I recently wrote a email to NAR, an organization that I am a part of. The email spoke out against bailouts that use tax payer dollars to subsidize and artificially support home prices. Although many colleagues have brought it to my attention that these types of blogs will not help me to get business, I also do not believe that not being honest is good business either. Howoever, I do know that keeping my opinions to myself may be! This is my real estate blog and this is my opinion. Plus very few actually read my blog anyways! Most of which are not my current clients anyways, plus if my current clients ask my opionion I will tell them regardless if it it costs me short term business. Nevertheless, I still believe that real estate is a great investment, in fact, to me it is still the best investment. However, it's only the best if done right. Moreover, bad policy is not good for anyone. My latest email to NAR is below.
I do not mean to bombard you with information, however, it is important that I clearly demonstrate my point.
Hence, I wanted to put together some facts to better demonstrate my position regarding home prices and affordability and why prices still need to come down in some areas. Moreover, why I believe that government subsidization in these areas will actually hurt affordability, the economy, and agents.
Moreover, that by giving people the ability to purchase past government policy made it irresponsible to purchase for a whole group of American’s that could not; and possibly still cannot responsibly afford a decent home in many areas of the country. Furthermore, by passing legislation and promoting policy that “stalls foreclosures” and artificially props up prices they are making another mistake.
For example, the zip code 92620 is a relatively average zip code in Irvine, CA.
· Between 2000 and 2006 the average home went up 260%
· During the same period the average income only went up 17%
· Although to date prices have fallen nearly 25% from the peak prices are still 93% higher than they were only 9 years ago while incomes have only increased 17%
· Is it really so bad if the people that bid up prices to begin with have to rent?
· Is it really so bad if the homes come back to market levels so that those that have been renting, paying their taxes, and savings can be rewarded and purchase a home for the right price?
Moreover, to demonstrate my contention regarding rental paridy I’m going to use real numbers. There is a home in my neighborhood currently for sale for $535,000
. The exact same floor plans rents on average for $2400. You can see using my preferred Rent versus Own calculator if a buyer is making a rational choice between renting this home and buying this home, he will choose to rent it. As the total cost over ownership is nearly $600 more per month than renting it. If the housing stimulus package is successful, home prices will stabilize at this level and instead of buying it at a price that would allow for a total cost of $2400 and allowing the buyer to have an extra $600 to spend to stimulate the economy it will get sunk into mortgage payments and go the bank.
The rent versus own calculator does not work on here, however you can access it your self and check for rental paridy at: http://www.irvinehousingblog.com/calculator/
Furthermore the home in this example is a relatively average 1700 square foot condo. Using the tempo (our MLS conduit) buyer’s qualification form for a conventional mortgage with 20% down, the average income family in Irvine earning $99,015 per year with 20% down only qualifies for a mortgage of $227,000. Do you know how many 3 bedroom homes sold in Irvine for less than $300,000 in 2008? Zero.
Buyer's Qualification Calculations for Conventional Mortgage:
The following data is for estimation purposes only and the accuracy of the figures is not guaranteed. The actual costs with respect to each transaction will vary depending on the circumstances.
Gross Monthly Income
Appropriate Percent for Mortgage
Max PITI $ 2310.00
Appropriate Amt for Total Debt ( 36%)
Total Monthly Long Term Debt
Max PITI $ 1970.00
Maximum PITI (lower of above)
Monthly Real Estate Taxes
Monthly Homeowner Ins
Estimated Max P&I
Estimated Maximum Mortgage Amount
Note: A Maximum Mortgage Amount that says "Unqualified" or a MaxPITI of 0.00 means that a calculation resulted in a negative number.
Mortgage for Desired Loan Amount
Desired Loan Amount
Annual Interest Rate
Term of Loan
Monthly Payment for Desired Loan (P&I)
Monthly Real Estate Taxes
Monthly Homeowner Ins
Estimated Monthly Payment for Desired Loan (PITI)
Quite simply prices will quit falling when they are back in line with income and rents. Moreover, the housing market will stabilize and our country will begin to move forward. Policies that stall and prevent this simply delay the necessary but somewhat painful process in exchange for a desired quick fix and instant gratification. The best case scenario based upon current policy is hyperinflation which will erode the dollar and cause incomes and rents and to catch up to home prices. Moreover, it angers me that our policy makers have not learned from their mistakes. The current economic situation is due in large part to policy makers that thought it would be a good idea if everyone in America owned a home. As a result they put into motion a chain of events that led the sub-prime melt down, the great housing bubble, and possibly the next great depression.
On the surface the idea that everyone should own their home is a great idea, however, one does not have to look too far ahead to see that it is not a good idea to borrow money to people that cannot manage it, to allow someone to take a negative amortization loan, to borrow $500,000 to someone that cannot save $5000 to pay for closing costs. Now, our policy makers irrational thought that the only way out of the mess is to artificially keep prices high and reward those that made horrible decisions.
Do not get me wrong, as an agent there is no better feeling than helping someone to purchase their dream home. Beyond the fact that if this works it will simply drag this mess on indefinitely, if he is successful, many responsible, hardworking people, that by any standard should be able to purchase, will not be able to and will be left holding the bag. Worse yet, this group will end up subsidizing the people that the irrational policies support and NAR has stood up in favor of this.
NAR’s policy is to make the dream of homeownership possible; however, by supporting this type of legislation it is actually stripping the dream from the most deserving people. Moreover, it is unforgivable that NAR has failed to take note of past failures and is asking those that these policies have hurt the worst to pay for these mistakes through their tax dollars. NAR has essentially caused the dream of responsible homeownership to disappear for this group and NAR continues to beat them over the head as they fights for the preservation of the failed experiment of homeownership for all, well most, ummm well, at least those that have not earned it.