Playground For The Wealthy

A former federal regulator who served when the 2006 housing bubble burst is concerned that today’s housing market is on an unsustainable path.

The housing market’s affordability is worse than it’s been in decades as mortgage rates toy with 8%. The median price of a U.S. home was $322,500 in the second quarter of 2019. Then the pandemic housing rush hit, and prices across the nation shot up. High mortgage rates sent sales spiraling, but home prices only experienced a minor correction before heading back up. In the second quarter of this year, the median price was $416,100, according to the Federal Reserve Bank of St. Louis.

“Talk about a bubble. That’s a classic supply-demand imbalance,” Sheila Bair recently told CNN.

Bair, who served as a federal regulator when the mid-2000s housing bubble popped, nearly taking down the entire financial system, said home prices today are “bubbly” following years of low mortgage rates.

A housing bubble can form when prices rise to unsustainable levels. This can be caused by speculative buying, as was the case during the sub-prime mortgage crisis when people who could not make the monthly payments on their mortgages were buying homes with very little money down. The bubble popped when home prices dropped and many people owed more on their home than it was worth.

A bubble can also be caused by irrational exuberance, in which a surge in prices leads to a buying frenzy.

“When rates were cheaper, a lot of people wanted to buy. You ended up with really frothy price increases. That was pretty predictable,” said Bair, who led the Federal Deposit Insurance Corp. from July 2006 until July 2011.

Although Bair said home prices need to correct downward, she’s not confident that will happen anytime soon because there’s still a shortage of homes on the market and she doesn’t expect the bubble to violently burst.

“If supply remains constrained, this could go on for some time,” said Bair, who last week released a new children’s book about bubbles called “Daisy Bubble: A Price Crash on Galapagos.”

There were just 1.1 million existing unsold homes on the market as of the end of August, down 14.1% from the year before, according to the NAR. “Letting that bubble deflate a bit would probably be a good thing,” said Bair. “People who already own their home – and I’m one of them – don’t want to hear that. But for those who want to own, I hope home prices do come down.”

Over the past year, the median home price has increased by 23.8% in Los Angeles, 18.2% in San Diego, 15% in Richmond and 14.6% in Cincinnati, according to

The good news is Bair does not see a repeat of the bursting of the mid-2000s housing bubble, which set the stage for the Great Recession. That’s in part because a typical homeowner today has more equity in their homes than a homeowner during that time. Only 1.1 million homes, or 2% of all mortgaged properties, owed more on their mortgage than their home was worth in September, according to CoreLogic. That is a small number compared with the share of properties underwater during the sub-prime mortgage crisis, which topped out at 26% in the fourth quarter of 2009, according to CoreLogic’s equity analysis, which began in the third quarter of 2009.

In addition, mortgage lending standards are significantly tougher today, meaning fewer people are borrowing more than they can afford.

“I see much less speculation in the housing market today, thank goodness,” said Bair.

And unlike in the mid-2000s, homeowners today have built up a significant cushion of equity. That means they shouldn’t find themselves in a situation like during the subprime meltdown where many owed more than their homes were worth.

“Even if home prices adjust a bit, people should not be under water,” said Bair.

Legendary investor Jeremy Grantham shares Bair’s concern about a housing bubble. He has been warning of an eventual plunge in home prices around the world.

“Real estate is a global bubble,” Grantham said on The Compound and Friends podcast last month. “Home prices will come down…30% would be a pretty good guess.”

Yet others on Wall Street are confident home prices will continue rising.

Despite high mortgage rates, Goldman Sachs expects US home prices will increase by 1.8% this year and then accelerate to 3.5% growth in 2024. Similarly, CoreLogic forecasts that home prices will increase by 4.3% from June 2023 to June 2024.

Although UBS acknowledges home prices have spiked to “dizzying heights” in recent years, the bank only sees two cities around the world at risk of being in a bubble: Zurich and Tokyo. That’s down from nine cities a year ago. Miami, Los Angeles, Toronto and Vancouver are among the cities that UBS says are in “overvalued” territory.

Fannie Mae CEO Priscilla Almodovar said it’s “unusual” that home prices have not taken more of a hit from high mortgage rates. “What has surprised us the most is the stickiness of home prices,” Almodovar told CNN in a recent interview. “Supply is the issue. There is no place to go. There is a lack of inventory.”

That’s the main reason Lawrence Yun, chief economist at the National Association of Realtors, says homebuyers shouldn’t hold their breath waiting for a drop in home prices.

“There is not going to be a home price crash,” Yun told CNN. “When you have a housing shortage, home prices simply cannot decline in any measurable way.”

While a temporary dip in prices is possible, Yun said a “prolonged” drop of 10% to 15% “cannot happen in this tight supply market.”

Yun noted that many assumed London was in the midst of a housing bubble years ago – only to see prices continue to rise, albeit with fewer people participating.

“It became only a playground for the wealthy. I hope America doesn’t go in that direction,” he said.

In many ways, today’s housing market is the polar opposite of the one that preceded the Great Recession.

Back then, reckless mortgage lending helped create a situation where demand became artificially strong. Eventually, it collapsed and the market was left with way too many homes.

“Today, we have an imbalance the other way. Too much demand, not enough supply,” said Yun.

The NAR has estimated the supply of homes needs to basically double to moderate home prices.

“It’s creating social inequity. The only way out of this situation is we have to induce more supply,” said Yun.

November Graphs

Let’s look at the graphs that were updated with November’s data today:

About 50,000 people live in Carmel Valley, 92130, and only seven houses sold there last month?

The pricing is holding up for the few who do sell:

The wildest frenzy period was from Spring, 2021 to Summer, 2022 when the median DOM was really low for a year. Higher rates shook up this measurement, but it has since settled down in 2023:

This looks solid too – under 2 months is healthy:

The 92037 is La Jolla, which is higher-priced, but look at how similar the median sales price is around Carlsbad, Encinitas, and Carmel Valley now (graphs are interactive):

NSDCC November Sales, Prelim

The market is so much different now than it used to be that we should jettison all previous assumptions (paraphrased from a Rob Dawg comment years ago).

In the old days, prices would be coming down by now because the demand would have been severely impacted by higher prices and rates – but not today:

Is it just early? Maybe, but are sellers going to dump on price when there’s always next year? With virtually no foreclosures and unemployment, there aren’t the usual pressures on sellers, and most will wait it out, rather than lower their price in a panic.

The real impact will be on the number of sales. We’ve already experienced – and survived – around 100 sales per month in the off season, and if that happened every month of the year, we’d find a way to live with that too.

Sellers need to choose – do more to spruce up the house for sale, or be willing to take less. If the house is already dated and needing a full renovation, the discount will probably be getting larger, because buyers are putting up a fight.

Here are examples of the November discounts – only one sold over list:

The median sales price could levitate, or even rise, while more discounts off the aspirational list prices keep happening!

Seller vs Buyer Markets

A columnist reflected on history to help measure whether it’s a seller’s market, or a buyer’s market. I like it!

House-hunting’s transformation includes several market trends including people moving less often, consumers accessing detailed market info, near-instant cash buyers and tighter lending standards. Maybe the buyer/seller-market math should morph, too.

From 1990 through 2006, just before the bubble burst, California was a “buyer’s market” in 49 percent of all months and a “seller’s market” 17 percent of the time — using the traditional 6-month/3-month template and Realtor data.

Looking at the past 12 post-crash years — assuming you’d want to match that pattern — a buyer’s market would be 3.25 months-plus of supply and a seller’s market would be 2.25 months or less.

This evolving gap in homebuying supply is another reminder of today’s steep house-hunting challenges.

Link to the Full Article with data

Currently there are 359 active detached-home listings between La Jolla and Carlsbad, and last month there were 140 sales. The 359/140 = 2.56, which, by the new definition, is pretty close to a seller’s market!

SD County Update

Having 2,218 new detached and attached listings in a county of 3.3 million people is anemic. There were 4,198 new listings in October, 2019.

But it doesn’t look like we need any more – those on the market aren’t selling like before. In fact, the unsolds are starting to stack up now, which is the #1 fear for sellers:

It’s showing here too:

These are the more typical market pressures we would see in a normalizing market. The sellers are losing some of their pricing power, and buyers think that most of the current offerings just aren’t worth it.

Local Sales and Pricing

They update the previous month’s stats on the first of month, so here’s the latest for Carmel Valley, Carlsbad, and Encinitas:

Encinitas had an crazy price bump in June, but toss that stat out and the pricing looks fairly steady. There just aren’t enough homes for sale that deserve the money. Until sales bottom, having the pricing hold up will be a challenge, especially with sellers enjoying the unnaturally high appreciation rate over the last 3+ years – if they have to give back 5% to 10% to make a deal, it won’t hurt them much.

San Diego Is Most Expensive

San Diego is #1! Hat tip to Mitch for sending this in:

According to the magazine, the Value Index measures how comfortably the average resident of a metro area can afford to live within their means. Specifically, it looks at housing affordability, as well as federal data on the parity between regional prices and national averages.

Home prices were one of the factors that pushed San Diego up on the ranking, given that average prices are considerably higher than the national rate.

In August, the median price for a single-family home came in right at $1 million for the first time in the region’s history — nearly $650,000 more than the national average by some estimates.

U.S. News and World Report also pointed to additional fees that San Diego residents have to pay, such as homeowners association dues or apartment complex maintenance costs, as another factor driving its unaffordability.

However, the magazine said that many residents are willing to pay elevated prices relating to cost-of-living, given other aspects of the region that make it an ideal place to live.

They added that some San Diegans often refer “to the cost-of-living differences as the ‘sunshine tax,’ or price of enjoying a year-round temperate climate.”

Many of the other metro areas that were placed along the top 10 have similar “sunny” reputations with their climate, including cities Los Angeles, Honolulu, Miami and Santa Barbara.

Los Angeles, which came in second place on the ranking, was also given a score of 3.3 for residents’ ability to afford living there. Although, San Diego’s northern neighbor comparatively had lower scores for other metrics used by the magazine to look at “best places to live,” including the overall and quality of life indexes.

A full list of the top 25 “most expensive places to live” in the U.S. can be found here. San Diego is #1.

This ranking comes as inflation rate nationwide remains to a persistent problem for federal officials, but San Diegans seem to have been feeling it even more.

In San Diego, the U.S. Bureau of Labor Statistics estimated that the city exceeded the year-to-year national rate of inflation, which was around 3.7% in September. Over the last 12 months, prices in the San Diego area advanced about 4.7% overall, according to the bureau.

Housing costs have been one of the most pressing issues facing elected officials, with prices skyrocketing for both buyers and renters due to a continued lack of available units to meet the demand in the region.

NSDCC September Sales

Even as the doom continues to pour in from other areas that aren’t as fortunate as the North San Diego County coastal region, our home sales are defying expectations. Two facts:

  1. In September, 2022, there were 146 sales with a median sales price of $1,940,000 (16% lower).
  2. There have already been 66 sales closed this month, and the current MSP is $2,150,000.

Although it would seem like a miracle, having 100+ sales per month in the fourth quarter of 2023 with a median sales price staying above $2,000,000 looks possible.

Plunging Sales

The local sales numbers are frightening. Compare our sales counts to these areas:

Populations / Sales = People Per Sale

New Hampshire: 1,389,000 / 1,490 = 932

Portland metro: 2,220,000 / 1,717 = 1,293

Las Vegas metro: 2,227,000 / 2,374 = 938

Charlotte metro: 2,267,000 / 3,316 = 684

Denver metro: 2,931,000 / 3,175 = 923

San Diego: 3,319,000 / 1,656 =  2,004

Here is how they compare – the high month in 2023 was similar to the annual low month perviously!

Sellers will have to do more than ever to improve their home for sale – just to get in the running!

Pin It on Pinterest