This Just In: Housing Prices Actually Linked to Income, Jobs and Mortgage Rates

Holy cow! I mean, if you had been listending to a Realtor the last 8 years, you might never have suspected this 2x4 of obviousness across the face. But it's true.

Wait a minute, you mean, income, jobs and mortgage rates determine..... Yep, there's this complicated thing called "fundamentals".

This is a fantastic article by Susanne Trimbath which restates the critical success factors for prospective homebuyers.

1.) Do I have enough income (take home after expenses and debts) to purchase a home at the market prices?

2.) Will I have a job in 6 months?

3.) How do current and future mortgage rates coincide with local home prices and my monthly take home budget?

This is the part where our hall monitor Realtor friends step in and remind us, in that I-never-sold-anyone-into-foreclosure-ever condescending manner, "real estate is local".

True.

But so too are jobs and incomes.

And last Friday, California and Orange County got some interesting news:

California, the worlds' 9th largest economy according to GDP numbers, has an unemployment rate of 10.1%.

Orange County California's unemployment has reached an all-time high since 1993 of 6.5%

So why is it that a 4 bedroom, 2.5 bath, single family home in Lake Forest, CA is priced at $650,000, or 6 times the median income here of approximately $100,000 per family?

If you were to go to Redfin, Trulia, RealtyTrac, or Zeus forbid, Realtor.com, you'd be surprised as to the homes available for sale in Lake Forest.

And you would be far from impressed.

In a word, almost all single-family homes in Lake Forest, California are over-priced pieces of crap. I'm dead serious here. Most of the homes for sale right now in February 2009 in Lake Forest are foreclosures, or trashed out short sale properties. Nobody who doesn't have to sell is trying to sell their home right now. The availability of quality homes for families with children, for example, to consider purchasing are few and far between. Most fence-sitters must not only cope with still unbelievable home prices (between $450,000 and $750,000), but also the reality that the home they might buy will be riddled with defects and necessary repairs. It's just a fact. And this I'm reporting AFTER the housing crash has supposedly occurred.



Paseo Verdura, Lake Forest, California, 350 days later, still $650,000.
Bank get's an A for stubborness, and an F for creativity.

I submit that parts of Orange County are still living in a dream world in terms of their asking prices.

Why?

Well, because the local real estate market is screwed up. Yes, Orange County is a nice place to live. A beautiful place. Perfect weather, oceans nearby, mountains nearby. I mean OC living has its' merits, and those should be priced at a premium of some measure. But single-family homes remain overpriced.

Earned incomes in OC are higher than the rest of the country. However, I suspect that job market uncertainty combined with ridiculous home prices that bear no relation to incomes will keep many on the sidelines through a difficult 2009.

A Weekend With The Realtors

I visited some open houses (5 single family homes) over the past weekend in Lake Forest, California.

Many of the homes I viewed were completely and utterly outside my realm of affordability - which pretty much sums up all single family homes for sale in Lake Forest today, despite numerous foreclosures and a certain degree of home price corrections as a result. But hey, I thought it would be interesting to view a few of the local homes that were for sale in the nose-bleed pricing stratosphere ($700 - $900K) and also find out what some of the realtors or maybe some homedebtors had to say.



Here are a couple of observations (since a realtor was present inside each home during the open house). There were no homedebtors present from what I could tell.:


-All 5 homes were single family's in Lake Forest with 4 bedrooms and 2.5 baths or more. All had been on the market for 1 month or more. All had been subjected to price reductions of varying degrees.

-4 of the 5 realtors mentioned "increased local sales activity in Lake Forest" and "all-time low prices for the area" for single family homes. One agent used the phrase "there are some great bargains out there".

- 4 of 5 realtors mentioned that "now is a great time to buy". 2 said that phrase exactly to me. When I asked why they thought it was a good time to buy, they cited the historic high appreciation of home values here, good schools of Saddleback School District, access to local convenience stores, no mello roos in Lake Forest, and the recent price declines.

One realtor told me an interesting story suggesting that in Orange County the trend is that "we always have 5 years of an up market and 3 years of a down market".

- One realtor promised that the home he was selling for $899,000 today (marked down from $900K) would be worth $1.4 million in another 4 years.

- 3 of the 5 realtors expressed their opinion that the "the market has bottomed out" or probably has bottomed out.

- 2 of the 5 realtors said the market would bottom out this summer. One then back-pedaled and said "it'll bottom out by around September 15 at least.....but don't hold me to it."



- At one of the open houses, the realtor mentioned to me that he would cut his sales commission by one-third of a percent (but that he would have to clear it with his partner first). That owuld be 0.33%. Given the sale price of the home ($799K), this would be about $2,600 in potential commission savings for the buyer.

- One realtor acknowledged my entrance into the home but decided to continue a loud and boisterous converation with another client about her failure to convince her lender to "make a deal" about the new rate on her condo ARM loan. He then proceeded to explain to her what a short sale was and that he had a visitor and would need to call her back later.

When the above realtor got off the phone, he introduced himself and then told me about his clients' problem (did not mention her name), an elderly woman who can't afford the "new payments" on her condo. The realtor proceeded to say that he didn't understand why lenders don't work a solution out with their customers on these ARM loans. Then he decided to ridicule his client referring to her by saying "some people are just stupid".

- One beautiful 4 bed single family home I visited was for sale for $899,000 in a lovely Lake Forest cul de sac. Really terrific home. Was previously placed on the market for $915,000. Even though I stated to the realtor that I was just perusing and not serious about buying right now, the realtor said he was very sure he could talk the owners down to $879,000 but that the sellers would not go below $840,000!

I thought to myself, holy shit, the sellers may be screwed as it is with the fucked up housing situation of OC, but the realtor they've decided to hire is feeling footloose and fancy free about leaving plenty of cash on the table. If there is a case to be made for people to pay realtors an hourly wage instead of a flat % off the sales price, this realtor was poster material.

I left the last home really hungry and thinking about stopping by a local Pollo Loco restaurant for some lunch.

I then decided no. What I really needed was to take another shower.

Lansner: California Home Prices Down 20%

John Lansner delivers more glorious California housing market news.

If it was ok for California realtors to cheerlead the entire real estate market to its euphoric price highs, is it now OK to stare with gaping mouth amazement at the collossal and historic housing crash now underway?

Yeah go ahead, it's ok. As long as you don't block traffic.

Rising Rates + Stricter Lending Standards = Fewer Qualified Buyers

Take heart, my real estate flogging friends.

There IS still a pool of prospective homebuyers still out there.

But indeed, that watering hole of prospective home buyers is about to get a whole lot smaller.

Ah, and then finally - a valuable nugget of common sense and operational wisdown from Wells Fargo and Wachovia banks!:

"Raising rates and imposing stricter standards on some of their most creditworthy borrowers as slumping demand in the mortgage bond market chokes off funding."

"Making it tougher for the most creditworthy borrowers to get mortgages may worsen the two-year-old housing slump and threaten U.S. economic growth by reducing the number of people who can buy houses or how much they can afford to pay."

This means that fewer people in Orange County, and the state of California for that matter, will qualify for a home mortgage loan at all. Those that manage to qualify for a mortgage loan, given the inconvenient median gross income in Orange County of $75,000 per annum, will not be funded to buy homes in the $500K to $750K range. It's highly questionable whether the average Orange County resident (local renter or new arrival) will be able to fund even a $400,000 home.

This begs to question who is going to show up with an "S" on their chest and buy up the rising inventory of OC homes priced in the stratospher of $550 to $800K?

And where will these lending restrictions leave sale prices?

There's only one direction.

Down town.

And if one considers the May 2006 numbers, there were only 495,000 licensed real estate agents in California (one real estate agent for every 52 adults in the state). The self-proclaimed "competitive industry" is going to get a whole lot more competitive. We're talking stifling competition.

It's no longer who you know in that PDA roladex. It'll be who you know who has liquid money in the bank, a steady job for over 6 months, a good-to-fantastic freaking credit rating - and this other little annoyingly absent pre-requisite called "an interest in buying a home right now" during this shittiest of real estate markets ever known.

Assuming realtors find that qualified, and more importantly, informed but motivated, prospective homebuyer, how much home is he/she qualified to purchase? How does that match up with the inventory list of homes and their actual for-sale prices?

Not well, one must admit.

On the other end of the equation, OC homesellers are expecting a little something too. Not much really, just their $300,000 markup on the home sale transaction. I mean, afterall, they earned it. They deserve it. And when they bought the house from the realtor a few years ago, that realtor promised it.

The greed. The deception. And the revulsion, once the rancid truth rears it's ugly head.

Sure, you can lie some of the time. Just not all of the time. Sometimes you need to say the truth to maintain credibility and stay in business.

Orange County Realtors, just say it: "It's not a good time for me to take your money right now. It's not a good time to buy a home. It's better for you to wait."

You can say it.

They know.

It's all coming to a head.

What a wicked web have we woven!?

It's a great time to buy a house in Orange Count.....wait, no it's not.

The OC Register reports today what many have suspected for some time - that the OC housing market is in serious trouble. As of June 21, 2007 home sales are down by a total of 29% from 2006 (including single family homes, condominiums and new homes).

In Lake Forest, CA year to date home sales are down 48.5% in June 2007 compared to June 2006, but the median home price skyrocketed to $647,500.

John Lansner correctly points out that while the total OC median home price is the same as this time last year at $640,000, it is impossible to discern whether actual home sale concessions in 2007 are up or down compared to last year's exchanges (concessions include paying out closing costs and buyer agent commissions, etc.).

It's now July. The summer home sales spectaculars must be in full swing.

Can OC Realtors now, after 6 shaky months, look at prospective buyers in the eye - in that oh so"special way" that a mere computer cannot- and still proclaim: "Hey, it' still a great time to buy"?

They can't.

But the Realtor told me everyone wants to live here

Think again.

Mr. Esmael Adibi, the Director of Chapman University's Anderson Center for Economic Research, and Mr. James Doti, the president and Donald Bren Distinguished Chair of Business and Economics of Chapman University, both claimed today that over the short-term fewer people will be migrating to Orange County, California.

Why? Here's the article from the Daily Pilot.

Mr. Adibi:

"Orange County is going to be a strong economy no matter what, but there will be fewer people moving in because of high housing prices and unaffordability," said Doti, the president and Donald Bren Distinguished Chair of Business and Economics at Chapman. "But we hope in the coming years, that will subside because of the natural amenities this county offers."Those amenities, Doti said, included the county's landscape, its educational system and its bustling arts scene.

Also, he said, the increased reliance on exports would turn the area into a trading hub."Global trade will be greatest with Asia, Southeast Asia and the trading port for much of that will be Southern California," he said.

A problem for the county, according to Doti and Adibi, was the housing market, which was slowing due to high mortgage rates and a decrease in the population — between the ages of 25 and 49 — that usually bought homes. Adibi said the average Orange County family paid 49.8% of its gross income on mortgage payments last year, a record amount.

While we keep reading how the National Association of Realtors and the California Association of Realtors wish to position themselves and staunch advocates of affordable housing, it's not quite making it happen on the streets of Orange County.

Median home prices in Orange Country rose again in May by 0.8% to $635,000.

I mean, when you think about it, why would realtors want home prices to come down to affordable levels when that would have an adverse affect on their income (6% of the home value sale)? I guess, you'd have to assume then that a home sale at any price, even if it's lower, is better than no sale at all. And a commission check is better than no commission check at all.

OK.

Good to be clear about what's important to realtors - and to what extent they are truly interested in affordable home prices in Orange County.