San Diego Housing Bubble News and Analysis

Rich getting richer? Wealth-effect in action?

I have the feeling the sub-million dollar sales have been primarily sub-prime driven, whilst the million+ are more conventionally financed. I mean this in the most general of terms, however. I could also be totally wrong (and would love to be corrected).

Imagine all the FB's taking out suicide loans, re-financing and HELOC'ing new cars, boats, kitchen remodels, etc. All that money has to go somewhere, i.e. local business. I'm sure the guy selling yellow hummer's is doing great (for now).

So even if the FB's foreclose and lose their toys the equity they pulled out is still going to be floating around the local economy. And since I don't know too many folks using home equity to shop at the thrift store or buy big macs, its likely primarily going to end up in the pockets of the already very wealthy. This in turn creates a feed-forward mechanism that is further inflating prices in the high end.

Of course, this will all come grinding to a halt when the free money disappears and *everyone* feels the hurt. I have a hunch it will take a fair bit of time for this to percolate up into the high end, though. All those HELOC's have created a massive equity cushion for the super-rich.

Maybe we can call this the 'trickle up' effect?

Went to Derby Hill, and the traffic seems to be heavy. Does anyone know how the current prices compared to previous releases? Are they still increasing slightly? We stopped by the place when they just opened, but I forgot prices back then. Didn't stop by Carriage Run, too tired. They say that they have a waiting list of about 300 people. I remember the first time we stopped by it was 500 people.

I have looked at the models at Carriage Run and, personally, I think they have atrocious floor plans. OK, that is a bit harsh. I did not find any of the Carriage Run models that appealing. Don't know if I represent an average Joe on this sort of thing and whether my opinion of those homes may be why they are not selling. Just one data point.

Actually didn't the 4-Closure Ranch series (was that ocrenter?), mention two homes that were nearly 100% financed at 1.6 million.

Derby Hill has stayed the same, no increases, no decresases, $1.2-$1.3M.

There are plenty of zero down buyers in the 1M+ crowd as well. Do not worry stupidity runs across all price ranges.

Actually I have looked up the tax records and 75% of the 1M+ homes in new tracts such as Derby Hill and IvyGate and others are zero down or very little down and folks mortgaging $1M+ with mortgages of $4K/$5K+ per month. Just a matter of time before they all go belly up.

can you tell us how you check that?

I have a friend in Bressi Ranch and they were checking the MLS and nearly everyone in their little enclave is mortgaged to the hilt, with 2nd's. His wife is a RE agent with access to the MLS and they were curious if my ramblings had any truth. They were surprised at the types of mortgages in their nabe.

My father in law is a realtor so I have access to MLS. However I believe that there are some public web sites where you can look that up. You will be very surprised that the majority of buyers are mortgaged to the hilt and most are doing near 100% financing. It is astonishing, I would never dream of buying a $1M+ home and not at least putting 40-50% down payment. From my observation looking at Stonebridge, IvyGate, Derby Hill and others, that 75-80% of the buyers have put less 20% down and are carrying $1M+ mortgages. This is a ticking time bomb, wait until all of these mortgages reset or the economy takes a dive.

Or when they think about how much they are going to be paying in taxes over the next 5 years because they aren't going to sell at a profit anytime soon. Yikes!

Yes, I agree. The taxes are about $14K - $16K a year including the mello roos. It is just nuts I do not get it. The real estate/mortgage industry has done a hell of a con job on all of these folks.

Total monthly cost to support a $1.3M house at 5% downpayment (30 year at 6.25%) is about $9,600/month. The owner, if they are in the highest tax bracket, can get about $3K in total tax deduction. Still, $9.6K is the gross cash cost assuming about 1.4% in total tax and HOA; about $300 in insurance and $200 in misc maintenance.

So what income is needed to support this? $240K ($20K/month) at the minimum? Basically, give 50% of your income to support this house. Two very good professional jobs will actually achieve that in San Diego, so maybe not everyone is doomed. What do you all think?

I agree, not everyone is doomed if all you need is 240 k annual income. Have family incomes in San Diego Quadroupled since 2000?

Location Pop. Median Family
Income (2000)
San Diego 1,223,400 $53,060
Chula Vista 173,556 $50,136
Coronado 24,100 $82,959
Imperial Beach 26,992 $37,352
La Mesa 54,749 $50,398
Lemon Grove 24,918 $45,844
National City 54,260 $31,497

"So what income is needed to support this? $240K ($20K/month) at the minimum? Basically, give 50% of your income to support this house. Two very good professional jobs will actually achieve that in San Diego, so maybe not everyone is doomed. What do you all think?"

What % of San Diego households gross over $240k per annum? And are not dependent on bubble-related business?

And have done the sensible thing and re-fi'ed to lock in a low rate, rather than use their house as an ATM to furnish a more lavish lifestyle?

I'll suspect not enough to finance a soft landing.

Anyone knows how to check the size of the mortgage that an owner owns on a property? Is that public record? Or only realtors have access? Thanks.

jztz, I have the same question. Looking at a particular house in 4-Closure Ranch bought in 12/23/2005: 17014 Sienna Ridge Dr. (Zip 92127) through the Grantor/Grantee index of the county, it would seem that purchase price of $922,215 has been all paid off, although the POS carried a "Mechanics Lien". I'm confused whether it (over $900k!) is really all paid off, or if it still carries an outstanding mortgage. Total property taxes including melloroos and supplemental taxes for year 2006-2007 amounted to $18,397.18. What a fool to take on such huge yearly property taxes.

Nancy, it appears that they have a mortgage for $700K. Also the taxes show as $14,994 and not $18K. Hope that helps. I actually checked this in two places and both show the same exact information, so I am certain that it is accurate.

"There are plenty of zero down buyers in the 1M+ crowd as well. Do not worry stupidity runs across all price ranges."
__________________________

Going zero down may very well be an extremely astute decision, depending on the circumstances. I have two acquaintences (one is my mortgage broker) who have gone zero down on expensive properties as part of a bigger financial strategy. Zero down does not automatically equate to stupidity - in fact, it may equate to just the opposite.

Going zero down when you have the money and the ability pay the fully index rate is potentially a good move.

Going zero down when you can barely cover the teaser ARM payment ...

I would say that people who are doing 100% financing are generally speculating on their own homes. They are planning on moving within a couple years. You can get a much better interest rate by having at least 20% down. What kind of return do you need elsewhere else in order to make a 100% deal pay? Someone previously calculated 10% or more.

It's interesting how so many real estate professionals are speculating while they are telling clients to buy for the long term.

Bobby D -- Thank you so much! Piggingtonians are such resourceful and helpful bunch. I'm so proud to learn new stuff from many brilliant minds.

Said property also paid "supplemental" property taxes of $3,402.90 (two installments of $1701.45 in May06 and Oct06) Property was bought Dec05. But you were right that regular taxes for Dec and April = $14,994.26 per Property Tax Search Results via county's website.

On top of the remaining principal balance of about $700K on mortgage loan, the property taxes alone will bleed the new owner to the poorhouse. Same with all the neighbors too.

I think most of you posting here are either not qualified or pessimistic.

In general, the white average blue collar people folks spend all their dimes, and use a lot of creditcard to buy luxury items.

The houses mentioned here like Derby Hills, I bet the people who bought them are very well qualified, and I bet they are either business owners or the indian/chinese scientists.
Even if they financed 100%, they have the income and job stability to pay it every month!!

If my assumption is correct, you guys are not qualified.

Also if you want to be pessimistic and hopeful that the house prices come down more like 40%, i bet again that you will never guess when it will reach the bottom, and when the house prices are trending down, nobody buys it anyway.
Everybody becomes chicken.

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i bought my home in 1998. I have lots of cash on top of home equity. if you are one of the ones who outbid my offers for the 3 years, I am just laughing at you and how does it feel now to be a sucker?

Feels pretty good actually. Your post has the tenor of a fear filled rant. Most of us are qualified and Asian scientists don't make that much. By any objective series of facts you can drum up, we are headed for a large fall. Somewhere on the order of another 30% over 5 years. Hey we could be wrong, but I have put my money where my mouth is (put options that is.)

I haven't seen you post before. I'll give you the benefit of the doubt and just say you are ignorant. Both of whats going on and the historical context. Hopefully next time you post, you'll have some facts to support your argument and proper grammar to be persuasive about it.

Josh

We all could be wrong, but if you are betting on a 30% drop over 5 years you should try to find something besides home ownership as a goal.

Regarding the 100% financing, the key is the 1M loan amount, anything above that is not deductible, and AMT will catch any attempt to do so with a second. A lot of people with money in excess of what they need to buy the house only put enough down to get to the 1M threshold. This provides a deduction, and the other cash can be used for other investments as insurance against a real estate drop.

The comments on this thread about areas like stonebridge are right on the mark (stay away). If purchasing above 1M you need to look at the existing demographic of the neighborhood. If everyone is heavily leveraged and low on other cash as the posts indicate, bad things lie ahead for pricing. On the other hand, if the neighborhood consists of business owners and professionals that put 20% plus down and have additional cash to spare, the overall pricing in the neighborhood should be better (no forced sales, adjustments out of income, etc).

chip_designer interesting post that you made. It has a tinge of bitterness in it. Personally I consider myself somewhat of a moderate bear compared to most of the posters here.

I think that bob2007 touches on what I believe will be distinct uniqueness about this next downtrend, (of which we are already well into)... That is I believe we will see a more profound effect on certain areas then others. We are already seeing that now. Downtown condos are still getting hammered. Even in the midst of this spring rally. Yet neighborhoods like Scripps, and north county coastal are seeing brisk activity. Again, areas that were subject to heavy speculation, relatively risky financing, and other extraneous factors will be subject to wider depreciation...IMO.

Now yes if what you posted IS TRUE, that even with 100% financing, homeowners in say 4s or Carmel Valley can afford the payments, then yes, those homes will depreciate at a slower rate... However, if you compare that local system to a neighborhood that may not have the same property values but is much older with the majority of the homeowners having larger equity stakes, then I believe those older neighborhoods will hold up better simply because the owners are more inclined to ride out the bad years at a much lower cost.

I feel your assumptions break down very rapidly for a variety of reasons such as divorce, maybe one of the wage earners decides to have a baby and stop working, job displacement, relocation... It seems to me that there are variables that you are conveniently ignoring.

So getting back to my point, I think this secular downtrend will see substantial depreciations in lower income neighborhoods, (this due to the tightening of lending standards), many condos, and areas that had large speculative investments. Areas that have nice schools, and are desireable such that families want to raise thier kids there, and they are in decent locations, may depreciate as well but not as much IMO. Again, ASSUMING that these people can continue to make thier mtg payments, property taxes and mello roos. As for high end stuff.... well I guess we will see. I do agree that one major underestimation of many on this site is that there is a vast number of people out there with ALOT of money. Whether they buy a home for themselves, thier kids, or whatever, they will continue to do this. However these people are also smart and I don't think they and they alone will prop up the entire market of higher end property.

Regardless of how much money some people have, prices are made at the margins. It only takes a few defaults to drive down the comps. The comps are the new values. Sorry neighbor.

I'm bearish on the Real Estate market but not on the economy. We'll have recession but we'll move on.

I might be proved wrong. We'll see in 5 years. I've made the decision not to buy for 5 years, although I can afford to do so today. It's going to be hard to resist "deals" but I'm pretty unemotional.

Bob2007 and Josh, thank you for the well thought out and articulate responses. I could not agree more!

From my research and hard facts, I have access to MLS and title reports and have pulled all existing sales in the these various developments. The majority (in excess of 75%) of the buyers in the SD luxury tract developments (Stonebridge, IvyGate, Derby Hill, SantaLuz, and others) are highly leveraged with very little down and mortgages exceeding $1M. If the tract is older and homes were purchased at prices below $1M, some of have since taken out HELOCs and now owe more than $1M. All of these properties also have a tax assessment of at least 1.25% to 1.5%. The monthly HOA also ranges from $100-$450. So the monthly expense (mortgage + taxes + HOA) for these homes ranges from $5,000 to $8,000 plus depending upon the rates.

Even with a household income of $240K, I find it hard to believe that most of these households will be able to sustain a hefty payment each month as well as leases on two (I am certain) luxury vehicles at $500/month for each. Not to mention child care, utilities ($300+/month), landscaping, etc.

I am certain that most have gotten in over the heads and live lavishly but paycheck to paycheck and with very little if anything going into savings. As the Professor has pointed out previously, should they ever be laid off, they are one or two paychecks away from foreclosure or bankruptcy. As rates have adjusted on the ARMs, they are starting to pop up for sale unless they were able to refi and buy themselves sometime. You will start to see more and more NODs of these homes and consequently going into foreclosure.

The point of this site to share information with one another for our mutual education and benefit. There is nothing wrong with healthy debate and discussion, but it is counter productive and meaningless to insult others. Just my two cents.

Hi,

>Now yes if what you posted IS TRUE, that even with 100% >financing, homeowners in say 4s or Carmel Valley can afford >the payments, then yes, those homes will depreciate at a >slower rate...

I didn't specify - sorry my fault. I would say carmel valley and 4s are risky. One example of what I was referring to is an area of poway I researched that was the right demographic.

>I feel your assumptions break down very rapidly for a >variety of reasons such as divorce, maybe one of the wage >earners decides to have a baby and stop working, job >displacement, relocation... It seems to me that there are >variables that you are conveniently ignoring.

I agree with you about the divorce, I had not counted that as strongly as I should have. The areas we looked at were populated by local business owners and self employed professionals with their practices located here. They probably won't be displaced or relocated by a forced move, but rather by their own choice. Although spouses may work, a single income can pay the mort.

>However these people are also smart and I don't think they >and they alone will prop up the entire market of higher end >property.

I don't think they will prop up the entire market, but these areas will have higher comps than others. The people live in the house as a choice on where/how to live, not as an investment. If I end up +/- 10% whenever I do sell, its not a big deal. If its down 30%, then I guessed wrong and will pay the price. Hopefully I will guess better on other non-real estate investments.

One of the best posts I have ever read come from this group. I don't remember exactly who said it, but the gist was that hedge funds controlled the market and any guesses we could make were already considered by the hedge funds earlier. This sure feels right. Since I moved to dollar cost averaging and long term investments life has been much better.

I'm not considering my home as an investment, but my financial bet is that housing won't crash to the 30% - 50% range from 2007 values.

Sorry about the bad formatting in my last post. I was trying to keep the content from SD Realtor small. The formatting looked ok on my screen, but I can see after the post it is difficult to follow.

Hi bob2007 - I actually screwed my post up to as I was trying to address some of the things that chip_designer said but got it all mixed up with your post as well... heheheh... In summary, I pretty much agree with your post 100% and pretty much disagree with his post...

SD Realtor

BobbyD -- can you tell us how many houses are built in those luxury tract home communities (that you referred to) in the last 3 years? Just wonder the size of the problem if it were to suffice. Do you get the sense of an average buyer's profile (profession, age, etc)?

I wonder if some people right now are covering mortgages and expensese not from income, but from previous lump sum home equity extractions. That is, a homeowner sold previous house, instead of put all his profit as downpayment, he put the cash aside and take out a large mortage beacuse credit is easy. Now if someone made $200K profit, and his monthly housing related expense totals $8K, but he can only realistically support 4K from his salary, he's $4K short. But his $200K profit can support him for 50month - that's 4 years. Of course, if housing prices start to go down meaningfully, he sure will get nervous before he exhausts his previous gains (or equity extraction from a HELC loan). I guess my point is that people who bought these high end homes may have more room to manuver to buy them sometime before the cash flow issues really force them to give up. We'll see. 2007 and 2008 will be critical years.