they proceeded to pull out $306,000 in mortgage equity withdrawal over the ensuing 10 years.
These borrowers weren’t periodic HELOC abusers who were paying off yearly credit card bills. In fact, they were prudent up through 2005 when they refinanced with a $395,00 first mortgage. It appears that doubling of their mortgage debt was enough to push them over the Ponzi threshold requiring further cash infusions to make payments.
They got a $469,000 Option ARM on 1/30/2007, and they got another one for $517,500 on 7/27/2007. They stopped making payments, and the property was sent to auction on 10/21/2011 where the bank bought it for $488,750.
Proprietary OC Housing News home purchase analysis 
8 STAR THISTLE Irvine, CA 92604
$579,900 …….. Asking Price
$222,500 ………. Purchase Price
11/10/1997 ………. Purchase Date
$357,400 ………. Gross Gain (Loss)
($17,800) ………… Commissions and Costs at 8%
============================================
$339,600 ………. Net Gain (Loss)
============================================
160.6% ………. Gross Percent Change
152.6% ………. Net Percent Change
6.5% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$579,900 …….. Asking Price
$115,980 ………… 20% Down Conventional
3.67% …………. Mortgage Interest Rate
30 ……………… Number of Years
$463,920 …….. Mortgage
$113,421 ………. Income Requirement
$2,127 ………… Monthly Mortgage Payment
$503 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$145 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$155 ………… Homeowners Association Fees
============================================
$2,930 ………. Monthly Cash Outlays
($336) ………. Tax Savings
($709) ………. Equity Hidden in Payment
$140 ………….. Lost Income to Down Payment
$92 ………….. Maintenance and Replacement Reserves
============================================
$2,117 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,299 ………… Furnishing and Move In at 1% + $1,500
$7,299 ………… Closing Costs at 1% + $1,500
$4,639 ………… Interest Points
$115,980 ………… Down Payment
============================================
$135,217 ………. Total Cash Costs
$32,400 ………. Emergency Cash Reserves
============================================
$167,617 ………. Total Savings Needed
——————————————————————————————————————————————-
We're sorry, but we couldn't find MLS # S704798 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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$539,000 12 GOLD Blf |
0.41 miles 3 bd / 2 ba 1,686 Sq. Ft. |
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$659,000 3921 BLACKTHORN St |
0.46 miles 4 bd / 2.25 ba 1,897 Sq. Ft. |
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$648,888 3962 ASH St |
0.56 miles 4 bd / 2.25 ba 1,873 Sq. Ft. |
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$725,000 41 SONGSPARROW |
0.67 miles 4 bd / 2.5 ba 1,949 Sq. Ft. |
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$699,000 5051 BARKWOOD Ave |
0.8 miles 3 bd / 2.25 ba 1,920 Sq. Ft. |
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$610,000 5141 YEARLING Ave |
0.85 miles 3 bd / 2.75 ba 1,480 Sq. Ft. |
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$499,900 5132 GREENCAP Ave |
0.88 miles 3 bd / 2 ba 1,482 Sq. Ft. |
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$779,000 6 ORIOLE |
0.92 miles 4 bd / 2.5 ba 1,910 Sq. Ft. |
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$530,000 5181 DOANOKE Ave |
0.95 miles 3 bd / 2 ba 1,535 Sq. Ft. |
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$653,000 3541 EBOE St |
1 miles 4 bd / 2.5 ba 1,873 Sq. Ft. |
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18 Responses to “Monthly cost of home ownership down over 50% from 2006”
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Not one cent of the HELOC money got spent on the house, obviously.
Median income at 70k does not buy median house at 500k.
The median household income in Irvine, CA is just about $100,000, not $70,000.
Also only ~2/3 of housholds buy houses at all – one would think with some correlation with higher incomes. So I think people who buy a median house have above-median income.
Problem is, US wages are not indexed to inflation and the underlying assets have the 10yr treasury bond priced into the financial model.
And the yield on the 10-year US Treasury drops even lower. Are we really going under 3% for a 30-year fixed mortgage?
But I think we are running out of stupid refi tricks. I just refinanced my townhome into a 15-year loan. If I wanted to refinance again into 10-year (the goal being to reduce my mortgage time line) the new loan would have be at a 0% mortgage rate. Even at 0% my monthly payment would still be higher than new 15 year payment. My point, all the home owners that getting 15 years loans, they will not be able to really refinance again in future for additional savings.
Of course there are lot of people underwater loan owners that are trying to refi’s. However, even with BofA offering loan mods, they are not getting many takers.
Are we at the bottom of the reducing the monthly cost of home ownership?
I thought we were at the bottom of payment affordability when rates hit 4.5%. They are now at 3.65% and still falling. There is no telling if they will fall even more. The federal reserve will want to keep them low through the latest round of HAMP loan modifications, and unless the economy starts picking up, there aren’t many other opportunities to invest in.
Low rates are masking the greater contraction, both in real estate and the general economy. The ‘unless the economy starts picking up’ talk is fairly unrealistic.
We are piling on debt and seeing marginal increases in GDP, all of it inflationary. And they dub it ‘solution’
Nobody lends forever to an entity with such unsustainable policy. When the tide turns on interest rates, the pain will be felt. It may take a couple years, but that tide will certainly turn.
We are a nation with an overspending problem, very high interest rates are the only true solution. The longer we avoid dealing with it, the greater the pain and the higher rates will ultimately go.
Your decline forecast of 39% in nominal terms will probably be right on the money. These things are very hard to predict when they can dilute the economy.
Mike,
Why would you refinance a loan from a 30 year to a 15-year to a 10-year when the rates advantages are so minimum? The difference from a 30-year to a 15-year is only 0.5%-0.75%. After taxes that is a 0.35%-0.55% difference due to the mortgage interest write-off.
Obviously, I don’t know how much cash you have in the bank and in general terms, paying off debt is a smart move, but I would rather keep my 30-year mortgage and pay extra and have the flexibility to buy other positive cash flow properties etc. or possibly increase my rainy day fund. Especially in this economy, it is always good to have a rainy day fund, but for someone that pays off his mortgage in 10-years, I am sure you thought of that too. Kudos to you for not being like the government and not kicking the can down the road.
As far as rates go, I can’t see them increasing rates especially with us being at 102% Debt/GDP. Ben B. should play soccer, he’s an expert at kicking the can.
I went from a 20 year to 15 year loan. But I was paying 4.75% I refinanced too early last year. I couldn’t do a 10 year loan because the place only cash flow a little if I rented it out and it would have increase my issues qualifying for a new loan for a new purchase
I thought about the 30-year option, but I was worried I won’t be disciplined to pay the extra amount every month. Besides the 30 year loan you end up paying so much more interest over the life of the loan.
I also want to put 20% down on the next place (I hate PMI), but I want shop for a good deal without worrying about moving or selling while trying purchase a new place. Right now that’s just impossible, so I’ll hoard my cash.
I look at my current townhome as my future 1031 exchange into a duplex or something when we have a normal market again….in the 20′s.
At 102% maybe market forces will increase the US Treasury rates. Sort of what is like happening with Italy and Spain right now.
“At 102% maybe market forces will increase the US Treasury rates. Sort of what is like happening with Italy and Spain right now.”
In normal markets..this is correct, but the USD is the world reserve currency…so until they find anything new, it will always be a “safe” haven. Did anyone notice how the rates decreased when our credit rating was downgraded by S&P last year. That is like saying if you FICO score goes down…you get a better rate? Does not make sense.
I like your townhome idea. I recently convinced the wifey to hold off on our family home and move on positive cash flow rentals.
Redfin: Rising Demand, Falling Supply Driving Home Prices Up
Real estate broker Redfin released the June results of its Real-Time Home Price Tracker, showing home price increases in nearly all 19 major U.S. markets.
The tracker showed an average year-over-year price gain of 3 percent across all major markets and a monthly gain of 2.6 percent. Sales volumes also rose year-over-year (a 7.4 percent increase) but fell 1.1 percent month-over-month. Overall inventory levels declined, falling 25.3 percent from June 2011 and 2.4 percent from May this year.
The price data, combined with an earlier Redfin report that showed demand broadening, points to a strengthening market, said Redfin CEO Glenn Kelman. Kelman expects prices to continue to rise, but said he’s interested to see what happens next.
“Prices in June rose year over year for the second straight month, but the true test lies ahead,” said Kelman. “For the first time in five years, we’re seeing sellers enter the market to take advantage of rising demand, not just out of sheer necessity. We thus expect listing prices to increase, even as employment remains weak and Europe’s debt crisis continues. In competitive markets like the San Francisco Bay Area, buyers will likely rise to the bait. Elsewhere the market may falter.”
Out of the 19 markets served by Redfin, 16 showed annual price increases, with Phoenix posting the greatest gains (28.7 percent, the only double-digit year-over-year increase in all markets). Of the markets that posted decreases, Long Island suffered the most (a 4.4 percent drop). In month-over-month data, 16 markets showed price increases-Portland and California’s Inland Empire stayed flat, and Austin fell 0.1 percent.
Additionally, the tracker showed that homeowners who listed their homes sold very quickly, with all single-family homes listed in the first three weeks of June finding a buyer within two weeks of debut. The San Jose market actually saw 52.5 percent of homes selling within that short time frame.
While sales occurred quickly, the number of closings grew only modestly since last year, owing partly to lack of inventory. Closings of single-family homes increased 4.3 percent since last year. The biggest drops in sales volume were found in places where inventory was in shortest supply: Sacramento, San Jose, the Inland Empire, and Denver.
It would take unbounded naivety to think OC housing has turned the corner…..
Owners trying to sell their OC businesses in the second quarter dropped their asking price 10.3% YoY.
*revenue down YoY
*cash flow down YoY
*sold prices down YoY
http://jan.ocregister.com/2012/07/10/report-oc-biz-sellers-drop-asking-price-10/80166/
We need to reflate the housing Ponzi scheme so people can flood the local economy with housing ATM money. That would fix the problem… not.
The Libor scandal is becoming this year’s Robo-signing scandal.
States weighing Libor scandal suits
By Chris Isidore and Logan Burruss @CNNMoney July 16, 2012: 1:07 PM ET
NEW YORK (CNNMoney) — The world’s biggest banks, already under scrutiny from U.S. and U.K. regulators in the Libor rate-setting scandal, could soon face a flood of civil suits from numerous states.
Spokespeople for the New York and Connecticut attorneys general confirmed Monday that their offices have conducted a joint investigation into the Libor scandal for several months.
“The attorneys general will follow the evidence wherever it leads and with the goal of providing restitution to state agencies, municipalities, school districts and not-for-profit entities nationwide that may have been harmed by any illegal conduct,” said Jaclyn Falkowski, spokeswoman for Connecticut attorney general George Jepsen.
Officials with the Massachusetts and Florida attorneys general say their offices are also looking into allegations, although the Florida probe is not yet considered a formal investigation.
The scandal concerning major banks misreporting the rates they pay to borrow from other banks broke into the open last month when Barclays (BCS) reached a settlement with U.S. and U.K. authorities to pay$453 million in penalties. Barclays admitted that its employees regularly manipulated Libor between 2007 and 2009, and that it was done at the request of traders at the bank and other banks. .
Banks face billions more in Libor losses
Barclays also admitted its employees conspired with other banks to manipulate the rate. Since then many of the world’s major banks, including Deutsche Bank (DB), Royal Bank of Scotland (RBS), Credit Suisse (CS), Citigroup (C, Fortune 500), UBS (UBS) and JPMorgan Chase (JPM, Fortune 500) have disclosed that they are being investigated.
Libor is a benchmark rate used to set the interest paid on an estimated $10 trillion in loans worldwide. But it is also used in the trading of about $350 trillion in derivatives.
[...] I noted, Monthly cost of home ownership down over 50% from 2006. BUSTED CONVEYOR [...]
[...] bullish statements, but right now, those statements are true. As I pointed out earlier this week, monthly cost of home ownership down over 50% from 2006. Prices are below rental parity in most markets, and we all know how rare that is. Sure, there are [...]