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.
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Proprietary Irvine Housing News home purchase analysis
$559,999 …….. Asking Price
$725,000 ………. Purchase Price
5/27/2005 ………. Purchase Date
($165,001) ………. Gross Gain (Loss)
($58,000) ………… Commissions and Costs at 8%
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($223,001) ………. Net Gain (Loss)
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-22.8% ………. Gross Percent Change
-30.8% ………. Net Percent Change
-3.4% ………… Annual Appreciation
Cost of Home Ownership
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$559,999 …….. Asking Price
$112,000 ………… 20% Down Conventional
3.51% …………. Mortgage Interest Rate
30 ……………… Number of Years
$447,999 …….. Mortgage
$119,273 ………. Income Requirement
$2,014 ………… Monthly Mortgage Payment
$485 ………… Property Tax at 1.04%
$92 ………… Mello Roos & Special Taxes
$140 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$350 ………… Homeowners Association Fees
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$3,081 ………. Monthly Cash Outlays
($314) ………. Tax Savings
($704) ………. Equity Hidden in Payment
$125 ………….. Lost Income to Down Payment
$90 ………….. Maintenance and Replacement Reserves
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$2,278 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,100 ………… Furnishing and Move In at 1% + $1,500
$7,100 ………… Closing Costs at 1% + $1,500
$4,480 ………… Interest Points
$112,000 ………… Down Payment
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$130,680 ………. Total Cash Costs
$34,900 ………. Emergency Cash Reserves
============================================
$165,580 ………. Total Savings Needed
The property above is available for sale on the MLS.
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Cost of Ownership Analysis
Are you ready to make an offer, but you are worried the cost of ownership is really more than you can afford? Don't make a mistake that might cost you the family home, your life savings, and your good credit! Get the advice of a seasoned professional. Contact us at info@ochousingnews.com today!
We produce detailed reports showing the cost of ownership based on the most likely transaction price and current financing terms. You will know how much you will spend each month in out-of-pocket expenditures and the true monthly cost of ownership factoring in tax deductions, loan amortization, and opportunity costs on your down payment. In addition, we show you how this cost compares to a rental of equal quality to make sure buying is the right decision for your situation.
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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."Comparative Market Analysis
Are you ready to make an offer, but you are worried you will either (1) underbid and miss the property or (2) overbid and pay too much? Don't make a mistake and miss your dream home, or worse yet, overpay for it! Get the advice of a seasoned professional. Contact us at info@ochousingnews.com today!
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$485,000 117 SAPPHIRE |
0.15 miles 3 bd / 2.5 ba 1,500 Sq. Ft. |
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$399,500 77 SAPPHIRE #49 |
0.15 miles 3 bd / 2.25 ba 1,500 Sq. Ft. |
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$558,800 54 BURLINGAME |
0.34 miles 3 bd / 2.5 ba 1,706 Sq. Ft. |
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$470,000 25 VISALIA |
0.38 miles 3 bd / 2.75 ba 1,802 Sq. Ft. |
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$488,000 30 EL CAJON #32 |
0.52 miles 3 bd / 2.5 ba 1,510 Sq. Ft. |
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$580,000 34 OLIVEHURST |
0.63 miles 3 bd / 2.5 ba 1,500 Sq. Ft. |
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$648,800 85 TALMADGE #65 |
0.63 miles 4 bd / 2.5 ba 1,750 Sq. Ft. |
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$558,000 77 MODESTO #94 |
0.63 miles 3 bd / 2.5 ba 1,650 Sq. Ft. |
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$723,600 2711 ALISTER Ave |
0.73 miles 4 bd / 2.5 ba 2,100 Sq. Ft. |
Rep. John Campbell (R-California) introduced to Congress a piece of legislation designed to keep local governments from using eminent domain to seize homes with underwater mortgages.
Titled “The Defending American Taxpayers from Abusive Government Takings Act,” the bill would prohibit Fannie Mae, Freddie Mac, FHA, and the Veterans Administration from purchasing or guaranteeing loans originating in counties where a municipality has seized a mortgage loan through eminent domain in the last decade.
Campbell said the act is intended to protect taxpayers’ investments and preserve the rule of law.
“There is no question that we need to take steps to assist American homeowners in distress,” Campbell said in his introduction of the legislation.
“But these steps must not undermine rule of law, must not engage in corruptive and abusive practices, must protect the American taxpayer, and must not further degrade the housing market,” he continued.
In a release, Campbell’s office points out that widespread use of eminent domain powers to seize mortgage loans may result in Fannie and Freddie losing up to 30 percent in the private-label residential mortgage-backed securities in their portfolios.
As an alternative to the eminent domain program, Campbell and Rep. Gary Peters (D-Michigan) introduced H.R. 5940, “The Preserving American Homeownership Act.” This bill would direct Fannie/Freddie conservator FHFA to establish a program to pilot principal reduction programs for loans owned or guaranteed by the GSEs.
Campbell’s bill has already seen support from the Mortgage Bankers Association (MBA).
“While the problem of underwater borrowers continues to slow the housing recovery, using eminent domain to take those mortgages is not a responsible answer,” said MBA president and CEO David Stevens. “Beyond the obvious legal issues of using eminent domain in such a radical way, the government seizing mortgages would set a precedent that will hurt those communities and borrowers it is most designed to help.”
The Defending American Taxpayers from Abusive Government Takings Act is currently awaiting consideration in the House Committee on Financial Services.