Yesterday reader SBT asked,
I’m not in the real estate industry so maybe I’m missing something but does the fact that the ppsf is the same as ’05-’07 mean we are in a mini bubble?? Everything seems too expensive right now? thoughts?
If it were a bubble, it would need to be “pop-able”.
The last bubble (and to some degree the late-1980s bubble) popped due to exotic financing. We saw homeowners fleeing in mass numbers around Oceanside and other parts where subprime loans were prevalent.
The rising appreciation that we enjoyed from 1995 to 2007 became embedded – most thought it would last forever. When it didn’t, those in more affluent areas bailed out over the thought of being ‘underwater’.
Those folks may be having some regrets today.
Today’s mortgages are the most conservatively underwritten financing we’ve had over the last 30 years. Buyers are using sizable down payments in most cases, and their payments must be affordable to get a loan.
These are folks who plan to stay forever, regardless what happens to prices.
If prices were to drop, they won’t be selling – they live there.
How do we know?
Because they would be more tempted to move if prices went UP – and look how few sellers we have now. Nobody wants to move at today’s prices, if they were lower they really wouldn’t move!
How can we support these prices when the SD median household income is $70,000? Have lots of renters – the homeownership rate is 55% in the county.
It is a market for the affluent, and the thought of everyone enjoying the benefits of the American Dream is kaput.
Could a Baby Boomer Liquidation Sale disrupt the market with a flood of inventory? I doubt it – not in prime coastal regions where the kids would rather move in, than give it away. The houses are paid off – what would you rather have? Free housing or free money? The government will provide enough money for food, but you are going to be on your own for housing.
Yet, today’s valuations aren’t as crazy as they seem – here is Rich Toscano’s latest comments and graph:
(T)he peak was over 8 years ago — nearly a decade now! — and since that time, both rents and per capita income in San Diego are up 20%. “Peak pricing” in nominal terms just isn’t a meaningful number, when the purchasing power of money has been declining while nominal incomes and rents have been rising over that period.
Read more here:
Are today’s prices sustainable? Beats me, and each neighborhood will probably bob along from here.
On a street where a few sellers really need to move, we could see a dip or two.
I thought that might happen on my UTC 2br condo listing. The last sale of this model was $418,000 in December, so we were going to list for $419,000 – you might have heard reference to it in the video.
But a first-floor model-match listed the day before us on the range $369,000-$399,000 by an original owner who would still make out nicely.
“See, this is how it could happen – a couple of motivated long-time owners list at the same time and prices could drop 10% within a few months”.
We wanted to sell promptly, and I knew we wanted to be the first one out.
I already had the video processed with the $419,000 price, but discussed with the seller and changed our list price to $395,000 just in case.
Boom – four offers, and we sold it for $430,000.
I note that the current pricing is approaching the peak levels of the bubbles seen in ’79 and ’90. I haven’t been around long enough to understand the local economic conditions that lead to the subsequent declines. Is there any similarity to current conditions?
The big difference now compared to history is that if trouble comes your way, you don’t have to make your payments.
Readers will scoff at the thought, but how can the banks and BigGov go back to foreclosing on people?
The new Policy: Reduce their payment to something they can afford and keep them in their house.
It’s a policy that will solve all problems; unemployment, recession, earthquake, terrorist, war, divorce, death – you name it.
Seems like there will be a tipping point. Moral hazard cannot expand indefinetly. At some point the productive moral people will not be able to bear the burden.
First the moral hazard was provided to big banks in the form of FDIC insurance. Now the average citizen should count on principal reductions and underwater refinancing?
The only reason these moral hazards can exist is because the dollar is the world reserve currency. Are we as a country willing to continue to risk our currency to bail out those who could not follow through with their own risky investments?
Moral hazard cannot expand indefinetly. At some point the productive moral people will not be able to bear the burden.
True, and it’s why we have debt. If citizens can’t/won’t pay, then BigGov will just borrow more. $17T and you barely hear a peep about it:
We as a country would have to elect a renegade politician to change policy, and it is doubtful that the status quo/illuminati would allow that to happen. But if there is a revolution, let’s get in on it!
Hi Jim and everyone…
FWIW more background on that graph, and some similar ones, can be found here… this article has further thoughts on the “bubble” question and some other perspective on valuation:
Thank you Rich!
JtR: You nailed it: “Too Big to Fail” will be extended to mortgage payers indefinitely. With the next severe economic downturn, mortgage payers will not be evicted en masse for that would bring out the middle-class pitchforks aimed at politicians on both sides of the aisle. The banks will, again, certainly not want to realize any loan losses. New government-backed (read “taxpayer subsidized”) programs will be created for mortgage payers to remain in their abodes with lenient payback terms, extended pay horizons and little to no enforcement of the new contract. There will be no free-market discipline; no real house price discovery. Moral hazard is now baked into our U.S. economy.
It is working so beautifully that it will be repeated in the future.
Another example of how the BigGov has gamed the old system:
Fannie Mae is known for its more-aggressive foreclosing policy. They put their REOs up for sale at list prices inflated 5% to 10%, and provide the financing themselves with no appraisal needed (HomePath). In February, they began offering 3.5% credits to the buyer for closing costs.
They are taking advantage of first-timers and other unsuspecting buyers who are re-inflating the price bubble rapidly.
That isn’t why Fannie Mae was started, but now if BigGov finds a need to change the rules midstream to boost their policy/profits, they do it.
And the choice for citizens is this:
Fight it, or roll with it.
But don’t be naive and think they aren’t doing it to you, because they are.
Great post. Let’s call it a plateau in prime coastal areas at permanent unaffordable prices.
And great comments. Now that JtR has a new generation to work the real estate business, let’s draft him for Congress!
I’m too old, I’d have to start at the top.
JtR: Do you recommend someone of your daughter’s generation buying into this “frothy” market (pertaining to SD real estate)? Or would you council them to wait (until what, I am unsure)?
Yes, be smart, make lots of offers, buy on the dips, and get as much of the cheap stuff as you can handle comfortably.
If you can buy a cheap house for 5% under market with 5% down you will likely have 20% equity in a year. Refinance off the PMI and you’re good.
JtR: Appreciate the response. So how does one apply your “…5% under market…” rule to your UTC 2br listing which sold for $430K? Would you have supported Kayla offering $13,500 over list price ($408,500 or 5% less than what you actually sold it for) when the “market” dictated a $430K sale price?
I do not mean to pick on you (I know you have thick skin), I am just trying to wrap my head around such pricing escalation.
You won’t get a price deal on any of my listings, but you will likely get a decent value because I strive to sell the premium products.
To get a 5%-under deal you have to make a lot of offers until you can take advantage of somebody, which is rare in this market during the selling season.
You have to work around the edges – fixers, up-and-coming areas, and old listings.
Most buyers looking for a home in which to live don’t have the time or patience to work that hard – they just want to buy a house and get settled.
But for those who have a sharp eye and plenty of time/patience, there is opportunity.
There appears to be a pervasive underlying assumption that the government will always backstop everyone and everything everywhere using a money tree that can grow infinitely without consequence. Wow, just wow.
Yes – and this government will.
For it to change, we’d have to elect a President and Congress that went back to democracy.
It would sound like wild eccentric balderdash, and the candidates would be vilified by the status quo & media. If they got elected anyway, they’d have about 6 months to change the world or be killed – figuratively or maybe even literally.
“$17T and you barely hear a peep about it:”
There are people giving a ‘peep’ about the moral hazards surrounding the Fed’s/US govt’s policies. The loudest are just not in the US. If the world decides that it will not recognize the US dollar as the reserve currency, the US will not be able to afford to continue with moral hazards.
It would probably take an outside source to shake up this country enough that something changes.
I think this covers it:
there are no angels
there are devils in many ways
take it like a man
I travel internationally and you can see the results of dollar inflation / fed pumping in what your money can buy now compared to 20 years ago.
There was a day (maybe 20-30 years ago) when you could flash American dollars and it would get you almost anywhere. Even if you had to convert it to the local denomination it wasn’t hard to do.
Now the dollar doesn’t have the cachet it used to have. People in other countries can speak English and they read/watch American news. They all know that the Fed / US central bank is printing money.
I’m with Jim in that there’s not much you can do to fight the banks anymore so you might as well just buy. In times of inflation sitting on hard assets is the way to go.
I think of banks kind of like playing poker with someone that has infinite amounts of money. If they can go all in every hand, it doesn’t matter how well you play against them eventually they’re going to win.
Agreed – get your piece of the action!
The thing about San Diego is it is basically a resort area that also has High Tech and Fed-Defense Jobs.
Most other areas around the country are still far below peak,
“San Diego” is NOT the whole country,
That’s cool, it’s all local.
I’m not sure there is much, if any, inter-relationship between real estate markets, other than people wanting to capitalize on the substitution effect.
Also the Dollar is holding up fairly well IMO,
Holders of Canadian dollars, Australian dollar, yen and RMB are not feeling it lately.
This is a really good thread. I bided my time during the last bubble but this one unfortunately was different ….the government bailed everyone out, unlike other bubbles I have lived thru. I had hoped to swoop in and buy property when things fell but they never really did. And I think you are absolutely correct that there is a new normal…I think the politicians are too weak to do the right thing. So now what to do going forward?
You mentioned buying as much of the cheap stuff as you can. Fixers, up-and-coming areas, old listings, etc. But where are these? unfortunately, I’m not seeing any of that anywhere in any even halfway desirable area. And the fixers seem to be selling for as much as the updated homes. I would never buy a house without a home inspection yet I’m up against other buyers who don’t ask for one.
Developers seem to be buying infill and they have deeper pockets then I do, as well as cheap construction crews they can bring into rehab a property. Then it’s back on the market with a few cheap upgrades with an even more accelerated price. Or Chinese buyers with bucket loads of cash are driving up prices.
All I am seeing (and I have been looking for years) is bubble price listings with multiple offers and often the house sold before it’s even listed. And most of these mid range price in demand houses are location challenged as they are next to the freeway or under the high tension powerlines, under a flightpath, etc. I don’t care that much about the condition of the house but I’ve learned from long life experience that living on a noisy busy street, or in a crime area is just not worth it .. especially not for such inflated prices. Those seem to be the only homes that are turning over, and there’s a reason.
I greatly respect your advice and point of view and wonder if you could expand on how to find a modest detached house in this market in a decent neighborhood and location. Please don’t think I’m challenging you as I think you’re great!!!!.. I am just a frustrated buyer who really wants a home and is stymied by this extreme sellers market. Thx
Prices dropped roughly 40% and bounced along for 3 years before beginning a visibly sustained increase.