San Diego Housing Bubble News and Analysis

I meant to say that incomes contributed to the housing bubble, not caused it. I know I've got a group of semantics watchers here..

So we're talking about the "increase" (not the total number) in high wage jobs being sufficient to push pricing to triple?

Not a chance. Those addition of those jobs had NOTHING to do with it. I doubt there are enough of those guys around to have accounted for an average increase of $5,000 on a county wide basis, let alone $300,000+.

Nor_LA-Temcu-SD-Guy

Dont' know about SD in particular, But Hi Tech, especially software engineers , have until just this last year or so have been on the losing end of the employment game. with wages and Jobs disappearing sense 2000 at a very fast clip. So I would say unless your looking at the last 15 or so months then no way.

Nor_LA-Temcu-SD-Guy

Besides even at that income level using a 20% down 30 fixed, about 500K is the most I would want to commit to. And I would expect alot more than an "L" shaped match box.

He said that a former mayor made San Diego a tech town in the 80's, and the lagging effect was was a large number of people earning $120K in the mid to late 90's. The per capita income is skewed up by these workers. So we've got a bunch of low wage jobs and the $110K jobs, and the latter were able to pay more for housing, pushing up the prices of homes for everyone. That's why housing prices did not rise in Pittsburgh.

For his theory to hold, we would have needed a significant number of new employment in +$110K jobs since 2000. Did we?

Of course, loose lending was the main enabler.

Nor_LA-Temcu-SD-Guy

I was going to say exactly the same thing (right down to the 500K). I, too, would go fixed rate.

Sure, you could go higher with some of the creative (?) loan products out there, but then the driver is the loan products, not the income levels.

That said, my feeling is it was mostly speculators and the boom itself that fed the boom. Booms in high tech have happened before (even though they don't seem to be happening now). Adjustable and negative amortization loans have been around a long time. Stated income seems new, but other than that, speculators and psychology (and manipulation of same, witness the spin with the August new home sales numbers) seem to be the drivers to me.

People didn't stretch to pay 50% plus of their income on ARM payments because they were expecting their wages to increase enough to eventually make the full payment; they did it because they thought there was a big payoff in the near future.

Besides, if the tech sector was that big a factor why did our market do an about-face and enter into a decline? This region has close to 3,000,000 residents. Did the tech sector suddenly lose 15,000 jobs that were paying $100k+?

You're right, Bugs, now I can see his argument doesn't hold up to scrutiny.

My family lived in Pittsburgh before I was born for a few years. One of the great wisdoms my father passed down to me as NEVER MOVE TO PITTSBURGH.

Back on topic though....lots of relatively young techies/engineers suddenly making relatively good money likely fueled the fire in SD. All of a sudden they felt rich and successful without actually having earned the incomes they got. I think that continues to this day. When I grew up, engineers were distinctly middle to lower middle class unless they owned the business or were in technical sales. When I graduated college in the mid-80's engineers earned starting salaries of 30 to 40K and hoped they might someday reach 75K. Now we have a lot of engineers starting salaries in 70K range and many making low six figures after a couple years that think they are movers and shakers. I'd agree with the sweaty guy at the gym.

Deleted

sdrealtor, what do you mean they think they are movers and shakers? Do you think their salaries contributed to the boom? After all, Wyoming has 10% or more of its loans as Option ARMs, but they didn't see the price appreciation. Despite loose lending all over the country, only a few cities saw bubblicious prices, and maybe they were the cities with the higher paying jobs? By the way, the guy was beyond sweaty, and looked like he just got out of the pool (he started talking to me because he said I'm the only person at the gym who knows how to do proper push-ups); I have great respect for someone who gets as wet as I do in the gym.

Cheap money and low lending standards are what drive home appreciation. Houses didn't cost more than people could save before financing started the march up.

Where do we go from zero down, interest only, adjustable rate and no doc loans though?

Maybe the lending industry will let us start selling off body parts next? I'm sure some rich investment specialist could use those eyes that poor person is wasting.

The sad thing is the poor person would probably sell them to keep up with their neighbor who just sold his leg for a nicer kitchen counter.

PS, Yes I think they contributed to the boom. I think that alot of techies/engineers fit the stereotypes having grown up modestly, working hard and being pretty introverted. Many suddenly found themselves with low six figures incomes, thought that was a lot of money, got seduced by it and thought that they would always make that much money and more. Its all emotions at play.

I dont think that is alot of money to live well and save. They bought homes stretching themselves while not allowing for downturns or periods of unemployment. Unless your household income is AT LEAST $200K and you ARE the boss, I don't consider you as being a mover and shaker.

I'm a software engineer and I highly doubt you can get into the low six figures with less than 7-10 years of experience. New grad right now are looking at around 50-55k. So I don't think there are a lot of low six figure engineer around. Like previous poster, even w/ 2 engineers making 200-250k/year total, They still can barely afford a 600k house. If new grad in 1985 made around $30k/year, at 3% salary increase every year due to inflation, then it would be about $56k/year right now. So engineer salary hasn't change very much if at all, after adjusting for inflation.

Between 1999 and 2001 anyone with a pulse could get a 75K job with all the Internet nonsense. I had friends making 100K plus sitting in their cubicles playing solitaire all day.

BTW, you must be working the wrong place. My old neighbor was an HR exec for a major defense contractor. She was constantly hiring dozens of mid level guys in the 90's with a couple years experience and that was a few years ago.

Lastly, a HH Income of $20K per month easily supports a $600K home. A 30 year fixed rate on 500K loan is only about $3100 per month, add $700 for taxes, $150 for HOA and $150 for insurance and you reach approximately $4000 per month. At 20% of monthly gross that is a no brainer.

The run up in housing prices was not the result of people with high incomes who could afford these outrageous prices. It was the people with low incomes who could not afford them, and were only able to get into these homes with mortgage fraud...

Agreed! Someone with a $100K income cant really afford a $500K or higher home.

With HH income of $200K, you can get a 30 year fixed at $600K - $ 700K using traditional lending standards (3-3.5x gross income).

The runup in prices was possible due to low lending, but maybe it got started because of the many higher paying jobs. Say we are selling 40K homes/year, and half those people are making enough money to buy at 3.5x income, and then the other half must stretch to 7 or 10 x income just to keep up. So the combination of $120K jobs and loose lending caused the higher prices.

I don't know of any other way to explain why Cheyenne Wyoming is not in a housing bubble. Las Vegas and Phoenix are in a housing bubble, but Cheyenne Wyoming is not. What explains it, if not the difference in wages?

I know many people in defense contracting, between 0-5 yrs experience and I know they start @ 50k. I work for 3 different telecom companies in SD and their salary are quite similar. I know 10yr+ experience engineer getting around 110-130k. Just look at salary.com, their range is very true to real life. So again, to make 100k, you need at least 7-10 yrs experience. You can't really compare the peak of the .com bubble with current wages, it just doesn't work.

There just aren't that many big earner households in San Diego county:

6.3% (64K) of San Diego county households (1,009K) earn $150K or more.

http://www.census.gov/acs/www/Products/Profiles/Single/2002/ACS/Tabular/050/05000US060733.htm

55% (553K) of San Diego county households (1,009K) own their own home or condo.

http://www.census.gov/acs/www/Products/Profiles/Single/2002/ACS/Tabular/050/05000US060731.htm

On average, over '88-'06, there were an average of 26K resale homes sold each year.  Separately, there were sales of new homes and of new and resale condos. 

The $150K+ households, all 64K of them, could not have driven up home prices for all 553K homes and condos.  I agree it was loose lending for hoi polloi that fueled the fire/gassed the bubble.

Gotta chime in on this one. SD realtor your post somehow suggested that there are all these young engineers walking around making buckets of money, that just isn't so. Asianautica is right it takes almost 10 years to hit 100k. Engineers today earn about what they did twenty years ago, adjusted for inflation.

During the height of the boom that was true. You can't however compare the height of the boom and make it seem average its not. I was one of those overpaid engineers, just out of school, at that time. For the priveledge of being overpaid for one to one and a half years I paid the price of being unemployed for 7+ months over the next 2 years.

There is alot of IT in San Diego, but alot of those jobs aren't necessarily the highest rungs of the ladder. There are lots of sys admins and server admins etc who make 40-70 a year.

Its ludicrous to posit that any one profession is powerfull enough to move the market. If so housing prices would have exploded in 1998, when the tech bubble was forming. Not over the last 6 while the job market has been mostly lackluster to say the least.

Josh

Ok Gang,

I feel compelled to reply to this message, since this is a little up my alley.

First, I did not even have a Bachelor in 2000, and with 3-4 years experience, and I’ve made $80k. Things changed after the DOT.COM bubble…..

However, to put my 2 cents in this trail, here are some facts.

NOTE: I don’t have SD specific data, as my portfolio of Engineers (contractors/contingent labor) is for US high tech positions (software, hardware, IT architects, PMs etc…..all IT related)

My portfolio of contractors (504 right now), combined with off-shore (India = 294) and local (US = 210) shows something like this:

Local (USA) – IT contractors (high tech engineers/techs) AVE RATE / Hour $63.06 (you have to subtract 20% from the agencies/headhunters mark up) – REAL RATE $ 50.45

Combined (USA + India) – IT Contractors AVE RATE / Hour $ $43.15 (again, subtract 20% markup).

Bottom line, per my local (US portfolio of IT contractors):

US Contractors (Engineering IT jobs) aprox. $50.45 / hour (2,080 x hourly rate = $104,936 average contractor salary / year)

Note: keep in mind, the ratio of US hires vs. off-shore hires is consistently moving toward (off-shoring…..India). However, as some research might have you believe, off-shore outsourcing does create jobs locally (high end…….complexity/management/PM jobs).
Also, keep in mind, that contractors don’t get benefits (401K, medical….etc)

Besides all that, we have had the FOB (fresh off the boat) engineers being brought in to depress engineering wages in this region. I guess the employers thought there was a shortage of engineers who would work for the wages they wanted to pay.

I think there were a LOT more $120k+ jobs created in the RE industry and its affiliates than in the tech sector.

Anyone catch the article in the Union-Trib today where an economist is forecasting a job reduction (statewide) of as many as 100,000 workers in the construction industry? Think about the ripples that kind of reduction would create. I don't know what's going to happen with all that but I do know the tech sector ain't going to offset those losses.

-----------

Ooops, I was still writing while the above was being posted. Sorry for repeating

I should have been a little more analytical in my approach. So,here is a little stats table for US IT contractor from my portfolio (210 contractors).

Correction: I think I've mentioned AVERAGE vs. MEAN in my previous post.

US IT Labor Rate - Descriptive statistics

Base Rate
count 210
mean 63.0606
sample variance 1,112.0150
sample standard deviation 33.3469
minimum 18
maximum 221
range 203

1st quartile 34.0000
median 59.0000
3rd quaritle 80.0000
interquartile range 46.0000
mode 80.0000

Only 2% of households buy/sell their homes every year and they set the price for the other 98% of homes. How many people earning $120K would you need to drive up the prices for the other homes? Could 10,000 people drive up the prices of homes for the other 30,000?

If it isn't the income, what explains why some cities had a housing bubble and others did not? Loose lending is nationwide. Even Omaha, NE, has a "mortgage lender on every corner" according to a friend who lives there.

I'm not saying the wet sweaty guy is right, but perhaps the jobs/income contributed?

200% increase in homes in La Jolla or other places could have some bearing but what about the 200% in Hemet or Inland Empire? They all have high tec jobs also?

My website tracking Temecula and South Riverside County

sdrealtor was on to something when he said that high paying tech jobs were easier to come by from '99-'01. The early stages of the boom might be supported by that somewhat.

That said, following the dot-com bust, the trend reversed, but the bubble continued to grow at an even faster pace.

I'm still sticking mostly with buyer psychology. The American consumer is easily manipulated.

Must... go... buy... new iPod nano

From my experience, asianautica's estimates are about right. What you have to realize is that there are many different ways to hire engineers. Because of that the pay scale can vary a lot.

For example, after a few years of experience, I managed to find a contracting job that payed double my hourly rate as a salary worker. As a self employed contractor, however, you don't get any benefits, pension, etc. Plus, your job is not as stable so it would be pretty risky to stretch yourself on mortgage payments.

Some contractors work for contracting companies, where the company finds work for the contractors and take a cut of the contractors pay. The percent cut can vary, based on the amount of service they provide. sdrealtor's HR exec friend was probably hiring one of these. Space and Defense doesn't generally pay that much unless you're a contractor.

Some high tech companies (sellers) sell software products to other companies (customers). Sometime, the customers need help using the software product so the sellers contract out engineers to help the customer. The engineers are salaried employees of the seller, but they are hired as contractors by the customer. In this scenario, you might see cases where the customer is being charged $100/hour, while the contractor is being payed $30/hour. The customer might be thinking, "Wow, this kid is making $100/hour!", but the truth is that he's not.

The point is that there are all kinds of pay scales. This can lead to a lot of misperceptions on how much an engineer is taking home. On top of that, there can be a lot of anecdotal cases which are outside the norm. But when you're talking about averages, then I agree with asianautica's: Go look at salary.com.

Movers and shakers?

>they might someday reach 75K. Now we have a lot of engineers >starting salaries in 70K range and many making low six >figures after a couple years that think they are movers and >shakers. I'd agree

This brings up an obvious question:

Who deserves to be movers and shakers,
Realtors or engineers?

What is harder (or of more societal value),
making 100k as an engineer or 100k as a realtor?

AN,
To your point that "You can't really compare the peak of the .com bubble with current wages, it just doesn't work."

That is the point. Alot of homes were sold based upon these salaries at the time which sent this market into overdrive beginning in the early 2000's. The falling interest rates feed the beast and Voila! Here we are!

I Never said they caused the bubble but certainly they helped feed it.