Dr Beede commented:
Jim, I’ve heard a lot of talk that the bottom end always leads during a housing pullback, the top end goes last and recovers first. In other words, a lot of people like to say that what’s happening now is exactly what always happens in a regular cycle, ho hum, nothing to see here. However, I’ve been told by some seasoned pros that it’s the upper end that usually falls first, people trying to move up a rung on the ladder who didn’t get a firm grasp, while the bottom end is usually relatively stable since that’s where people are slipping down to.
Indeed, when I bought my first house in 1992, right after a serious pullback, you could get a lot more house for just a little more money, indicating weakness at the upper end. If the long-term pros are right, this big crash in low-end properties last year was very unusual and is now seemingly over, while the pending correction in high-end is more what you’d expect to see in a normal economic cycle as people lose jobs, need to cutback expenses, etc. What do you think?
Forget the first example, this isn’t your standard run-of-the-mill downturn. If it was, it would have started in 2001-2002, and we’d be on our way back up by now. Anybody who tries to soft-peddle this collapse as a normal event isn’t an expert, they are a shill.
I agree with your second example, and it’s the job losses and cutbacks of expenses in personal and business that worries me the most – they lead to a worsening economy overall.
For those who want to buy a house today, consider what one client is doing (mentioned here before).
We can’t find ANY high-end sellers who are realistic in his area, so he has focused on cheaper investment properties. He had purchased a number of low-end condos in the 1980s and 1990s as rentals that he sold in 2004-2005, and is stocking up again. In that search we happened to find one that would work for a few years as his residence, so he moved in.
Today’s buyers should do the same thing – search in the lowest-priced end of their desired markets.
Here’s an example. Check out the street named Caminito Vistana in 92130. Eleven of the 103 houses on the street are for sale, and all of them are looking for at least $2 million.
In the last six months there has been ONE sale, at $2,300,000. If you were thinking of buying one on the street for more than $2 million, you are doing so at great risk. Eleven for sale, and one closed in the last six months is a scary combo, especially at $400 to $500/sf.
But if you can find a quality house in 92130 at, or around $300/sf, you’ll see them fly off the market, because they’re selling like hotcakes – that is the lower-end of the Carmel Valley market.
The other angle to having the prices come down is buying more house later, for the same money. If you are a candidate for a move-up purchase in a few years, you might consider buying a quality CV house at $300/sf today, and get a bigger & better one for $300/sf to $350/sf in a few years. Many will say just don’t buy, period, but for the folks who are renting (and tired of it) and have the desire to buy now, you could make sense of it – if you wanted to keep the old one as a rental. You’d want to use a big down payment now to keep the payments lower, but as we’ve seen, most are doing just that.
Is there any chance that we won’t have massive price reductions in the high-end market? About the only scenario I can imagine is a wicked combination of full government intervention in the mortgage markets, combined with a heavy dose of inflation. But that seems like the path we’re on.
If you are buying today, make sure the house will suit your needs forever, just in case.
Let’s assume you have money and want to live on that street. Let’s also assume all the houses are suitable to you, and are about the same size and quality. Offer $1.7 million or so on each of the 11 houses. You would think at least one of the 11 would bite, and you’d get a nice place for a big discount.
If you are buying today, make sure the house will suit your needs forever, just in case.
You know, those are words to live by in any economic times. None of us ever knows what is around the next bend in life. Yeah, we would all hope to be move up buyers at some point, but sometimes life just doesn’t work out that way.
I know people who live on that street (and are not trying to sell). Those properties have huge lots – most at least an acre. Is that a plus or a minus in this market? The people I know bought in 2002 for about $1.8M (maybe a bit more). I don’t know what their square footage is, but it is BIG. How low do you think these will go? Below 2001 prices?
I am seeing much more activity in the lower end than the higher.Everyone is looking for a bargain right now.
So what’s the timeline on this? We are looking in the $700k to $1mil range in North PB, Birdrock etc. We rent in Bay Park and are happy to stay here if we can have some sort of timeframe as to when the prices will start moving…
Thanks
Mark,
A timeframe is hard to give. Government keeps stepping in not allowing house prices to fall. At the moment the economy is building more and more pressure. Eventually either something crazy will happen or we’ll endure years of downward pricing.
It all comes down to what you want to do?
Is owning a house worth it? Maybe yes if paying 200k over what a property is “worth” to live in your own house now. And to get the wife off your back. Maybe no if you like traveling and having expendable income to play with is more important.
But that seems like the path we’re on.
That’s phrasing it as nicely as can be.
CR’s most recent post on the subject:
JP Morgan Analysts Predict 60% House Price Decline for High End
That’s peak-to-trough, of course. I’d argue they’re slightly on the conservative side, too, given the fundamentals.
You can imagine what 8 to 10%+ mortgage rates would do to all housing, not just the high end:
Andy Xie: Tight Spot for Fed, Blind Spot for Investors
The 10-year Treasury yield historically averages about 6 percent, with about 3.5 percent inflation and a real yield of 2.5 percent. This reflects the preferences of marginal buyers in the United States. Foreign central banks have pushed down the yield requirement substantially over the past seven years. If marginal buyers become American again, as I believe, Treasury yields will surge even higher from current levels. Future inflation will average more than 3.5 percent, I believe. Some policy thinkers in the United States believe the Fed should target inflation between 5 and 6 percent. The Treasury yield could rise to between 7.5 and 8.5 percent from the current 3.5 percent.
Of course, there’s the alternative view for rates…
Treasury Yields Near Two-Week Low; Consumer Prices Seen Falling
“We are looking to buy in the neighborhood of 10-year bonds,” said Akira Takei, Tokyo-based general manager of the international fixed-income investment department of Mizuho Asset Management Co., a unit of Japan’s second-largest banking group. “All of a sudden, market participants will have to realize that there is no inflation risk, but instead deflation risk.”
Ten-year yields will probably drop to as low as 1.5 percent over the next two years, Mizuho Asset’s Takei said.
Of course, serious, broad-based deflation wouldn’t exactly be good for housing, either.
Those are Poway schools on Vistana even though the houses are in CV.
Hard to imagine prices falling 60%. Imagine a $3 mil place in RSF going for $1.2 mil. Um, if they do, then something terrible and much more troublesome is happening. I’m pretty sure even shifting the Mexico border up to Camp Pendleton wouldn’t drag RSF prices that far down.
The mid/high end (definition: $2 mil and above) isn’t owned by sub-prime or alt-a borrowers with weak income. Well, some might be! A larger proportion are owned by people who put down a lot more cash, have high income jobs (this board seems to think there aren’t any), family money, are DINKs, etc., etc. And they care a LOT more about credit ratings than the deadbeats that get bashed here.
Prices have been d*mn stubborn so far in that bracket, maybe down 10-15% tops so far. It *could* last. I’m not saying it will, just that it could.
Another scenario (hey, you asked) is a recovering equity market. If the Dow cracked 9,000 or 10,000 and stayed there, people who have million (or multi-million) dollar portfolios may suddenly feel pretty good again.
TJ,
In the high interest rate scenario, I would expect the yield curve to be really steep (over fears of future inflation). Meaning that the front end would still be relatively low, and ARMs would be a big favorite and provide payments much lower than longer notes/bonds would suggest.
Thus, I think interest rate fears are overdone.
Just some very good advice. Well done.
Um, if they do, then something terrible and much more troublesome is happening.
September 19th, 2008 – Bernanke: “most severe financial crisis” in the post-World War II era.
And that’s coming from someone who is still having trouble finding his own butt with two hands and a flashlight.
Besides, Aztec, 60% off peak-to-trough would only take most places back to their pre-bubble values, and these things always overshoot.
The way I explain it is to describe what we’ve had so far is a bursting bubble and what we are just starting to experience is a severe recession as illustrated by burgeoning job losses, stagnant/falling wages and rising day-to-day costs. Throw in a fiscal crisis at near every level of governance and I just don’t think anyone can honestly see the other side.
Ah, a message from above! Can’t argue with a “higher” authority. 😉
Jim, I would agree with you on buying a smaller/cheaper house right now (and took this into consideration when you suggested it to me at your office as well!) but for one thing — there’s NO inventory on the low end right now!
People are going nuts, outbidding others for marginal properties. It’s a feeding frenzy. I track inventory all over SD and the low-end areas have basically nothing. You’d have to either buy at the trustee sale with cash or aggressively hop on and make an offer the first day of a listing. Neither of these seem palatable.
It’s my opinion the frenzy is brought on by a confluence of two events: people who have been priced out of the market for 5-6 years; and the $8000 tax credit.
Tax credits make people act irrationally… I saw many who bought at the peak and justified it by saying they wanted the tax writeoff. In a similar vein, the $8K credit eggs people on to buy a house when a $8K price reduction wouldn’t.
My advice to pretty much anyone in coastal California right now is to rent. There are plenty of great rentals on the market at reasonable prices (at least compared to owning the same thing!) Rent for a year or two and let this thing shake out. Then buy when you aren’t competing against 25 other people. (I don’t think prices will appreciate significantly, even on the low end, for at least 2-3 more years.)
-Erica
Well said rob dawg.
It never ceases to amaze how localized some thinking is. Take one small subset of the market, one area or a group of small areas and extrapolate that into nonsense. All of which is to say (hypothetically), RSF might hold up, somewhat, but that doesn’t mean CV won’t end up a dry wasteland. And even that hypothetical commits the same misjudgment I’m pointing out. Things, housing inventories, jobs, as rob said, all levels of government are way out of whack. It’s all well and fine to posit that one end of the market might “hold up” but why? Show me the clear reasoning that makes that true and that isn’t based on some accepted cyclic theory. Then I’ll start listening more closely.
MIRA MESA, Calif. — A Mira Mesa woman who chained herself to her home and broke into the home after being evicted is preparing to stand trial.
Last year, June Reyno chained herself to her front porch after being told her Mira Mesa home was being foreclosed.
“It’s the most undignifying, humiliating feeling there is,” said Reyno in a previous interview.
The chains did not work, and Reyno and her husband were evicted this past March.
However, an eviction did not keep Reyno away.
Reyno broke into her old home, and that led to misdemeanor charges of trying to repossess the home and trespassing.
Deputy City Attorney Morgan Hezlep said, “It’s actually from her being, entering back into the property after she was lawfully removed.”
ice,
Are you talking to me?
You go try to buy a house in Oceanside under $200K, Shadowridge under $400K, Carlsbad under $500K, Encinitas under $600K, or Carmel Valley under $900K. It is very hard to beat out the competition, and that’s not theory, it’s a fact.
You want clear reasoning that it will continue?
There have been hundreds of buyers at these price points, most of whom are shut out so far. I guess you are saying that the economy is going to get so much worse that all the people today who are climbing over each other to buy, will go away?
It may seem like to you that the economy is getting worse, all I know is that lately 2-4 people a day call me wanting to buy a house, more than ever before. There are 5,930 active detached listings today, which is less than half of what it was a couple of years ago. I guess you could say it’s ‘out of whack’ because it should be, and will be larger once the foreclosures find their way to market, but I think that in the good areas there will be enough demand to pick them up at similar price points to the lower-end of each market.
That’s probably not clear reasoning, but walk a mile in my shoes and you’ll see a populace that has a voracious appetite for buying real estate today.
Jim,
We don’t question you, your experiences and/or observations. I expect you’re making out like a bandit; more power to you.
However, it’s just like the stock market runup — a bear market rally. This too shall pass.
Until then, we’re marveling at all the knife-catchers out there!
JTR, you know me better than that. If I had meant you specifically and alone I would have said you. So no. And while I’m not sure how what you posted refuted what I wrote, I’ll say this, wait for it. JTR, I don’t dispute your first hand experience, never have even though sometimes we disagree on the conclusions to draw from that experience.
Now, to respond directly to what you wrote JTR, let me suggest, as narrowly as possible, the following, if you think the economy is not getting worse and the prospects don’t look good for recovery, you’re drawing the wrong conclusions from your experience. I don’t dispute you have buyers lining up to buy things. Good for you, lucky them. But by and large, more and more people are out of work and more companies are suffering and local, state and the federal government is stymied by pointless politics and, no other way to say, utterly retarded policies and strategies. In that sense, yes, I am talking to you JTR.
I do keep saying this and time will tell if I’m an idiot or just one of the many who saw the proverbial wall writing, let’s see what all these homes are worth in two years. Then we can calculate the value of the investments and see what will hold up and what won’t.
I don’t think I can refute what you wrote – I thought that maybe I could, but by time I got done, I couldn’t, because it seems like the high-end is levitating. It should have come down a lot further by now, logically.
The creepy thought in the back of my mind is whether the possibility of the higher-end surviving this mess could come true. It’s possible – highly improbable, but possible. It would take at least the following:
1. All-out effort to modify loans to keep people in their houses.
2. Low interest rates.
3. Demand from buyers who care more about buying a house today than waiting.
4. Big down payments to mentally offset risk.
If it happens, or if the coming upper-end downturn is muted, it’ll demonstrate the struggle between the haves and have-nots. People with more money may jump in sooner, or pay a little more, leaving those who think they are being smarter on the sidelines.
Your request to look up in two years to see what happened is well-taken, and I hope it is that soon that we’ll see some real effects. Another haunting fear of mine is that it’ll take much longer.
I think Jim’s point about this market not being a normal cyclical dip (and that’s why it didn’t start in the high end properties) is spot on. And his view that only extreme intervention and/or heavy inflation will keep the high end of the market from plummeting like the low and mid-ends is also on target.
The question is how much intervention will it take to stop the plummeting and how quickly will inflation take over from the current deflation? It’s all about timing–so it’s a very tough call to know what’s ahead (especially in the high-end). I’m not sure anyone has a crystal ball on this.
So, without that crystal ball, you have to decide first: are you investing for a “return” or are you buying a “home”? Yeah, it’ s nice to do both, but unless your needs are pretty basic and you can stay in a place for years and years (I’m guessing 10+ should be a minimum view), then you need to view your “home” purchase as: “Do I love it? Does it meet our needs now and in the future? Can we afford it even if we hit tough times?” If no to any of these, pass till the longer-term market direction is more clear.
I know it’s hard for most of today’s borrowers to imagine it, but after the Depression, most people only bought one or maybe two homes their whole lives (my parents and my in-laws, for example)–if they bought at all. Of course the employment market today can make that tough to do, but it’s also a different mindset most of us no longer have. We tend to look at our homes as transitory places–places to move up from, thanks to this record bubble period.
If you want to invest, you have to ask yourself, “What happens to me if this market goes further south? Can I hold this long-term? Or do I need current rental figures to not decrease to keep from getting foreclosed?” If your numbers are close and this is your life savings, be careful! OTOH, if you have a bag full of cash–there are bargains to be had.
A lot of people ARE going to get rich in this period, but I fear a lot more are going to get into more trouble than they imagined–all trying to get rich.
Does it seem rational to ANYone that the RE market is in a frenzy during the “worse U.S. econmic crisis since the Great Depression?”
buy now or be priced out forever.That is what my realor said in 2004.She is drinking very heavily now.
In standard economics most would agree the federal government running $2T deficits per year would be clearly inflationary. Certainly it keeps prices from falling. However, inflation is affected by other factors including:
Wealth
Money multiplier
banking stability,
etc
Given the amount of wealth that has been destroyed in the last two years $2T is like bailing water from the Titanic. It is still falling. Will the price level be further pushed up by creative neg am mortgage financing? By increase credit card availibility. The answer is no, actions taken recently have ended this type of money creation. Lets not even mention state governments are looking to pass down pay cuts to their employees (as they should).
While most of my posts here have a degree of certainty this is the one item I am unsure about.
Anyone have any opinions on this point of view that wealth and credit destruction as well as lower local government employee pay was great enough to offset the inflationary effects of federal government deficits.
Housing was so leveraged it just got ridiculous.People buying 500k homes with zero down.Lenders basically taking the note and selling it to foreign investors, getting their money back and then loaning it out again.then investors found out what AAA really was and woke from the drunken stupor.Subprime loans all of a sudden were AAA rated.My point is the trillions lost in the housing market was a mirage in the first place.
The sad part is as more and more moderate buyers buy and leave this blog, all we will have left is permabears. Ive got about a year left in me and then im gone too.
The end game for the permabears is not going to be pretty – be it now or 10 years from now, as the rest of us buy and go on and happily lead our lives, there will only be permabears here, thinking “it just hasnt been big enough” or “just wait, its coming”.
I know a woman who DIDNT buy in LA beach cities in 1996. She was convinced we were “nowhere near the bottom”. She still hasnt bought today 13 years later, and prices are far far away from that 1996 mark. Even worse, shes still out there now, blogging away, calling knifecatcher for 13 years running now. What a sad, miserable existence.
Thats the way I see this playing out for you Jim. The reasonable buyers will continue to buy and leave this blog, leaving behind only the permabears here to shout “kinfecatcher” in perpetuity.
You think you can turn them? You cant. Thats the nature of the permabear. You could bring in a chart from god almighty showing prices will start going up 2-3% a year for the next 8-10 years, and none of them will believe you. If you keep up this blog, just understand thats what you will be dealing with. Good luck to you.
OTOH, I love it- “PERMABEAR”. I’ve been looking for just this term, and you got it.
Inventory down, signs of life in the over +$500K market, joblessness dropping, stock market doing good. We even had, (gasp), a price increase in San Diego County. Anecdotally even the high-end coastal market has very recently started to go again. Yesterday when I saw those 3/4 finished Barrat homes I also saw an amazing opportunity.
Great information on this blog, really unbeatable, but the permabears could do some real damage by influencing renters and others on the fence who are unsure of what to do. I guess if someone follows permabear advice, then, they must be a permacub. They’ll have missed-out and will join others in moaning about how unfair life is.
I’m glad that OTOH and a few others jumped in. JtR, might be time for a new website. Plus, what are you going to call this blog by this time next year? The bubble is gone, sorry permabears.
The REO on Sequoia (that was assigned to me in September) is finally coming to market. They’ve asked me to update my BPO – in the map coordinates 1087A1 today:
1 ACT
8 CONT
19 PEND
12 SOLD since March 1st.
Of the 7 that have closed since April 1st, two sold for list price, five closed above.
One active listing, and 27 pendings?
How about nextbubbleinfo.com?
Mozart,
I can confidently say that I’ve saved over 200k not purchasing the house I wanted to buy in 2005 and waiting until more recently. And during that time I’ve been able to save up cash for a sizable down payment. The only downside that I can see to renting is as at the end of the year I can’t write off interest.
Renting sux when house prices are going up
Renting’s better when house prices go down
House prices tend to always go up in spring, peak in the summer, fall in the fall, and hit bottom in the winter. Usually the number of houses on the market also tends to follow this model. (This year it’s not because of the banks)
Jim,
Do you have an idea of how many of your buyers have been using the loan products created by the govt this year.
new San Diego conventional limit $540,000
new FHA limit $697,000
I was wondering how much of an influence these loan products make on the market? I know the tax credit and 4% rates worked, I am just wondering do higher end buyers use an FHA product or just go jumbo?
Will these limits go away at the end of the year?
If yes…will that make an impact in 2010?
The loan programs created slightly better interest rates (3/8%) which feels good, but I don’t think they made a difference between buying and not buying.
Same with the tax credit – if there are people buying just to get an $8,000 tax credit they are crazy.
Combining a bunch of feel-good items eventually leading to real benefit? I guess I’ll live with that idea, but price is still the number one determining factor if you ask me.
If you can’t find the right house, at the right price, I don’t think you’re buying, in spite of the feel-goods.
I might be too bearish though?
Shadash, being able to write off the interest is a perk, but one that is in danger. I’d look for that to go away sometime in the future, it will hurt whomever sits in the oval office when it happens, but it needs to be done.
“Does it seem rational to ANYone that the RE market is in a frenzy during the “worse U.S. econmic crisis since the Great Depression?”
Our real estate and financial markets are still thoroughly corrupt. That’s why we continue to see the residue of frenzied behavior from the ’03 to ’07 period.
Corrupt realtors working with corrupt appraisers working with straw buyers, or, working with easily duped buyers, or working with flippers; all of them working with corrupt mortgage companies who sell the stuff to corrupt investment banks who sell the stuff to anybody who will buy it because it is highly rated by corrupt companies like AIG. All of this passing through the hands of local governments who KNEW something was up but looked the other way because the increasing tax receipts were too good to pass up. Ditto for EVERY state and federal oversight agency.
A gangster system. In late 2007, the bubble burst.
What Jim is documenting is the back and forth of people trying to do deals today as we work our way through this collapse.
Any system based on lies, deception and wishful thinking is unsustainable. We created a system that is unsustainable. So I would argue that things are going to get a lot worse (based on the size and duration of the deception), before they get better.
If I had to make a prediction, I’d say coming out the other end of this mess we’ll have (nationally) more long term renters, no flippers, and most people buying homes to live in long term.
A bunch of feel-good items help provide the mental justification for spending more then initially intended.
It also adds another selling point to get fence sitters at least more open to the idea of getting down.
Price is still the #1 factor. If the house is $100,000 more then you wanted to spend it’s probably not doing much. But what if it’s $20,000 more? That $8,000 tax credit might be all the justification needed to get someone to pull the trigger.
Jim,
Off topic: I’m hearing that Oceanside Terraces will be auctioning off unsold units.
From developer’s website:
In Spring 2004 Janez learned through one of its relationships that the development of a coastal mixed-use condo project had stalled. Janez recognized that, if they could work closely with the Developer and City of Oceanside Redevelopment Officials, they could assume control of the project.
In order to meet project deadlines under a Development and Disposition Agreement with the City of Oceanside, Janez needed to understand the project and its feasibility, negotiate with the existing developer and consultants to take over the project and then finalize the construction drawings within an exceptionally condensed timeframe.
Understanding the market and recognizing the opportunity, Janez focused its resources and met the required deadlines and acquired City approval to proceed with the project.
Afterwards, Janez capitalized the transaction with attractive debt and reliable equity in order to commence construction.
In addition to residential units, Janez is offering retail and office space condominiumized for sale. Based on interest to date, Janez expects to realize a sale premium on the commercial space.
The Oceanside Terraces condominium home community is a landmark $40 million mixed-use redevelopment project. Located three blocks from the Pacific Ocean, the architecturally sophisticated, six-story project will feature 28,000 square feet retail and office space on floors one and two as well as 38,000 square feet of luxury condominiums on floors three through six all with secured underground parking. The condominium homes will include semi-custom two and three bedroom single-level floor plans, ranging in size from 1,600 square feet to 2,600 square feet with most homes featuring dramatic ocean and horizon views. Oceanside Terraces is located in the city of Oceanside’s nine-block urban redevelopment area and is the city’s first approved mixed-use project with an office component.
I think it’s ironic that Real Estate agents use the term “pull the trigger” when referring to purchasing a house.
In the stock market, when the market tanks for a week straight and then gets a moderate move up following the huge decline, they call it a “dead cat bounce”, because even a dead cat will bounce if you drop it from a great enough height.
I believe the recent rally in San Diego is a dead cat bounce driven by (1) a huge decline in the low end market, (2) pent up demand from people who didn’t buy from 2005-2008, and (3) speculation that the bottom is in. Whether or not its sustainable is dependant upon a real recovery in the markets leads to increased incomes.
If you look at a balance sheet (assets = equity + liabilities), assets can only increase through higher equity or debt. The last housing bubble was fueled by a huge surge in debt. While the government is doing everything it can to re-inflate credit, banks and credit card companies are pulling private credit everywhere you look. So at best, the net change in the liability side is flat. As such, I would assume that any sustainable recovery in Asset values would have to accompany increased equity (in the form of higher wages). If that’s the case, then at worst, I’ll be no worse off than I am now, because the real value of my net worth won’t have changed. So, I’m sitting this one out, saving my money and looking for more attractive (and more liquid) investments to put my money on. Just one man’s opinion, though.
I love that so many “anonymous” posters here are so consumed with conspiracy theories and bullshit agendas. From the “permabears” to the insanely optimistic. Get over your agendas.
Either you’re risk averse, or you’re not. Don’t blow it out of proportion.
Jim the Realtor’s comments are very helpful. He’s telling us there is indeed demand. People are willing to buy in North San Diego. But that doesn’t mean it’s a healthy sustainable demand.
It was only several months ago the world was brought to it’s knees, and the United States began to nationalize industry. The Fed spoke of not having an economy at all. Only a few months back.
So, to me (if I were a workerbee) the risks are very high and much uncertainty remains about the future. What people (some call permabears which may or may not be accurate) are saying is the prices in San Diego for them don’t reflect this new risk.
One big factor leading to the “rebound” is the level of government propaganda. Did anyone see Brian William’s series at the white house a few weeks ago? BO and his staff honestly get up and spend their morning watching CNBC and CNN. If there is any non-positive news whatsoever, they quickly throw together a plan for a news conference, press release, or whatever to counter the news. Really, WTF is the deal with BO appearing on the tonight show, CNBC? Bernanke on 60 minutes? ETC, ETC… I would have imagined less propaganda out of the Soviet Union. The weird thing is, they really don’t even try to hide the fact. It’s all about image, perception, and confidence in trying to restore the debt/housing bubble and false sense of wealth.
My realtor is still drunk on kool aid.She told me we are in another bull market and real estate will shoot to the moon.I dropped her off a couple lists of houses she wanted me to buy in 2004.I would have lost my ass had i listened to her great advice.Do your homework.
Jim, who are these buyers? Are they mostly renters, moveup or out of towners?
I think the rally we’re seeing is temporary, driven by artificially low inventory, a high level of pent-up demand and sprinkle a bit of government intervention via low interest rates, high LTV loans and tax credits, and wala! you’ve got yourself a minny rally. But the question we all have to ask ourselves is: are these factors sustainable? I’m thinking this three legged stool is wobbly, at best.
Also, FHA Loans may save 3/8 on cost, but what about downpayment requirement. Do the 697K FHA loans allow for high LTV (like 3%-5% down)?
By the way, i think the low end (Oceanside) is probably there, the mid-end is too expensive but is being supported by govt intervention while places like Carmel Valley have been supported by fence sitters that have accumulated large cash downpayments.
The Govt support is probably here to stay for the mid-end so this segment will probably hold up until interest rates spike. But for places like Carmel Valley, once those liquid buyers get worked off, watch out below. I just don’t see this govt stepping in with aggressive loan products to help out the “wealthy” (i.e. anyone making over $150K, lol).
The mortgage interest deduction is not just enjoyed by homeowners. You don’t think rents take into account the interest deduction? You don’t think investors when buying a property to see if it ‘cash flows’ don’t take into account the interest deduction.
It is all priced in already. No one benefits from the mortgage interest deduction. In fact, financially speaking only wealthy people should buy homes as their mortgage interest deduction benefit is greater given their higher marginal tax bracket. Those not in the highest tax bracket should rent and share in the tax benefit the ‘wealthy’ landlord will receive.
The only financial benefit to owning vs. renting your home is that you get to live ‘rent free’ in your investment. Of course, the math still doesn’t pencil out for properties north of $500k even at unsustainably low interest rates. This causes prospective buyers to rationalize their purchase based on recent price movements, tax credits, or some unquantifiable emotional value.
If you can’t see the potential downside risk to purchasing a house today with the prospect of a stagnant economy, much higher taxes, and higher interest rates, then please by all means buy your dream home. Just good luck getting any equity out of it when you want to high tail it out of California.
“My advice to pretty much anyone in coastal California right now is to rent. There are plenty of great rentals on the market at reasonable prices (at least compared to owning the same thing!) Rent for a year or two and let this thing shake out. Then buy when you aren’t competing against 25 other people. (I don’t think prices will appreciate significantly, even on the low end, for at least 2-3 more years.)”
Read Ericka’s quote above carefully. Buy later when there are not 25 people competing for the same property?. Good luck.
I have said it before and will say it again. Any California coastal region property, near good schools, etc., will not ever reach fire sale #’s. Lower $ yes, but if it ever approaches bargain basement, that # will jump to 50 people.
Ever lived in Michigan?
“Hard to imagine prices falling 60%. Imagine a $3 mil place in RSF going for $1.2 mil.”
________________________
How about this statement from not so many years ago -“Hard to imagine prices skyrocketing 100-200% in a few years’ time. Imagine a $1.2 mil place going for $3 mil.” Think about that one for awhile.
The #1 problem I see with analysis of how far prices are predicted to fall is that the starting point is an absurdly overblown figure driven by well-documented loose lending, manic consumer psychology, speculation, mortgage and appraisal fraud, etc etc. Why is 60% off an absurdly overblown peak sales price unrealistic? I think it’s no more unrealistic than properties doubling or tripling in values in a short time.
Jim’s example of the CV high-end is representative of what is happening county-wide. There is almost no action in the high-end. Of course there is always going to be someone who thinks they are getting a deal because they are only paying $2 mil for house that sold for $2.3 in ’05. Let’s see how they feel in 3 years.
Hey Jasper,
I hear you loud and clear but that could be fallacy. I did a stint in Texas recently, I cannot tell you how many from CA are moving in. Few of them seemed unhappy many say they will not leave to go back.
Wow,
Great debate here.
However, remember if there is some lesson to be learned from the last 10 years is this: People are Irrational. Very, very irrational. And frightened. And stupid. This means bubbles will continue.
I remember the first big dead cat bounce of the NAZ in 2000. People told me it was a screaming buy at 3500, but I was too shellshocked. Most everyone I know blew their wad and everything they had (including margin) on the first dead cat bounce. Noone had anything left when the real bargains came at 1100.
People have to remember that bubbles don’t pop “one and done”. They take time for the indoctrinated masses to wake up to the collossal overpricing.
Right now, California is still priced beyond perfection, even without considering the huge California budget imbalance that needs to be balanced; either with large layoffs or large tax increases, and neither one of those is good for the housing market.
I’m sorry to say that while I think people should find a place to live that they love, if you try to justify a house purchase at this point on future economic reasons, Costal SoCal is just not there, not by a long shot.
Chuck Ponzi
I grew up in Denver in the late 80’s to early 90’s (during the S&L scandal/bailout) and almost all of my friends were transplants from California. Relatives that still live in Denver say it’s happening again.
“I have said it before and will say it again. Any California coastal region property, near good schools, etc., will not ever reach fire sale #’s….Ever lived in Michigan?”
Why should coastal prices be higher than their 2000 price on an inflation adjusted basis? Did the ocean not exist in 2000? Have we replaced our teachers with Nobel prize winners? Was Del Mar’s weather Michigan-like in 2000?
The stock market is below the 2000 average and unemployment is approaching 10%. Tax rates on high income earners are rising. If anything, economic conditions are worse now than before.
“Why should coastal prices be higher than their 2000 price on an inflation adjusted basis? Did the ocean not exist in 2000?”
Coastal property wont behave on an inflation adjusted basis, but an income adjusted basis. Coastal property is a luxury good meaning it is scarce and will go to those who are most willing to pay for it.
Inflation adjusted goes well for run of the mill everyday houses in everyday areas. It hardly describes beach areas. Inflation adjusted on the beach may be the absolute bottom threshold if the economy was in a freefall for year, but barring that, income adjusted is going to be much more accurate for describing beach property.
“Hard to imagine prices falling 60%. Imagine a $3 mil place in RSF going for $1.2 mil.”
________________________
How about this statement from not so many years ago -”Hard to imagine prices skyrocketing 100-200% in a few years’ time. Imagine a $1.2 mil place going for $3 mil.” Think about that one for awhile.
The #1 problem I see with analysis of how far prices are predicted to fall is that the starting point is an absurdly overblown figure driven by well-documented loose lending, manic consumer psychology, speculation, mortgage and appraisal fraud, etc etc. Why is 60% off an absurdly overblown peak sales price unrealistic? I think it’s no more unrealistic than properties doubling or tripling in values in a short time.
Jim’s example of the CV high-end is representative of what is happening county-wide. There is almost no action in the high-end. Of course there is always going to be someone who thinks they are getting a deal because they are only paying $2 mil for house that sold for $2.3 in ‘05. Let’s see how they feel in 3 years.
*************
Dacounselor, I hate to use a cliche, but I think it’s different *there* in RSF, Olivenhain, the true coastal (e.g., whitewater ocean view). There are countless people with the dosh to show up with cash for those homes WELL before they reach anything close to that. A judgment error that people everywhere (and especially on this blog) seem to make is that they think very few other people have more money than they do. Well, they do.
Second, you have to go back pretty far to get $3 mil RSF homes for $1.2 mil. What, like 1995? Remember, that stuff didn’t rally like the stuff most people on this blog seem to be interested in (e.g., the true middle market). The spread between RSF and Carlsbad (or wherever) narrowed during the bubble.
Jim, Thanks for answering my questions and confirming my impressions. Your buying advice seems sound and dovetails with the classic advice to ‘buy the worst house in the best neighborhood.’ A young couple I know snapped up their first home earlier this year. The house needs lots of work, having been a rental for years and last occupied by five families at once, but they seem happy as larks. Based on the long-term history, I have to think higher-end buyers will finally get their chance soon, even with all the curve balls you mention.
“Coastal property wont behave on an inflation adjusted basis, but an income adjusted basis.”
I agree, but I was being generous. Wage inflation has not kept pace with inflation during this decade. Further, wealth destruction in this downturn has disproportionately hurt the wealthy. So again, I ask: why should the price of coastal properties be so much higher than the 1990’s levels on an inflation adjusted basis (using CPI or wage inflation, you choose)?
“Coastal property is a luxury good meaning it is scarce and will go to those who are most willing to pay for it. ”
Why was this luxury good so cheap in the 1990’s (using 2009 dollars) when stock portfolios were healthy, incomes were disproportionatly lower to coastal home prices, and the jobless rate was in the low single digits? The ocean was still there, the sun was still shining, and while I was a lot younger then, I presume beach homes were still considered a “luxury” good.
Am I the only one sick and tired of these faux-arguments.
One thing is certain, I would pay up to 2X more than what the typical starter home sells for in Oceanside or in a marginal Carlsbad and San Marcos to live in a better location. Essentially, if it costs $300K for a starter home in Oceanside, I would easily pay up to $600K in Carlsbad/Encinitas. Some would be amazed how much two people can save by eliminating two car payments. It’s not that hard to save 100K in a 3 – 5 yrs if one really wanted to. Unfortunately, that too much in this age of entitlement.
The guy who owned that mid-century modern home on Hillside in La Jolla probably argued that “it’s different here” before watching the house (with the North Shore view) he bought for $3 mil in ’05 close for $1.7 a few months back. The guy with the fixer a block from the water on Chelsea probably said the same thing about his $1.5 mil purchase that closed a few years later for $982K. And the guy on La Jolla Rancho….
The only thing “different there” is that when a house drops 20% in value, there goes $600K instead of $100K in a modest neighborhood.
It takes about 15 minutes of effort looking at the MLS to observe that the high end is dead across the county, with the exception of Del Mar. It’s dead. So where are all these multi-millionaire white knights riding in with all-cash bankrolls to scoop up these properties? It’s not happening.
“I agree, but I was being generous. Wage inflation has not kept pace with inflation during this decade”
From 1999 to 2007 median incomes grew 30% in san diego county. What was inflation, like 18% or so?
http://factfinder.census.gov/servlet/ADPTable?_bm=y&-geo_id=05000US06073&-qr_name=ACS_2007_3YR_G00_DP3YR3&-ds_name=ACS_2007_3YR_G00_&-_lang=en&-_sse=on
Second, if we can agree that coastal property is most desirable, it will go to the highest income bracket.
In SD county, the number of 200K+ households nearly doubled from 29,507 to 57,935. The number of houses on the coast did not double. Thus, the only way to accomodate that shortage is for prices to rise.
To be sure, there has been alot of wealth destruction since 2007, so this may not be as accurate as it was before. Still, unless you are in that top 5.6% of the population in that top income bracket, they will outcompete you for that good based on what they are able to pay.
Sorry – wrong data set.
http://factfinder.census.gov/servlet/ACSSAFFFacts?_event=&geo_id=05000US06073&_geoContext=01000US%7C04000US06%7C05000US06073&_street=&_county=san+diego&_cityTown=san+diego&_state=04000US06&_zip=&_lang=en&_sse=on&ActiveGeoDiv=geoSelect&_useEV=&pctxt=fph&pgsl=050&_submenuId=factsheet_1&ds_name=DEC_2000_SAFF&_ci_nbr=null&qr_name=null®=null%3Anull&_keyword=&_industry=
1- until prices fall to 3.5 x annual household income – prices will keep falling.
2- this is a dead cat bounce
3- the masses are asses. See what everyone else is doing and run the other way and you will be correct at least 90% of the time(this holds true in any single thing in life)
4- the beach town -great school areas will fall to 2001 levels- at least.
5- How do I know this ? because I do.
6- finally seeing my REO inventory increase again in vegas. After 2 yrs averaging 45 new assets per month – this year my totals are :
Jan-17
Feb-20
March-13
April-6 (yikes)
May-11 (yikes)
June so far- 26
Perma-Bear
are you saying I am a perma bear? lol .
as I said ” The Masses are Asses”
historically until home prices are 3 to 3.5 x earnings they will correct towards that figure -regardless of location. Last I saw Carlsbad Median home price was 520k ish and what is the annual income?
that is pretty much all you need to know
“historically until home prices are 3 to 3.5 x earnings they will correct towards that figure -regardless of location.”
You know thats not true right? You know that historically some areas are much higher than that right? Look at my earlier data set on San Diego. Back in 2000 median prices were at 4.82X earnings. Other even more desirable areas like Manhattan were at 16X earnings.
You knew this right???
Further, you knew that completely undesirable areas like Detroit are at 2.0X income right? Sorry, but that 3-3.5X income in all locations is BS. Its extremely harmful to those that want to live in desirable areas and dont know the historical relationship of their areas.
You are correct, 3-3.5X is the national historical average. However, that average is made up by a few 2X earnings markets like detroit, a few 4.8X earnings markets like San Diego, and and a bunch of 3X earnings markets in the vast majority of flyover country.