Aug052013

OC housing affordability fading fast

Mortgage interest rates are up 20% over this time last year, and house prices are also up 20%. The combination of the two has made home ownership 30%+ more expensive in just 12 months. Given that rents are up 2% and wages are stagnant, the dramatic rise in mortgage interest rates and house prices is crushing affordability. The undervalued condition homebuyers briefly enjoyed is quickly becoming a faded memory.

I recently noted that Coastal California housing markets will hit affordability ceiling first. We are officially there. Even the mainstream media is reporting that home prices appreciation should cool due to this constraint. Due to the new qualified mortgage regulations, I would ordinarily say hitting this limit would be a barrier to further price increases, but given our uniquely manipulated market, I don’t think this will be the case. The inventory squeeze is still acute, and upward price momentum is undeniably strong. Home price appreciation will likely wane over the coming months, but I wouldn’t be surprised to see markets overshoot to the upside based on inventory restriction and cash buyers who aren’t limited by affordability.

The rental market is not a strong fundamental driving prices higher. With the recent overbuilding of apartments by the Irvine Company and other apartment developers, the rate of rental increase among MLS listed homes is slowing to a crawl. Rents are still rising, but they are teetering on the threshold of weakness at a 2.2% yearly rate of increase.

Even when viewed in the broader historical context, the sudden drop in affordability is remarkable.

This isn’t the first time the cost of ownership has risen rapidly, but it is the first time homeowners actually paid this cost. In the last housing bubble, the cost of ownership increase is somewhat misleading because borrowers used interest-only and negative amortization loans to cheat on affordability. Since these products are now banned, borrowers don’t have that option any longer (See: New mortgage regulations will prevent future housing bubbles).

Housing markets generally show strong momentum, both up and down. The rapid rise in prices will likely carry forward into the fall and winter. The rate of increase will slow, but I don’t foresee house prices declining despite crumbling affordability.

As I noted previously, rents are still rising, but not at a brisk pace. With the influx of new apartments in the OC market, rents will likely rise slowly for the next several years.

Despite declining affordability, the conditions today still represent a great buying opportunity. House prices are rarely undervalued in OC.

If you start looking at the details of the submarkets in OC, the relative overvaluation in the beach communities is glaring. Lenders never did process their foreclosures here, and as I’ve demonstrated in Delinquent jumbo loans in Coastal California pollute bank balance sheets, the jumbo loan delinquencies in these markets is much higher than other markets or even national averages. Many suffer the delusion that the rich people and high wage earners that live in these communities aren’t in financial distress. Nothing could be further from the truth. The beach community markets are overvalued by any historic measure. Buying in these markets takes faith that trees can grow to the sky.

The bargain communities come in two flavors; those that are undesirable, and those desirable communities that were overrun with Ponzis, with Coto de Caza, Ladera Ranch, and Yorba Linda being notable examples.

The investment opportunity, such as it is, in Orange County is evaporating. Cashflow positive properties are becoming a rarity.

For as much as I enjoy the posts where we delve into the various issues surrounding housing, it’s important to take a fresh look at what the data is telling us about our local housing market. Informed opinions are always more insightful. Plus, many potential homebuyers read this blog for information about buying a house in OC. Many of these people subscribe to the monthly newsletter from which these charts are drawn, but it’s also helpful to have a personal interpretation of this data from its author and the astute observers to comment on this blog.

I want to take this opportunity to thank all the astute observers who provide their insightful comments. The high level of discourse in the comments on this blog is one of its best features. I learn from the comments every day. If not for the continued support among the various brilliant readers (and I mean that), this blog wouldn’t be the resource it is today.

Thank you.

The bank acting as a flipper

The former owners of today’s featured property bought back in 1996, and they did extract about $300,000 during the housing bubble, but given the increase in value on this property, their HELOC abuse was not as egregious as it could have been. Apparently, they got in trouble early on, and they quit paying their mortgage in late 2006. The bank amended their mortgage, and they stayed current for a while, but the bank served them a notice again in 2011. After six years of struggling — and off and on squatting — the bank finally took back the house.

The former owners undoubtedly had a great deal of deferred maintenance, so when the bank obtained the property, they decided to fully renovate the property and see if they could make a profit on the deal. The acquired the property at auction for only $280,000. Considering they are now asking over a million dollars for it today, even if they spent lavishly on the renovation, they still stand to make a good profit on the deal.

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[idx-listing mlsnumber=”PW13152352″ showpricehistory=”true”]

18702 LORAINE Ln Yorba Linda, CA 92886

$1,049,000 …….. Asking Price
$325,000 ………. Purchase Price
9/5/1996 ………. Purchase Date

$724,000 ………. Gross Gain (Loss)
($83,920) ………… Commissions and Costs at 8%
============================================
$640,080 ………. Net Gain (Loss)
============================================
222.8% ………. Gross Percent Change
196.9% ………. Net Percent Change
7.1% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$1,049,000 …….. Asking Price
$209,800 ………… 20% Down Conventional
4.96% …………. Mortgage Interest Rate
30 ……………… Number of Years
$839,200 …….. Mortgage
$217,246 ………. Income Requirement

$4,485 ………… Monthly Mortgage Payment
$909 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$219 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$5,612 ………. Monthly Cash Outlays

($1,289) ………. Tax Savings
($1,016) ………. Principal Amortization
$403 ………….. Opportunity Cost of Down Payment
$282 ………….. Maintenance and Replacement Reserves
============================================
$3,993 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$11,990 ………… Furnishing and Move-In Costs at 1% + $1,500
$11,990 ………… Closing Costs at 1% + $1,500
$8,392 ………… Interest Points at 1%
$209,800 ………… Down Payment
============================================
$242,172 ………. Total Cash Costs
$61,200 ………. Emergency Cash Reserves
============================================
$303,372 ………. Total Savings Needed
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