California has a long history of real estate bubbles. Cycles of boom and bust range back to the gold rush in the nineteenth century. Over the last forty years, California has experienced three major real estate bubbles. Each of them had different causes and sprung forth from different circumstances, but they all shared the common cycle of irrational exuberance leading to a boom followed by a crash back to fundamental values of rental parity.
Historic Valuations by city
Over the last month, I commissioned Brian Nadel (thanks, Brian) to download MLS rental data back to 2000. From other sources, I extrapolated rental rates back to 1988. I also purchased the resale data back to 1988 from DataQuick. From these various sources, I calculated rental parity for each OC city back to 1988. I compared these values to the median resale price to determine the historic relationship between rental parity and the median. In particular, I focused on the period from 1993 t0 1999 which was the last stable period between housing bubbles. By establishing the relationship between rental parity and the median during this period, I have a benchmark to where prices should bottom in the aftermath of our most recent housing bubble. Below is the result of this analysis.
What I found most interesting in this study was how inflated the beach communities have always been. I knew these communities were never at rental parity, but I didn’t realize some of them were more than 50% inflated even at the bottom of the last bust. In fact, some of these communities which are still inflated are less inflated than ever before. For example, Coto de Caza is trading for near rental parity today, an over 50% reduction from its normal level of price inflation. In other words, Coto de Caza is a relative bargain today.
Long history of OCHN ratings
When I developed the OCHN rating system (read this for more information), I used history as a guide to weight the variables of resales prices and rental rates in a way that timed the housing cycle. A useful rating system should say not to buy when prices when the timing is poor, and it should say to buy when the timing is right. You can see the results below.
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.
If you would like to use this information in your house search, you can request it below.
Wouldn't you be embarrassed to overpay by $100,000? Only fools buy houses without knowing neighborhood values. Don't be a fool. Don't suffer the pain of an underwater mortgage. The surest way to lose your house is to overpay for it. Our reports identify overvalued and undervalued neighborhoods. Use it to broaden or narrow your search area. Savvy buyers work with us to find bargains. We've saved thousands from financial ruin. Let us save you too. If you want peace of mind while shopping for your next home, sign up for our monthly market newsletter.
Ponzi spending showed no socioeconomic barriers. I profiled small condos where people tripled their mortgage to get a few hundred thousand dollars, and I profiled mega-mansions where the Ponzis withdrew millions and millions of dollars. The one thing they all have in common is that they borrowed so much they lost their homes.
- The former owners of today’s featured property paid $1,152,000 on 11/7/2002. They used a $921,204 first mortgage and a $230,796 down payment.
- On 8/18/2003 they refinanced with a $921,000 first mortgage.
- On 11/302004 they refinanced with a $1,350,000 first mortgage and obtained a $150,000 HELOC.
- On 1/18/2005 they obtained a $450,000 HELOC.
- On 8/30/2006 they refinanced with a $1,820,000 first mortgage.
- On 11/2/2006 they opened a $150,000 HELOC.
- On 12/7/2006 they refinanced with a $2,045,750 first mortgage. They couldn’t afford it one the Ponzi money was cut off.
- Total mortgage equity withdrawal was $1,124,546.
Wouldn't you be embarrassed to overpay by $100,000? Only fools buy houses without knowing neighborhood values. Don't be a fool. Don't suffer the pain of an underwater mortgage. The surest way to lose your house is to overpay for it. Our reports identify overvalued and undervalued neighborhoods. Use it to broaden or narrow your search area. Savvy buyers work with us to find bargains. We've saved thousands from financial ruin. Let us save you too. If you want peace of mind while shopping for your next home, sign up for our monthly market newsletter.
We're sorry, but we couldn't find MLS # 120043731 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
Proprietary OC Housing News home purchase analysis
132 Sidney Bay Dr #26 Newport Coast, CA 92657
$1,995,000 …….. Asking Price
$393,000 ………. Purchase Price
4/26/2001 ………. Purchase Date
$1,602,000 ………. Gross Gain (Loss)
($31,440) ………… Commissions and Costs at 8%
============================================
$1,570,560 ………. Net Gain (Loss)
============================================
407.6% ………. Gross Percent Change
399.6% ………. Net Percent Change
14.4% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$1,995,000 …….. Asking Price
$399,000 ………… 20% Down Conventional
4.05% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,596,000 …….. Mortgage
$411,292 ………. Income Requirement
$7,666 ………… Monthly Mortgage Payment
$1,729 ………… Property Tax at 1.04%
$117 ………… Mello Roos & Special Taxes
$499 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$615 ………… Homeowners Association Fees
============================================
$10,625 ………. Monthly Cash Outlays
($1,429) ………. Tax Savings
($2,279) ………. Equity Hidden in Payment
$565 ………….. Lost Income to Down Payment
$269 ………….. Maintenance and Replacement Reserves
============================================
$7,751 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$21,450 ………… Furnishing and Move In at 1% + $1,500
$21,450 ………… Closing Costs at 1% + $1,500
$15,960 ………… Interest Points
$399,000 ………… Down Payment
============================================
$457,860 ………. Total Cash Costs
$118,800 ………. Emergency Cash Reserves
============================================
$576,660 ………. Total Savings Needed
The property above is available for sale on the MLS.
Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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Nearby Foreclosures
Gain a competitive advantage over other buyers. By locating distressed properties -- before they hit the MLS -- you can discover where tomorrow's REOs and short sales will appear. Most of these properties are not listed on the MLS, but they will be soon. Research properties in advance and get a jump on your competition. Don't miss out on another deal because you couldn't act quickly. Use this tool to your advantage! The red properties are already bank owned. As soon as REO asset managers prepare them for sale, they will be on the MLS. Get ready! The green and blue properties have owners who are not paying their mortgages. They may be offered as short sales, or they may go through foreclosure and become REO. Either way, they will also likely be available on the MLS soon. Find your next home! Be prepared to offer on these properties by researching them in advance or risk losing out to buyers who are have done their homework. Start your research today! To find distressed properties, enter your desired location and press search. Scroll through list by pressing "next."  |
$2,935,000 32 WHARFSIDE Dr |
0.32 miles 4 bd / 3.25 ba 3,150 Sq. Ft. |
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$2,895,000 847 EMERALD BAY |
1.55 miles 4 bd / 3 ba 2,594 Sq. Ft. |
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$1,595,000 10 TIDAL SURF |
1.58 miles 4 bd / 2.5 ba 2,645 Sq. Ft. |
13 Responses to “OC housing market ratings and historic city values”
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Fewer home buyers are first-timers
Despite low interest rates, low prices and slowly rising sales, first-time homeowners accounted for just 34% of all buyers in July, according to data released Wednesday by the National Association of Realtors. While that figure has inched up slightly from the month and year prior, the association says first-time home buyers account for 40% of purchasers under normal conditions.
The reluctance of newcomers to enter the market may be further adding to housing’s woes. After all, first-time buyers are vital to boosting sales, especially during downturns, since when they buy a home, they aren’t also selling a previous home to finance the purchase.
Their recent absence is largely due to the current challenges of saving up enough for a down payment: In a survey released in June by Trulia, an online real estate marketplace, 47% of all adults who aren’t homeowners and who wish to buy a home said that the down payment is the biggest obstacle to entering the housing market. Most mortgages require at least a 10% down payment, and in some pricey markets, like New York and San Francisco, coming up with that cash can take years, says Jed Kolko, chief economist at Trulia. A poor credit history, which makes it difficult to qualify for a mortgage, was the second most common issue holding back would-be first timers, according to Trulia’s survey.
Many potential buyers are also facing higher unemployment rates than other groups. The unemployment rate among 25- to 34-year-olds stood at 8.2% in July, compared with 6.9% for 35- to 44-year-olds and 6.5% for 45- to 54-year-olds, according to the Bureau of Labor Statistics.
Separately, first-time buyers are competing against investors—who tend to have all-cash offers and who go after the same, lower-price homes, says Leonard Baron, real estate lecturer at San Diego State University. Sellers who are eager to unload their homes are more willing to work with investors, since the sale doesn’t hinge on a bank’s decision to approve them for a mortgage. More recently, experts say, tight inventory has made it even harder for first timers to compete.
In the past, government intervention encouraged more first timers to buy a home. They accounted for nearly half of all purchases during the first half of 2009 through spring 2010, according to the NAR. That spike was partly attributable to the federal government’s $8,000 tax credit for first-time home buyers.
But there was also a larger supply of homes to choose from at that point, says Walter Molony, a spokesman for the NAR. Going forward, experts say, a larger economic recovery will have to occur in order for more lifelong renters to become home buyers. And more lower-price-range homes—in particular, foreclosures and other distressed properties now being held off the market—need to go on sale, says Molony.
Why The U.S. Housing Recovery May Be Due For A Stumble
There is plenty of evidence to suggest that the U.S. housing market has hit bottom and is on the mend, including Tuesday’s S&P Case-Shiller index for June, which showed prices were up 1.2% in the first quarter from a year earlier. The critical 20-city composite index showed its first year-over-year gain since September 2010.
Tuesday’s data offer the latest evidence that some form of a housing rebound is underway, but there is something more important to consider. Whether the market has bottomed is the wrong question, says Radar Logic CEO Michael Feder. What people should be asking “is how quickly will it recover?”
If a faster recovery is too slow in coming, it is worth wondering just how long the “technical” bottom will hold.
The early 2012 housing rebound that is turning up in the lagging Case-Shiller index was driven by a number of factors, in Feder’s view, all of which may be unsustainable. For one thing, the recovery may have had a seasonal impact, as demand was pulled forward thanks to mild winter weather in much of the country. Secondly, investor buying and distressed sales have been a big part of the demand to date, as shown in the fact that mortgage applications have declined of late even as sales figures have held fairly steady.
As evidence, Feder notes that the decline in mortgage applications comes at a time when U.S. banks like Wells Fargo and JPMorgan Chase are getting some of their best performance out of their mortgage units. That means that standards remain tough and the barriers for owner-occupant buyers remain high. With banks on the leading edge of pricing, Feder says that their demands for high down payments and credit scores should be a signal that firms are still concerned about the risks remaining in the housing market.
“They must believe there is future risk in prices,” Feder says. If the banks believed housing has truly bottomed and, more importantly, is going to enjoy a faster recovery, “they would lower the down payment requirement,” which he calls the biggest impediment for the entry-level buyer.
What Housing Recovery? Distressed Sales Still High, Shadow Inventory Massive
Housing markets seemed to have turned a corner, with Tuesday’s Case-Shiller data adding to the optimism. Home prices have risen for a second consecutive month for the first time since the summer of 2010, but much of this is a consequence of the falling percentage of distressed sales, while prices are still more than 31% of their peaks and may take years to recover. With 11.4 million, or 23.7%, of all residential properties with a mortgage under water, and a shadow inventory worth $246 billion, according to CoreLogic, a true housing recovery is far away.
Tuesday’s Case-Shiller release, with data through June 2012, showed home prices continuing to recover. Both the 10- and 20-city composites finally recorded annual gains (0.1% and 0.5% respectively), prompting index Chairman David Blitzer to say:
“We seem to be witnessing exactly what we needed for a sustained recovery; monthly increases coupled with improving annual rates of change. The market may have finally turned around.”
The report was met with optimism, as it came after improved existing and new home sales, which Wells Fargo’s analysts suggest indicate markets may be “bottoming in July.” Morgan Stanley/Smith Barney’s people also acknowledged the “improving U.S.-housing fundamentals,” while Barclays’ research team now expects home prices to rise 3% on an annual basis in 2012.
There are several reasons to remain skeptical, though, that this recovery will both be swift and will fuel economic growth that will help pull the U.S. farther from the edge of a new recession. Goldman’s economics research team understands that much of the improvement in housing markets can be attributed to a fall in the percentage of distressed transactions, which accounted for 50% of sales in 2009 and has now fallen to 25%. (Read Steve Schaefer‘s piece, Why The U.S. Housing Recovery May Be Due For A Stumble for more on this).
The typical foreclosure discount is on the order of 27%, according to John Campbell, chair of Harvard University‘s economics department. Thus, a falling percentage of distressed sales mean a lower percentage of discounted transactions. The number of distressed sales also affects the size of the foreclosure discount, which in May was reported to be about 20%, according to Goldman. A falling rate of distressed sales provides a double-whammy then, reducing the discount and the number of discounted transactions.
While the number of distressed sales vis-à-vis regular sales has fallen quite dramatically since March 2009, its decline was more moderate from May 2011 to May 2012, when it went from 31% to 25%. The historical average, though, is far away, at about 5%. While Goldman expects the percentage of distressed sales to slowly tend toward this average, they understand this could take many years:
“In our view, returning to a more normal proportion of distressed sales will take several years, given the large number of borrowers with negative equity, the large current delinquency and foreclosure inventory, and the long current foreclosure timelines.”
IR, nice charts. You state a bottom similar to 1998 might be forming in the local real estate market. There are many fundamental differences between 1998 and 2012…sky high unemployment, lost jobs that are never coming back to our soil, wages that are stagnant, sovereign debt crisis around the world, our national debt that has spiraled out of control, real inflation that is here to stay and millions of homes that are still distressed. Back in 1998 there was still room for housing appreciation. Fast forward to today and I see little if any room for appreciation (maybe if the Fed keeps lowering rates).
We may have reached the bottom but I think we will be there for years to come. The train isn’t leaving the station anytime soon. Thoughts?
As long as the banks hold the inventory off mls this can go on i definately. The younger generations are having fewer children and jobs are becomming more automated (lower pay). This is it unless wall st can create another “creative” (toxic) product that will spark another bubble.
This is it folks. Capitalism and free markets are dead.
When is this damn fiscal cliff comming already?
There are multiple ways to benefit from buying a property. We may or may not be seeing a bottom in nominal pricing, but payment affordability is so good that even if prices don’t appreciate, buyers can benefit from owning properties with a relatively low cost of ownership. It can compensate for the lack of appreciation. Plus, there is always the chance the fed may inflate another bubble.
IR,
fantastic charts. the long history chart is great.
you should have posted this on tuesday so more people would see it…
thanks.
That chart will likely make another appearance in a future post. Also, I suspect many people will check out the post who stop by Tuesday. I’m glad you liked it.
Hi IR,
Great post. The data is really interesting. In a future article, I was wondering if you could look into the relationship between rent inflation for each city versus the price premium for that city.
A while ago, I was researching historical price-to-rent ratio’s (Gross Rent Multipliers) in the U.S going back to 1913. It turned out that GRM’s didn’t have a single historical value. It actually had 3 historical values. Before the mid 1940′s the, GRM was around a certain value (say a normalized value of 1.0). From the mid 1940′s to the mid 1970′s, the GRM was about 2.0. And from the mid 1970′s until today, the GRM stabilized around 2.5. So the national GRM underwent 2 step changes over the last 100 years.
I wondered what caused these step changes in the GRM to occur. I believe the first step change (in the mid 1940′s) occurred due to government housing acts and the formation of the GSE’s in the 1930′s. Lending standards were greatly loosened, >20 year loans were introduced, and lower down payments were required. After WW2, this new lending environment allowed the US to transform from a country of mostly renters to a country of mostly home owners.
The next step in the GRM occurred in the 1970s. After doing more research and giving it some thought, I theorized that the last step in the GRM was due to inflation. The 1970′s was a time of massive inflation. The US abandoned the gold standard and inflation took off. Since buying is a hedge against rent inflation, it makes sense that in a high inflationary environment, you might be willing to pay more to buy a house.
I looked at the average inflation rate from the mid 1940′s to the mid 1970′s and compared it against the inflation rate after the mid 1970′s. The inflation rate before the mid 1970′s was about 3% while the inflation rate after the mid 1970′s was about 4%.
Then it occurred to me that inflation might be the reason why some cities demand a price premium over renting. If the median rent in a particular city rose faster than average, then you would expect to pay a premium over rental parity in that city since your expected hedge against inflation is worth more.
I couldn’t find good rent data for specific cities so, as a proxy, I used wages. I compared the wage inflation between San Jose and Los Angeles. San Jose also had higher wage inflation. Then I compared the GRM’s between San Jose and Los Angeles. San Jose had a higher GRM.
When I compare LA to the rest of the US, I see the same pattern. Better wage inflation seemed to correlate to higher price premiums.
I suspect that all cities may follow this pattern. It looks like you may have the data to verify if it is really true or not. If you find that this idea has merit, it would be great if you could add the city specific rent inflation data to the chart.
Thanks,
Lee
Lee,
I think your supposition is correct. I believe GRMs increased after WWII due to the proliferation of the 30-year fixed-rate mortgage. Then it went up again in the 1970s due to inflation.
I don’t think the excessive GRMs in certain cities is rational. I think wage growth caused rents and wages to go up, but people responded irrationally and bid prices up beyond all reason. What it really introduced was a lot of unnecessary volatility.
Email me at sales@ochousingnews.com, and I will send you city-by-city data on prices and rent for Orange County back to 2000 from the MLS. Data beyond that is extrapolation from other data sources.
[...] how can buyers recognize a good value when they see it? On Monday, I posted OC housing market ratings and historic city values. In that post, I described how to use my OCHN report to find areas where values are relatively [...]
[...] how can buyers recognize a good value when they see it? On Monday, I posted OC housing market ratings and historic city values. In that post, I described how to use my OCHN report to find areas where values are relatively [...]
[...] how can buyers recognize a good value when they see it? On Monday, I posted OC housing market ratings and historic city values. In that post, I described how to use my OCHN report to find areas where values are relatively [...]