Irvine home prices surpass housing bubble peak
House prices in Irvine, California, reached the peak of the housing bubble, providing equity and relieving many underwater homeowners.
The federal reserve in conjunction with government officials reflated the housing bubble to restore collateral backing to lender’s bad loans. Whether or not this is a good idea depends on your perspective. If you’re a renter whose tax dollars are being diverted toward this endeavor, these efforts are not particularly welcome. Renters receive no benefit from this intervention, and the resulting high home prices make it more costly for renters to become homeowners, so it’s a double whammy. If you’re a homeowner, it’s a very welcome government intervention. It costs homeowners nothing, and they get all the benefits.
Whether or not we think its a good idea, policymakers do, and these efforts will continue until the bubble is fully reflated and the banks are no longer in danger of insolvency or bankruptcy. As house prices in more markets reach the peak of the housing bubble, the props and stimulants will be slowly removed, probably culminating with a slow rise in mortgage rates.
Irvine Reaches the Peak
The housing bubble is fully reflated in Irvine, California, many years ahead of schedule.
The chart above projects housing prices forward based on the mid 90s period of stable interest rates and rent growth. If lenders had not enabled borrowers to inflated a massive housing bubble in the 00s which required equally massive intervention to reflate the bubble in the 10s, house prices would have risen steadily based on income and rent growth finally reaching today’s median of $733,800 in 2025 or 2026.
For those of you into stock trading and technical analysis, what does the chart above tell you? Would you be surprised to see house prices touch that trendline again, perhaps a price levels lower than today’s within the next 10 years?
The Irvine median reached housing bubble peak valuations while maintaining it’s historic relationship to rental parity, a 15% premium.
In the post Bold California housing market predictions for 2015, I stated, “If mortgage rates remain below 4.25%, both sales and house prices will rise next year. The economy is improving, and with an improving economy will come increased demand. If this demand is amplified by super-low rates, housing will do well.”
With mortgage rates still hovering near 4%, buyers had the borrowing power to push prices higher, which they did.
The rate of appreciation slowed in Irvine, as it has everywhere, and for the last year, home price appreciation has remained in a stable range mirroring the increase in rent.
When I developed the market analysis tools deployed on this site, I intended to provide buyers with tools to properly evaluate fair market value for both individual properties and the market as a whole. Several years ago when prices reached historic limits of affordability, I predicted prices would be limited by this new ceiling because with toxic loan products effectively banned, buyers would not be enabled to push prices up beyond what they could afford.
This prediction specifies a certain price level, and the housing market has reacted exactly as this mechanical analysis said it would. For the last three years, aggregate home prices were tightly tethered to the affordability ceiling across all the Southern California markets I cover.
Home prices appreciation over the last three years has been driven almost entirely by increasing rents and incomes.
The rate of rent increase has been in a stable and affordable range.
The rate of resale price change and rental price change show strong correlation.
Despite the high prices, Irvine is relatively affordable due to low mortgage rates. Most markets are within a few percentage points of the predicted value based on the historic premium from the 90s (see column on the right below).
As I noted at the beginning of this post, we are about 10 years ahead of schedule reaching today’s market pricing. I believe we will see some degree of reversion to the mean in mortgage rates over the next decade or two, and as a result, home price appreciation will be below average as aggregate prices respond negatively to rising mortgage rates. Today’s buyers will still build significant equity, but this will materialize through a more rapid amortization of mortgage loan balances than it will through resale price appreciation — assuming lenders don’t find another way to inflate a new housing bubble.
With house prices back above peak levels, the percentage of underwater borrowers in Irvine should be very low. Some will still be burdened by increased mortgage balances due to loan modification terms, but by and large, most people should have enough equity to sell if they want to. I anticipate the problem of low inventory will slowly go away as fewer loanowners are trapped in their homes.
While the housing market still has to adjust to higher mortgage rates, at least in Irvine, it’s starting to look more like the 90s — which is to say it looks more “normal,” whatever that is.
Housing Market Reports
Look here for the updated SoCal housing market report. If you want the OC Report, you can download it below.