What was the housing market like in 1997 at the bottom of the last price crash? Will history repeat itself?

Asking Price: $245,000

Address: 199 Pineview Irvine, CA 92620

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This fed time outta town pie flipper

Turn cristal into a crooked I sipper

Everbody want to be fast, see the cash

Can’t Nobody Hold Me Down — Puff Daddy

Is the FED working to feed flippers? Everybody wants to get that fast money…

I have written about the bottom of the market on a number of occasions including: The Market Bottom Is Not a Price Point, The Market Bottom and Fundamentals at a Market Bottom. Today I want to take a more detailed look at the market conditions present last time and extrapolate those conditions to today.

What were the market conditions in 1997 at the last market bottom?

The market peaked in the spring of 1990 at $245,000. In early 1997, the median was $223,750. It dropped for 7 consecutive years (The data series is a bit noisy, but the lowest low was recorded at $192,750 in May of 1994).

There where bear rallies almost every year similar to what we are seeing now.

The median household income was $62,022.

The median home price was $223,750.

Mortgage interest rates were at 7.6%. Rates had been steadily falling since 1982.

If a borrower puts 20% down on a $223,750 home, they are putting $44,750 down and borrowing $179,000. The payment on $179,000 at 7.6% interest is $1,263.87. This amount represents 24.4% of the median household’s $62,022 income.

Think about that: in 1997, a family making the median household income could buy a median home with a payment that was less than 25% of their income.

One of the erroneous contentions real estate bulls have made over and over again is that the median household income could never buy a median home. That is simply nonsense.

Twenty percent down was the norm in 1997, but what about the first-time buyers who were only putting 3% down with an FHA loan? They would have put down $6,712, borrowed $217,037, and they would have had a payment of $1,532. This payment would have been 29.6% of their income. By any standard, houses were affordable in 1997.

So what would these same market conditions which prevailed in 1997 look like today?

The median household income in 2008 was $91,101. I doubt it went up since then.

The current mortgage interest rate is about 5.25% (It fluctuates wildly lately).

If a family making the median household income were to put 24.4% of a $91,101 income toward a payment, they could make a payment of $1,852.39. That payment would finance $335,452. A 20% downpayment of $83,864 combined with the $335,452 loan would yeild a median home price of $419,316.

If the people in 2009 were putting the same percentage of their income toward housing as those who bought in 1997, the median home price in Irvine would be $419,316.

House prices did not go up by magic. People were utilizing crazy loan products that allowed them to borrow unbelievable sums, and they stretched beyond the limit to borrow these massive sums. The collapse of these loan products has already resulted in a huge decline in borrowing. People are still stretching to an insane degree and putting very large downpayments to keep our median at $550,000. As those with large downpayments spend themselves, and as people stop stretching to buy depreciating assets, the median will continue to fall.

Keep in mind that the $420,000 median we should be seeing is only supported by artificially low interest rates. As I described in Real Estate’s Lost Decade, if interest rates go back up to their historically stable levels of near 8%, the amounts financed drop even further.

What would happen if incomes were to remain flat and interest rates were to rise to 8% by the summer of 2011? (This probably will not happen, but it could.) Using all the same parameters and an 8% interest rate yields a median home price of $315,561.

If you knew the median household income went up about 50% from 1997 to 2008 ($62,000 to $91,000), wouldn’t you suspect house prices would also have gone up 50% ($223,750 to $335,625)?

Is it logical to think house prices can go up more than incomes?

How are people capable of bidding up house prices higher than their incomes would allow?

If lending standards retreat to 1997 standards (which they have), shouldn’t the relationship between income and price also mirror 1997 characteristics?

When I was interviewed recently at the Irvine Homes Blog (Blogger: Irvine housing market nowhere near bottom), I said that I believed the Irvine median would bottom near $375,000, particularly if interest rates rose to 7%-8%. When you look at the math, and look at the history, the crazy number that I threw out looks reasonable and even conservative.

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A year in review: 1997.

2 Silveroak Irvine, CA 92620, Sold $302,500, Price: $1,039,900

3 Shadowglen Irvine, CA 92620, Sold $517,000, Price: $1,399,000

14 Crestwood Irvine, CA 92620, Sold $358,500, Price: $1,250,000

15182 Marne Cir Irvine, CA 92604, Sold $274,000, Price: $788,000

166 Oval Rd #4 Irvine, CA 92604, Sold $97,000, Price: $299,900

5 Highland Vw #8 Irvine, CA 92603, Sold $175,000, Price: $499,000

Asking Price: $245,000

Income Requirement: $61,250

Downpayment Needed: $49,000

Purchase Price: $98,500

Purchase Date: 11/12/1997

Address: 199 Pineview Irvine, CA 92620

Beds: 1 Baths: 1 Sq. Ft.: 932 $/Sq. Ft.: $263 Lot Size: 763 Sq. Ft. Property Type: Condominium Style: Other Stories: 2 Floor: 1 View: Lake, Pond Year Built: 1977 Community: Northwood County: Orange MLS#: S579050 Source: SoCalMLS Status: Active On Redfin: 18 days

Affordable Resort-Style Living. Two-story townhome (no one above or

below) nestled in a tranquil environment overlooking lake, stream, and

mature trees. Premium private location, best in tract with unobstructed

views. Open floor plan with vaulted ceilings. Generous living room with

fireplace, open to cozy dining area. Large bedroom loft with full bath.

Beautiful lakeside patio. Spacious laundry/storage room with washer and

dryer hookups. Move-in condition, with brand new carpet and modern

ceramic tiles throughout. Association features pools, hot tubs, tennis

courts, and is within walking distance from shopping, parks, and

schools.

nestled and cozy… I feel all warm and tingly…

This property was purchased on 11/12/1997 for $98,500. The owner used a $95,150 first mortgage and a $3,350 downpayment. He never refinanced nor took out any HELOCs! If he gets this asking price — which doesn’t seem very likely — he will make $131,800 after a 6% commission.

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I profiled this second property recently in the post The Lenders Are The Market. It was also a 1997 purchase, so I am repeating it here today.

Asking Price: $130,000

Income Requirement: $32,500

Downpayment Needed: $26,000

Purchase Price: $62,500

Purchase Date: 10/29/1997

Address: 228 Orange Blossom #34, Irvine, CA 92618

Beds: 1 Baths: 1 Sq. Ft.: 471 $/Sq. Ft.: $276 Lot Size: – Property Type: Condominium Style: Other Stories: 1 Floor: 1 View: Creek/Stream Year Built: 1976 Community: Orangetree County: Orange MLS#: F1786080 Source: SoCalMLS Status: Active On Redfin: 275 days

Charming end unit. Lower level one bedroom with full bathroom and

kitchen. Inside laundry. Living room and patio area overlooking water

stream and soothing sounds of a waterfall. 1 car port. Association has

pool, spa, tennis courts and clubhouse. Excellent location next door to

Irvine Valley College. Near 5 and 405 Freeways, Irvine Spectrum

Entertainment Center, Business District, Shopping. Located in Building

# 12.

This property was a classic “put” to the bank. The owner paid $62,500

on 10/29/1997 using a $35,000 first mortgage and a $27,500 downpayment.

She only borrowed against the property once during the bubble taking

out a $20,000 loan in late 2003—that is until 7/23/2007 when she took

out a $212,000 first mortgage. Her timing was great because two weeks

later the credit crunch hit, and financing these properties became

significantly more difficult.

So which owner do you think was wiser? The one who did not HELOC the property stands to make a smaller profit, but he will retain good credit. Or do you think it is the owner who HELOCed every penny out of the property and walked away was wiser?