Exclusive: IrvineRenter on South OC real estate

There's nobody better to talk real estate with than legendary Irvine Housing Blog writer-turned-author IrvineRenter. We recently caught up with him and asked for his thoughts about South Orange County real estate.

Question: What is your general opinion on South OC real estate in the near future?
Answer: In my opinion, you will see the same trends in South OC as you are in Irvine. The low end will lead the charge going down, the middle of the market will crumble next, and finally the high end will drop. The biggest difference I see between Irvine and other South OC markets is the depth of the drops. South OC will get hit harder.

Q: You blog about Irvine for the IHB. What are some general differences between the Irvine real estate market and South OC?
A: South OC has been getting hit harder than Irvine in our current price decline. This is typical of fringe markets. Housing markets located farther from major employment centers always get hit first, and they often get hit the hardest. I have noticed many properties already trading for at or below rental prices where someone can save money versus renting. This is the first signs of a market bottom. Unfortunately, the properties at rental parity are often the less desirable condos. These properties usually fall well below rental parity and reach prices were investors will buy them for positive cashflow.

Q: South OC is taking a beating, but it's still nowhere close to as bad as the Inland Empire. What are some factors that will save South OC from becoming as bad as the IE - even though South OC is facing a lot of foreclosures?
A: What happens in South OC will be something between the carnage of a market like Irvine and a market like the Inland Empire. Price declines like this get more severe the farther one has to travel to a main employment center. For instance, the Hemet/San Jacinto market is more than 50% off, and so is Palmdale and Lancaster. They have little local employment, and there is no reason for people to buy there when prices nearer the employment centers are dropping too. There is an exodus from fringe markets to prime markets that makes the price drops in the fringe markets more remarkable. South OC will continue to see big price drops because prices are still elevated relative to incomes, and there are many Alt-A loans likely to go into delinquency and foreclosure.

Q: A good rule is to buy as a "rent saver," meaning you are saving money each month by buying as opposed to renting a comparable property. Considering the amount of damage some areas in South OC are taking - and the real possibility of prices falling well below this level - is it still a generally good rule of thumb to jump into the market when it reaches rental parity?
A: I believe it is always a good idea to buy at rental parity, if it is a property you plan to live in long term. If you buy at rental parity, you are saving money versus renting each month, and if you have no need or desire to move, it doesn't matter what happens to resale prices. I will not be concerned if prices drop after I finally purchase because I will not be selling, and I will know I am saving money versus renting each month.

Q: What signs should we be looking for in the next few years that the market is actually stabilizing?
A: When desirable properties start reaching rental parity, the market bottom is near. It is unlikely that desirable properties will fall much below these price levels because the savings on rent is a powerful inducement to buy. This is what will finally bring sufficient buyers into the marketplace to stabilize prices. Looking for some other indicator like inventory levels or sales volumes is not going to be predictive.

Be sure to check out the Amazon page for IR's book - The Great Housing Bubble: Why Did House Prices Fall?