Back in 2000-2001, there were some of us long-time real estate people that thought we were due for a downturn. Historically the market ran its full cycle every ten years, and 1990 was the previous peak.
But thanks mostly to the 1997 rule that allowed homeowners to be exempt from capital gains’ tax on their first $500,000 of profit (if they had lived there two out of the last five years), the market kept rolling.
The mortgage industry, led by Countrywide, started pushing the more exotic loan programs, first the interest-only in the 2001-2003 era, then the option ARMs from 2003-2005. This extended the euphoria, beyond its normal life expectancy.
Yesterday’s graph by IHS Global Insight showed the ‘normalized value’ line continuing straight up, without any natural downturn/correction.
But the market was already getting overheated by 1999 or 2000 just due to the amateur speculators who were empowered by the 2-out-of-5 rule, and by year 2000 they were already onto their second flip.
A ‘normalized value’ estimation should include what should have been some sort of downturn early in the decade – this chart has an additional red line to approximate what might have been normal, if it weren’t for the wacky chain of events that artificially spurred the market.
Whatever happen to the value of your house you purchase should be three to four times your income.
I guess these guys think the average family income in San Diego is $100,000.
I bought in CV in 2000. I do recall being nervous (first time home purchase) that we were overpaying as prices had already increased from mid 90s doldrums. I was amazed to see the continued, crazy climb in the following years and thankfully sold in 2004…
Thank you for that Jim. I always draw that phantom line on Zillow’s 10 yr home value chart of what the home “should” be worth today if not for the bubble.
What percentage of homebuyers would you estimate were “amateur speculators?” We traded my “bachelor pad” starter home for another in ’97 when we got married, then sold again in 2001 when I got a new job that required a relo, but these were life changing moves we would have made even without the 2 out of 5 rule.
Looking at median income in SD at $74,900 and using the old metric of median home price at roughly 3X median income, then that red line looks more plausible.
To all of those that believe this is a great time to buy, I sincerely wish you would make the jump!!!
The more of you we have believing in the mantra of “bottom is here”, the worse real bottom will be in about 5 years.
Unless you have 500K in cash, I am not sure why people are dying to buy a house. The reality is if you finance your mortgage, you are not buying. You are renting! You are renting from the bank rather than the owner of the property. Anyway, all those waiting on the sideline, please buy now! Buy as many as you can. Thanks for making the real bottom much worse than it should be.
Hey BAM…
You’re beginning to sound like a paid ‘stock basher.’ The Iomega and Pets.com boards are long gone but can’t you find another stock board where you can do your bashing? TIVO’s up a lot this week. Give that board a try.
Is this what happens when the news doesn’t match people’s world view? Some denial is fine but this cheering for a collapse of real estate in San Diego is tedious.
Here is a list of California Median Home Prices since 1968 to 2004. Draw your own conclusions. If you research further you’ll see incomes also have had a roughly equivalent gain.
Year Median Price Increase/Decrease
1968 $23,210 NA
1969 $24,230 4.4%
1970 $24,640 1.7%
1971 $26,880 9.1%
1972 $28,810 7.2%
1973 $31,460 9.2%
1974 $34,610 10.0%
1975 $41,600 20.2%
1976 $48,630 16.9%
1977 $62,290 28.1%
1978 $70,890 13.8%
1979 $84,150 18.7%
1980 $99,550 18.3%
1981 $107,710 8.2%
1982 $111,800 3.8%
1983 $114,370 2.3%
1984 $114,260 -0.1%
1985 $119,860 4.9%
1986 $133,640 11.5%
1987 $142,060 6.3%
1988 $168,200 18.4%
1989 $196,120 16.6%
1990 $193,770 -1.2%
1991 $200,660 3.6%
1992 $197,030 -1.8%
1993 $188,240 -4.5%
1994 $185,010 -1.7%
1995 $178,160 -3.7%
1996 $177,270 -0.5%
1997 $186,490 5.2%
1998 $200,100 7.3%
1999 $217,510 8.7%
2000 $241,350 11.0%
2001 $262,350 8.7%
2002 $316,130 20.5%
2003 $371,520 17.5%
2004 $450,990 21.4%
Jim probably has access to more info but I think you can look at the periods prior to the tax break referenced and see that prices were even more meteoric.
Yesterday when I was saying 18% gain that was based on the uptick after recessions. Remember that slinky thing?
Sorry for taking so much space.
Re commend about Zillow: I have found their evaluations to be virtually useless because of its simplistic calculations. This site is popular with the public, however it should not be relied upon for anything other than a general overview of price ranges. Realtors do not use this site for CMAs or BPOs. For example, Zillow values a home backing up to a busy road w/no view much higher than the larger home across the street, facing the golf course, with spectacular views. I have seen the same errors with ocean view properties. Zillow does not evaluate location…and we all know that location is No. 1.
Also, housing as a 1/3 of your income or prices that 3-4x do not match the reality of high income regions. Look at the Bay Area or New York City. We fit roughly in this grouping and given coastal locations that are desirable not only for a country of 300,000,000 but also internationally, prices here will be more of your income.
Again, Jim probably has good info available from CAR. I’d be interested to see what the 20-40 year average is for the income to housing ratio here in San Diego. My guess is 40% of income goes to housing in California/San Diego.
Hmmm… CAR isn’t that the organization that calls a bottom in the Real Estate market every month?
“We fit roughly in this grouping”
I would disagree. SD is no SF or NYC when it comes to making money.
Tampa FL with out the bugs and humidity is more on target. Tampa’s beach is also better.
What I draw from your numbers is that in two years time the market did what previously took 18 years.
Talk about a bear market comming… what if this bottom takes that same 18 years to get here..
Mozart,
I’d be willing to bet $100K on your +18%.
Seriously. I’d take that bet all day long that the CAR median price this time next year will be lower than 18%
Care to recant your assertion, or are you willing to put your money where your mouth is.
In fact, I can ante up $200K if you’re really interested.
Thanks,
Chuck
Sorry meant to say “this time next year will be lower than Up 18%.”
Chuck
One of the things I’ve been thinking about lately is the change in the American family since the ’60s. Beginning in the late ’70s, more and more women took on jobs that were nearly exclusively held by men. In other words, we saw the advent of a true dual-income household. Obviously with that increased income, the home-price-to-income ratio will be affected. I think during this time the families that purchased homes had fewer children, which gave them more disposable income.
I think we’re at a point of saturation when it comes to dual-income households and there are some major differences when comparing home affordability going back too far.
Any thoughts?
Mozart, I’m not exactly sure what you mean about historical income/housing ratio, but there is good info about that over on piggington.com
(in case you haven’t seen it)
http://piggington.com/shambling_towards_affordability_december_2008_edition
No way SD is like SF or NYC when it comes to incomes. I’d be making at least 33% more in those cities, but I choose to live here for personal reasons i.e. family, weather, etc. Call it the Tony Gwynn hometown discount!
Re Gameagent’s comment. Disclosure: I have no position in stocks, real estate or any other bubble that’s about to pop or in process of popping. I just have liquid assets (cash, gold, CDs, savings, etc) In about 4 years, I will have about 500K to buy in SD with 100% cash.
I made a fortune, completely by accident, when I bought a property in Hawaii in 2003 and sold it in 2005. When I netted more money (250K) on that transaction then my regular job, I knew something was seriously wrong with the economy. So I started doing a lot of research and realized by end of 2005, that there was a serious bubble in housing and that it was not sustainable. I had everyone telling to buy when I moved to SD in 2005 and when I told them that the housing would crash everyone thought I was nuts. Guess who’s laughing now!!!
Here is the bottomline: You can manipulate the data all you want. The only proven method of affordable housing is based on income. Unless the housing prices come down to a level where the median prices is approximately 3 times that of annual income, we are still at an inflated price. I doubt median income in SD is over 100K. Probably more in the range of 60~70K.
I have to admit though. When I see all these people wanting to jump in because they think it’s the bottom, I stopped telling them not to. I figure the longer the down turn, the lower the ultimate bottom will be. If you are convinced that this is the bottom, by all means, buy now!!!
Here’s a few links;
http://seekingalpha.com/article/115464-new-home-prices-vs-median-income-chart
Notice the red line. Median home prices have never been able to stay above 4 times median income. (excluding bubble)
http://housingbubble.jparsons.net
Notice that house prices kept up with inflation, or exceed it by a small margin. (excluding bubble)
So in the future, house appreciation should not beat median income growth or inflation, which are interchangeable.
http://www.visualizingeconomics.com/2007/11/04/has-middle-americas-wages-stagnated/
Median household income in San Diego as of 2008 was $68.5k. This is taken from http://profilewarehouse.sandag.org/profiles/est/reg999est.pdf
The median price of a home in San Diego on that chart is $327k. That gives a ratio of 4.8, which is actually about the historical norms for the San Diego area as the piggington post above shows. HOWEVER, our current median price is comprised of a horde of low-end houses selling and nothing moving at the higher end, as our good host constantly shows. This is a skewed metric at this time. The ‘burbs and outlying areas are becoming affordable once again, but the desirable areas are still way overpriced.
I would note that Mozart might be right about the median price increasing by 18% by next year because I believe the mid- and high-priced folks will start lowering prices next year. If more mid- and high- priced houses sell, the median can increase, even if housing prices overall are falling, just because of the metric of choice.
Chuck, I agree interest rates matter, but you still have to make payments on the house. See my 3 links post, when it gets moderated and put up. And be careful with your $100k bet with Mozart, if JtR’s trustee vid is any indicator ( https://www.bubbleinfo.com/2009/06/trustee-sale-competition ), he can make that much on a single house flip to take you up on your bet and have money left over.
I’ll take the red pill please.
I hope none of my investments are in any way influenced by IHS Global Insight. By their methodology GOOG should be at least $2k by now.
1. Pick a random starting year and plot points
2. Draw a line through said points
3. Profit
Bam is right, what about that 3% tax Hawaii charges on non-resident land sale. Had some crappy lots on the big Island which more than doubled and also sold in 2005. I can now buy it back for a 70% off sell.
Houses will continue to decline for at least 5 more years. I bought a beautiful lake front house in LA County in 1989 only to see it drop in value by 30% by 1999. Sold in 2007, value had tripled from 1999.
It takes years for bubble values to drop back down to normal levels.
I sure like to know what Mozart is smoking!
Well, I have to say the Mozart Data is compelling. So are the charts on Piggington Osidebuyer referenced. Other circumstances lead me to believe we haven’t hit bottom, but 35 years of historical data can’t completely be ignored.
I also think the $600k+ market has more coming to it. There’s too many delusional sellers out there. Del Mar is a joke.
Let’s not discourage all the buyers out there. After we need them to make the jump to prolong the down turn. And longer the down turn, the lower the bottom of housing will be. When everyone thinks that buying a house is a financial suicide, that’s when we (people with money and good credit and foresight to see the trend) can really make a killing.
So for all those would be buyers out there, this may indeed be the bottom. Please buy, buy, buy!!!
Was that Mozart that outbid us today at the Trustee Sale–I have never yet to have a successful bid!!! Nothing ventured, nothing gained!
The problem Mozart has is that he’s thinking this is a temporary dip, whereas the last decade was actually a temporary high. We’ve not gotten back *down* to normal yet.