San Diego Housing Bubble News and Analysis

The median income in San Diego County triples overnight?

IMHO, the market will return to stability when:

1) Most people look at their house as a nice place to live, an enjoyable consumer good, and a way to even save a bit of money in the long run, NOT as an "investment" or as a way to get rich.

2) Mortgage lending standards return to their historical norm.

3) Substantial down payments become a requirement for all but the most wealthy of purchasers.

Not sure what you mean by stable. Seems to always either be on an upward or downward trajectory to me over the last 20 years.

If you mean the next turing point, here's my opinion ...
When the changes in prices, interest rates, rents and incomes reach the point where monthly carrying costs to buy approach that of renting, you will see things turn.

When the number of active listings drops from 17,000+ by 65%.

http://piggington.com/images/primer/flat...

Maybe massive inflation?

I agree w/ kewp. That is the fundamental. When income support the price. Be it income triples to match current price or some kind of combination of falling price and income rise.

Doofrat, this is my concern. The White House is printing green backs faster than ever right now to deflate the dollar in global markets. Our labor is going to get cheaper globally, but things that are bought over seas are going to become more expensive here. As long as salaries keep up with inflation, then this could be something that might happen. But how fast does it need to happen?

Doofrat, this is my concern. The White House is printing green backs faster than ever right now to deflate the dollar in global markets. Our labor is going to get cheaper globally, but things that are bought over seas are going to become more expensive here. As long as salaries keep up with inflation, then this could be something that might happen. But how fast does it need to happen?

I dont think its going to stabilise for a loooong time.
The baby boomers as they start to sell so they can have cash from their house or they die and their kids are trying to liquidate etc, will continue to swamp the market and set new low marks for prices. However that is a few more years out. If we are done with this crash very very fast, we may have some recovery going before that happens and that may be the right time to get out of ownership.
But if this crash drags on for 7-10 years, we'll run smack into that window.
Cool.
Cow_tipping.

The bubble will take some time to deflate.

Susan Bies of the Federal Reserve said that the Fed doesn't want to hamstring "innovation" in the financial sector. That means that the financial services company will continue to come up with new products that expand the debt market and give credit to consumers/buyers who heretofore did not have access to credit.

Since we won't see a cut-off of credit anytime soon, consumer confidence will hold and we'll see the housing market slowly deflate over years. I believe it's psychologically healthier to have a slow protracted downturn. Economically, we're much better off to cut out losses and move-on.

Since we won't see a cut-off of credit anytime soon, consumer confidence will hold and we'll see the housing market slowly deflate over years. I believe it's psychologically healthier to have a slow protracted downturn. Economically, we're much better off to cut out losses and move-on.

I kind of believe in self-correcting markets. If our assumptions are correct, and subprime mortgages are too risky, the lenders and/or MBS investors are going to get that soon or late. At that point, they will either stringent mortgage requirements or significantly increase subprime interest rates, both of which will push prices down. Additionally, if home prices fall for any prolonged period of time, the mentality will change and RE will become as scary and shunned an investment as hi-tech stocks were in 2002. Right now a substantial percentage of population still seems to be too optimistic and market downturn does is yet not a common knowledge.

I believe we will see a sharp price declines in coming years when all of the above happens. Inflation is of course going to somewhat soften the process, but in a short (2-3 years) period it's negligible.

My bet is, by 2009 the median/sq.ft price in San Diego will be down by about 40% from the peak. After that, it will continue slightly downward for several years, but most of losses will be offset by inflation.

cow_tipping brings up a good point

the baby boomers are relying on the equity in their homes for retirement (average 401K account has less than $50K in it) - that means selling, refinancing or doing a reverse mortgage

2008 is the leading edge of the 78 million baby boomers heading into retirement

by the time the excesses from the real estate bubble have been worked through it may be time for massive selling by the baby boomers

I also agree that the retirement of the baby-boom generation will bring unforseen changes. The housing market may be depressed for 2 decades.

Limit Lending

I have a crazy idea that might bring stability to the housing market: limit lending to a multiple of verifiable income.

Let's say Sacramento passed a law that said any amount loaned on a primary mortgage over 3 times verifiable income on the date of loan origination did not have to be repaid. Further, any other mortgage claims which exceed 90% of property-tax value or one years verifiable income did not have to be repaid. What would happen?

IMO, the first thing that would happen is that lenders would stop lending insane amounts of money because there would be no obligation for repayment. This would effectively limit house prices to a multiple of income plus available savings. Exotic loan terms would not matter because the total amount is capped. Plus, the "verifiable income" provision would immediately eliminate all "liar loans." Since the only way to get ahead at that point would be to save to increase a downpayment, people would actually start saving money. The limitation on total mortgage obligation would eliminate the 80/20 loan and ensure homeowners had some equity in the property ensuring foreclosure rates would remain low. Plus, by limiting this to "property-tax value," people would be unable to take out HELOC's to spend their equity once prices began to appreciate. Proposition 13 would force people to save.

If something like the above were passed today, it would be the apocalypse for the housing market; however, if something similar were put in place after the coming crash, we could ensure home price stability for years to come.

You'd have to think about it though.
I'd venture to guess, florida condo's will start gaining ground as will San Diego and New mexico etc (warmer weather states with decent retiree laws) while the north and unfriendly retirement states plummet.
In any case, soon, if the existing house wont sell, it will be their grave (literally) cos they'd hope to fund a retirement out of that little piggy.
I dunno, wait and see, and yes I hope this crash is done and we recover before boomers start selling en masse.
BTW we have many retirement birds moving to NC and SC from FL due to hurricanes. Maybe FL is going to crash after all.
Cool.
Cow_tipping.

"I agree w/ kewp. That is the fundamental. When income support the price. Be it income triples to match current price or some kind of combination of falling price and income rise."

Hehe, not bloody likely. As Rich says, wages are flat. My own personal experience is this is a stingy area for salaries especially, I only make a few grand more now than what I did when I moved here in '99. And this is with a few job changes!

I wonder how many of these RE perma-bulls are business owners that pay their employees minimum wage? Amazing the amount of cognitive dissonance that goes on these days.

My serious opinion is that it will take three things to bring the market down (in order of importance).

1. Public Perception

RE is a shitty investment. Always has been. Once the public mindset shifts and everyone realizes they are either holding a white elephant, or thinking of buying one, will the prices really correct en masse'. Remember, its buyers that ultimately set the prices, not the sellers.

2. End of easy credit/easy fraud

Once the sub-prime market collapses I think indeed the market will correct itself, as the lenders are going to have a hard time convincing anyone to buy mortgage-backed securities. Heck, just enforcing the current standards would probably be enough.

Would be nice if the gubbmint regulated this area more, but we will probably have to wait until the Dem's are back in power.

3. Foreclosures

Banks aren't interested in holding properties and waiting for a rebound, so they are going to sell for whatever they can get. This should help return the market to equilibrium.

The most important point is as long as there are folks willing to buy property at the current prices (regardless of what loan product they use), they are going to stay where they are.

What could make the housing market stable?

Fundamentals.

Wages rising? - only in inflated dollars

Inflation adjusted wages are only going in one direction - down, down, down - our government is on a money printing path that is only going to get worse as more and more entitlement spending comes online (boomer retirement)

The continuing exportation of US jobs will also cause real wages to decline (more US workers looking for fewer available jobs - supply and demand says that employers will have to pay less to get qualified workers)

My point: don't expect rising income to have an effect on the real estate market - in fact, as wages continue to decline in real terms, more and more people will be forced to double-up in housing (or move back in with the folks) which will reduce the demand for housing and exacerbate the decline in housing prices

CA companies are exporting jobs to other states and to India faster than any other location in the US.
Double whammy.
I'm telling ya, soon a house will be a liability no matter what the cost. Bye bye appreciation for good.
Cool.
Cow_tipping.

breeding arsonists

I saw the title of this post and immediately thought about the iceberg scene from the Titanic movie:

http://www.youtube.com/watch?v=W8Ba8Js9f3s

Like I've said before, what scares me to death is the possibility that the Fed will lower rates back to the level of a couple of years ago, which started this mania in the first place, which could lead the banks to lower mortgage rates to under 5 percent, perhaps 4 percent. That would spark a new round of buying, and we're off the the races again! I really hope that doesn't happen, as I'm renting on the sidelines, and waiting, patiently.

With rising inflation looming and the dollar's value sinking, I don't see the Feds lowering the rates.

That would only prolong the inevitable.

We need to look at this in terms of cause and effect. The prices are out of whack here as result of investor activity and outright speculation. The low interest rates and the lack of reasonable underwriting for the credit was just an enabler.

One of my kids had an MTV show on the other day about kids getting married. Among other thing's it showed an engaged couple of 19/20 signing escrow papers for their first house (they live in Missouri). My son was shocked to see it, and he didn't believe me when I told him the sale price on that house might only be $60,000. Needless to say, I looked like a freaking genius to him when the camera zoomed in on the bottom line of $56,000.

My point on this is that if the current pricing were even primarily about the interest rate and the lack of underwriting then this house in Missouri (wherein these borrowers have equal access to these credit terms) would be double or triple in price. But it isn't, and the main reason it isn't is because that town hasn't had investor-mania.

Lowering interest rates won't bring back the investors because they don't care about long term interest rates. They only care about short term flips. Without the masses clamoring to get in at any price lest their chance be gone forever, the interest rates don't mean anything.

The only people who would benefit from lower interest rates are those mortgagees who have ARMS and who also still have enough equity to refinance into those lower interest rates. I don't think there are enough people in that category to reverse the current market psychology, even if our economy could afford the downsides to reducing interest rates.

Here's something that worries me.

Would it be possible that to avert mass-foreclosures, the banks implement some sort of 'reverse re-fi' in order to keep folks in their homes (and make them debt slaves?)

For example, say Joe FB ARM resets and he just can't make the payments (for whatever reason). So instead of foreclosing, the bank basically short-sells the property to him with a different loan product that he can afford, say an interest-only one.

Joe FB ends up basically renting from the bank (and can't sell) for the forseeable future.

I can see something like this mitigating a full-on crash and potentially creating a soft-landing type scenario.

Lots of liquidity.
Have you seen the latest (or very recent) Businessweek cover story on the low low (interest) rate world we live in? The point is that liquidity abounds and investors don't know what to do with it. I sold my house in mid 2005, as part of an in-state relocation, and didn't buy another house expecting that prices would drop about 25%-35% in real (inflation-adjusted) terms by the end of the decade.

But now I'm not so sure. There really is a lot of liquidity due to several of the reasons mentioned in the Businessweek article (mostly tech iinovations in finance and globalization). At the same time, due to the billions of willing workers in Chindia, prices of consumer goods don't increase in response to the increased liquidity (as they would have in the past). As a result, only what is really limited (real estate, gold, oil, etc.) increases in price, but not consumer goods because there's a nearly infinite supply of low-wage labor.

As I wrote elsewhere, 'supply and demand' applies to dollars too: if greenbacks are more plentiful, then their value falls. Hmmm, and back in 2005 I thought that my house had doubled in value in the few years that I owned it. Perhaps it was the dollar that lost half its value and not that my house doubled...! Only we don't see that inflation reflected in consumer goods because of Chindia.

What matters in microeconomics is not so much whether an item's price is $3 or $200. What matters is its relative price. I can see that the relative price of gold, land, etc., has gone up enormously given the entry of emerging markets in the world economy. Perhaps Greenspan wasn't as far off as I initially thought when we blamed the recent bubbles on the fall of the Berlin Wall.

Quite a conundrum. I can't wait to see how this will resolve. But we won't know for several years. In the meantime, it looks like interest rates will remain unusually low for years.

But, OTOH, Jim Jubak (msn finance guru) cautions that current difficulties in the finance sector (where the mortgage bust is only another component) will result in a credit crunch where the highly liquid investor (like me who sold a house) will be king.

A reverse mortgage is based on equity. If there was equity, then the banks wouldn't have exposure.

If you are proposing that the banks own the proerties, and the former owners are legaly required to rent from them and pay them as much as they can, then you are advocating a system similar to middle ages serfsom to the banks.

How about we stick with are current system. If you can't make your payments you default. If the bank made injudicious loans that fail, they take losses.

If a borrower can't service their debt there is a loss and its the lienholder who suffers it.

There might be a lot of liquidity out there, but the investors have no intentions of losing it. They'll put their cash where it generates the best returns; and right now that isn't in RE.

Diego Mamani, that's what I mean. Is it possible that we have moved into a new era of permanently low interest rates? I remember when I bought my first house in 1980, I got a 10.75% fixed loan. I thought, wow what a good deal, as the rates were typically around 12% then. I remember my friend and I saying that "yeah, we'll never see rates again under 10 percent". It just shows you that just when you think you have figured out the game, they change the rules. Now, many people think that we have very low rates and they couldn't possibly get lower. Well, guess what? Maybe, just maybe these are now the new normal, and the range could be anywhere from 4-7 percent. Maybe we're living in yesteryear, and it's time to shift our thinking with the changing times and world economies.

Greenspan started flooding the system with liquidity and
then the asian bankers ahve been following that.

it's going to be a disaster when that stops sloshing around.