San Diego Housing Bubble News and Analysis

Here's the other side of the coin.....we've been in a building boom for about 5 years. New home sales have cut into resales ALOT! The reduction corresponds to about 10,000 less new homes being permitted over the next 12 months if the trend continues. There is a lag in these homes coming to market so they probably would be 2007 new home sales. The MLS shows that there were 41,171 sales of attached and detached homes for 2005 (the last full year of data). A 25% decrease in new inventory would help the resale market and aid in a soft landing. Resales volume will go back up and Home Depot will be busier than ever as people remodel the 25 year old home they just bought. The Granite Guy will buy a new Ferrari and his wife will get a new set of boobs! Not sure if this will happen but you need to look at both sides to be fair.

Of course less new homes will help resale homes. Unless the builder expect demand to drop 25% in 2007, when these houses will come online. Then there would be 0 effect to the resale market. If the demand drop more than 25% and the new homes undercut resale homes in price, which they can very easily, then it would still hurt resale homes. But we don't know what will happen until 2007 when it happens. But I'm sure those builder have a much better insight in the market than you or I.

Unfortunately for housing bulls, realty is not a coin tossing game. If it were, you'd have a 50-50 chance of a soft landing.

But if you want to use statistics, I'll give it a 99% probability of resales continuing their slide.

Demand for homes is reduced by 25%, and builders have responded by reducing their supply. But that won't help the resale market, as asianautica already explained. In addition, the resale market will keep adding to inventory, as people try to cash out, speculators get cold feet, and homeowners try to get out from adjusting mortgages. At the rate of 50/day, could we hit 40,000 homes on the MLS next spring?

Just curious, sdrealtor,what leading indicators are you following that give you hope for a flat, rather than declining market?

None...I expect a slow decline just not a major crash like so many of you. My best guess is about 20%. If you consider that a major crash sobeit. I consider it a reversion back to where things made a bit more sense payment wise.

None...I expect a slow decline just not a major crash like so many of you. My best guess is about 20%. If you consider that a major crash sobeit. I consider it a reversion back to where things made a bit more sense payment wise.

That's a little contradicting, don't you think? Even if rates doesn't go up, in order for the price to reverse back to where things made a bit more sense, it would have to drop by at least 30-40%. I use rent cost and income to be consider where payment make sense.I can rent a 550k house for $1800. So, even if rent go up to $2k, and rates stay the say, in order for mortgage payment to be anywhere near $2.5k, price would hav to drop under $400k. That's more than 40% to my calculation.

If you consider renting equivalent to owning (as does powayseller) than you are correct. I do not consider it equivalent to owning. There are many benefits to owning renters dont enjoy and which homeowners are willing to pay for.

To a certain extent, I agree. But please tell, have you ever seen a market that does not over shoot or undershoot? Also, tell me how much more than rent do you think is enough? Of course i'm not saying it should be exactly the same. I would personally pay about 100-200/month more. But 20% drop would still mean at lease $1000/month more. In that case, no thanks, I'll put that $1000/month to my retirement and retire early rather than buying my house.

You must be in a very low tax bracket. If you were in a 37% marginal tax bracket like most homeowners around here a 2500/month rental payment is about the same as a 3700 mortgage+tax payment. Through in a couple hundred bucks for happiness associated with owning your own home, a couple more for not worrying about having to move when your landlord sells (havent moved lately but imagine it would cost at least 5K when you factor in all the costs), a couple more for the prinicipal you are paying down each month and then a couple hundred more to account for your rent rising over the next 5 to 10 years and I'd say it's worth a little more than $100 to $200/month.

But here's my 64K questions...ARE YOU SAVING $1,000/MONTH FOR YOUR RETIREMENT RIGHT NOW?

I've been saving more than $1k/month for retirement since I was 21. Now that we got that out of the way.

You're correct, I'm not in the 37% brack. I'm on the border between the 25% and 28% bracket. Where do you mean by around here? Obviously, you're not talking about San Diego wide. Maybe in Rancho Santa Fe? Oh, and btw, there's no such thing as 37% tax brack, the highest is 35%. In order to be in the 35% bracket, you have to make well over $300k/year after all the write off. So tell me again, where exactly are you talking about that most homeowners make well over $300k/year? Tell, if you make $300k/yr, would you buy a $500k house? I highly doubt it.

Let assume your variables, rent = $2500/month. In order for then to be that high in San Diego, the house has to be around 2300-2500sq-ft and be around Scripps Ranch, Carmel Mt, Rancho Bernardo area. Houses that size in these area are in the 800-900k range right now. So lets assume the lower end, around $800k. W/ 0% down, and today's rate of 6.5%, the monthly payment would be $5k. If it drop 20%, the house would cost $640k, the monthly payment would be $4k/month. If you're in a 35% tax bracket, after tax write off, that's about $2600/month. Lets assume tax+HOA+MR+Insurance = 2%, that's about $1100/month. That would bring th total back up to $3700/month. So, tax save is about = to tax+HOA+MR+Insurance. Tell me again, is $1200/month worth it for you to know you don't have to move again?

Last time I checked you had to pay state taxes also....maybe you don't but I do as does everyone I know. SO here it is in B&W....28% marginal tax bracket for federal+9% marginal tax bracket for state = 37%. GOT IT?

Nice attempt to change the topic but just admit you were wrong...you said it was worth $100 to $200 and YOU WERE WRONG! What it is worth is very personal and specific to each person and not for you or I to decide. A simple I was wrong would suffice.

Alright, that still doesn't change anything. Tell me, is $1k/month - $1200/month worth it to you to know you don't have to move?

Please reread my post, then plese, a simple I was wrong would be suffice. I said to ME, it's worth $100-$200 more. My question to you was, with 20% drop, it would still be $1k/month more. Is $1k/month worth it to you. My math proved my point.

I did say, for ME, I would take that $1k difference and put it toward my retirement. So please refrain from the personal attack. But if you do have to resort to that, please get the information correct first before attacking. It just make you look like a jacka$$ that can't read.

I take an Alright as an I was wrong. It is worth $1K/month to own my own home. For the record I could rent my home in a day and be cash flow positive about $500/month. I will own my home forever. In 30 years one of my children will live in a great home in a great location and will pay annual real estate taxes that will be a joke to them and the scorn of their friends. When I retire before I pass this house on to my heirs I will likely rent it out for a few years and generate 3 to 4K of monthly income while I live in small condo down by the beach.

In the 25% tax bracket it's clearly worth more than 100 to 200 per month even if you really are in the 37% bracket whether you want to admit it or not.

Alright = I miss understood you. How can I be wrong when my math prove I was right.

If I take that $12k/year i saved, invest it in a CD that yield 6% a year. In 65 years, I'll have $10M. Tell me, will your house be worth $10M? I would much rather pass on to my kids $10M than a house. Now, if I put it in an ETF that trace the S&P500 (historical average 10%), I'll have $83M. I'm pretty sure 65 years is long enough to smooth out all the peak and valley. Sorry, try again.

I said it's worth $100-$200/month more for ME. Who are you to tell ME how much more it should be worth to ME? I don't care if you believe that I'm in the 25-28% tax bracket or not, it doesn't matter to me.

It's not me telling you it's the IRS

AHAHAH, it's just getting more funny after every post. Now, the IRS is telling ME, I should pay more than what I think I should pay in mortgage compare to rent? You make absolutely no sense. Once again, a simple I was wrong would be suffice.

Ok, sdr, a little debate for you.

First I consider renting equivalent to owning only now, when houses are at 2x their actual value. I will buy a house when prices correct, and then owning will once again be preferable.

It doesn't make sense that you say a house is worth much more than a rental. A house must have an intrinsic value, which is the rent-equivalent. You can add 1% or so for the benefit of homeownership, but not 200% or whatever markup you are using. Be honest - your occupation as realtor is causing some blinding to the facts.

I think it sounds rude that you scoff at those who are not in the 28% tax bracket, as being in a "very low tax bracket", i.e. not as rich as you? My husband earns over 6 figures, but due to deductions, our marginal rate last year was 15% federal. So the tax benefits of homeownership are not as you claim. In our case, the interest deduction is cancelled by not having to pay property taxes. Another thing: with interest rates at record lows, the interest deduction has lost so much of its value. I'm surprised this hasn't served to reduce housing prices!

Last, where did you get the idea that most homeowners in San Diego are in the 37% tax bracket? Do you even know what the median income is in San Diego? My guess is that less than 20% of San Diegans are in any tax bracket over 28%.

Finally, housing prices have softened 5% - 10% already. And we haven't even had the bulk of ARMs adjust yet. If we keep going at that same rate of price reduction, we're in for a 15-20% price drop by the end of 2006.

Geez, I go out for the evening, and I come back to find all this silliness :)

Well, I do enjoy the debate sdr. Please don't feel like you have to defend yourself. You're in a valid honorable profession, which you can conduct with dignity. You can adapt to the changing market. Just accept the market is taking a nosedive, and adapt. You will be more successful for your openmindedness.

PS
Two quickies b4 bed.....I don't scoff at people below a 37% tax bracket which is 28% federal and 9% state...that's where the 37% comes in. Unless you own a home and have an interest/RE tax deduction you get there very quickly. A single person reaches the 25% federal bracket at 29K taxable income (BTW that's new one on me, didnt realize there was a 25% bracket)A 45k job gets you there. A married couple w/ no kids is probably there at 70K gross income. These are not high incomes. I know admin assistants making 45K/year and entry level jobs for college grads at that level too.

Last year you were in a 15% marginal tax bracket. Last year you owned a home that you paid interest and taxes on which most likely put you in the 15% marginal tax bracket. I suspect you will have a very different tax situation in 2006.

PS Hope you had a nice night out:)

ok...ok....enough you guys. Knock it off....

AN,
I think it's great that you save lots of money and I wish you the best in reaching. I do think it will be difficult to continue saving $12K a year until you are age 86 but maybe you have great genes. Maybe you'll live to be 200 and your nest egg will make you the richest person on the planet. Personally, I plan on retiring by age 60 myself and am on track to do so in a home I own free and clear. My house is my families home and I do not view it as a financial instrument like so many others do. It is the place my children live and go to sleep each nite feeling safe and secure. It is home to a dog, 7 fish and 8 tadpoles (soon to be frogs). It is the cornerstone of my family and has value beyond financial terms to me. This is part of the reason why I do not equate a rental payment with what it costs me to live in a home. Someday you may understand this. I hate that housing prices are so high. I loose sleep for my clients and cannot wait until the market returns to sane place where hard working people can afford to life in nice homes.

One little tidbit of advice as I sense you are still pretty young. Stuff happens to good people all the time, sometimes bad stuff, jobs change, economies change, kids get sick, kids go to to college, kids get married, people get disabled and even die. If you are saving alot now keep up the great work as it gets harder as you age and life gets more complex. Best Wishes SDR

Asianautica, I thought your debate with sdrealtor was skilled and polite.

Please don't let his comments about your decision to rent mean anything to you. Just as he implies that owning a home provides security, comfort, love, and probably better sex in his view, that is the opinion of a man wearing realtor-colored glasses. I am as passionate about mopping my floors as he is about homeownership. Both passions are purely emotional, and not backed up by any facts or statistics that their pursuit leads to a healthier longer or more passionate life.

Second, I'd like to make a personal request that we refrain from condescending remarks. Things like "I do think it will be difficult to continue saving $12K a year until you are age 86" and thinly veiled advice that you may not be able to keep saving if bad stuff happens, and telling Boston_OC that his boss' expectations will be raised to unattainable heights due to his stellar sales record, are just unpleasant. I'd like to request that we refrain from giving unpleasant or condescending personal advice to people, and stick to exchanging ideas. Compliments are always appreciated for all sides.

I think sdr feels defensive at times, so he attacks people, and we need to be careful on attacking realtors in this forum. There are plenty of professional knowledgeable realtors, and there are many bad ones. We can't be prejudiced against realtors just because we've encountered a few bad ones. For all we know, sdr could be one of the good ones. He's operating on the info given him by the NAR, and believes we'll see a 20% correction, and then continued appreciation. As a salesman, he owns what he sells, and is highly defensive of it. Who can blame him? And he does have guts for coming back on a website where most peole housing is going bust.

Anyway, I hope we can continue exchanging ideas without the personal poking...

PS
Sorry you took it that way it's not my intention. I said stuff happens (sometimes it's good and sometimes its bad). I dont think most people feel kids getting married and going to college are bad things. I encourage him to keep saving and thinks it's commenadable. The more he can save at a young age the better because it does get tougher as your life gets more complex. However, as you know I can never resist pointing out a flaw in someones case to provide balance to any argument ....nor do I mind you doing the same to me.

It's a healthy exchange of ideas in my book. AN's assumptions included 65 years of saving 1000 per month from age 21 which is flawed. He should be retired well before 86 and living off the earnings from his nest egg not adding to them beyond his investments return.

As for Boston_oc, he understand where clearly you do not. No indictment on you intended. Anyone that has ever been in corporate sales understands also. It is neither condescending nor unpleasant. It is the reality of being a top sales performer in an organization that must produce sustained growth to satisfy shareholders expecting a return on their investments. The more you give the more they want.

As for the thinly veiled advice, you are certainly guilty on that accord. You say there is no difference between renting and owning but then say you will buy when it makes sense. Clearly you consider it better to own or you would never buy because renting will always be cheaper. Of course, it's emotional. I talk to many people everday who consider owning a home an important part of their life and not a finacial instrument as you. I am not a nomad and value safety, security and certainty. I know who my neighbors are and they know me. When I pass on, I expect to be remembered for the love and affection shared with friends and family not my bank account. Perhaps you come from a culture that values different things...many do. Doesnt make them wrong or right...just different.

sdrealtor, you're correct, I'm still young, 26, to be exact. But I don't think my age matter when it come to saving. I came from a family that emphasize saving over spending, and so is my wife. Saving has alot more to do with mindset than age. Just to prove a point, I have more saved for my retirement @ age 26 than the average baby boomer.
I would think as I get older, it'll be easier to save because since I'll be saving enough by then that the money I make from interest would be more than I need. I don't need to live to 200, I just need to teach my kids what my parents taught me. This will alow them to continue where I left off. It takes time to be wealthy, and I mean wealthy, not rich.
I agree with you about those advantages of owning a home. I do want to own a home, many houses to be exact. My point is just, now is not the time, and 20% drop is not low enough for me. When I buy those rental properties, I want it to cash flow positive or at least break even.

powayseller, I agree, I don't think people should resort to personal attack and condescending remarks. I hope we can continue to have good professional debate without having to resort to personal attack and condescending remarks.

My parents taught me the same things and I agree it is a scary time to buy a home. 20% more is my best guess for a total of 30% off the absolute peak. Thats what I beleive...what happens is anyone's guess. Life does get tougher but you sound well armed for what's coming. Keep up the good work!

Thanks. Personally, I hope you're wrong and it drop more :-). But it's anyone's guess. Like a very rich man once said, buy when everyone say sell and sell when everyone say buy. I'll keep my finger on the pulse, and buy when everyone stop saying now is a good time to buy. I rather miss the bottom by 5-10% and be on the up swing than trying to time the market for the bottom. I tried that many time with the stock market and my experience is, when I think it can't drop anymore, it does. Also, when I think it can't go up anymore, it does.

Good advice...buy when everyone says dont!