Each month before I prepare the OCHN market newsletter, I think about ways I can improve it and deliver more value to users. This month, I added a new metric to the report that I believe provides a more intuitive way to look at the current state of the market. I applied the mortgage interest rate to the median home price to backward calculate the monthly cost of ownership for the market. I like this approach because it returns a number immediately comparable to rent.
When I first thought about this indicator, I didn’t think it would reveal anything of value. It’s basically the inverse of the rental parity calculation I already perform. I was wrong. When I plotted out the result, I was astounded to find that the monthly cost of ownership reveals much more about what’s going on than charts of median home prices and rental parity. The first thing I noticed was that the current monthly cost of ownership is comparable to what buyers were paying back at the peak of the late 80s bubble. That shocked me.
The implications of this are eye-opening. If the cost of ownership is the same today as it was in 1989, then all appreciation over the last 23 years is due to a decline in interest rates from 10.77% in April 1989 to 3.5% in October 2012.
Let that sink in for a moment. In April of 1989, the median home price in Orange County, California, was $206,000. With a 10.77% interest rate, the monthly cost of ownership on a median priced home was $1,926 per month. In October of 2012, the median home price in Orange County, California, was $428,000. With a 3.5% interest rate, the monthly cost of ownership on a median priced home was $1,922 per month.
Twenty three years later, and the monthly cost of ownership is the same despite home prices being more than two times higher. Appreciation in California is a bi-product of federal reserve interest rate policies and ever-decreasing mortgage interest rates.
The relationship between cost of ownership and rent
The other very powerful tool this analysis provides is the ability to easily compare the cost of ownership to the cost of a rental. Comparing the median home price to rental parity also does this but in a less intuitive manner. The charts below show both views of the market. The top chart shows median home prices, rental parity, and the historically predictive relationship between the two. The bottom chart shows the monthly cost of ownership and the median rent.
Seeing the long-term cost of rental compared to the cost of ownership, it becomes obvious when it was wise to buy and when it was wise to rent. Whenever the cost of ownership breaks its tether to rents, a price bubble is inflated that inevitably leads to a crash. Armed with this information, I hope future buyers will be less prone to overpay and buy into a frenzy. There will always be fools who think it will be “different this time,” but it never is.
At the bottom of each page of the report, I have a graph of the median market rent with a line also showing the current cost of ownership. You can see if the cost of ownership is higher or lower than the cost of a rental, and you can see the trend over the last year.
The cost of ownership bottom
Another thing that jumped out at me when I first did this study was that despite rising house prices, the cost of ownership is still going down in many markets. The impact of rising prices is being cancelled out by falling interest rates. I know many people are worried about missing the bottom or being priced out due to the lack of available inventory. Though the lack of inventory is frustrating, and it is causing prices to rise, the cost of ownership is not rising, so nobody is being priced out of the market. In fact, with the cost of ownership at 1989 levels and below rental parity, houses are as affordable as they have ever been in Orange County.
If you haven’t already done so, if you are considering buying a home in the next year, you should sign up for my monthly market newsletter and start watching the market more carefully. Based on user feedback and my own observation, I will continue to improve this report and deliver more value to help you make a sound decision.
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Another Option ARM casualty
The former owner of today’s featured property sold it to Downey Savings at the peak. Of course, Downey didn’t know they were buying his house for double what it was worth, but by giving him $440,000 with an Option ARM, that’s what they did. This borrower started out okay. He paid $200,000 for this property back in 1998 at the bottom of the last housing bubble. He rode the wave of appreciation and refinanced with his Option ARM at the peak. He got his money, and he paid the price with bad credit. My guess is that he will do it again.
We're sorry, but we couldn't find MLS # P836935 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
5151 KINGSCROSS Rd Westminster, CA 92683
$379,000 …….. Asking Price
$200,000 ………. Purchase Price
9/24/1998 ………. Purchase Date
$179,000 ………. Gross Gain (Loss)
($16,000) ………… Commissions and Costs at 8%
============================================
$163,000 ………. Net Gain (Loss)
============================================
89.5% ………. Gross Percent Change
81.5% ………. Net Percent Change
4.5% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$379,000 …….. Asking Price
$13,265 ………… 3.5% Down FHA Financing
3.38% …………. Mortgage Interest Rate
30 ……………… Number of Years
$365,735 …….. Mortgage
$103,243 ………. Income Requirement
$1,618 ………… Monthly Mortgage Payment
$328 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$95 ………… Homeowners Insurance at 0.3%
$381 ………… Private Mortgage Insurance
$245 ………… Homeowners Association Fees
============================================
$2,667 ………. Monthly Cash Outlays
($238) ………. Tax Savings
($588) ………. Equity Hidden in Payment
$14 ………….. Lost Income to Down Payment
$67 ………….. Maintenance and Replacement Reserves
============================================
$1,923 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,290 ………… Furnishing and Move In at 1% + $1,500
$5,290 ………… Closing Costs at 1% + $1,500
$3,657 ………… Interest Points
$13,265 ………… Down Payment
============================================
$27,502 ………. Total Cash Costs
$29,400 ………. Emergency Cash Reserves
============================================
$56,902 ………. 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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23 Responses to “Orange County monthly cost of ownership falls to 1980s levels”
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Lenders are content to wait and see if prices are going any higher before pushing out the squatters. MLS inventory will remain tight, and there will be no flood of REO. In fact, the shortage will continue.
West Coast Foreclosure Starts Plunge in September: ForeclosureRadar
Foreclosure starts fell dramatically in all five West Coast states tracked by Foreclosure Radar, confirming suspicions that a foreclosure wave may not arrive.
“It was recently reported that the nation’s five largest mortgage servicers have implemented all of the 320 servicing standards required under the national mortgage settlement,” stated Sean O’Toole, founder and CEO of ForeclosureRadar. “The continued decline in Foreclosure Starts clearly shows that even though servicers are now apparently in compliance and clear to move forward with foreclosures, they are still in no rush to foreclose on the majority of delinquent borrowers.”
In September, foreclosure starts in Nevada fell 40.1 percent from the prior month and in Oregon, foreclosure starts fell 40 percent during the same period, according to a ForeclosureRadar report released Wednesday.
Arizona (-37.1 percent), Washington (-31.2 percent), and California (-20.7 percent) also saw dramatic declines over a one-month period.
While California saw the smallest decrease, the state had the highest number of foreclosure starts, which totaled 14,090 in September compared to 1,450 in Nevada and only 51 in Oregon.
Year-over-year, the decline in foreclosure starts was even greater. Oregon led with a 96 percent drop, followed by Nevada (-73.8 percent), and Washington (-70.8 percent), Arizona (-50.8 percent), and California (-48.1 percent).
“There has been speculation that the banks would rush to clear inventory before the CA Homeowner Bill of Rights takes affect in January 2013, causing an increase in the number of foreclosures. Clearly this is not the case as we continue to see the number of Foreclosure Starts decline,” the foreclosure data provider noted in its report.
Month-over-month, September foreclosure sales were also down across all five states: Arizona (-24.3 percent), California (-17.9 percent), Nevada (-19.5 percent), Oregon (-0.3 percent), and Washington (-33.5 percent).
With lenders slowing down their foreclosures, the inventory shortages will persist.
Zillow: Inventory Shrinking, California Metros Depleting Fastest
Sellers may begin to have the upper hand in the market as housing inventory shrinks, leaving first-time homebuyers left to compete with investors, a report from Zillow revealed.
“First-time homebuyers are being squeezed out of the market by falling inventory and the rapid influx of investors looking to buy basic homes to rent out to the growing population of people who have recently been foreclosed upon,” said Stan Humphries, Zillow chief economist, in a release Thursday. “Investors are paying in cash and can close sooner, which is more favorable to banks and homeowners looking to sell.”
Inventory across all price levels fell 19.4 percent year-over-year as of September 30, according to Zillow analysis, which tracked the number of homes listed for sale on its site.
Among the 30 largest metros, California cities saw the biggest annual reduction in inventory. When looking at changes across all tier levels (bottom, middle, and upper), Sacramento led with a 42.4 percent decline, with San Francisco ranking second after seeing inventory drop 42.2 percent. San Diego was third due to its 40.7 percent decrease.
Cincinnati saw the smallest yearly decline across all inventory tiers, falling 9.5 percent, followed by Portland (-10.8 percent), and St. Louis (-14.5 percent).
Surprisingly, the inventory category that declined the most on a yearly basis was upper tier homes, which fell by 22 percent, while lower tier homes fell 15.3 percent.
Phoenix ranked highest among the 30 metros for having the steepest drop in inventory for homes priced in the bottom tier. In Phoenix, bottom tier inventory plummeted 57.1 percent. Following Phoenix, California cities were most notable, leading with Sacramento, where bottom tier inventory fell 55.4 percent, then San Francisco (-53.2 percent), San Jose (-47.5 percent), and San Diego (-45.4 percent).
Declines in the upper tier category weren’t as dramatic, with Kansas City, Missouri leading with a 42.7 percent drop, followed by San Francisco (-35 percent) and Miami (-34.4 percent).
The market apologists are out to spin the end of the spring rally.
September prices down 0.8%, sales plummet 17%
Home prices in September were up 5 percent year-over-year while home sales posted a 4 percent annual increase, even as housing metrics began their typical seasonal declines, according to Redfin’s analysis of activity across 19 major U.S. markets.
Between August and September, these 19 markets saw prices decline just 0.8 percent, which Redfin says is a smaller decline than is customary at this time of year. Over the same period, home sales dropped 17 percent — a figure the company says represents “a typical seasonal decline.”
According to Redfin’s report, the number of homes for sale in the markets studied as of September 2012 — 198,581 – is down 29.3 percent from September 2011. Inventory fell by 4.3 percent from August to September.
“September is usually the month that real estate goes on sale, like Christmas toys in January. Whatever didn’t sell in the summer gets marked down for a September closing,” said Redfin CEO Glenn Kelman. “This September, we saw only a modest decline in prices, with inventory still dropping and demand fairly steady.
Homes on the market continue to sell quickly, according to Redfin. The company’s study shows the percentage
of listings that sold within 14 days of their debut held at 27 percent in September.
Redfin’s real-time tracker provides monthly data on home prices, sales, and inventory, based on the local databases used directly by real estate agents to list properties and record sales. As a real estate broker itself, Redfin has access to dozens of Multiple Listing Services (MLSs) used by agents, which means the company gets its data within minutes of a sale, pending sale, or listing activation.
Kelman notes that in the most volatile markets, including Southern California, Phoenix, and Las Vegas, Redfin’s study showed a continuance of big price gains last month. Fifteen of the 19 markets studied had higher prices than a year earlier.
Phoenix showed the greatest appreciation at +30 percent year-over-year. Philadelphia suffered the biggest loss of -3 percent from September 2011.
The top seven markets with the largest year-over-year drop in inventory last month were all in California: Sacramento (-66.4 percent), Ventura (-64.8 percent), Inland Empire (-58.8 percent), San Francisco (-57.6 percent), San Jose (-55.7 percent), Los Angeles (-55.3 percent) San Diego (-53.5 percent).
The market with the smallest annual drop in supply was Chicago, – 5.1 percent from inventory levels at the same time last year.
The fastest-selling markets — which Redfin assesses as the percentage of homes selling in two weeks or less — are also all in California: San Jose (55.9 percent), Ventura (51.7 percent), San Francisco (46.8 percent), Los Angeles (41.4 percent), San Diego (40.9 percent), and Inland Empire (40.6 percent).
The slowest-selling market is Boston, according to the brokerage firm, with only 3.7 percent of the homes for sale last month selling in 14 days or less.
To be fair, I don’t think Redfin does the kind of spinning that NAR or RE/MAX are known for. I used to receive Glenn Kelman’s monthly newsletter and they were pretty balanced and informative. He cited a lot of outside news articles to back up his internal metrics.
Not to come across as a spin artist myself, but Redfin uses $/SF to measure home prices (aka el BOGEY’s favorite measure), and they say prices are up 5% over last year. Of course, that only captures 19 of the largest markets, so I’m sure el B will find some way to shoot holes in the number.
Kellman keeps his spin within reason. Many of the others completely lose touch with reality.
I favor the $/SF measure as well. The median reflects how much people are paying for property, but it doesn’t capture how much they are getting for their money. The $/SF measure does a much better job of that. It isn’t as prone to distortion from a change in the mix.
“all appreciation over the last 23 years is due to a decline in interest rates from 10.77% in April 1989 to 3.5% in October 2012″.
——————————————————————————
That’s an avg of 0.32% drop in rates for a $9652.17 increase in price per year x23.
Based on those stats, let’s evaluate what the next 5 years will look like.
We’re currently at 3.5% and the current OC median price is $428k.
A 0.32% drop in rates + $9652 price increase YoY over the next 5 years looks like this:
Oct 2013: 3.18 = $437,652
Oct 2014: 2.86 = $447,304
Oct 2015: 2.54 = $456,956
Oct 2016: 2.22 = $466,608
Oct 2017: 1.90 = $476,260
It would take unbounded naivety to think housing has turned the corner.
Right now the banks are forcing prices higher by withholding inventory, and based on current affordability levels, they have some room to push prices higher before people simply can’t finance a large enough debt to keep the Ponzi scheme going.
If rates go up without an increase in wages, then affordability will plummet, and any price gains may get wiped out in the process.
We have all witnessed the results of the last round of forced OC price-increases that began around the y2k. This time around, banks are a little more ‘crafty’ and the set-up is quite different: most buyers will have a lot more skin in the game. A LOT MORE.
I am keeping my eye on the US 30 year Treasuries. But I’ve been watching since 2008 and I have been wrong every year.
With the Fed buying 10-year Treasuries, it looks like prices will rise and yields will fall, but when you consider they are already at historically low yields, you have to wonder how much lower they can go.
I was reading that banks normally where making .7% spread on the mortgages they where selling. So, a 3.7% 30-year fix, they sold for 3.0% and made .7% profit.
Now, I’m reading (might have even posted) that spread is now 1.2% to 1.4%. There might be a little more downward pressure on mortgage rates, however so processing it getting in the way.
“…It would take unbounded naivety to think housing has turned the corner…”
LOL
Apparently, such unbounded exuberance is in unlimited supply at the NAR, CAR and some local newspapers.
Since NAr and CAr are the only advertising groups keeping local newspapers afloat, it shouldn’t be too surprising that chorus is singing from the same hymn book.
That’s a mind blowing stat that monthly payments are the same as they were in 1989. This is exactly what ultra low interest do, they offset the high nominal housing prices.
On a purely monthly basis, it is cheaper to buy a 500K property with 20% down today than rent a 1 bedroom apartment in any decent part of OC. Yes, the downpayment is tied up, but you build equity quickly with the low rates and write off the interest and property taxes. As we know, most Americans just care about the monthly payment…nothing else.
Unfortunately I think this will be the new normal for sometime to come. A little anecdotal evidence, a friend of mine was squatting in his nice OC home for almost 2 years. He could pay the mortgage, just chose not to because he was underwater. Looks like reality just hit him, he is bringing money to the table to stay in his house…the alternative of becoming a renter now doesn’t look “appealing” to him. Maybe this is another reason for such low inventory, I think we’ll be hearing more of these stories in the future.
“On a purely monthly basis, it is cheaper to buy a 500K property with 20% down today than rent a 1 bedroom apartment in any decent part of OC”
My question is that on the $500K purchases are buyers doing 3.5%? 5%? or 20%?
The example of your friend, I believe will be the next “evil thing banks are doing to homeowners.” If the Fed succeeds and the 30-year rate drops to 3%, borrowers who’ve been squatting for months/years are going to see comps selling for not much less than the squatters’ delinquent mortgages. At that point, their mindset will change from, “living rent-free as long as possible” to “staying in this house by getting a reasonable modification.” Except, banks may not offer mods at that point (unwilling to capitalize arrears in the modified principal?) and foreclose.
That’s when the sob stories will hit the mainstream media. “I went through a rough two years like a lot of people, and I couldn’t pay my mortgage. Now, I want to pay. I don’t even want principal reduction. I just want to pay a portion of the delinquent payments and start making regular payments on the principal after the bank lowers the rate. But the evil bank foreclosed on my house so that they could steal my equity!”
Indeed…
If the tax code forced squatters to pay tax as imputed income on equivalent rent then the majority of such squatters would of been forced out long ago.
1] no sob stories to tell.
2] banks would be also more inclined to list such properties in the MLS thus increasing supply.
Perhaps the expiration of the tax credit will bring out more sellers. Of course, it may have the opposite effect as the squatters will want to wait until they are above water to avoid any tax bills. The real sob stories come when these people are foreclosed on as prices are rising. They will all cry foul that they weren’t given a chance to be made whole by the market.
Perspective,
Your vision of future news stories is prescient. For each of those sob stories, there will be ten squatters who were given a loan modification and given a pass for the sins of their years of squatting. The only justice would be for the squatters to get the boot, but in the real world, they won’t. They will get some form of accommodation to stay in the property. I suspect the banks will tack on the missed interest and fees to their principal balance and let them stay. At least that will carry some consequence.
[...] ————Orange County monthly cost of ownership falls to 1980s levels – OC Housing News – … he implications of this are eye-opening. If the cost of ownership is the same today [...]
[...] So that opens the larger question about which is better, lower prices or lower interest rates? Both lower the monthly cost of ownership and result in more disposable income. Obviously, the banks prefer higher prices to recoup their capital from their bad bubble-era loans, so they are offering 3.5% interest rates to prevent prices from going any lower. I think most buyers would prefer lower prices, but since the banks make the rules which determine market prices, low interest rates and high prices are what we get. And as I pointed out last week, the cost of ownership is back to 1980s levels in Orange County. [...]
[...] So that opens the larger question about which is better, lower prices or lower interest rates? Both lower the monthly cost of ownership and result in more disposable income. Obviously, the banks prefer higher prices to recoup their capital from their bad bubble-era loans, so they are offering 3.5% interest rates to prevent prices from going any lower. I think most buyers would prefer lower prices, but since the banks make the rules which determine market prices, low interest rates and high prices are what we get. And as I pointed out last week, the cost of ownership is back to 1980s levels in Orange County. [...]
[...] So that opens the larger question about which is better, lower prices or lower interest rates? Both lower the monthly cost of ownership and result in more disposable income. Obviously, the banks prefer higher prices to recoup their capital from their bad bubble-era loans, so they are offering 3.5% interest rates to prevent prices from going any lower. I think most buyers would prefer lower prices, but since the banks make the rules which determine market prices, low interest rates and high prices are what we get. And as I pointed out last week, the cost of ownership is back to 1980s levels in Orange County. [...]