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flyer.
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March 23, 2006 at 11:05 AM #6428March 23, 2006 at 8:12 PM #23752
sdduuuude
ParticipantNice job putting together some thoughts.
Data supporting some of these claims would help your case significantly.I think all of these are effects of the speculation, not causes for increased prices:
#1 Perhaps more low income people move out cuz they can’t afford to live here anymore.
Also, if this is true, wouldn’t rents go up as much as home prices?
#2 – If it has changed that much in the last 5 years (again – data?), this is another effect of high prices, not a cause. Plus, I think it is a California culture from way back. I remember when I was litttle (um – lets just say its more than 5 years ago) my parents would talk about how tragic it was that families in California had both parents working just to make ends meet. Data would prove me right or wrong.
#3 – Homes may have gotten larger, but lot sizes certainly haven’t. In fact, it seems the lots get smaller and the houses closer together. My 1950’s ranch in Clairemont boasts 25 feet between houses. I’ve been in Poway homes where you feel like you share a bathroom with your neighbor because the windows are 6 feet apart. The land hasn’t changed at all, yet it is really the driving cause of home price increases.
Oh – and if houses are getting so much bigger – wouldn’t rents go up as much as home prices?
#4 – As Rich said, I think many neighborhoods have turned up due to the speculation and HELOC ATM effect.
Um – if the place is so much nicer, wouldn’t rents go up as fast as home prices?
D
March 23, 2006 at 9:17 PM #23756ParticipantRegarding item #1:
If people with more cash were really causing prices to go up, we would be seeing more buyers make larger down payments and/or take out higher-quality, conforming loans.Instead we see zero-down, neg-am, and ARMs. These are not the financial instruments of wealthy retired folk.
March 24, 2006 at 4:59 AM #23765powayseller
ParticipantSomeone gave me the argument that lots of rich people are coming here and paying cash, driving up housing prices. I checked last month w/ realtor Gordon Kane of Help-U-Sell in Poway. He told me they have about 1 or 2 cash sales per year.
I like the questions in this post. And they’ve all been answered to substantiate that this is indeed a bubble.
sdduuuuude – You make a good point. If fundamentals caused SD to be more expensive, rents would be up, too.
I first learned about the rent/buy discrepancy many years ago, in Aspen CO. A $800K condo was rented for $1500 – $2000/month. The person’s mortgage was more than double that. I asked the owner why he couldn’t just charge more rent, to cover the mortgage and property management fees. He told me that all the rents in that town were low, since that’s what the residents who work there can afford to pay.
March 24, 2006 at 7:26 AM #23767LukeAJ
Participant“Demographic Change”
I will not argue your point, that there seems to be more individuals with more money in San Diego. Real Estate has had quite a run over the past 5 years, leverage on the upside is bliss.
But, where are the high paying jobs, that would typically accompany the wealth recently produced in San Diego? Aside from Real Estate, I don’t believe San Diego has seen a demographic change in its job composition. I must have missed the headline about SD becoming a hotbed for the best financial and business leaders of the US. This leads us to the point that underscores the Bear story for the San Diego housing market. If RE flattens in San Diego, where will the capital necessary to drive this market come from?
March 25, 2006 at 11:39 AM #23787RightSide
ParticipantUnfortunately, I do not have data to support my arguments. 🙁
Honestly, I think one of the challenges with analyzing this market is that the data does not exist.
I do have some counterpoints though:
1) Few all cash purchases – Even those who can afford it are going to get a mortage of up to a million dollars because of the tax breaks and low interest rates. It makes it so cheap to borrow that you can beat the cost of the debt with even conservative investment strategies. Therefore the # of cash sales do not tell us anything.
2) How changed are parts of San Diego over the last five years? I can’t speak for San Diego, but I would say that 5 years ago, Oceanside had undergone a prior transformation in the previous 10 years that was not yet priced into the market. Certainly, I think it has overshot a fair price now, but part of the market action in the last five years was also a recognition of the dramatic changes that took place the previous 10 years.
Its also not just caused by the whole real estate appreciaton, but just a fundamental change in who is living there as well and the investments they are making will only continue to drive this demographic change regardless if the bubble bursts.
3) Why have rents not kept pace? I think again this speaks to the demographics. People who buy million dollar houses do not rent (I know, I’m one of them). Rent is not a comparison to owning your own home. Its also speaks to the rationale side people have shown over the last 5 years. Choosing to buy vs. rent has been a much smarter investment. That is a FACT. Now, I know it may be quite the opposite the next five years, but as of right now, that’s where we stand.
Again, I’m firmly on the side that plans to profit from what I believe will be a coming decline, but there is a lot of rationality to what has occured in the San Diego real estate market. Some of the comments from people on this forum sound very emotionally invested in the idea of a market meltdown and their expecation of how its going to play out. I’ve always found that understanding both sides and staying objective is going to give you the best chance to exploit the situation as it unfolds.
The one great thing about this debate, (and markets in general) is that unlike political viewpoints, a real answer to what’s going to happen will soon be forthcoming and we can all see where we were right or wrong…
…by the way…I have some additional bearish arguments to add to the fire as well..I’ve just been holding those off because I don’t think anyone here is going to dispute them. 🙂
March 25, 2006 at 8:04 PM #23801Bugs
ParticipantI’m one of those people who will be DIRECTLY hurt by a declining market – I still think it’s going to happen, though and I can’t see any reason why it won’t.
In my mind it’s as simple as this – people will stretch and pay 50% of their income for housing when they think there’s an upside to it. Most people won’t continue to do that once it becomes clear there is no short term gains to be had and when their financing crutch gets taken away. There’s still an income gap that can’t be closed, too.
I agree that Oceanside was undervalued for a long time relative to its attributes, and good for the people who were smart enough to recognize that and benefit from it. But that area is by no means the most stable market in the region – I’m already seeing a couple areas that are taking a beating and a couple more areas that are teetering. Hopefully you were smart enough to stay away from the back gate area near Pendleton – that area’s eventually going to end up awash in foreclosures.
March 30, 2006 at 1:57 PM #23857sdrealtor
ParticipantRich,
Let me begin by saying I have firmly been bearish on RE prices since late 2003. While there is no hard data this is what I have see anecdotally.Demographic Change
Lots of high income people moving to the area who work from home and/or renting office suites. This wont show up in any booming new business or local hiring. Older long time retirees with most of their assets in their homes cashing out and moving to cheaper locales. Wealthier retirees with substantial assets replacing them. Net effect is retiree population stays flat while the composition changes.Changes to SD
Rich, you really need to get out more. I just spent a nite at the Westin Horton Plaza to get away from the kiddies for a night and was astounded at how the city has changed. The very cosmopolitan city I found was a far cry from the ghost town I caroused during pub crawls in the mid-90’s before getting hitched. Drive around Carlsbad/Encinitas where I moved in 1997 and It is unrecognizable today. Good Restaurants back then were Taco Shops and a good dinner required a drive south to Del Mar or Downtown. Not any more! I grew up back east and SD might have well been on Mars when i told my friends I was moving out here in 1992. Now every one in the USA know what SD is about!Not that this justifies the price spikes we’ve seen but they certainly are a major factor in rising prices and shouldnt be discounted. As you know, RE is sold on the margin and while every house on my street couldnt sell for close to a $1M, one or two a year can. For the record, I think prices will return to 2003 levels and then settle there for a few years.
March 30, 2006 at 2:05 PM #23858ParticipantRich,
Let me begin by saying I have firmly been bearish on RE prices since late 2003. While there is no hard data this is what I have see anecdotally.Demographic Change
Lots of high income people moving to the area who work from home and/or renting office suites. This wont show up in any booming new business or local hiring. Older long time retirees with most of their assets in their homes cashing out and moving to cheaper locales. Wealthier retirees with substantial assets replacing them. Net effect is retiree population stays flat while the composition changes.Changes to SD
Rich, you really need to get out more. I just spent a nite at the Westin Horton Plaza to get away from the kiddies for a night and was astounded at how the city has changed. The very cosmopolitan city I found was a far cry from the ghost town I caroused during pub crawls in the mid-90’s before getting hitched. Drive around Carlsbad/Encinitas where I moved in 1997 and It is unrecognizable today. Good Restaurants back then were Taco Shops and a good dinner required a drive south to Del Mar or Downtown. Not any more! I grew up back east and SD might have well been on Mars when i told my friends I was moving out here in 1992. Now every one in the USA know what SD is about!Not that this justifies the price spikes we’ve seen but they certainly are a major factor in rising prices and shouldnt be discounted. As you know, RE is sold on the margin and while every house on my street couldnt sell for close to a $1M, one or two a year can. For the record, I think prices will return to 2003 levels and then settle there for a few years.
March 30, 2006 at 3:56 PM #23859speaker
ParticipantAhem….SD realtor:
“For the record, I think prices will return to 2003 levels and then settle there for a few years.”When you take into account that the majority of recent homebuyers (past 2 – 3 years) are ARMed, then prices returning to their 2003 values will wipe a lot of them out. They will most certainly be squeezed even harder if prices stay flat. Even if prices stay flat, inflation will eat away at any equity gains so that is not a good scenario either. The logic of home prices returning to their 2003 prices is somewhat circular. If homes were overpriced in 2003 then they will still be overpriced in 2006 or 2007.
Nope, this thing is coming down hard and fast. Remember, “It’s different this time!!”
“End of line.”
March 30, 2006 at 4:27 PM #23860ParticipantNever said it’s different this time. Around the end of 2003 prices still made sense to me re: mortgage payments and incomes for most of the people I knew. At the beginning of 2004, everything seemed to jump $100K to 150K almost overnite. It didnt make sense then (I said so) and it doesnt make sense now.
As for buyer’s being ARMed, while there are quite a few in that situation there are alot more that rolled equity in move ups from what I saw personally. Here’s what’s going on in my area:
I track inventory every Monday in my submarkets when I get back from lunch and have data going back 2 years. Not sure what’s going on anywhere else but in the North County Coastal Area of San Diego where I work detached inventory was 530 homes on Halloween and now stands at 521 homes. Pendings homes sales are down from 173 to 168. Attached Inventory has risen from 294 to 312 and pending attahced sales have risen from 68 to 73. Dettached prices feel like they are around 5% lower versus Fall (10% lower for attached) but we haven’t seen any dramatic Crash here yet. Still lots of homes being bought and sold every day. One thing we are definitely seeing less of are the zero down toxic loan buyers. Nothing controversial here…just reporting the facts.
Does that look like hard and fast you? I think its coming down but disagree on the hard and fast. I think its gonna be more like slow and painful.
March 30, 2006 at 5:41 PM #23861ParticipantSo the North Cty Coastal area has not experience the inventory spike and decreased sales, as the rest of SD County. Then to what do you attribute the price decrease – rising interest rates? Have you noticed credit tightening?
I moved here from Phoenix in 1999, and when we were looking at homes in 2000, I noticed that the prices had jumped about 30% between 1999 and 2000. So that’s when the unrealistic jumps happened, from a buyer perspective. Why do you think it was still realistic in 2003? Are you using per capita income/median price, or rent ratios, or are you going on the fact that there was lots of momentum, speculation?
March 30, 2006 at 8:15 PM #23862ParticipantIn 1999, I was still working in High Tech sales/marketing (and getting very tired of life on airplanes). Working in RE has allowed me to watch my young children grow albeit at much lower earnings. Mine was a lifestyle choice and while I am consistently in the 10% of Realtors production wise, I could make more money working in my old career.
In 1999 my new house cost around $450K and was cheap in spite of an 8.5% fixed rate mortgage (I’m a conservative 30 yr guy).
In late 2003, it was about $650K and with interest rates in the mid to low 6’s it was affordable too. Just about anyone that had a good job and lived here more than a year or two had $100K to 200K to put down 20% and buy a house like mine.
In Feb 2004, my house went to $825K and stopped making sense from my perspective. Since then its gone up to about $925K.
If prices went up about 5% a year from late 2003 it would be in the mid 700’s which would make sense to me. Someone whose been here for several years would be able to move up to buy my home (5Br/3Ba 2800 sq ft in very nice master planned community with great schools which is likely their 2nd or 3rd home like it was for me) with 20 to 30% down. With a loan between 500 and 600K the payment would be around 3000 to 3500 which isnt too much for a household income of 150K to 200K. Homes like mine rent for around that very easily.
I know this back of the envelope type logic…but it makes sense to me intuitively.
To answer your other questions. The real inventory spike happened between July and October last year. I’d venture to guess North county Coastal isnt all that different from other areas with the possible exception of Downtown. As for what I attribute the price decreases to….the insanity has ended and we are headed back to a more normalized level which i beleive we should be at (mid 2003 pricing plus 10 to 15%). As for credit tightening, I dont see many 100% buyers anymore. Sales volume is down but the quality/qualifications of those that are buying is substantially higher on average than b4.
March 30, 2006 at 10:56 PM #23863Participant“It’s different this time”
I wasn’t quoting you; I was merely parrotting what I have been hearing over and over from the permabulls for the past few years regarding home prices.
When I mean hard and fast I mean hard and fast like a roller coaster:
just moving right along at a slow pace ’til you reach the top and then…..you hit the top….then there is that giant pause…..and whhhhhhhheeeeeeeeeeee!!!!!!!
While I appreciate your numbers and the facts you bring, it is foolish to think that somehow N. Coast County will be insulated from a crash when the rest of the county goes down. Only 9 detached homes have been sold since Halloween? Hmmm…that doesn’t sound like a whole lot to me. Additionally, that means there are 521 homes (same ones I imagine) for sale. That is 1.8 homes sold/month (I estimated at 5 months). Therefore, it will take…break out the abacus….289 months to sell current inventory. That is of course no more detached homes go on the market which will only exacerbate the situation.
While I can imagine the more desirable places (N. County Coast) resisting a downward trend in prices, it is inevitable that even these desirable places will be brought down by the rest of the county. A lot. With lending rules tightening, rates going up, Americans (San Diegans as well) living with greater debt and the savings rate at the lowest point in history, who is going to buy these remaining 529 homes?
Here is the one thing that just puzzles me to no end:
if the real estate market took off so quickly in such a short period of time, why can’t it come down just as quickly?answer from the permabulls: because it’s different this time!
“End of line.”
March 30, 2006 at 11:52 PM #23864ParticipantIs there a counter point to the question – why are all these wealthy people taking out stupid loans? I agree, even wealthy people will take out mortgages, but they won’t take a zero-down ARM. They will at least put down 20% to avoid PMI and get a fixed rate in times of low interest.
I think the mix of loans we saw in the last two years make it very clear that the buyers are not low-income, cash-wealthy people. They are streeeeeetching to get in to a market they see growing out of control.
Rent is not a comparison to owning a home, but rental rates give some indication of “intrinsic value” and whether or not the intrinsic value of the area is changing.
Also, you can’t compare renting a small home with buying a large home. You have to compare the cost of renting a house and the cost of buying the same or identical house.
Has the value of owning a house really gone up that much more than renting a house? Come on! Really? I don’t see any logical explanation why the EXACT same house, which rented for 1500 4 years ago and 1900 now should cost twice as much to buy now as it did then.
I agree some people are passionate about this decline. I’m not one of them. I just trust the numbers and the analysis of good economists.
D
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