Wednesday, December 24, 2008

The IE is now 50% off peak


The latest report from the California Association of Realtors has the IE median price at $202,740. That is down 41 percent from last years $344,930 median price. But the IE peak median was $416,000 in Jan 07. That puts us 51.3% off peak prices.

Back around that (early 07) time the research outfit Global Insight reported that the IE was 65% overvalued. According to that math the median should have been $145k, so we still have some room left to fall. The Fortune report says another 27% over the next tow years. And the official X-report (that's the report I generate using reams of data, a few drams of whisky and my Magic 8-ball) predicts another 20-25% from the current price. Those all put us around the same place. $150k median give or take a few k.

44 comments:

Sara said...

There might even be an overcorrection. We might see a decline of another 30% or more in the IE, particularly in Corona and other desirable areas.
It's scary. I was planning to buy sometime in 09, but now I don't know. I'll wait and see. I cannot put down the little I worked so hard for only to see it disappear in a few months as a result of a declining housing market.

Sara said...

Here's Krugman about 10 days ago:

http://www.washingtonpost.com/wp-dyn/content/discussion/2008/12/11/DI2008121102406.html?tid=informbox

Oldtimer said...

Not sure I follow the math here. If $400K is 65% over-valued, don't I take 100/165 x $400K = +/-$250K to get fair value?

There's no reason to believe that fair value will provide a floor on the way down; it sure didn't set a ceiling on the way up.

But a $145K median would put the IE somewhere between Detroit, Cleveland and Cincinnati in terms of median price if housingtracker.net is to be believed. I'm pretty certain those markets didn't experience a housing bubble in recent years.

golfer_X said...

It's hard to say what they "meant" by 65% overvalued. I take that to mean homes are actually worth 35% of peak values. That may be low but if you follow the long term trends that is about where they should be. I figured the price would be in the $175k range but I too expect an over correction so we may well hit $150K. And that assuming there is no full blown depression.
My house more than tripled in value in about 8 years. Was that fair market? Hell no it was bubble market value, it had nothing to do with fair. It's getting closer to what I feel is fair market value. The best way to determined fair market "value" would be to compare it to rental value. I know most homes in the better parts of the IE are still above that mark. Fair market value in that respect will set a floor on the way down. Because there are enough investors out there that will buy when they can make a buck by renting. Just take a look at the outer areas. The cheaper homes in Perris, San Jacinto, MoVal etc are being bought in droves by investors. That's what's making the sales numbers look so good. The low end is selling.

Paul said...

Sara, I too had plans to buy toward the end of 2009. Now I am going to re-think my strategy about Corona and might upgrade toward Los Angeles County or Orange County instead of the IE if prices continue to tank. With the adjustments swamping toward 2009 through 2012, I am thinking that the neighborhoods may turn into a "not so safe" area but not a DMZ like Moreno Valley and French Valley has succumbed to. What isn't being published are all the theft once again of abandoned homes of their central air units, interiors and the like, even in occupied homes that the owners who are commuter owners!

I am renting now and all I can do is to keep saving cash and not pull the trigger too fast. I would rather be the guy that buys on the way up instead of the guy who didn't know the bottom.

Life said...

I agree that we still need to drop another 20-25% but am not sure it will happen if the mortgage rates drop to 4.5%

Renee' said...

I refer to "X's" point here - it's not families that are purchasing the majority of the homes right now - it's investors.

Investors either want to flip or rent out - I'm sorry but I've owned enough homes in the IE to know that when you start to get masses of people who are renting in area's - that you seem to get communities that become run down real quick....it happened about 15 years ago in the high dessert and they haven't recovered.

My nephew in L.E.- I stated he lives in Canyon Hills - nice looking area of L.E. but - MAN! - he said himself that he sees more and more renters coming in and trashing the neighborhood - he says it kinda just breaks his heart because he and my niece paid prime for their home and maintain it really well...

I came to the conclusion that buying in an older community in Corona like Green Gate or off of East Mission/Main would be the better bet....not as many homes for sale or REO's - more older established neighborhoods where people bought about 10 years ago when the market was perfectly affordable...meaning - less renters (HA - and I'm a renter)

FairEconomist said...

The promised low mortgage rates won't make much of a difference. The Feds already subsidize homebuying extensively with the mortgage deduction and the Fannie/Freddie implicit guarantee. Especially with economic trouble coming and payment coming due on recent borrowing, they can't subsidize much more. Even the Feds have their limits. So they will only be able to hold rates to 4.5% if they were going to be really low anyway, which means depression, which will lower prices as much as the low rates will help.

If I were looking to buy I'd buy in an older community too. Some IE communities will become slums/ghost towns and some will do reasonably well. The difference will be closeness to jobs and the strength of the existing community, and both those favor old, established neighborhoods. They also generally have better work/house balances and more allowances for mixed income.

Sara said...

What about Eastvale, which is new but close to jobs. Do you see areas like Eastvale turning into "slums/ghost towns"? I hope no!!

golfer_X said...

Of all the areas of Corona, I would put Eastvale at the highest risk of ghetto-fication (is that a word??). It's already in an area close to the hoods in Mira Loma. It's also got the smell, the flies and the wind and dust. Ask someone with a pool about the dust! I think you are far safer on the South side of the 91 fwy. Those areas are more established and farther from the riff-raff in Mira Loma. Plus the smell, the wind and the dust are no where near as bad as Eastvale.

FairEconomist said...

2 risk factors (new and poor income/jobs mix) is better than 3 (remote too) but it's still a risk. I don't know Eastvale well but it's in the Jurupa Valley area and absolutely some of that will become slums. There's just so much. Ghost town is very, very unlikely for a (relatively) close-in area like that.

Going by general history, the wealthier people who could keep the prices up like to live away from the riff-raff but can't get too far away. Your best bet would be a gated/restricted access community that's near some mixed development (with apartment, industry, and commerce) *and* that has some unusual feature to make it desirable. Views are always good. The other thing to look for is a Floral Park (in Santa Ana) style community which works really hard to keep the area pretty, nice, and safe. I doubt you're going to get that in any new community.

Renee' said...

I have spent the last 6 months driving around the IE comparing homes - communites - demographics, etc and I keep coming back to the older ranch style homes in Corona in the areas I mentioned. For me - I love character in a home - so these homes are fine for me - but take a drive sometime and you will notice one big difference than in the new housing tracks - very few For Sale signs. These SMART families bought these modest homes that they could afford to pay the mortgage on - low tax rate and maintain. Drive by one day - you will see and actually feel that these are folks who aren't going to loose their homes - they are mowing their lawns, adding on a porche..doing the things that homeowners used to do a long time ago - living.

I agree with "X" - Eastvale does have a higher risk for ghetto rama - in fact there are already pockets of newer neighborhoods near there that are already having gang problems...

Sean said...

Renee,
I'm looking in Eastvale area. Could you tell me which area there have sign of gangs so that I could avoid that particular area when looking. Like the x-streets
thanks

Jeff said...

Take it from someone that lives in eastvale. There are no gangs in Eastvale. They are in Mira Loma but the sheriff is very proactive in Eastvale to keep them out. There is a quarterly townhall meeting where numerous county agencies report on what is going on in Eastvale. The sheriff gives a report during these meetings and they have said no gangs operate in Eastvale. The majority of crime is non-violent property crime, ie car burglaries.

You can actually view these meetings at www.eastvaleresidents.com and see exactly what is going on in Eastvale. There is a very active forum there as well but you need to be a resident to gain access. You can also view the quarterly newsletter at www.eastvaleedition.com. Research the area yourself and don't rely on those "experts" that post here that may have driven through Eastvale once or twice in the past couple years.

Eastvale has what is called the Eastvale overlay that is similar to HOA regulations that is enforced by the County Code Enforcement agency. There are laws that lawns need to be properly maintained, there is no parking of cars on the lawn, no RV parking on the road or driveway, trash cans must be put away 24 hours after trash day, etc. These laws will keep the area from becoming ghettofied as what others have mentioned on this blog. You can view these laws on the Eastvale Edition website mentioned above to see if they will be too restrictive for yourself as some residents have stated they are.

I have to say that I have never lived in a community that has so many residents that are so active in the community.

the only negative about Eastvale for me is the Santa Ana winds. They do blow hard in this area. The smell is gone in my area and so are the flies. It is a little dusty but over time as more land is developed that will go away.

Sean said...

Jeff,
thank you for detail information and taking the time to response. Great site by the way. I planned on attending the town hall meeting once I move there.

Sean

golfer_X said...

That's great that the area has an active group of homeowners. That can certainly make the difference in keeping an area nice.

HOA rules though don't mean a whole lot. They are not law so they are unenforceable. The HOAs can fine and complain all they want but most cannot force people to do anything they don't want to. The real problem comes when people are in foreclosure and don't care. I had a neighbor that broke them all on a regular basis. Parked cars on the lawn, loud parties etc. He got lots of nastygrams and HOA fines but continued to do it until he lost the house. BTW it actually looks like I may have new nieghbors. I saw a car in the driveway this evening and the inside lights are on. I am keepiong my fingers crossed they are better than the last ones.

Jeff said...

Sean,

I forgot to mention the site that gives updates on our path to cityhood: www.eastvaleinc.org. In February a comprehensive fiscal analysis will be presented that will be used to determine if the new city will be financially solvent. If it is fiscally solvent there will be an election later in 2009 for the residents to approve or deny cityhood. The word from the analysts is that the city will be financially solvent.

Terry said...

In reply to golfer I believe Jeff was talking about County Code Enforcement Office and not an HOA. I am a Code Enforcement Officer and with a local city and a homeowner can wind up in court not adhering to the local ordinances and laws. If the the city or county abates any problems they tack a lien onto the property to get reimbursed for the abatement. It can be a long process but it does happen.

Sean said...

Jeff,
thanks again for that link and update about Eastvale's cityhood. I remembered 8 months ago when I first started looking at homes in Eastvale, looked over 50 homes by now easily. Put in about 10 offers all got outbid, now i'm glad that happened because the selections are just getting better and better. And I bet some of those people wish they had bid so much now they were bidding over $117sq/ft. heheheh Anyhow, I hope it does become a city.

Jeff said...

X,

It isn't an HOA. They are actually county ordinances enforced by Code Enforcement. A homeowner has 30 days to comply and after that get fined ever increasing amounts until the issue is resolved and can eventually end up in court. So it is like an HOA but has teeth behind it.

The main problem they are having right now are dead lawns for foreclosures. During the foreclosure process, banks can't do anything to the property until the foreclosure is done. Then code enforcement contacts the bank that took over the house and will start the process of giving them 30 days to repair the lawn or start levying fines.

Yeah, the people who are losing their house in foreclosure won't pay the fine and do anything about fixing it because they will be gone soon but someone will eventually buy the house and will resolve the outstanding issues.

I do have to say all of the new residents that are buying these foreclosures in my neighborhood are actually very proud homeowners. Much more so than the previous owners.

Jeff said...

Sean,

Prices in 92880 which includes Eastvale and some parts of Corona seemed to have stabilized around $125 sqft in the last few months. You can see this on Redfin's statistics.

The larger homes are selling for the low $100's per sqft. The smaller homes go for a higher per square foot price.

golfer_X said...

Hopefully the current crop of homeowners are "real" homeowners and will take some pride in their homes. In many cases the last batch were just speculators and people hoping to make a quick $100k for doing nothing. A community can be a wonderful thing when people work together and take pride in their homes. We kind of lost that in the last 10 years.

Jeff said...

What I noticed is that many of these recent foreclosure sales in my area actually have holiday decorations on their house which is a clear sign of pride of ownership. I'm glad the speculators are disappearing and homeowners are replacing them.

Sara said...

Thanks everyone for your comments--very helpful.
Jeff, I'm very glad to hear the good news about Eastvale.
But you mentioned that the problems are in Mira Loma. So one should avoid anything east of Hamner? the 15? old or new neighborhoods of Mira loma? I live in Brea and I'm not very familiar with Eastvale. I'd like to buy there in the future.

Sean said...

Jeff,
I have noticed that the listing have somewhat decline in $/ft for homes that are 3000 and higher sq/ft which is my target homes. And yes you're right that the smaller ones are higher. I too am glad to hear that the new homeowner are prouder. Maybe they'll be more envolve with the community. Hence, I agree with golfer_x that the new crop of homeowners are the "real" owner where they intend to stay for years to come like I will be doing.

mith said...

I don't see where's the 50% off.

Just put an offer in south Corona, in zip code 92882 for a 1700 sq feet house. At $118/sq foot the seller got insulted?!?!

doghouse said...

I tend to agree,( 50% off offers)
we made several offers ( alot more then I care to admit) at what are supposed to be reasonable prices,($100+ sq ft) only to be out bid everytime!
so for all you that are waiting for prices to drop to next to nuthin. it ain't gonna happen!
I don't have a crystal ball,and would like to see prices stabilize,so everyone can step up and buy part of the dream, but if you really think home prices will drop to less than $100 ft, or pre 2000 prices, I wish you luck, as I feel you'll be renting forever!

FairEconomist said...

We have too many houses. Ergo, the economics will have to get to the point where it's not worth building them. That's below replacement cost, and below $100/sq ft. (generally)

You can bank on it.

It's a good sign for Eastvale that they have an active community. But it's a very bad sign that they seem to think parking regulations and hurrying to get garbage cans back to the side of the house are what makes a strong community. Ultimately a community must rest on a strong economic base and the McMansion farms don't provide it. They have too few jobs, and no place for ordinary people to live if they ever get them.

Jeff said...

Sara,

I would stay west of the 15 freeway. There is a battle currently between Eastvale's and Jurupa Valley's cityhood efforts over the eastern boundary of Eastvale's cityhood. We are trying to have Wineville Ave as the eastern border as there are new homes between the 15 and Wineville that want to be a part of Eastvale and not Mira Loma. But we also have to propose a secondary border and that is the 15 freeway. So there is a chance that the eastern border will be the 15 and those east of the 15 will possibly become a part of Jurupa Valley.

The border will ultimately be decided by the agency called LAFCO.

Jeff said...

FairEconomist,

Please educate yourself on a local real estate market before you make wild assumptions such as the ones you are making.

I don't presume to know the intricacies of other markets like Hemet, Beaumont and Lake Elsinore and so leave that up to others to assess. But since I reside and interact with many in Eastvale I know this area far better than you do. There are doctos, lawyers, business owners, law enforcement officers, stay at home mothers and other blue collar and white collar workers in Eastvale with the majority being white collar. Some work in the I.E., some in Orange County and others in L.A.

The median income for the area is $78k (source). To get traditional home values you normally multiply the median income by 3 but with how low interest rates are currently I think you can bump that up to at least 4 maybe 5. So that gets Eastvale to the low $300k's. When interest rates are low that increases affordability and when they are high that decreases affordability so you have to adjust the multiplying factor accordingly.

golfer_X said...

Jeff, you don't increase the multiplier just because the interest rates are low. That's what got us in this mess. Better off using the traditional 28/36 values (28% of your income for house payments or 36% total debt). Using the 28% front end ratio someone making $78K can afford roughly a $200k house assuming a 6% interest rate and a minimum DP. That right there should tell you houses in Eastvale are probably still too high. Someone making $78k a year is only bringing home around $5k/mo. Assuming they want to eat, drive a car, pay utilities and the other bills and have something left over for emergencies, the total (PITI) house payment had better not be much higher than $2k/mo.

golfer_X said...

BTW, here's how I came up with the numbers (for the sake of any arguments)

78/12 = 6500 per month

6500 *.28 = $1820 per month

I estimated the homeowners insurance, property tax and mortgage insurance at $650/mo

$1820 - $650 = $1170/mo for your payment and interest. At that payment with a 6% 30 year loan the total loan would be around $193K.

I know interest rates are a little lower than 6% right now. But how many people are getting those real low rates? The 10% with credit over 800, the 20% with credit over 720? I dunno but most people are still paying higher rates. even if you drop the rate down to 5% the amount of house you can buy only jumps $25k to around $215k. So it's not really significant. The conclusion is the same, $78k can't afford $350k homes.

Renee' said...

Mira Loma and even parts of Norco - yes - even Norco - are dealing with gangs....it's just that Eastvale is very close to these areas.

MoVal has gone through this - they built some really big beautiful homes on the South side right at the edge of Perris - problem is - they are located right near gang infestation. We had looked over there about 4 years ago - we could see that these homes stood a risk of being a "victum of circumstance" and opted out of that area.

Sara - everyone has their own opinions about communities and where they personally would want to live. My suggestion would be to make SEVERAL trips on various days,times (to include evenings) and drive around the neighborhoods that you are interested in. People often make determinations on neighborhoods based on finding a home listed on the Internet - they drive by for about 3 minutes and are on their way. Check out your potential neighborhood within a 5 miles radius. Also - drive behind the block behind the home your interested in and see who lives behind the home (as well as the other neighbors) because remember, they too will be your neighbor. If you drive by and see a neighbor out - talk to them - get the scoop of the goings on of the street. I know it might sound corny - but I can honestly tell you that I have done this (and am getting ready to do this again today) and each time I see or find out something new that I didn't know before and has helped in narrowing down my search as to where I would like to live.

Keep in mind - wolves can come in sheeps clothing - just because it's a newer home in a newer community that has HOA's, CCR's, etc...doesn't mean that there won't be problems - been there once in my home ownership life and I choose not to be there again.

Paul said...

Thanks X for keeping it real. 3X the annual income is the purchase price of a house should be. The rule of thumb was created long ago so that people could "live" and prosper. Any fool can raise the bar and fools they have become. Sometimes one has to hold that line top people lest they forget the mess we are in.

With the cost of most everything going up including State taxes, the prices in the IE are still too high. I am awaiting an over correction before I jump in.

I would not consider Mira Loma and many parts of Corona if I have children going to school. Their safety and my peace of mind would make my decision clear.

I have also seen and witnessed the demise of community groups, committees, conscientous neglect of so called Codes. Professionals by their jobs are transients as well. It is the neighbors who are homeowners that make the neighborhoods appealing but little helps when it is located in a forest of demise.

There is nothing one can do other than to stand one's ground in the best place they can afford and protect one another. Short of vigilantism, gangs are everywhere. Anyone saying otherwise are liars or so stupid that they do not read the published FBI and Homeland Security bulletins.

Sara said...

This site provides detailed crime and other statistics:
http://www.bhgrealestate.com/Views/Look/Default.aspx

Martin Burtin said...

I would be entertained by having a "gang war". HOA's vs the Homies vs Code Enforcement. Three way mayhem. Couldn't care less who wins.

Jeff said...

I firmly believe that 4 times median income is a healthy market in California given current interest rates. I read on many blogs that prices will be going back to 2001 prices. So taking the general consensus and looking at the Price to Income ratio on HousingTracker.net for Riverside, the price to income ratio in 2001 was 3.7-3.8. Even going back to 1999 it was 3.5. I'm sure we can all agree that the market in 1999 was healthy and appropriately priced.

The bottom of the last bubble was in '96/'97. The price to income ratio was at 3 then but interest rates were higher then (7.5-8%) than they are today. So given current interest rates it will not reach that level unless rates reach similar levels as in '97.

During the last bubble in '89 the ratio got to 5.7. The reason it only got to that level is because interest rates were 10-11%. The reason the recent bubble got to 7 is the Fed kept rates too low for too long.

Now if inflation returns to early '80s levels then I can see the price to income ratio dropping to 2 due to a drastic rise in rates to combat inflation.

Whether you think it's right or not, people in California extend themselves a little farther than other areas of the country due to the desirability of Southern California so that is why we have historically been higher than 3 times income.

golfer_X said...

For the sake of argument lets use "official" numbers. Remember housing tracker tracks listing prices not selling prices.

Lets take 2000, according to the California Association or Realtors the median home sold for $133,410 in 2000. According to the 2000 US census the median family income was $48,409, the median household income was $42,887. Using the household income you get 3.11 and using the family income you get 2.75. Rounded off that's close enough to 3 times the median income for me. I do beleive it is household income that is normally used and not family so the 2.75x would be the correct ratio. This also matched the NAR chart that I have that shows the ratio going back to 1980.

According to the NAR's own data the ratio only went above 3x in mid 2002. The only other time in the last 30 years it was over 3x was in the early 90s and it was just slightly over 3.

Jeff said...

From Housing Tracker's site for Price to Income ratio in Riverside:

"The price to income ratio compares the median single family home sale price to the median family income for Riverside, California."

They are using historical sales and median income data for the Price to Income ratio I used in my data. However, they do have some assumptions/caveats explained at the bottom of the page but I feel confident in their analysis using the technique they are using. However, this section of their site hasn't been updated since 2007. The section you normally look at is based upon asking prices.

The numbers you are quoting are for the whole state of California. Different geographical areas have different ratios. And some areas fall before others and vice versa which will affect CAR's numbers for a given year. I'm looking for more localized data. We can agree that the inland areas are correcting sooner and quicker than coastal areas so that is why I'm not interested in statewide data as it includes areas that are correcting or appreciating at different times. I don't know what areas were correcting or appreciating in 2000.

I will agree to disagree with you and we have both provided statistics backed by facts so now only time will tell who is more accurate with their analysis.

Thanks for the civil debate.

Renee' said...

WOW...all these stats....my head hurts.

This market is so funny that the baby might be thrown out with the wash....I think we can all agree that we really don't know what's going to happen next in this housing market.

Years ago when I was a home owner -I could predict fairly accuratly the housing markets ups and downs...NOW - it's like shootin craps - you never know what's going to happen.

I'm a spiritual kind of gal - I rely on a "higher power" to give me direction - if I tried to figure out all the stats on my own ~ value (x) the median household (-) the flux cupacitor ---I would screw it up and then I would have to slit my throat. LOL!

I give allot of credit to you "X' & you too "Jeff" - you guys are better at all those stats than I sure am and probably will fair better when you purchase your homes.

Me...I'm careful but I know that whenever I buy - weither it be now or later - it will be some kind of risk.

golfer_X said...

The numbers posted are for Riverside County not the entire state. They come from reports put out by the California Association of Realtors or the National Association or Realtors. Now where they get there data is anyone's guess. I don't put too much weight in numbers. You can take a set and make it say just about anything of you're creative enough. I still prefer the tried and tested method of 28/36 ratios that the lenders use. It doesn't really matter what you or I think the ratios should be. It matters what a lender will loan.

Cheers!

Renee' said...

....a home is only worth what some will pay for it and - EXACTLY - what a lender will loan.

I would pay $500k for a home - that was 6,000sq ft and came with a freakin maid - but not a 1200sq ft fixer upper...I STILL marvel at what people bought their homes for - I guess I am too cheap.

OSA said...

I agree that no one knows what will happen. I have been reading and one of the options been thrown out there is to reset the mortgages of folks that are underwater to the current value. What this means is that an artifical floor will be put in prices. Some areas are still high historically but other areas are not. So if they do this those waiting might miss the boat - due to the fact that many folks that bought with funny loans will be able to stay in the house if it is repriced. If houses are not repriced then who know where the bottom may be

golfer_X said...

The resetting of the loan principal has already been tried. That was the 300 Billion Hope 4 Homeowners act that congress passed back in August or Sept. That one was supposed to save 300,000 borrowers from foreclosure. The problem was the lenders would not or could not reduce the principal. End result was the got something like 300 applications in the first 3 months and ZERO loan modifications. ZERO! It will undoubtedly go down as the biggest failure in the history of congress. All that time spent bickering and lobbying for NOTHING.

There are a lot of problems doing this. The primary one is that the loans are held by wall street funds and they will not allow it, That's if you can figure out who actually owns the paper. Another problem is that many homes have multiple mortgages. That's just not going to happen and if it does it will be to only a very lucky few.