This guy has experience in the mortgage industry, so that makes him an expert about housing demand.
Here’s the link:
http://www.pimco.com/EN/Insights/Pages/Are-There-Any-Rungs-Left-on-the-Housing-Ladder.aspx
My takeaways:
1. He ignores the fact that tough underwriting today has much to do with the lenders’ paranoia about buying back mortgages from Fannie/Freddie. As we transition to private lending, the underwriting will make more sense. You can already get a seven-year interest-only mortgage in the mid-4% range up to $2,000,000 with 20% down payment (and up to $1,000,000 with 15% down).
2. He makes his whole down-payment case based on people saving the money from scratch. What about the buyers who are using money from previous home sales, bonuses, inheritances, gifts, businesses, and sales of other assests?
3. He notes that the average student borrows $23,118 to get their bachelor’s degree, to only then make $27,000 per year (the median salary for college graduates in 2010). At that pace, college will stop being seen as the holy grail before long. Thankfully there are plenty of folks who already have degrees and well-paying jobs who want to buy.
4. Looming retirement will take older folks out of the buying pool, and/or cause downsizing. I agree that downsizing is a major trend currently, and likely to dominate the landscape for the next 10 years.
5. New regulatory hurdles could further impair the mortgage market, and in particular, the securitization of loans. The banks who are willing to keep their loans will be in a great position. Higher rates may result.
If demand dwindles, and sellers don’t want to lower their prices, then sales will drop further, and everyone will stay put. Some will live for free for years, others will struggle to keep up, and most will forget about this crazy housing talk and go to the races!
This article seems to primarily focus on first time home buyers at a macro level, so in the NCC coastal market where there just aren’t that many first time home buyers and I understand both the article and Jim’s takeaways from it. The view points are coming from different places.
From me the second point is completely true to Jim’s clients looking to buy in NCC, but other than inheritances and gifts most wouldn’t apply to some 25-35 year old looking to buy their first house.
In general more expensive real estate relies on either the rare successful/lucky cases (inheritances, successful businesses, gifts, etc.) or the move up buyer chain. The move up buyer chain relies on new first time homeowners. Generally, but not always somebody has to buy your house to move up to the next house. I think this is the area of the market that will suffer because of the points raised in the article. It going to take longer for the smart joe coming out of college to buy their first place which slows down the move up chain for everybody else. We’ll always have the rare success cases, the wealthy moving from the east coast, and the ones lucky enough to receive a big inheritance, but that pool of buyers isn’t that deep.
but that pool of buyers isn’t that deep
How do you know?
At today’s rate, we only need 200-250 per month.
Wealthy or near-wealthy from LA, SF, or east coast all think we look cheap, and if downsizing is the trend, they could keep us afloat. Foreigners too.
I agree w/ you, JtR, except it’s not downSIZING, it’s downDOLLARING. SD looks DIRT cheap compared to the SF area; we can get twice the house/land in great parts of SD (think O-hain, RSF) for 50%-80% of the prices in Marin county (probably the best comparison to NCCSD). A pretty pedestrian 2750 sq footer >45 mins commute from mid-SF (i.e., San Anselmo) runs about $1.75 mil. For less than that, you can bag 5000 sq ft in Olivenhain, on a couple acres, 5-10 year old construction, etc.
I agree with most of the article.
And I think Livincali made one of the best replies of the year. Pretty spot on.
But I will add that basically the only ones(in the US) who think San Diego is cheap – are from California.
Pretty much ask anyone else from anywhere (with the exceptions of NYC and Hawaii) and you will get a completely different answer. I would say 95% are horrified by the still bouyant cost of certain prime NCCSD real estate and for that matter even more so in OC.
As soon as people get out of there heads that their home is an investment- the better off CAli will be.
The real demand will show up when inflation catches up to underwater home owner’s prices or they magically become above water somehow,
They and only then will the recession end and the real fun begins,
As Cisco Ad’s used to say , Are you ready!
“I would say 95% are horrified by the still bouyant cost of ****certain prime**** NCCSD real estate and for that matter even more so in OC. ”
Pretty much by definition anything that is “certain” and “prime” is going to be more expensive than things that are less so.
“How do you know?
At today’s rate, we only need 200-250 per month.”
To be honest I don’t know. Maybe NCC will be an Aspen, Colorado where all of the big money from across the nation and the world will continue to pay high prices to live in this particular trendy area. Of course that means we’re going to go with the “It’s different here argument.” Certainly some of that current 200-250 buyers a month is move up buyers right now, or buyers that sold at peak pricing waiting for prices to come down. Maybe the pool of buyers will support 150-200 properties a month and maybe that’s what we’ll get. I willing to entertain the “It’s different here argument” until there’s actually weakness in price or sales.
Hmm
Well don’t know about SD, but LA can’t survive financially with homes at 2001 price level
They need the tax rev from 2005.
Well they will probably go BK anyway so the point is moot (or moo)
You guys forgot the big spenders from Mars.
Well the races were fun today….
I totally agree with livinincali. In general I think the article hit the nail on the head at a macro level. It doesn’t mean sd won’t continue to be ridiculously overpriced in perpetuity. At least Jim hopes so…..
I say bring on the lower prices.
There’s (2) things going on here that are perhaps not so obvious;
1.) College Grads are coming out with MASSIVE debt. Owing $20K isn’t so bad but often it’s much more. And usually the expensive debt is from diploma mills. Since they can’t go BK, these people are saddled forever. That’s a big hit to those who are potential first time home buyers. Maybe they’ll marry well and get an inheritance.
2.) State and Federal regulators are telling the banks not to lend. My banker has the Feds saying to not lend on anything residential. He’s shaking his head as he watches private equity charge 3-4% points up front, then 8% interest with another 2% points on the back side. They want to do the loans but are not allowed to do so.
Lastly, if you look at the county on the whole it’s pretty damn cheap compared to LA, Orange County or Ventura. If you go inland it gets really affordable relative to local incomes.
I’d prefer lower prices.
Selling in this environment is excruciating, if prices were lower my life would be much easier, and more rewarding.
It has always been a challenge working with each person involved with a sale, but that is the most rewarding part – assisting people in getting what they want.
But now I have to also deal with the negativity of people who want to try and take me down.
I don’t know what I did to deserve it, because I think I provide a somewhat unique glimpse into what’s really happening on the street – something that is hard to find elsewhere – for free. No obligation to you, and very little JtR sales pitch and no ads flashing at you up and down every border of the website.
Yet almost daily I have to deal with people taking personal shots at me, and trying to disrupt my business here.
I don’t get it.
But it’s what we do in this country – anybody who tries to bring positive change gets persecuted, or killed.
If prices were lower, maybe the negative people would give me a break?
For people already set in their convictions It’s a tough nut to swallow your arguments bolstered by facts and data. Just human nature. Stay strong JTR.
Jim – I hope you didn’t think I was taking a shot at you. I was just saying of course you would want higher prices since that would mean healthy returns for your hard work. That’s just a no-brainer. Nothing personal intended in that statement. Given the excellent coverage you provide on here, I guarantee you will be the last guy standing in NCC if it all goes to hell (which it won’t). In 10 years, we’ll be laughing at all this doomsday stuff.
No offense taken, I try to read between the lines.
I want it to be easier for people to buy and sell homes. I think lower pricing would help do that. I am willing to work in either environment, because I am a tough guy. But the anxiety that you and others are going through over buying a house isn’t right.
I think I would make more money if prices were lower. It’s a volume business.
JtR…
No good deed goes unpunished. However, with that being said, I appreciate your efforts to educate those that have in an interest in the real estate market. Thank you for your candor. As a prospective buyer, it has been extremely helpful to read your website because you have provided your readers with your front line experiences. Bravo.
One thing to remember when looking at housing demand is that North County Beach properties are a complete and total aberration.
Jim, let me start by saying that if we ever need to sell or buy again (we are thinking of giving you a call to look at investment properties) you will be our realtor.
“I want it to be easier for people to buy and sell homes. I think lower pricing would help do that”
I think the best market for both buyer’s and seller’s is one in which the prices are “slowly” increasing. In this case, both the seller and buyer win. I have been a buyer in San Diego on three occasions (1998, 2000, 2009) and by far I had the most difficult time in 2009 when prices were falling off a cliff even though I was getting a price that made sense in terms of historical norms.
When the market is finished correcting and starts to gradually rise again, it will once again be a good time to buy and to sell and the sales volume will return to healthy levels regardless of where the price level ends up.
The price level will have to end above the water line,
Sorry just had to say it.
for a healthy market, that is.
My thoughts only
but the water line is where less than 10% home owners are under that.
Hey Jim,
You’re right. Demand is high for SoCal, and as far as I can see, supply is low. Unless something big changes, prices are going to stay relatively high.
Of course, when I compare some places, even OC seems cheap. A friend in Dallas told me about his $1000 electricity bill for his 4600 sq ft big bomber. Do you realize that I could finance an additional 200K (before tax, and more after tax) at present rates for that much? And that doesn’t even account for the salaries there vs. here.
SoCal is not as expensive as one might be led to believe. Sticker shock is not a long-term indicator of price shock.
Chuck
There are so many things wrong with so many posts above. @ Jiji, um, the recession has been over for 2 years. The economy is chugging along larger than ever before. You must have meant housing prices.
@ Mozart. Your posts are usually excellent, but this one baffles me “State and Federal regulators are telling the banks not to lend. My banker has the Feds saying… ” That absolutely cannot be correct. I’m connected to banking, and I can assure you that lending is encouraged.
JtR, I suspect some of the shots you take (although the one you referenced didn’t seem like a shot to me) are no doubt aimed at agents in general because of the high commission. I know I scratch my head how agents (especially crappy ones) can complain when their commish is still double what it was from 10 years ago. When I sold my house after it had doubled in value, I was pretty bitter that the fee to sell also doubled (and the agent had no more work to do than before). In my business, our fees have dropped 30-90%, depending on the product. Likewise for things like stock trades, etc.
In this context I was referring to the housing market.
But
Well if you consider unemployment over 9%
“Economy chugging along larger than ever before”
Great, just don’t tell that to my neighbor.
I do not think we have seen the cuts in government that are coming. The state and local governments have been getting federal money to keep them afloat and it is about to end. California has borrowed billions to give out as unemployment benefits and the first interest payment is due this fall. I also think there is going to be a lot of issues surrounding the tuition increases at the UC and State University systems. Big Gov., Ed. and Mil. are going to take a hit.
But I could be wrong.
Aztec, I didn’t think del mar renter threw a shot, I’m still reeling from vegasandre blasts that I deleted.
Everyone is entitled to their opinion, but this blog has changed because I and many other are tired of waiting for the doom, and are moving on.
Please go to the doom blogs to express your opinions on how the future may unravel, and respect that we’re here to discuss relevant data to make decisions with today.
“Everyone is entitled to their opinion, but this blog has changed because I and many other are tired of waiting for the doom, and are moving on.
Please go to the doom blogs to express your opinions on how the future may unravel, and respect that we’re here to discuss relevant data to make decisions with today.”
APPLAUSE!
JtR, you weren’t referring to me as a doomsayer, were you? I’m saying everyone should suck it up and stop whining! Times aren’t THAT bad, people!
@Jiji, you may have a neighbor who is hurting. You probably have plenty who aren’t.