San Diego Housing Bubble News and Analysis

scardey, you need to evaluate fundamentals, not stories of 1920 or 2006. Just figure out what you pay in rent, what it would cost you to buy and compare the difference after taxes. When they are almost a tie, you buy and you trade off the maintenance for the rent control. Primary houses are not an investment, look at it as a shelter that you must pay for one way or another.

I put in a bid recently and will find out probably by the close of business tomorrow if I am in escrow. My scenario is a little different because i am renting something smaller than I want because the lease terms were beneficial but I just ran the numbers to compare. Here they are

1600 sq ft rental 1500/mo 3/2/ 2 car
the purchase offer I made is 3000 sq ft 5/4/3 car 1600 mo P%I to buy if I put nothing down (i will put money down but that money costs me profit/interest elsewhere so I use 0 down to do the math). It may be as high as 1750, interest rates have been all over the map day to day.

There will be taxes, insurance, hoa and other costs but they are equal to the tax deduction so I compare the pure 0 down principal and interest using 30 fixed and make my comparison. It isn't exactly a wash, i'm paying $100 to $200 more to buy but it is much larger place and rent would have been 2k+ for that one had I chose to rent a larger place. I could buy my exact rental for $1100 P&I. In both cases, it's cheaper to buy than to rent. You need to run your numbers, that is what is relevent, not historical or other parts of the country, none of that matter, just your numbers matter.

Run your own numbers using this formula or post your rent and your purchse price and I'll tell you if it makes sense, please note if your rental and your purchse are not comparable because that matters. Stop thinking of houses as an investment, purchasing merely locks your rent, nothing more. If you want to invest in r/e, then you buy rental property.

I see the logic from both ends here, but the difference is that TG is buying in one of the most depressed home markets in this country, while its neighbor sits positioned to fall at a greater rate in the next year or so, IMHO.

There are very few desirable places in San Diego where you can get a mortgage for $1,700/month with 0 down. That said, I don't necessarily think that Temecula is a bad place to live. I just don't think it is very practical to many who work in San Diego.

My recommendation is to rent a home near the beach for the next year or so and enjoy yourself before you decide to pull the trigger. Make sure to lock yourself into a lease so you don't have these sudden urges to buy a home.

TG, good luck with the purchase. I had a chance to check out the area recently and I was shocked not only at how overbuilt the city is now, but at level of home values.

While I agree with your basic thesis, the one thing I would add is the investment dimension.

For the people buying for the purpose of renting the property out, the magic number I am seeing is 8% return on their investment annually.

If someone feels that they are getting about 1/12th of their money back each year, that seems to make sense for them.

It is hard to imagine a rational investor accepting 8% returns on a risky, illiquid asset. Then again, the owner of the house I am renting is accepting -9%. Yes, that is a minus sign. Go figure.

I will add my usual comment of caution in this market. Take a quick read of this guys analysis and see if you buy his logic:

http://www.howestreet.com/articles/index...

Remember, if you're bottom fishing, RE does not turn on a dime. So you're safe in waiting for some reversal indicators before you buy. But, if you really want to own a house and you feel quite confident that you will keep your job in the next few years....prices are lower than they've been in 5 years, etc...

Housing is no more of a suckers bet then it was yesterday or last week or month. As discussed over and over again, you need to analyze why you are buying a home and where you are buying a home. Regional differences are quite staggering. If you are purchasing a property as an investment then as UR said, simply run your numbers to check out the cap rate. It is arguable that 8% is a good cap rate, however in this environment of today I would take it in a heartbeat. As pointed out by others whether that will be considered good a few years from now is an unknown.

If you are considering the home as your primary residence then that is another question altogether. If you are asking, "have we hit bottom yet" the simple answer is no, not even close.

If you are basing a decision to buy a home on proximity to market bottom then sign a multi-year lease and ignore the market another few years. How much risk have we already bled out of the market depends on where you are looking and what type of home you are looking for. Over the past year we have been given a glimpse of what sort of government backed measures will be taken to subsidize the housing market. Those efforts will indeed begin to take effect and we will ABSOLUTELY see additional steps taken. I absolutely expect a foreclosure moratorium to be put in place sometime in early 2009. Whether it will be 90 days or longer is the only question. This will be put in place while another TARP type of program will be created only this time the goal will not be to bail out lenders and businesses but more in line with racheting the cost of ownership down for the current homeowner. The goal will be to prevent foreclosures.

This will not halt the secular depreciation trend but it will indeed stem the foreclosure flow. This will also create a relatively unbalanced market where people who get to stay in thier homes will effectively be lowering comps BUT those comps will never be realized by the open market of true resales. The result will be a Japan style real estate market that should be a slow moving beast for several years.

My hope is that I am wrong. I am not saying foreclosures or distressed properties will halt. However there will indeed be a reduction, more then people care to admit. Rather then a huge second wave I think it will be more like a long drawn out rising tide, slowing and inexhaustibly washing in. Again, some markets have already hit a point where alot of risk has been washed out. What will be particularly interesting to me will be the dilema of the distressed homes in the 600k-2M range. My hope is that nothing will happen to these homes.

Adam

psssshffft.. who's bottom fishing.. I'm "makes sense" fishing..

TG,
Just curious, did you put in an average bid compared to comps or an agressive bid compared to comps? If you recall I got blasted many a time for suggesting Temecula in this timeframe and agressive bidding.How is market time going for what you want?
No, I wasn't suggesting it would be a guaranteed bottom for every house out there that could be obtained in this manner.

can you make an excel doc with this? I can host it

My sense is that most/many of the Piggs are looking at the housing market(s) in isloation from the rest of the economy. IMHO, it seems to me that the byword should be caution. The macro-economic situation is very dire and could get much worse. Aside from national issues, California will have monumental problems of unemployment, bond payout, just to name a few. The big picture is very ominous right now.

TG, good luck with your purchase!
I think we are in the same market and look at similar house at similar price range...so soon one less competitor for me. :-)
Temecula housing prices are certainly looking good on buy/rent valuation front, but the price is most certainly going to drift downward for the next few months. So I'm making offers with agressive bid compared to comps and I'm happy with either winning the bid or losing the bid. So far, I have been losing...
That said, I don't think the price is very attractive for investors now. And I will think the price will bottom when it looks very attractive for rational investors. TG has a very good formula that he posted before. Price will be very attractive for rational investors when it is 100xrent. One can probably get 125xrent in Temecula right now which is pretty good for primary residence...as long as it meets all your other personal criteria.

denverite- I could not agree with you more on this! We are embarking on very likely the worst global economic disaster to happen since the 1930's. Maybe worse. Going long with max leverage on a depreciating asset that's highly illiquid is the absolute worst thing to do right now. But pent-up demand and dreams die hard. I am amazed at what I see.

i think what i really would like is one of the houses currently going for around 550k. maybe if I wait it'll be 300. i understand "locking inr ent" but I'd rather either lock ina lower rent or lock in a better place to rent...

Not the bottom!

If you really think this is the bottom and that you must rush in. Please read this first:

PMI U.S. MARKET RISK INDEX
Q2'08 San Diego-Carlsbad-San Marcos 95.9

Translation: There is a 95.9% chance that prices will be lower in two years.

Source:
PMI Q2 Report
Who is the PMI Group, Inc.?

More Evidence

"There is no change in the previously reported negative outlook for the local economy through the first half of 2009. What is needed to turn the economy around both locally and nationally is stability in the housing market. Falling prices and a jump in foreclosures have hurt both the labor market and the financial markets and institutions. The recent increase in home resales is a positive sign, but a bottom in the housing market in not likely to be reached until the latter part of 2009, and home prices are not expected to increase until 2010 at the earliest."
-Professor Alan Gin

Source:
San Diego Index of Leading Economic Indicators

Last night I attended an RE investment meeting. A couple of observations about the meeting and what was said:

1) There was easily 250 people at the meeting looking to invest. So this tells me sentiment for RE is still quite high despite recent huge declines.

2)The only organic sales happening right now are low-end starter home purchases for people that were priced-out for the last 8 years and now want to buy. Pent-up demand seeking to satisfy their demand.

My take: There's still some money to squeeze out of the market in the near term on the low-end. How long this will last? As unemployment rises in CA, this could be a very short lived opportunity.

For a moratorium to be popular, it would also have to exempt the higher end houses, as I think your final two sentences suggest.

"The only organic sales happening right now are low-end starter home purchases for people that were priced-out for the last 8 years and now want to buy. Pent-up demand seeking to satisfy their demand."

Peter I do not agree with this statement. There are many more sales then you implied in housing in the 600k range on up. Are the sales "robust"? No not at all. Also I will compare some sales in those higher ranges. Without looking at the data, they are more likely lower then last year but to say that the only sales happening right now are lower end starter home purchases is something I disagree with. My thoughts are more that this type of housing is following the same trend as lower end housing did when it was starting to crack, just staggered by a few years. Let's see what the data shows later tonite. All I know is, there are still people buying out there in the higher ranges and as a potential buyer it is FRUSTRATING the heck out of me.

Fearful as always I think that the efforts by the powers that be are simply intended to slow things down. There is no true solution to the problem outside of letting it correct properly but to many dominoes fall by letting it do that. Similarly with a nasty recession and unemployment coming on strong I can VERY easily see some sort of "relief act" passed by the legislature at the federal level that would strictly prohibit any unemployed citized from being foreclosed on.

Does anyone think this is a stretch?

Similarly it would not surprise me if any sort of blanket moratorium was passed. Maybe a 90 or 180 day duration.

Let's talk more about the higher end. This really worries me. What about the guy that bought the 900k home and really could only afford the equivalent payment of a 600k home. Maybe he got a 5/1 option arm in 05 or 04. Why wouldn't his loan be reworked into that new 600k payment? If it kept him in his home it seems more then probable that he gets reworked because he is no different then the guy living in a 300k home who can only afford a 200k payment. Similarly this 600k comp is never a comp. That pretty much royally sucks.

Now right now the banks may be dragging thier feet on these sorts of reworks and there may be restrictions on these however to think that there will not be more programs in front of us to push stronger action into place is in just as much denial as the seller who prices his home wrong. This future is not happening cuz of Obama, it would have happened no matter who is in the white house.

Now what I do see helping us potential buyers is that there is NO WAY that this will halt the depreciation trend. What we WILL start seeing now is more distress due to economic conditions rather then what we have seen in the past 2 years. Our previous distress was due to people overconsuming and prices peaking and dropping leaving homeowners in a lurch. Now we have true distress caused by unemployment and that is gonna be a grinder.

So... we will see how it plays out. I do think we are well overdue for a chunk down move in the 800k on up housing.

Yes, I understand what you're saying, but I think his experience was that the "first-time buyer" is a much bigger market than the number of buyers that would be in the "move-up" catagory. For obvious reasons. And most first-time buyers come in at the low-end. He's buying and selling an average of 10 SFR's a month for the last 6 months. This model needs volume. He claims he's going into escrow within 15 days of listing. Paying 25% of the first morgage from the lender. Strictly a low-end strategy. Lower buy-in and with greater volume in this market.

I have two big concerns about this.
1) Selling homes for way over what the comps may be.i.e...would appraisers go for this? Do appraisers use auction/REO sales as comps for a retail loan appraisal?

2)As unemployment takes off, these buyers may dry up real fast.

As for govt intervention. Who knows. They've never been all that good at helping j6pak. I doubt that will change too much. If history is any indicator.

Thank you for your insights and taking the time to post them.

Maybe bailouts for "rich" homeowners are even less politically palatable than for the general public.

Overdue, yes. Imminent? Who knows.