The doomdayers had their run yesterday. But they’re just referring to the same facts that have been present for the last couple of years (lots of foreclosures, shadow inventory, unemployment, government intervention, etc.) and declaring that 2011 is the year that it’ll all come home to roost. It is the casual-bystander viewpoint.
Let’s review the reasons why we’ll weather the storm:
1. Lower pricing is a good thing.
The bears think that another 5% to 10% decline will set off a new round of defaults. I think the close-to-underwater folks have already decided, and another 5% or 10% isn’t going to change their mind. I hope that those who are underwater go ahead with defaulting in 2011, so we can get it over with – enjoy the free rent while it lasts!
A surge in defaults might put focus on improving the short-sale process, which is still a mess.
The best part of lower pricing is that it’ll bring more buyers. If the tax credit caused people to buy, think of the incentive of lower pricing. While a 5% to 10% dip in prices may not be felt in the wallet like a check for $8,500, lower pricing would be great on the ego.
2. Servicers will continue the drip system.
The slow processing of defaulters/trustee sales/REO listings is working beautifully for lenders and servicers alike. Losses are drawn out, and fees racked up – if you are them, what’s not to like?
Servicers are probably telling the MBS-holders that their money is only gone for now – it’ll be back in 5-10 years, hang around!
Hopefully a big lender will go renegade, and flood a test market with well-priced inventory. They’d see it get gobbled up, especially in the better areas, and they’ll end up wondering why they thought that there was no demand.
3. The perception of a bad market will keep casual sellers off the field.
An extremely tight inventory of quality homes for sale at reasonable prices will only get tighter. Bidding wars were erupting throughout December, and, as we head into the spring selling season, the buyers will be out in force. Any seller who has a decent price on a quality home will be inundated by lookers, and have no trouble selling.
4. Mortgage rates in the 5%-range won’t dissuade serious buyers.
There might be some grumbling, but buyers who have been looking for months are already anxious. Rising rates will feed that anxiety.
5. Unemployment is more of a confidence issue, than actual threat.
The pundits throw around unemployment like jobs are the answer to everything. But the jobs they are dreaming about aren’t going to magically create homebuyers in the next couple of years, and may never happen. Yet, in spite of the 10% to 20% unemployment, we have plenty of buyers today! We could use more sellers – if more actually do lose their job and decide to sell, they will have an audience.
6. Hopefully all participants will learn some lessons.
At some point it will become obvious that we need not fear lower prices – conversely, lower prices are the answer. Unfortunately, that never occurs to the pundits, because the gloom-and doom fears are better for TV soundbites and book sales.
What we need is inventory to sell, and let prices go where they go – most will be surprised at how healthy the demand is for homes around the North SD County Coastal region.
I appreciate the bubbleinfo readers who turned into clients this year – 2010 was the best ever for Jim the Realtor! Yet I could have sold TWICE as many houses if other realtors had any common sense about the market – their ignorance is as much to blame as anything why we don’t have more sales.
Jim, do you equate the bullish position with the number of sales, or rising prices? It might be good to clarify that point. It seemed to me that you were equating it to the number of sales, with lower sales prices.
It’s hard to prove how healthy the market is by pointing to sales, because they are being artificially subdued.
But yes, sales are the leading indicator for my bullish case, plus the 5-10 offers on every decent listing.
The current count for NSDCC detached December sales:
2009: 239, $403/sf
2010: 177, $391/sf
Let’s add the 10% for late-reporters, and call 2010’s count 195, or 17% lower than last year (which was higher sales than in any December between 2005-2008).
In 2005 there were 206 sales, at $469/sf. Being that close to peak sales is impressive with all the doom and gloom.
JtR- I have to disagree with “lower pricing is a good thing”. This also ties into point #3 that casual sellers will stay out of the market.
I believe the market is completely skewed by the distressed sales particularly at the low end and true values are not reflected currently in the market place. The low end homes, which I am guessing are a majority of home sales, are easier to walk away from both for an investor, and, for first time home buyers. Both groups really have nothing to lose so they jettison these properties which drops the median.
With prices going lower less people will want to sell meaning only low quality homes enter the market and on and on it goes.
A stable market with appreciation is really in every one’s best interest as it is an essential part of our economy. Both buyers and sellers benefit from an appreciating real estate market.
The real measure to determine pricing would seem to be income. If the median income works for the median price home, or better, then we should know where we are in the cycle. My suspicion is that this equilibrium is already in place.
Lower pricing is an illusion around here. I doubt there will be many houses in NSDCC selling next year for less than 2010 comps.
But it’ll feel like prices are lower when you look at macro indicators like median sales price.
Just a quick follow-up; I googled San Diego median income and came up with $75,500 for a household of 4.
My dumb math is to take 1/3 of that for what goes towards housing and then break it down per month which equals $2,097/month.
I then use more dumb math of $600/month = $100,000 in borrowing power. 2,097/600 = 3.5 x 100,000 = $350,000. This does not factor down payment.
From Dataquick the median home sales for all (5) areas of San Diego County average $340,600. Meaning affordability is here – now.
That’s also not assuming as a Californian that housing is really 40% of income.
My point is that any further drop in home prices is both out of whack and deleterious to everyone as it destroys wealth and confidence. And isn’t the economy, and faith in that piece of paper called a dollar, all based on confidence?
PS Happy New Year- the blog has been outstanding, keep up the good work. Looking forward to a PROSPEROUS 2011 for everyone.
Congratulations, Jim, on having your best year ever. No less in an environment filled with mine fields and roadblocks to getting deals done. Well done.
As for weathering the storm, the numbers tell the story so far and NCC and a few other elite areas of SD County have certainly held up well in relation the absolute battering that much of the rest of SD County has been suffering. I believe however that significant weakness can be documented in the condo markets and to a lesser degree in the junker property market segments of the more elite areas, so these zip codes in and of themselves are not invincible to large devaluation. It will be interesting to see how the values trend over the next several years for the less-desireable properties within the elite areas as well as in the less-desireable zip codes in general, and to see what level of premium the quality properties in the elite areas will command.
Ultimately I don’t think quality properties in elite areas are going to avoid this storm because I fear it’s going to end up being one of those relentess 100 year storms. But like Jim has always said, lower prices are the answer. More quality properties at lower prices would result in a red hot market as we know that the demand is already there.
We really shouldn’t be comparing a bearish national perspective to a bullish local (NCSD) perspective.
-Mozart,
Median household income in San Diego for 2009 is $60,231, not $75,000. Your number is the median income for people filing jointly, which is skewed high relative to the real value because there are plenty of single earners out there making less money.
So scale your estimate down by 20%, or dumb math = $280,000.
I think the jobs numbers are overblown too.What it boils down to is inventory.
There are still lots of distressed properties up here in n. cali.Until all that inventory is absorbed I think we stay relatively flat.
S. cali is a different beast.Seems like people have money out the wazoo there.A lot of the prices seem very high to me but if you have no choice then you pay up.I think moving out of s. cali is not an option to a lot of people.They are so entrenched in that lifestyle that they could never move.
Here is a good article that I just read. The entire article is bearish, except for the housing sector:
http://finance.fortune.cnn.com/2010/12/30/dont-believe-the-rosy-forecasts/
Jeeman,
The point about “mean reversion” is a very good one, but otherwise the analysis in that article is extremely shallow — it doesn’t account for any of the fundamental issues underlying the various markets.
Jim:
I just want to say “Thank you” to you, your wife, and Richard Morgan, a man of infinite patience. Through your office my wife and I found a house in La Costa that is just perfect(after the few changes and many gallons of paint). You helped us get a great price, great financing, and the workers you recommended did a great job for us. Look for our open house invitation early this year. Here’s to an even better 2011.
Mozart, your scenario of higher pricing only works if real wages for the middle class are rising instead of stagnating.
It took exotic and predatory loan products to pump up housing prices in the first place. People can only afford what they can afford when you are using the traditional lending standards that worked perfectly for decades. Continued higher pricing has only been made possible by two things:
1) the entry of a second wage earner into the household (Mom) starting in the 70’s and pushing forward
and when we had used up all of the additional income the second wage earner brought in
2) changes in lending stardards: no-doc, low down payments, interest only, adjustable rate, balloon payments, pick a pay…. The whole point of these products was to get people into houses they could not afford on their normal (stagnant) wages.
We will not go back to higher home prices unless middle class wages start rising (and FAST) or we go back to the creative loan products that wrecked our economy in the first place.
I suggest that no way, no how will the elite 1% who run this country tolerate middle class wage gains. There are profits to be protected and shareholders to appease, CEO’s will be cutting wages and benefits, not raising them, for years to come.
Those with money and job stability will still be avid buyers of well priced, quality homes in great locations. Nothing is going to change there, that’s the way it has always been.
What everyone else can afford…that’s where the rubber meets the road. Comps are going to have to get narrower and be more closely tied to quality/location.
In 2011 companies’ workers are going to be more expensive. With new regulations and increasing costs of healthcare the cost per employee to a company will go up.
This means that the wage increases for those employees will not go up as fast as everyone would like (or at all).
I don’t know how many of you have received a pay raise in the last year or two…but it doesn’t look like it’ll be happening next year either.
Houses will appreciate in dollar amount…the fed is pumping $600 billion in to the market (QE2), that will inflate the economy.
Now we only need is OPEC to raise prices of oil and this will be 1977 all over again by the end of the year.
Funny how history has a propensity to repeat itself.
Oustanding post.
I’m with TJ on the point of bullish local vs. bearish national. I think the tech industry and the retiring (and migrating to your neck of the woods) baby boomers are going to keep a granite floor under your market and 2011 is probably going to be better than 2010. I think the non-coastal part of the country has at least 4 years of painful sideways action ahead of it.
It would be great if one of the big lenders went renegade (your point #2). It’s would provide valuable information to the marketplace. But I doubt it will happen. The shadow inventory is the fog of the real estate war.
Here is the prop for the lower priced products.
http://www.calhfa.ca.gov/about/information/sr-staff-profiles.htm
ONLY 2B and plenty of government workers!
Happy New Year folks.
@Jim
Will there be a “The Bears’ Case” article?
Excellent post, in #13, Art Eclectic!
Could not agree more with all your points.
Thaylor, look back a few threads — he posted two of them.
Thanks Jerry (at #12), Richard deserves all the credit. Enjoy your new home!
Real estate prices have hit bottom or are near bottom if you believe 1) the Fed/Gov can prop up housing prices for an indefinite period of time because they can keep interest rates in the 4% to 6% range forever 2) no worries, there will be a QE3, QE4, and so on whenever it is deemed necesary to fight deflation, keep interest rates down and jump start the economy again! 3) People will be paying what they are paying for homes now when interest rates hit 7%, 8%, 9%.. 4) No one will have to pay for the massive government stimulus…Can’t wait to see what happens if the CBO gets their way and everyone with a home loan in excess of $500,000.00 loses their mortgage interest tax deduction 5) Inflation, not a problem 6) Everyone who got a 10 year interest only ARM with a low down payment from 2004 thru 2008 will be sitting pretty with tons of equity in 2014 to 2018
7.We really shouldn’t be comparing a bearish national perspective to a bullish local (NCSD) perspective.
Agreed, but where do buyers and sellers get their information? Are there many who ignore the incessant negative ranting from the mainstream media? Even though we pick it apart here, don’t most listeners consider it legit after grabbing a soundbite here and there and coming up with their own conclusions? The pundits now are just reciting each others’ opinions, as if they are fact.
The realtors aren’t any help either. I had a lady who was a director on the board of realtors just tell me that my detailed, compelling case was “invalid” because she heard on the TV news that Poway went up 3%.
Jim, you are by far the best and most informative (not to mention funniest) window on RE there ever was. However, you do work in paradise. 🙂
It’s likely a Florida based realtor would have an entirely different outlook, perhaps even considering the national media outlook overly optimistic.
@Thaylor Harmor
As you say:
More Dollars in circulation=higher property prices but “DOLLAR DELIMITED”
So if you are paying in dollars why worry? If you “overpay” by lets say 10% today in two years or so it will matter very little but you are now two years closer to paying off your mortgage and you have been living in your own home.