Bubble-Burst Less Likely

Someone asked me if I thought the bubble will burst again.  I said no.

Not in the same way that the previous two bubbles have ended – with foreclosures driving down prices across the board.


Because of these reasons:

1. The Foreclosure Process Has Been Compromised – Banks have been handing out loan mods like candy, and keeping defaulters in their houses at all costs. Of the 13,154 houses that have closed escrow this year in San Diego County, only 293 were bank-owned, or 2.2%. Only eight of those were in our La Jolla-to-Carlsbad coastal region, out of 1,730 closed sales YTD (0.5%).

How can banks reverse course, and start foreclosing again? They can’t, and instead the ‘loan-mod’ will become standard banking policy – though vague.

2.  Recent Buyers Were Well-Qualified – No exotic financing this time around.  Everyone who got a regular mortgage over the last six years had to qualify AND use a down payment.  Thanks to recent prices increases, most have tacked on some extra equity too – they aren’t going to panic-sell now.

3.  Those Who Do Panic-Sell – The kids who come to town to liquidate their parents estate will more likely sell to a flipper offering quick cash.  There have always been investors working the obits, but it is a cottage industry now – and they will improve and flip for a retail price.

4. Boomer Liquidation Less Likely, and Multi-Generational is the Substitute – Many of us have discussed the fear of baby boomers needing to tap their equity, and wanting to downsize. Here is an article:


If they need money, the reverse mortgage is still around, and likely to stay.  If aging boomers want to downsize, they need to leave town to have it pencil – because it’s virtually impossible to buy a smaller one-story house in the same area and still save big money.

Plus their kids – who could have afforded a decent house 2-3 years ago – are now left holding the bag. It’s better for the kids to move in with the folks and take care of them, then to buy the crapshack.

5. Sellers are Resilient – If they can’t get their price, they will wait – and agents will wait with them.  It is typical for agents to take six to twelve month listings and hope that’s long enough for the sellers to eventually wear down if nobody comes along.

6. Higher Capital Gains Tax – The sweetheart 15% capital-gains tax went back up to 20% at the end of 2012 – a 33% increase!  Even though they can sell for more now, investors are very reluctant – they hate paying tax! Especially when a spouse can “die correctly” and leave rental properties to the other spouse with a stepped-up tax basis.

I don’t think we’re going to see the roller-coaster ups and downs any more.  It’s much more likely to feel likely a bloated, stagnant slush of goo than an exciting crash.  Thankfully, agents work on commissions, otherwise sales could come to a halt!

Double-Bubble Trouble?

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.

rich toscano san_diego_housing_valuations_12_2013-1

Read more here:


Bubble Schmubble

These ivory-tower guys keep wasting their time debating whether to call this is a bubble or not using vague, mind-numbing graphs. From HW:

There is a lot going on right now in housing and mortgage markets. But one of the debates that continues to rage on is whether or not U.S. housing markets are in a bubble or not.

HousingWire’s own monthly HW Magazine talked about it in detail in our January issue.

So too has CNBC’s John Carney, in a post from late last year with the headline: Yep, it’s another housing bubble. And then on January 14 of this year, Peter Wallison at the American Enterprise Institute wrote a breathless op-ed proclaiming: The bubble is back.

But is it really a bubble just because home prices are rising again?


Happy New Year!

NickTNick at the Wall Street Journal has been doing a great job covering the real estate market lately.  He likes to stir it up on Twitter, and yesterday he got a few experts to chime in about pricing in 2014:


There is always a lot of banter and hyperbole, but pricing is somewhat predictable.  Sales are the leading indicator – and when sales start lagging, typically prices will follow shortly thereafter.

Here are the quarterly NSDCC sales counts for the last three years.  While it looks like there was a big drop-off last quarter, the sales in 4Q13 were actually higher than they were in 4Q11, when rates were comparable and pricing was 32% lower – so no panic yet:

Quarterly Sales

I think we will see the same ingredients in early 2014 that led me to believe we’d have little or no appreciation.  What changed was the how I think sellers will react to it.

They will likely tack on the usual 5% to 10% (or more) onto the recent comps, and tell their agent that they aren’t in a hurry, and don’t have to sell.  Buyers will hesitate, and the only homes that will be selling are the best-quality buys.

But instead of lowering their price to help cause a sale, the remaining sellers will wait or cancel, chalking it up to the ‘changing market’, and not to their unwillingness to sell for what the market will bear.

So while it might appear that pricing is on the rise, it will be on thin trading.  Once it becomes obvious that sales are falling – after being compared to strong counts from the frenzy – then we’ll see if the usual market fundamentals cause prices to follow.

They may not – after all, it is the new normal now.  We could see sellers put their home on the market every spring until they get what they want – the ultimate ‘Make Me Move’ market.


I’m expecting more bubbleinfo engagement in the social media this new year.  For those so inclined, here are my links:

Bubbleinfo.com on Facebook, the only place that has each bubbleinfo post uploaded automatically:


Bubbleinfo on Twitter, where you’ll find links to additional articles by others, with the first line authored by me as a tee-up.  Each new bubbleinfo tweet is posted in the right column here on the blog (and if you access via a mobile device, underneath the posts):


Our Pinterest account, full of housing-related photos and videos:


Have a Great 2014!

At or Above Peak Pricing

The Home Value Index has not only been a pretty good measure of pricing trends, but it has also been a good predictor of the Case-Shiller indices.

The next Case-Shiller Index is due out a week from today, and is likely to show more deceleration.  The HVI is predicting a less-than 1% increase month-over-month for the 10-City, and 20-City composites.

But the local pricing has been spectacular this year, and we are back to peak pricing – or higher – in some areas:

San Diego Zillow Home Value Index

More cities here:

San Diego Zillow Home Value Index

No Buyer Resistance

Historically it is very rare to have pricing go up 20% in a year.  With prices skyrocketing, wouldn’t you expect sales to slow down?

Or wouldn’t buyers at least become more selective when they are forced to pay substantially more, in many cases six-figures more, than they could have paid for a similar product 12-18 months prior?

For prices AND sales to be so strong for an extended period, there has to be virtually no buyer resistance.

Why?  Buyers feel more empowered due to the internet, and just want in.  They see a house, like the house, and after a cursory review of the comps and a pat on the back from their agent (a professional advisor whose expertise is rarely examined) they buy the house for whatever price it takes to win.

The buyers with a stronger attachment to the old prices/comps get left behind, and are forced to consider paying more later (when they didn’t like last year’s prices) – and have to live with the feeling that it doesn’t pay to be too smart in this environment.

Most realtors were never that good at valuations anyway, so the inexactness of pricing in a fast-moving market is no surprise.  But the big jumps in pricing could continue, due to these factors:

  • “More inventory” means more not selling, not a flood of additional choices.  Year-to-date there have been 43,900 listings in San Diego County, and last year there were 42,000 in the same period – not much increase overall.  When you hear that there is more inventory, it means that there are more high-enders who are wildly overpriced, and don’t care.  There is no inventory of good buys (they sell right away), and a very tight inventory of marginal buys under $1,000,000.
  • Flippers have gone crazy. In the beginning they were willing to flip for a $50,000 profit, then $100,000, but now they all want at least $200,000+ to be satisfied.
  • Because traditional realtors are making no effort to differentiate themselves, the new-age internet real estate portals have an open field.  They offer gadgets and gizmos, but not resistance.
  • Mortgages are getting easier to obtain every day.
  • Any resistance is worn down by the difficulty of finding a good buy.

There will always be buyers who are willing to pay top dollar for the exceptional homes.  The most fortunate sellers today are those who are selling the inferior homes – rigorous buyers will notice the difference, but those in a hurry and without discipline end up overpaying.

Higher mortgage rates are the only hope for a comeback in buyer resistance.

Carmel Valley Pricing Upsurge

It seems that everyone is looking for $400/sf around Carmel Valley now.  At this pace, it may only take a few more months!

graph (22)

Carmel Valley Annual Stats

Year Median SP Avg $/sf Avg DOM

The Carmel Valley YTD sales are 32% higher than last year at this time, and the pendings look strong too. There are 89 detached homes in escrow, with list prices averaging $381/sf and a median list price of $1,025,000. They average only 20 days on market.

More Bubble Talk

More bubble talk in this article from the latimes.com – an  excerpt:

More investors are buying homes to quickly sell again at a profit.

“Everybody I know is trying to do flips right now. It’s like the day trading of the 1990s,” Nordine said. “We went straight from Armageddon to speculation; there was nothing in between this time.”

Still, Nordine is advising clients to buy now if they can, citing low interest rates and low risk of another foreclosure crisis.

“That is how the American economy works now,” he said. “It seems as if we just go from one bubble to the next.”

bubbleThere is a distinct difference between the home price run-up of the last decade and the current upswing. During the previous boom, listings abounded and sales soared. Now, rising prices are driven by a shortage of supply. And although underwriting standards may be relaxing, they remain tight when compared to the days when lenders issued enough subprime loans to crash the U.S. economy.

Christopher Thornberg, founding partner at Beacon Economics, said today’s market remains rational, despite a rise in prices.

“It’s not a bubble by any stretch of the imagination,” he said of the recent price gains. “If you can’t borrow, you can’t speculate — that is the primary thing that will prevent this from happening.”


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