Surfer Steve wondered what we can expect in the post-housing-tax-credit environment. To qualify for the federal tax credit, transactions have to be secured by Friday, and to get the state cheese, buyers need to close their sale and apply before the money is gone – and that’s predicted to happen before the end of May.
In other words, the tax-credit era is almost over, at least for now.
The winding down of the tax credits has diverted some attention away from the fact that mortgage rates haven’t gone up much since the Fed quit buying MBS at the end of March.
Between the two, the only pressure on buyers is to purchase a home before their lease runs out.
There is a resounding theme among buyers: They’ve waited this long, they aren’t going to compromise now – even if it means having to sign another lease.
If they do buy, it’ll be because the house suits the majority of their needs, and can be bought for an attractive price. But I think we’re in for good news the rest of the year.
Doesn’t there have to be more sellers who NEED to sell, and will be forced to get real about their price? I think so, and while they might be basking in what they think is the prime selling season right now, within the next 30-60 days it will be become more obvious to them what we already know – they are an over-priced turkey.
Look for more sellers to be inching their way towards the exits, and if the banks start unloading, it could get hysterical. Market conditions are pretty good right now – if there were more quality homes for sale at price points around today’s comps, they’d be selling.
If there was a surge of listings priced 5% under comps (bank-owned or otherwise), they’d be gobbled up in a hurry. But that’s about 10% to 20% below where most sellers are listed now – we’ll see if they can handle the truth.
“You want the truth? You can’t handle the truth!”
I’m a buyer with a 20% cash down that’s living and renting exceedingly cheap right now. Jim’s insight summed me up pretty well.
In San Diego it’s still cheaper to rent than own in the nicer areas.
Eventually I’ll get a seller willing to accept my terms.
Another price chopper in East Cardiff today. This one looks like they tried for an equity sale first but quickly dropped into short sale territory. “Owners are teachers, moving to east coast.” We may be seeing a lot more of that — or “Owners are high tech engineers, relocating to Austin” or “Owners folded small business, retiring to Colorado.”
Overall, I’d agree that the balance is tipping in favor of buyers. But there is still no inventory in prime locations. Today’s Clark and yesterday’s Mackinnon are both marginal locations.
In older prime coastal neighborhoods, we’re not going to see much inventory. I don’t think people got in over their heads on loans in these neighborhoods, so they can afford to ride it out. If all the homes in the neighborhood were purchased prior to 2000 and nobody caught Home ATM Fever, you don’t have any distressed sellers. If they have to rent out an in-law unit or have the kids move back in to make ends meet, they’ll do it.
And if they need to move, they’ll rent the place out rather than sell. People seem to instinctively know that inflation is coming at some point, and limited-supply beach property will be a good hedge.
Er, not East Cardiff but just south of Leucadia Blvd. and east of I-5. My bad. Otherwise, point still stands.
I agree with W.C. People with equity are going to hold on to their prime properties. What are they going to do sell out at a 2001 price and then put the cash in a CD at 1/2%? Not much smarter IMHO then those that sold their stocks last March.
It is easy to find a great deal on a lousy house and it easy to find a great house at a lousy price. Finding the package deal is still pretty difficult and I don’t expect the tax credit expiration to change the situation much.
I personally believe that prop. 13 will pretty much guarantee that renting will always be a better deal then buying in the prime areas IF you are only looking at today’s numbers. The long time free-and-clear owners paying $500 a year in property tax are just simply always going to undercut the market when times get tough. For buying to make sense you have to look out 10-15 years when the economy recovers and inflation hits. Would you rather have a fixed payment on a 30 year loan that will be completely paid off in 15-20 years or be at the mercy of a suddenly tight rental market? People that buy at the beach are buying a lifestyle and they want that lifestyle now and probably through retirement as well.
@W.C.Varones
It’s not instinctive, the USA has been printing dollars at a greatly increased rate the last 2-3 years so rising inflation is DEFINITE.
After all, those dollars will be used to make purchases, so as the number of propertys is not rising while the number of dollars is, it means more dollars per house.
Ask your parents about the last time the US did this (Hint: Vietnam war to pay for) and how hard assets like Gold and Property retained their intrinsic value while their dollar value escalated.
Andrewa–I am in agreement with what you posted about inflation. However, “wage inflation”, as it has been pointed out numerous times on this site, will need to follow in order to have an effect on housing prices–that could take quite a long time!!! I feel that is a great time to get positioned accordingly–long-term.
VC–I know the theory of people fleeing California, however, the last few families that have moved INTO our neighborhood are FROM out of state–Arizona, Utah, Tennassee and Illinois–go figure!
Local Boy,
I think the Dirty Fed can create asset bubbles a lot easier than it can create wage inflation.
So buyers are going to be the asset-rich, not the working Joe. It may or may not be enough to keep the real estate bubble propped up, but it’s definitely a transfer of wealth from the working/middle classes to the already rich.
Viva Zimbabwe Ben!
In older prime coastal neighborhoods, we’re not going to see much inventory. I don’t think people got in over their heads on loans in these neighborhoods, so they can afford to ride it out. If all the homes in the neighborhood were purchased prior to 2000 and nobody caught Home ATM Fever, you don’t have any distressed sellers. If they have to rent out an in-law unit or have the kids move back in to make ends meet, they’ll do it.
And if they need to move, they’ll rent the place out rather than sell. People seem to instinctively know that inflation is coming at some point, and limited-supply beach property will be a good hedge.
W.C. Varones | April 25th, 2010 at 10:13 am
Good points, but I see it a bit differently. These neighborhoods have LOTS of elderly people who will be moving because: they pass away, they move nearer to their children/grandchildren, they move to nursing homes, etc.
Many of these owners own their homes free and clear **and can afford to sell at 2001 prices** while still making a very nice profit. If you talk to them, you’ll find that most of them never expected 2001 prices, nevermind 2005 prices. They don’t price-anchor to 2005 prices, in many cases.
Some will agrue that their heirs will just move in or rent the places out, and that may happen in some cases. However, many of the heirs are not only children and will either need to sell in order to settle the estate, or an heir will have to buy out the other heirs — possible if they are rich, not so likely if they’re not.
I still think there’s plenty of room for prices to come down in the more expensive neighborhoods.
If interest rates ever rise, cash-rich buyers will value their dollars more than they have during this decade of absolutely pathetic interest rate levels. If inflation is really in the cards (some would argue we’ve already seen inflation — look at what asset prices have done this decade!), interest rates should rise rather dramatically.
OTOH, we might end up in a deflationary environment for much longer than people believe.
It’s all relative and the local buyers are going to keep crying that they have to compete for homes against out of state buyers who have little time to shop and lots more cash to burn.
Lots of neighbors moving in are east coasters that don’t blink at the prices and upgrade immediately after purchasing, at least in the over 800K club.
I think you need more out of town buyers, Jim. Local people can’t keep up with the right coast.
As a buyer I’m gambling a bit by waiting for the “gov’t cheese” to expire. I made up my mind after many sellers refused to entertain my fair bid in there overpriced homes.
Once the credit expires, I’ll offer the same price as before, in addition demand $8000 buyers credit from the seller.
“Many of these owners own their homes free and clear **and can afford to sell at 2001 prices** while still making a very nice profit.”
Where else are you going to retire with your house free and clear and be paying $1000 a year in property taxes and have this kind of weather and amenities? Sure they could make a nice profit but what are they going to do with it? Estate sales will be a factor but I don’t see why they will increase dramatically over what we have seen in the past.
There hasn’t really been any wage growth in the last 10 years but there has been a tremendous amount of wealth growth and consolidation nevertheless. Where all of this money is going to end up is the real question. It is getting hard to hold on to wealth much less grow it these days. Real estate may not be what it was but I still think some people are going to prefer it to the stock market or cash.
W.C. Varones, andrewa, Local Boy-You are all wrong on inflation. High inflation (5%+ or more a year) is extremely unlikely in the near to medium term (next decade). WE HAD ACTUAL DEFLATION LAST YEAR! Basing any type of investment strategy on high inflation at this point is complete folly.
I tend to agree that high statistical inflation is out of the question because of the bizarre & unfair way they measure it.
Still, I think savers can be royally screwed without the gov’t registering high CPI-U.
The allure of overpaying for RE will never dissipate in SoCal. It’s in part how individuals define themselves. You know, their profession, their car, their house, etc. And bargain hunters? They’re anchored to peak market pricing as well so they can justify their “screaming deals”.
A market bear such as myself has resolved that the current administration will throw as many resources ($$$) as it takes to continue propping up the market and banking industry. Had the government let the market self-correct, I’d be in a home by now because prices would’ve fallen through the floor…though arguably, we’d be in a noticeable depression (as opposed to the current unnoticeable one). However, since this is not the case and I have no desire to be married to a piece of property (based on my income) — inflation or not — I’m planning on moving out-of-state. I think a fair amount of median-income wage earners leaving the state, feel the same way I do…quality of life is not defined only by the weather.
The “affordable” single-family dwellings in my ‘hood (92127) are selling anywhere from 8x to 10x my gross pay ($54K). And these are recession prices? Multiple bids??…and these listings comprise about 5-10% of the least expensive of the available properties. And I thought unsustainable meant unsustainable. I guess my state of denial is terminal, because it ain’t even close! More than that, I couldn’t envision myself buying any of these properties at twice my income! That leaves one alternative…move out. Renting in perpetuity is not an option.
But let me say this…I would’ve acquired Jim’s services had I elected to buy in San Diego. Honesty is still the best policy and Jim seems to characterize that.
Thanks common-sense. If you come back, I’ll be here to help!
On the transition discussion. I did a final walk-through today with my buyer from England, purchasing a house in the $500,000S in Carlsbad from sellers who are moving to Boise. Both parties are happy.
It’s going to be a rich man’s game from now on.
I had another thought on when the bottom will be. There has to be movie writers/producers working on scripts about Bennie and the Fed.
The minute they release a movie that describes Bernanke as a hero for bringing in the soft landing, it’ll be the last straw.
Inflation, deflation. Just remember the 70`s- we had stagflation and that is where we are headed. Inflation and the economy stays flat – and after 8 or 10 years 20% interest rates – then houses will get reaL cheap.
Where else are you going to retire with your house free and clear and be paying $1000 a year in property taxes and have this kind of weather and amenities? Sure they could make a nice profit but what are they going to do with it? Estate sales will be a factor but I don’t see why they will increase dramatically over what we have seen in the past.
There hasn’t really been any wage growth in the last 10 years but there has been a tremendous amount of wealth growth and consolidation nevertheless. Where all of this money is going to end up is the real question. It is getting hard to hold on to wealth much less grow it these days. Real estate may not be what it was but I still think some people are going to prefer it to the stock market or cash.
pemeliza | April 25th, 2010 at 7:31 pm
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Yes, the low property taxes are a draw, but you can find that in Florida (and other states) as well. Many of these older owners are house rich and cash poor. They’re sitting on decimated savings (because of the stagnant/falling stock market and incredibly low rates over the past decade), and many are looking at higher expenses WRT caretakers or medcal expenses, etc. Either they will have to sell, or they will have to get a reverse mortgage.
Contrary to what we are being fed, inflation has been fairly high, while wages and savings/investment income (for regular folks) hasn’t really kept up. I think many of these people will be tempted to sell their homes for a $500K profit (tax-free…before that law changes???), and move to another place for $100K or less (mobile home parks or housing in other states). Then, they’ll hopefully have enough money to live the rest of their lives without having to take on any additional debt.
Oh, and the reason we’ll see this increase in the future vs. what we’ve seen in the past is the Baby Boomers moving into that demographic. Just MHO.
Good points CAR. I am basing a lot of my opinion on just looking at my immediate area. The tax assessment on 6 out of 7 houses in my block is currently set at a value somewhere between 10% and 20% of the current market value. That is a screaming deal considering the quality of life. As far as taxes go, my property tax on my house in North Carolina nearly doubled during the 6 years I was living there (they went from around 6k to more than 10k). The schools and health care there are probably some of the best in the country. The weather is nice probably about 4 months out of the year (2 months in the spring and 2 in the fall). NC is not a bad place to retire but coastal SD blows it out of the water if you like to be outdoors.
Inflation isn’t just a function of M0 money supply, but also the velocity of that money (i.e. credit and consumer/business confidence). Credit is being destroyed faster than money is being printed. I believe the government has stopped the destruction for now by suspending mark-to-market. Once credit is extended and people start buying things with money & credit, we will see inflation. I think it will take a few years still.
Look at between 2000 and 2007…money supply was pretty constant, and credit was loosened, and we averaged 3-4% inflation. By your definition, andrewa, we should have seen zero inflation due to printing zero dollars.
There are some great points made here. I have a couple of questions:
For those expecting inflation, to local boy’s point, where’s the wage-price spiral that comes with inflation?
For those expecting deflation, where are all of those bank reserves going to go?
The more I know about inflation/deflation and study past history, the more I realize that the FED has been pushing on a string for a while. Could it afford to follow these failed policies for the next 10 years? Or, like other areas, will it be forced to change the rules of the game to make sure its policies work?
The FED has been far more inventive on debasing our currency in the past 5 years than it was in the previous 50. Can they fail on their current directive to maintain inflation, or will they detonate the netron bomb of monetary stimulus? If you know what I’m talking about, you can’t help but feel a twinge of fear about what that means. If that’s the case, the whole rules of the game go out the window, and we’re back to square one anyway.
Let’s hope for just a little inflation.
Or Ben the Boogeyman is about to eat us alive.
Chuck
Ponzi,
Most of the national debt is index-linked, right? So that throws the monetary policy out the window; all you have is fiscal left.
pemeliza,
Thanks for the info on NC. It’s one of the places we’re considering if we ever move. I’m surprised to hear the weather’s not better there.
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Chuck,
I’m hoping for **asset price** deflation without it affecting wages and prices of household items too much. Basically, a reversal of what we’ve seen over the past decade or more.
CAR, to be clear there are probably 4 months out of the year in NC when the weather is comparable to coastal SD. There are actually only probably 3 months where the weather is really oppressive (mainly the high humidity summer months). The other problem I personally underestimated after living in SD was the bugs. The mosquitoes in the summer in NC are a major problem as are the ticks.
I hope I didn’t paint too bad a picture of NC it really is a great place to raise a family if weather and outdoor activities are not your highest priority. Given your family situation on the west coast, however, I would probably take Oregon or Colorado over NC just to be a one-hop flight from home.