Interest Rates and House Prices

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Submitted by AmenhotepIII on September 8, 2011 - 5:11pm

Hello,

Been following the housing market in San Diego since 2003-ish, saw the boom and bust and there's something that I'm trying to extrapolate out how the current really low interest rates. I believe at least a basic relationship between interest rates and housing prices is that when rates go up that prices tend to go down (and visa-versa), as the majority of people buy houses with 80% borrowed money. So with prices on average pretty low and interest seemingly now setup for a mid-2013 increase (referring to Fed's statement).

So my question which may be obvious is, as house prices drag along the bottom what will happen when the housing rate increases to say 6 to 7%? I see two things as possible, both could be 100% wrong though. The banks raise the down payment requirement so buyers will have to put more down to somewhat offset the rates? Or, SD house prices drift down to compensate?

Just interested in opinions, as in the 1990's boom/bust I seem to remember the interest rates had room to fall along with prices.

Submitted by flu on September 8, 2011 - 7:40pm.

Interests rates probably will be low for a non-insignificant amount of time imho.

I just closed on my refinance 15 year 3.375 no points/fees.
And looking around, I'm seeing 15 year 3.1ish these days...
Go figure...

Submitted by davelj on September 8, 2011 - 8:03pm.

The issue for housing prices vis-a-vis interest rates is the degree to which rents increase along with interest rates (which eventually reflect the general level of price inflation). If rates rise meaningfully more than rents then housing prices will fall. If rents rise more or less as much as interest rates then housing prices will be largely unaffected even if rates rise (see the 70s and early-80s for an example of this).

If the value (V) of a perpetual stream of cashflows (CF) is denoted by:

V=CF/(R-G)

where R is the interest rate and G is the growth in the cash flows, you can see that if G (re: rents) is increasing at the same rate as R (rates)... the denominator stays the same and the value is unchanged even as rates rise.

So, the issue of the impact of higher interest rates on housing prices must be discussed in the context of the degree to which rents follow the general level of inflation (the latter will drive interest rates).

Submitted by SD Realtor on September 8, 2011 - 8:41pm.

Dave I think it could be argued that the relationship between housing prices and salaries for a given region would alter the formula you put forth. For the most part I would agree with that formula for most of the country however I think it doesn't hold up as well for areas with distorted prices. For proportional price hikes the buyers pool shrinks more rapidly in the distorted regions especially as lending standards tighten up.

Submitted by FormerSanDiegan on September 9, 2011 - 10:17am.

davelj makes some excellent points, as to the other factors involved (namely rents).

People tend to look at how interest rates relate to payments. They correctly see that an increase in rates lowers the amount of property they might qualify for. However, people often make the mistake of extraolating this to the macroeconomy.

The mistake is assume that other factors remain constant (rent, income, inflation, etc).
Interest rates do not move in a vacuum.

If prices were inversely proportional to interest rates, we should have seen significant increases in prices as rates fell from about 6% to near 3% over the past 6 years.

In fact, history tells us that interest rates and housing prices over long-term periods (e.g. 5 year periods) tend to move in the same direction.

The lay person might ask, "How can this happen if the amount of the loan I can afford decreases when rates go up ?" The answer is that over the long run rates tend to move up with inflation and down with disinflation (or outright deflation). Rates are low now because the economy is sluggish, joblessness is high. Rates historically increase when either the economy is on the upswing or inflation is present. In both cases (historically) home prices tend to move up.

Look at what prices did in the late 1960's to the early 1980s as interest rates moved from 5 or 6 % to the teens.

An inverse relationship of home prices to interest rates is a fallacy.

Submitted by FormerSanDiegan on September 9, 2011 - 10:24am.

Here is a re-post of something I wrote back in February with some historical info ...

If rates changed instantaneously by 1% and no other factors in the economy changed, then the price would be inversely related to rate.

However, rate changes never happen in a vaccum. Rates respond to underlying economics, so changes in home prices rarely respond as you suggest.

Example #1: From 2006 to 2010, 30-yr mortgage rates declined from around 6.5% to less than 5%.
Did prices increase by 10%+ during that period ? Hell No. Prices declined at the steepest rates since the depression.

Example #2: In late 2002 30-yr mortgage interest rates were at 6%. BY mid 2006 they were 6.5%.
Were home prices flat during that period ? No. They were quite bubblicious.

Example #3: From 1990 to 1995 rates dropped from 10% + to about 7.5%. Did prices rise during this period ? Not really.
This period current decline) in home prices in post-war California.

Example #4: In 1972, 30-yr mortgage rates were about 7.4%. By 1989, rates were above 10%. What did home prices do doing this period ?
Hint: they did not decline.

The simple point is that it's not that simple. Rates do not change in a vacuum. As a thought experiment prices are inversely proportional to rates, but in reality, it is not neccessarily so.

Submitted by bearishgurl on September 9, 2011 - 11:20am.

SD Realtor wrote:
davelj wrote:
The issue for housing prices vis-a-vis interest rates is the degree to which rents increase along with interest rates (which eventually reflect the general level of price inflation). If rates rise meaningfully more than rents then housing prices will fall. If rents rise more or less as much as interest rates then housing prices will be largely unaffected even if rates rise (see the 70s and early-80s for an example of this).

If the value (V) of a perpetual stream of cashflows (CF) is denoted by:

V=CF/(R-G)

where R is the interest rate and G is the growth in the cash flows, you can see that if G (re: rents) is increasing at the same rate as R (rates)... the denominator stays the same and the value is unchanged even as rates rise.

So, the issue of the impact of higher interest rates on housing prices must be discussed in the context of the degree to which rents follow the general level of inflation (the latter will drive interest rates).

Dave I think it could be argued that the relationship between housing prices and salaries for a given region would alter the formula you put forth. For the most part I would agree with that formula for most of the country however I think it doesn't hold up as well for areas with distorted prices. For proportional price hikes the buyers pool shrinks more rapidly in the distorted regions especially as lending standards tighten up.

I don't quite understand the formula dave proposed here but I understand what he was trying to say re: rent levels proportionate to interest rate levels with regard to positive/negative cash flows for a landlord. (Correct me if I don't have this right, dave).

And I also understand what SDR is saying here, but don't think it rings true for SD County. I believe low and moderate income tenants or potential buyers of same have ACCEPTED the "sunshine tax" for housing in SD County for many years as a prerequisite to living here and will continue to do so. Many will simply use more incomes (thus put more persons on the lease or title) to rent or buy a property. I believe this is due to "coastal" SD County's near-perfect weather 95% of the time and its proximity to Mexico and LAX (Asian immigrants) and also shortish driving distances to desert and mountain resorts in AZ and RIV and SB Counties.

EVERYONE here has the option of voluntarily moving to the nation's midsection (for example), where housing is cheaper, often better built and there are more jobs. But how many actually do? Life is *very* different there than here. There is price to pay for everything. SD County's desirability isn't going away, prices here are a function of supply and demand (just like anywhere else). A legal (or even illegal - with cash) immigrant from south of the border can buy property here and STILL live in close proximity to their families in Baja Norte, MX and even <= a day's drive to Baja Sur, MX and the interior state of Sonora along the Sea of Cortez. Besides Imperial County (often hot & dusty), where ELSE is this possible??

If your answer is Brownsville, TX, that (gulf) region and the MX state of Tamaulipas don't hold a candle to the Pacific Ocean and Baja, CA. They're not even in the same league.

I believe the VALUES here are different for the middle-class on down to low-moderate income buyers/tenants here. Many persons who reside in SD County who are not well-established here (i.e. have little to no assets) and sometimes no familial ties are (consciously or unconsciously) *willing* to give up a certain amount of discretionary income to remain here (i.e. keep their rent or mtg/taxes paid).

I have come to the conclusion that longtime and native residents of the nation's midsection with comparable incomes to low/moderate-income San Diegans are established near their families and used to consuming or saving more and thus are NOT willing to relocate to a coastal locale with prices similar to SD County's because they have NO IDEA what they are "missing" by not living here, nor do they care. Different strokes for different folks.

I believe that even if all recent SD "transplants" become disgusted with what they can buy/rent here and load up their moving vans to places like Tulsa, OK, where they can buy a sprawling, manicured 2700+ sf mid-century brick ranch on a "leafy" 1/2+ AC lot in the middle of town for $250-$275K, SD's RE market will not miss a beat. These former residents' SD homes will be promptly rented/sold to longtime San Diegans (or their children, often with parents' help), SF bay area transplants or immigrants from everywhere in the world (both longtime and recent residents).

Believe it or not, areas such as Paradise Hills, Valencia Park, Lomita Village and Nestor (all City of SD) are VERY desirable to particular subsets of buyers and tenants both culturally and location-wise.

I don't think we are currently in a RE "bull" market by any stretch of the imagination, but this is just the way I view the region, based upon my own experiences. Looking thru the eyes of many potential first-time buyers, I just don't see the issue of SD's "desirability" and "buyer willingness to pay" as a pure numbers game, as many Piggs seem to.

In short, I don't think any (real or perceived) "price distortion" has or will ever affect the desirability of the SD region. Where there is a will, there is a way to rent/purchase a place to live in SD. Persons who want to buy bad enough can will find a way, even under more stringent mortgage underwriting guidelines (as they did "pre-millenium bubble"). Nothing has changed in this regard.

Submitted by davelj on September 9, 2011 - 11:59am.

SD Realtor wrote:
Dave I think it could be argued that the relationship between housing prices and salaries for a given region would alter the formula you put forth. For the most part I would agree with that formula for most of the country however I think it doesn't hold up as well for areas with distorted prices. For proportional price hikes the buyers pool shrinks more rapidly in the distorted regions especially as lending standards tighten up.

All of that may be true - I don't disagree. There will always be regional variations for various reasons. I was just pointing out how the math works for the *average* home (think St. Louis). Interest rates don't move in a vacuum - they are highly correlated with overall price inflation movements over the long term, and inflation has in the past always been highly correlated with changes in overall rents... but that doesn't mean that this relationship will necessarily hold when and if rates start rising again...

Submitted by rockingtime on September 9, 2011 - 12:57pm.

I don't really see a lot of value in staying in SanDiego.
I am here just because I have a well paying job.

I always tell my friends: You are well off in low expense areas like TX, Carolinas.., don't come to CA

Look at the amount of people( eg in Piggington ) discussing housing here because of the high cost.

You would find people in other parts of the country engaged in some better activities.

Submitted by sdrealtor on September 9, 2011 - 1:25pm.

Exactly! People in other parts of the country truly get to enjoy playing golf all year, driving to the mountains for great skiing, world class surfing, mountain biking, hiking, weekends in vegas/palm desert/napa etc. We have none of that here to enjoy;)

Submitted by temeculaguy on September 9, 2011 - 1:40pm.

FormerSanDiegan wrote:
Here is a re-post of something I wrote back in February with some historical info ...

If rates changed instantaneously by 1% and no other factors in the economy changed, then the price would be inversely related to rate.

However, rate changes never happen in a vaccum. Rates respond to underlying economics, so changes in home prices rarely respond as you suggest.

Example #1: From 2006 to 2010, 30-yr mortgage rates declined from around 6.5% to less than 5%.
Did prices increase by 10%+ during that period ? Hell No. Prices declined at the steepest rates since the depression.

Example #2: In late 2002 30-yr mortgage interest rates were at 6%. BY mid 2006 they were 6.5%.
Were home prices flat during that period ? No. They were quite bubblicious.

Example #3: From 1990 to 1995 rates dropped from 10% + to about 7.5%. Did prices rise during this period ? Not really.
This period current decline) in home prices in post-war California.

Example #4: In 1972, 30-yr mortgage rates were about 7.4%. By 1989, rates were above 10%. What did home prices do doing this period ?
Hint: they did not decline.

The simple point is that it's not that simple. Rates do not change in a vacuum. As a thought experiment prices are inversely proportional to rates, but in reality, it is not neccessarily so.

This is so well written and easily digested that I am going to save it for the next time a friend asks me this question. There are some other great posts about why this happens, but this one explains in laymans terms that history does not support the logical theory that prices are affected by interest rates.

At cocktail parties, when asked this question, the audience usually loses interest at about the 30 minute mark of my explanation (which happens with most other topics too). If I can just memorize this post, I'll save oodles of time.

Submitted by rockingtime on September 9, 2011 - 1:53pm.

sdrealtor wrote:
Exactly! People in other parts of the country truly get to enjoy playing golf all year, driving to the mountains for great skiing, world class surfing, mountain biking, hiking, weekends in vegas/palm desert/napa etc. We have none of that here to enjoy;)

I get your sarcasm:-)
But reality is: People here work to pay off mortgage not to live/enjoy making double income family a necessity

Submitted by sdrealtor on September 9, 2011 - 2:31pm.

dd123 wrote:
sdrealtor wrote:
Exactly! People in other parts of the country truly get to enjoy playing golf all year, driving to the mountains for great skiing, world class surfing, mountain biking, hiking, weekends in vegas/palm desert/napa etc. We have none of that here to enjoy;)

I get your sarcasm:-)
But reality is: People here work to pay off mortgage not to live/enjoy making double income family a necessity

That is your reality not everyone's here. You paint a broad brush....too broad.

Life is about trade offs. Texas has lousy weather, much higher real estate taxes, an under current of prejudice (no just racial but against them damn yankees) and limited access to high quality recreational pursuits. Carolina has much of that and other issues. I have lived other less expensive places and am willing to make the trade offs to live here. If you dont value what you get here, its probably not the right place for you and there are other places you might enjoy more. No wrongs or rights...just different strokes for different folks.

Submitted by AmenhotepIII on September 9, 2011 - 3:06pm.

I concur as well, thanks to all who submitted their responses, where else can you receive such a well thought out answers, opinions, experiences and for free!

In short, the answers have only confirmed my belief that SD prices are bouncing along the bottom and will probably rise overall from here on out. Now I just have to decide if I want to move back to SD, I was a transplant there from here (Philadelphia) and I moved out partly in disgust in 2010 and partly for a job I thought would be great for my career. Things didn't work out that way so I'm trying to decide if I want to move back or stay here. Guess I'm kinda anti-proof of BearishGirl's post. :-)

Submitted by bearishgurl on September 9, 2011 - 3:19pm.

dd123 wrote:
. . . People here work to pay off mortgage not to live/enjoy making double income family a necessity

dd123, a couple of things come to mind here . . .

If the above scenario IS your reality, WHY is that? Are you a "bubble-era" purchaser? Have you taken out too large of a mortgage and/or put too little down?? My P&I is currently about $1200 mo for a med-large 4 bdrm SFR. I can't even rent a 2 bdrm apt for that in my area (or a 1 bdrm *newer* unit).

In my mind, it's very simple. If you are living above your means or you need every cent both owner-spouses can earn in order to live month to month, you probably purchased or rented too-expensive of a property and/or a property too highly taxed (or saddled with too high of fees), barring any other consumer-debt issues.

For a middle to lower income couple or family to live comfortably here, they will invariably have to make tradeoffs .... usually in housing choices. If they are unwilling to do that, then they will feel a financial pinch every month until such time as they decide to reset their priorities or leave SD County for a cheaper locale. The only other solution is to find ways to make more money. Often, just $600-$800 more net per month can make the difference between staying here and living more "comfortably" versus leaving.

Another thing is, why would a "recent transplant" of, say, the last 10 years expect to be a one-earner household and also be able to select the housing of their choice in the area of their choice in a place such as SD County? This is not the 1950's. Why does this expectation even exist?? And why would you think that both spouses who have signed a mortgage note together in "TX or the Carolinas" wouldn't each work FT?? I can assure you that many, MANY dual-income families exist in those states.

This is why I have stated here before that incoming domestic buyers whose HH annual incomes are under $150K and have little set aside for a downpayment must be carefully screened and make preliminary trip(s) here BEFORE deciding to accept employment here. More often than not, their housing expectations must be drilled down far below what they are "accustomed to" or have previously "felt comfortable" living in. If this cannot be accomplished successfully, an agent/broker will just end up wasting theirs (and the potential buyer's) time.

Not trying to "trump up" the value of living in SD County, here, because it is entirely subjective. Just trying to be REAL ... face REALITY in the HERE and NOW....Remember, it's a free country :=]

[end of rant]

Submitted by rockingtime on September 9, 2011 - 5:39pm.

BG, How do you get so much time to rant?:-)

Anyway, my yearly income is >>150K and have quite a bit of cash for downpayment,
But still paying so much for housing sucks at-least in my perspective.

Submitted by rockingtime on September 9, 2011 - 5:41pm.

@sdrealtor:
I agree different strokes for different people
I have lived in almost all the places ( rochester NY, nyc, chicago, atlanta, dallas etc ) in USA but always find something fun to do almost anywhere

Submitted by sdrealtor on September 9, 2011 - 5:54pm.

All great places for the right person. Life is too short not to be happy, so only you can weigh the plus/minus points of each to decide what is best for your family.

Submitted by Former SD resident on September 9, 2011 - 11:10pm.

sdrealtor wrote:
dd123 wrote:
sdrealtor wrote:
Exactly! People in other parts of the country truly get to enjoy playing golf all year, driving to the mountains for great skiing, world class surfing, mountain biking, hiking, weekends in vegas/palm desert/napa etc. We have none of that here to enjoy;)

I get your sarcasm:-)
But reality is: People here work to pay off mortgage not to live/enjoy making double income family a necessity

That is your reality not everyone's here. You paint a broad brush....too broad.

Life is about trade offs. Texas has lousy weather, much higher real estate taxes, an under current of prejudice (no just racial but against them damn yankees) and limited access to high quality recreational pursuits. Carolina has much of that and other issues. I have lived other less expensive places and am willing to make the trade offs to live here. If you dont value what you get here, its probably not the right place for you and there are other places you might enjoy more. No wrongs or rights...just different strokes for different folks.

I agree sdr and have experince with the Carolina'a. My husband and I grew up in SD and left 4 years ago for a "better" quality of life in North Carolina. At first it was ok but after having 2 kids being so far away from Family, Friends and everything we knew it has gotten to us. There really is no place like SD and we are actively trying to get home. While the homes are cheap, relatively speaking, and there is plenty to do, not nearly as much as SD, the long summers SUCK, tons of bugs, we are so ready to be back in SD. Now that prices are down we look forward to buying a home in SD when we make it back there.

Submitted by scaredyclassic on September 10, 2011 - 7:36am.

If life is too short not to be happy would it be acceptable to be miserable if we could extend our lifespan?

Submitted by Jazzman on September 10, 2011 - 8:37am.

Many places around the world have always had expensive real estate. The difference is these are no longer isolated enclaves for the super rich, but have spread to middle class areas. You only need to check back over the last 10-20 years to see how much home prices have accelerated. It is frightening! Theories on number of sunshine hours, golf courses, haute cuisine establishments don't really cut it, as I don't think you can say SD is twice as good as Charlotte, and therefore should command twice the price. Cheap credit, broke social security, and Wall Street seem a more likely candidate. The importance of RE to the local economy might be another. The truth is we never got over our bubble addiction. Government medication prevented the pain of going 'cold turkey', and is it any wonder the tax payer feels aggrieved. It's a mystery why there haven't been riots on the streets, frankly.

Submitted by moneymaker on September 10, 2011 - 8:56am.

Gold prices are global
Interest rates are national
Real estate is local

Submitted by Jazzman on September 10, 2011 - 9:05am.

threadkiller wrote:
Gold prices are global
Interest rates are national
Real estate is local

Not so sure about that. I think much of it has gone global.

Submitted by moneymaker on September 10, 2011 - 11:51am.

Gold prices are global
Interest rates are national
Real estate is local
Uncertainty is individual

Submitted by bearishgurl on September 10, 2011 - 3:15pm.

Jazzman wrote:
Many places around the world have always had expensive real estate. The difference is these are no longer isolated enclaves for the super rich, but have spread to middle class areas. You only need to check back over the last 10-20 years to see how much home prices have accelerated. It is frightening! Theories on number of sunshine hours, golf courses, haute cuisine establishments don't really cut it, as I don't think you can say SD is twice as good as Charlotte, and therefore should command twice the price...

Jazzman, I don't think SD County prices are due to a "bubble addiction." Obviously, if an asking price is too high, a property will languish on the market and eventually be removed, unsold. TX and the Carolinas have BEAUTIFUL golf courses, sunshine and plenty of "haute cuisine" as does SD.

I'm not sure if SD County commands "twice the price" of Charlotte (NC) but if it does, it is because buyers are willing to pay "twice the price" to live here. As was discussed before, "worth" is subjective and in the eye of the beholder.

The reason SD County is not an "isolated enclave" is due to rampant urban sprawl over the last 20 years, IMO. Now that incoming buyers have all these "buying choices" in "urban-sprawl land," SD's best close-in neighborhoods have become "less desireable" to them. If this urban-sprawl was not allowed to take effect to the degree it did, it is VERY likely that new-homeowner money would instead have been used to revitalize SD's close-in neighborhoods house by house and block by block.

States such as Washington have had strict moratoriums on "urban sprawl" around its cities for at least 20 years. Not only has it kept traffic down, this policy has served to keep its cities best neighborhoods grand, leafy, walkable, safe and full of educated high-earning residents.

This is what the voters wanted in WA so this is what they have. In doing this, their quality of life in the existing areas has remained high.

Due to the eventual decimation of incoming coffers to CA state and local governments in the last 20 years (as a byproduct of enacting Prop 13 and its progeny), cities and counties in CA have gone "hungry" and needed all the tax money new development could bring in for their daily operations, thus they sold out to developers. In doing so, they sold down the river EVERY existing resident's quality of life.

Those beneficiaries of Prop 13 are using the exact same public services as the rest of the property owners in CA but are paying 1/6 to 1/12 of the taxes for that use. For this reason, Prop 13 needs to be repealed for all property owners but the original owners as of April 1978 who are still themselves residing in those same properties. These owners will eventually die and Prop 13 will become moot. Its premise was well-intentioned at the time but it turned out to be a BIG mistake for this heavily-populated border state.

[end of stump]

Submitted by beselfish on September 10, 2011 - 2:37pm.

sdrealtor wrote:
Exactly! People in other parts of the country truly get to enjoy playing golf all year, driving to the mountains for great skiing, world class surfing, mountain biking, hiking, weekends in vegas/palm desert/napa etc. We have none of that here to enjoy;)

As for the comments about weather alone you are correct. You are very naive sir to think driving to the San Bernardino mountains constitutes great skiing. It is priced as expensively as truly great (Rockies, Sierras) ski resorts, for overcrowded, inferior quality [manufactured] snow/runs. Now Mammoth at ~8 hrs gets you arguably good quality skiing, but 8 hrs...

Submitted by AN on September 10, 2011 - 3:28pm.

beselfish wrote:
As for the comments about weather alone you are correct. You are very naive sir to think driving to the San Bernardino mountains constitutes great skiing. It is priced as expensively as truly great (Rockies, Sierras) ski resorts, for overcrowded, inferior quality [manufactured] snow/runs. Now Mammoth at ~8 hrs gets you arguably good quality skiing, but 8 hrs...

It's more like 6-7 hrs. not 8, unless you going less than speed limit and hit traffic. But you're right, Snow Summit/Big Bear is not even close to be in the same league as Vail, Mammoth, Whistler, etc. But that's the thing, if you love to experience those great resorts, I don't know if you want to keep on going back to the same mountain. I've gone to Mammoth, Vail, Tahoe, etc and I'm making a point to visit all the major resort at least once in my life before I revisit a resort.

Submitted by sdrealtor on September 10, 2011 - 5:26pm.

I was referring to Mammoth and have made it in well under 6 hours. The drive to Mammoth is very easy and through the desert 90% of the way. Contrast that to driving to Killington, VT from Philly in harsh Winter conditions that can make the drive over 10 miserable hours through NY/NJ bumber to bumper traffic for skiing not even in the same universe. Then when you get there its 10 below with the wind chill for the pleasure of skiing on sheer ice. No thanks.

Chicago, Dallas, Atlanta dont even have driving options for skiing worth the time it would take to get there.

BTW, have you ever been to Mt Baldy? I can get there door to door in about 2 hours and when there is snow there it is outstanding for such a cheap and easy place to get to.

Submitted by Jazzman on September 11, 2011 - 7:44am.

Bearishgirl, I am with you all the way on Prop 13. The SD/Charlotte example was just to illustrate a point, that measures of life style, geography, weather etc alone don't determine home values. RE is the biggest industry in CA. If memory serves me, it is a whopping 17% of GDP. The mortgage/Wall Street fusion was purportedly born in Orange County. CA has one of the largest foreclosure rates in the country. I don't think this is all coincidence, or that people are simply "prepared" to pay higher home prices. Life-style is sold here big time, and some might argue largely on the back of Hollywood glitz and glamor, so one is "stuck" with the high prices.

Submitted by afx114 on September 11, 2011 - 8:28am.

bearishgurl wrote:
If this urban-sprawl was not allowed to take effect to the degree it did, it is VERY likely that new-homeowner money would instead have been used to revitalize SD's close-in neighborhoods house by house and block by block.

Have you been to North/South Park, Hillcrest, Normal Heights, Gaslamp, East Village, etc in the past 20 years? They've gentrified quite a bit, so I don't know what your above paragraph even means. Have you expected them to gentrify more than they already have?

Submitted by bearishgurl on September 11, 2011 - 11:24am.

afx114 wrote:
bearishgurl wrote:
If this urban-sprawl was not allowed to take effect to the degree it did, it is VERY likely that new-homeowner money would instead have been used to revitalize SD's close-in neighborhoods house by house and block by block.

Have you been to North/South Park, Hillcrest, Normal Heights, Gaslamp, East Village, etc in the past 20 years? They've gentrified quite a bit, so I don't know what your above paragraph even means. Have you expected them to gentrify more than they already have?

Yes, afx, I am aware that these areas have "gentrified" and that East Village is actually overbuilt now with a proliferation of *new* unsold (partly vacant) condos. I go downtown 1-3 times per week, to Hillcrest several times per month and the Gaslamp several times per year. In addition, I drive thoroughfares of all of these areas frequently and originally lived in dtn SD (Banker's Hill) from mid 70's to the mid 80's, where I jogged with a neighborhood group for about 10 years. In many cases, my photographic memory of parts of the SD core serves me well if a particular corner has not changed too much over the years :=]

Currently, I just don't see very many *families* buying/renting in these areas, just singles and couples. In the past, families loved North Park/South Park, Hillcrest and Mission Hills and willingly sent their kids to public and private schools around there. For a downtown worker, it was considered *prestigious* to live in SD's best urban areas as opposed to your old "stomping ground" in La Presa (Spring Valley) or National City, for example. Back then, all this "urban sprawl" inventory for a buyer to choose from did not exist as we know it today.

Of course, this was all PRIOR to the inception of the Community Facilities District Act (1982) and use of Mello Roos Bonds in SD County (1987), ostensibly put in place to fund infrastructure of raw land for residential development. The passage of the "MR Act" by the CA Legislature was also partly a byproduct of the earlier passage of Prop 13. Because even though MR bonds aren't funding infrastructure in the already-established areas, they free up cities and counties to service these areas with a larger portion of their available funds due to the MR set-asides collected within the CFD's to maintain their own separate public and private services and facilities. For instance, the City of Chula Vista is now collecting ALL of their portion of the property taxes for 3 annexed zip codes (over the original 2) and some the MR collected from those 3 zip codes. (Most of the MR collected from those 3 zip codes is used solely to fund the infrastructure and services there.) This is STILL a windfall for Chula Vista, CVESD and SUHSD because the CITY runs ALL the services (police/fire/administration/road maintenance, etc) and the DISTRICTS run ALL the schools (even those in MR areas). For example, I have no doubt that the labor-intensive 65-90 year old trees on City easements in my area are still trimmed regularly because the City is collecting so much more money from these newer HOA'd areas which are wholly or partly financially "self-sufficient" due to collection of MR, "Street Bonds" and HOA dues. Of course, property owners in my 60+ year old area do NOT pay for all the services they enjoy because a very large portion of them (35-40%?) are owned (not necessarily occupied) by persons who qualify under Prop 13 or its progeny to retain their last market-rate assessed value as of September 1977 plus 2% per year in accordance with Prop 13. This keeps their taxes artificially low in comparison to owners who have purchased since then and especially owners who have purchased since 2000.

I just don't think most younger buyers with children today even consider looking in the close-in urban areas when they are in the market for a home because they "perceive" listed properties there to have more "maintenance," to be located in higher-crime areas and to have "substandard" schools, etc., when actually the opposite is true. Many properties there have undergone extensive remodel in recent years. There is also far more public school choice within SD's core than a family would have in an outlying area.

Remember that the 22-45 year old set with children are the biggest market segment of homebuyers. Younger singles and couples without children often don't really NEED a home and wish to be in a position to be mobile, if necessary. The vast majority of singles and couples older than 45 either already HAVE home(s), will never be able to purchase a home or are now retiring and/or downsizing or will be soon. The "attitudes and biases" this younger market adopts will dictate the future values of various diverse RE market areas.

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