The permabulls are drooling all over themselves with glee about a recent study indicating that the median San Diego home seller in recent months collected a tidy 91% profit on his or her home. Of course, this doesn’t include transaction costs, improvements, or cash-out refis along the way… it is just a comparison of prior sale price and recent sale price. Even considering all that, though, 91% sure isn’t bad.
But this is all a waste of perfectly good permabull drool, because the statistic in question has nothing positive to say about the future disposition of home prices.
It tells us that home prices are higher than they were five years ago (really?). It also tells us that most of the owners who sold in recent months had bought their homes several years ago.
So it tells us, in short, that the more recent buyers have not yet pulled the ripcord. This is not surprising. With all the competing inventory out there, the successful sellers have been the ones who dropped their prices. And who is more willing to reduce their price — the multi-year owner with a healthy equity cushion, or the recent owner who may already be upside-down?
More importantly, this data point just shows that the marginal owners — the ones who have bought within the past two years, many of whom utilized option ARMs or other prone-to-reset-much-higher mortgages — are still out there. And they’re the ones we have to worry about.
This goes on and on and on.
This goes on and on and on. Really everyone, lets just face it. There is simply too much money in print. It is all making its way to S.California real-estate. Despite all your wise logic, which I think is good, the reality is, these prices are not coming down. I was disgusted to see yet again, that despite everything, prices in O.C. simply continue to rise and hold. There are too many people with too much money. Some fool will buy my old townhome (cashed out in 2004) at these exorbitant prices, simply because there are some many of them (fools not townhomes). I have been a true believer with you all for 2 years, waiting, dreaming of the great correction, but reality has finally set in. Prices have risen so far in Newport Beach, even a 20% correction at this point is meaningless. That just brings us back to 2004 prices, which are still rediculous. I am sad to say that I give up. Without a major economic shock these prices will never correct. The great 50% overvaluation argument is simply folly. I believe the reality is the money is there and people will pay. My dream of returning to S.california just simply is never going to happen. I wish I had never sold…..
Best wishes.
Snap out of it dude. If you
Snap out of it dude. If you want to return to California, go for it, just rent for a couple years before the housing prices drop. If you can’t find a good enough job to live comfortably with a nice rental then you shouldn’t move here at any point. Rent and home prices will always be much higher here than most of the country. However, they will likely drop 40-50% from their peak.
A couple of thoughts
A couple of thoughts here…
Guy1 – Part of your argument makes sense, “If the easy money is there, then the fools will spend it.” The fallacy is that even at super low interest rates and crazy loans, people will finally reach the point where their income cannot support continuing increases. This market is coming down with high probability. I think a better conclusion to your point is, “Once this market corrects, the fools will again drive it back up again… someday.”
On another topic, the psychology of markets is fascinating. As the bay park broker pointed out (and as I have noticed in my own behavior), the human temptation to value something at the previous high is very tempting. Who hasn’t owned a stock that hit a high and then saw it drop back 10 to 20%? It is so hard to not then view the stock as “worth” what it was at the high… but that is pure stupidity. It’s only worth what it’s worth today. Same for houses. Yes, someday, it is likely that SD real estate will be worth what it was in the summer of 2005, but I’d place my bet that it’s going to be a long long time before we see that day again.
This spectacle is interesting to watch, and especially the human behavior aspect. The only problem is it’s a very slow moving game and the data suggests we’re in the early minutes of the first quarter.
San Diego County led the
San Diego County led the other counties on the way up, and it is leading on the way down. Just be patient. Psychology here has shifted now. This morning I spoke with a parent at the school, and he started telling me that the psychology shifted (I didn’t ask about this). He said among the high tech companies he visits in San Diego, people are telling him that they are going to buy *after prices stop dropping*. He noted this is a shift from the time when people were anxious to buy because prices kept rising, and that this market is now going down on reverse psychology. The other counties are right behind us, just be patient.
I think the permabulls are
I think the permabulls are doing the rah-rah thing in an effort to stem the tide of the current market psychology. The thing about the market psychology is that although there is a certain amount of irrationality to it, the underlying trend did start out based on some economic fundamentals.
For instance, the bull market psychology during the boom did have some basis in what was happening at ground level. That psychology was preceded by some people making some very handsome profits at a time when everyone else was down on RE. The lemmings saw those profits and naturally jumped on board, thus feeding the trend. After a point, the trend and the fundamentals that started it diverged, at which point the irrationality of the trend became – temporarily – self sustaining.
My point is that the prior market psychology was not created or initiated out of whole cloth and neither is the current psychology. The bull market started when people realized the markets were underpriced. This bear market has started because people are realizing the markets are overpriced. If the bulls think they can stop this trend with a PR blitz before the fundamentals reverse they have another think coming.
I love you guys, I really
I love you guys, I really do, but do not miss the point. Prices will never correct as drastically as everyone wants to think without a crushing blow to incomes. Some hard numbers, I bought for $375K, sold for $1M. Prices are now $1.2M in my old neighborhood. So prices correct 20%. Thats still $1M for a 2200 sq ft townhome. Get real. If Joe Genious young guy with the rental advice, no family and the complacancy to sit in a dump appartment for $2000 mth, can rent until he can aford that, good luck to ya. And, if your holding out for the big correction, you’ve got a long, long wait. The laws of supply and demand do not apply when the supply can simply say, I’m not goint to lower my price, I’ll just pull off the market and continue to live on the $750K in home equity. (That can last a long time.) The only people who will sell are the last to buy overleveraged crowd, and there are not enough of them to destroy the market while there is still demand. And really guys, their is still demand or the prices would not continue to hold in the face of the tremendous inventory increase. (ie. someone is still paying these prices). Maybe you say, the buyers will wise up and dry up. Ok, so they do, prices are too high, so they drop 10, 15, 20. Thats still a drop in the bucket. If you cant buy now, you cant buy then either. Buyers will come back long before a 50% drop. They will only stay away when the economy says no hope. In a sense, Prices will correct when a banshee of people are feeling the pain and all must sell and everyone knows it. They must all be desperate = no income. Call me after the recession, which to clarify, does not include George senior’s 1% decline in GDP. That only affects the poor, not newport beach. As for the aforementioned recession, Don’t forget the first law of Bernanke. Goes something like, “there shall be no recession while I can monitize the problem.” Inflation hawk my ass, look at the money supply.
Best regards
guy1, you make some really
guy1, you make some really good points, esp about Bernanke. What good is raising interest rates when money supply is growing at 10%?
Since we are 1-2 quarters ahead of you, this is what I think you can expect. Buyers are priced out, so sales start to drop, and this causes inventory to rise (as inventory keeps piling up). With lower sales and higher inventory, months supply keeps rising, and that puts downward pressure on prices. A couple quarters of lowering prices and For Sale signs up, and everybody starts to notice that prices are getting lower. Stories start to cirlce about the neighbor who can’t sell his house, or the coworkers who had a firesale becaue their loan adjusted. The media adds to the stories.
So the psychology shifts, and then the real downturn is entrenched, even if it moves at snail’s pace at first. Buyers start to realize prices are falling, and it pays to wait. Yes, thousands of people a month are buying, but each month it is 30% less than that same month a year before. It is a gradual decline, and it picks up speed in year 2.
Adding fuel to the fire is the number of people leaving. Over 40,000 people left San Diego last year, and many people who are selling their homes are leaving. With a declining population and the first time buyer priced out, the sales chain is broken.
To the few overleveraged you mention, add anyone who bought in 1980 and took out a HELOC or refinanced in to an adjustable rate loan. A scary number is that 25% of all US mortgages are resetting next year.
We could see 10% of all mortgages in foreclosure. Maybe all 25%, or maybe only 5%. In any case, it’s a very big number.
Even if it’s only 1%, it will devastate the market, because prices are set by the 2,000 people a month who sell, not by the 1.1 million that do not. The 2000 sellers set the price for the other 1.1 million.
Add to this the job losses already starting in lending (OC is the home of exotic lenders), construction, real estate, retail… More foreclosures or sales (and leaving So CA) amongst people with 30 year or 15 year fixed loans, just because they lost their jobs.
If the CA regulators adopt the exotic lending guidelines, this thing will crash even faster.
d
d
Guy1,
You don’t say when you
Guy1,
You don’t say when you bought at $375k, so I’ll assume that it was more than 7 years ago. You’re absolutely correct that most people who can hold onto their declining assets during this downswing will do so and as a result will not book the loss. You are incorrect when you say there won’t be enough people who are unable to hold on to affect the price structure. The losses that are occurring now are already being influenced by the losers, and the rate of NODs (Notice of Default) and foreclosures in SD County is skyrocketing.
All the action in prices occurs at the margins. Just as it doesn’t take many desperate buyers to set a high price it doesn’t take many desparate sellers to set the low price. Buyers always have options; sellers sometimes don’t.
It’s happened before, which by itself is proof it can happen again. Conversely, the new paradigm/soft landing/new normal scenarios have never occurred before and there is no proof it can happen. We should never say never, but the odds aren’t looking good for the New Paradigm right about now.
A 20% decline on a $1.2M
A 20% decline on a $1.2M home would bring the price down to $960K, not $1M. –not to be picky, but people often make the mistake that if an asset appreciates by X% one year and then depreciates by X% the next year, you’re back where you started. Of course, the truth is, you’ve lost ground.
The laws of supply and
The laws of supply and demand do not apply when the supply can simply say, I’m not goint to lower my price, I’ll just pull off the market and continue to live on the $750K in home equity. (That can last a long time.) The only people who will sell are the last to buy overleveraged crowd, and there are not enough of them to destroy the market while there is still demand. And really guys, their is still demand or the prices would not continue to hold in the face of the tremendous inventory increase. (ie. someone is still paying these prices).
I have a stock I bought at 100, the current pricing point of which is 50. I can choose not to put my shares on the market until I break even- theres nothing intrinsically different about real estate in this regard.
First of all, its true that a reluctant seller with a true $750K equity curve has much more staying power than a recent buyer who finds him/herself down 20% from the start, not including the transaction costs. However, once you extract equity from your home via MEW, you start over at 0. Any depreciation in home value puts you under water. Remember that to tap that equity, you have to borrow against a depreciating asset. Your equity is determined by how much you could sell the asset for- and thats primarily based on comps. So even if you’re not participating in the market, you can lose paper equity. The old adage of stocks works here: no one makes money buying an asset. At some point, you have to find someone willing to pay you more than you paid for it to turn a profit.
As for prices holding- look for this to change. The same phenomena you mentioned before it at work: when sellers are not pressured, they can afford to leave the asset sitting on the market, collecting dust, hoping for the greater fool to stumble along. When it doesnt sell and comes off the market, it doesnt affect prices. I think what we are going to see in the next year to two are increasing pressures forcing sellers to the markets: ARM adjustments will be the first, but don’t underestimate the effects of falling prices on MEW- home owners will start having to get out simply because sans appreciation, the carrying costs of their homes become a huge burden.
The fundamental question when it comes to housing is this: is it cheaper to rent the home, or to rent the capital necessary to purchase it? Right now, yes, interest rates are low- but appreciations have risen so much that its between 2-6 times more expensive to own than to rent, depending on where in the US you live.
Tom
Someone already mentioned
Someone already mentioned this, but a single low comp lowers the value for the whole neighborhood, just like a single high comp can help raise the value of other nearby homes. Here’s a scenario that will definitely play out: an old person dies, leaving their 1500sf La Jolla home purchased in 1970 to their 3 children, who may or may not live here in California. It’s current market value is $1M and has been paid for for six years. Let’s say the kids aren’t particularly successful and need the cash from that home to pay off debts, etc… Do you think they’re going to hold out for the highest value or might they settle for a lower value and a quick sale? The money has to be divided 3 ways and is a total windfall for them; none of them will receive enough to purchase a home outright, at least not in La Jolla. That single low comp sets a new low watermark for the neighborhood.
That said, I do think there is something to the inflation factor. There is a LOT of money flowing around right now, so that could definitely put a damper on how low these nominal prices might fall. REAL prices, however, should fall a lot. Of course, given all of the monkey business with the money supply, can we even measure real prices?
The only way current prices
The only way current prices are sustainable is one of three ways:
1. People buying need to bring substanial capital from other source or equity from other markets.
2. People’s incomes need to rise substantially (literally 100%) to put housing costs at current median back into the 40% of income range.
3. Mortgage money and loans need to remain very low and available such that the payments on the typical home remain below 40% of current income
It doesnt matter the
It doesnt matter the specifics of why a comp goes on sale- the mere presence of lower sales will eat at your equity regardless of whether or not you play in the market. Sitting on the sidelines doesnt preserve your appreciation.
You must also remember that in addition to being a highly leveraged asset, your home investment also carries significant carrying costs: property taxes, the debt service, maintenance costs. Sure the mortgage deduction is nice- but it doesnt cover everything- the expense is still non-zero. If the carrying costs are not defrayed by appreciation, most owners would do well to sell at a small loss now, rent and invest the difference in other markets.
I am sure there is lots of liquidity in the system- and its clear from the price action that between 1999 and 2005, alot of that liquidity was being directed into housing. I think we are starting to see it move elsewhere- and that will eventually affect prices as people are forced to sell to stem the loss due to the intrinsic carrying costs of the asset, not to mention the implications of some of the creative financing that allowed their purchase.
This market is just like a stock market bubble- only worse. The asset being bought and sold is highly leveraged (5 to 1 if you put 20% down), has exorbidant carrying costs stocks just dont have, and has been fueled by creative credit and relaxed lending standards- theres an unprecidented level of systemic risk of default.
Tom
Hey fellas,
Never thought
Hey fellas,
Never thought I’d see myself making the counter agrument but food for thought. Your points above are well taken, and all correct, however this still does not lead to a massive correction. As I stated earlier, at these prices, a 20% correction is meaningless.
You will still never afford the house. Can you really rent for 5 + years, maybe more. If so, your in your early 20’s. If your 30-32 and starting a family, your not renting. If you don’t know why, then your about to find out. Try to keep your spouse happy while raising kids in a rental. Good luck with that! Your about to find yourself moving to Riverside and doing the commute. As to the cheap money argument, cheap money is not going away. Your not going to see 8%+ interest rates, the Chinese need our t-bills. The long rate cannot go up. For Crying out Loud folks, the fed pushed and pushed and what do they have to show for it 5.75% on the 30 year with the yield curve about to invert.
This thing is not ending soon, because it cant. People still have income and the economy is sound. The only people who are screwed are the ones with the really bad ARM’s. (sucker loans for speculators with no downpayment.) They will get flushed out, you’ll see some correction, but, demand will remain. Most ARMS are good loans tied to the 11th dist or comparable. If your waiting for a large correction, I hope you don’t have kids, because they will be mostly grown before you can buy.
We’ve reached a permanently
We’ve reached a permanently high plateau!
guy1, are you yanking our
guy1, are you yanking our chain? Why can’t a family rent for five years (or longer) if that’s what makes financial sense? You can rent really nice homes for half the monthly cost of what it would cost to buy the same place today, especially with these million dollar properties you seem familiar with.
The correction is underway and even if it stops at twenty percent, that is significant. Why would you be regretting selling your townhome? Sounds like you should have made over half a million dollars on it. Put your money to work for you, rent a place for a while and relax.
No disrespect here guys. I
No disrespect here guys. I wouldn’t yank your chains. Honestly, a family can rent. “Can” being stress here. I guess I am an old schooler. I view renting as a waste of money. I also view leasing a car as a waste of money. The two biggest money loosing hose jobs of your life. If you rent a nice house for $2000/mth for five years, your out over 100K with nothing to show for it. If your renting for less than that, I suspect one would be compromising their lifestyle at their families expense. Not just livable space, but schools, ect. Thats a personal choice, but not for me. Thats more than systemic risk, thats actual after tax income guaranteed gone. The frustrating part for me is that I have been an avid crash supporter. I love California, but could not pass up banking the cash. A bird in the hand and all that. So I did exactly what you suggested, I put the money to work, moved out of state, and relaxed. Obviously, one cannot perfectly time the market, but we have all been calling this for two years now. My complaint is the fundamentals have not changed, and until they change your not going to see a major correction. As to 20%, I stand by my earlier statement, it’s healthy but if you cannot afford it now, you cant afford it then either. Seems rediculous but prices have risen that much. To quote a friend of mine who is a heart surgeon, “I can not afford to buy my house.” That was in 04. When the heart surgeon cannot buy a house and it went up from there, you need more than a 20% correction. Its still gonna be a wait. And so, I’m waiting with you.
Best Regards
No disrespect here guys. I
No disrespect here guys. I wouldn’t yank your chains. Honestly, a family can rent. “Can” being stress here. I guess I am an old schooler. I view renting as a waste of money. I also view leasing a car as a waste of money. The two biggest money loosing hose jobs of your life. If you rent a nice house for $2000/mth for five years, your out over 100K with nothing to show for it. If your renting for less than that, I suspect one would be compromising their lifestyle at their families expense. Not just livable space, but schools, ect. Thats a personal choice, but not for me. Thats more than systemic risk, thats actual after tax income guaranteed gone. The frustrating part for me is that I have been an avid crash supporter. I love California, but could not pass up banking the cash. A bird in the hand and all that. So I did exactly what you suggested, I put the money to work, moved out of state, and relaxed. Obviously, one cannot perfectly time the market, but we have all been calling this for two years now. My complaint is the fundamentals have not changed, and until they change your not going to see a major correction. As to 20%, I stand by my earlier statement, it’s healthy but if you cannot afford it now, you cant afford it then either. Seems rediculous but prices have risen that much. To quote a friend of mine who is a heart surgeon, “I can not afford to buy my house.” That was in 04. When the heart surgeon cannot buy a house and it went up from there, you need more than a 20% correction. Its still gonna be a wait. And so, I’m waiting with you.
Best Regards
Guy1 Said:
As I stated
Guy1 Said:
As I stated earlier, at these prices, a 20% correction is meaningless. You will still never afford the house.
Then you make everyone else point quite clearly…if you can’t afford it, no one will buy it..and the seller will be sitting there waiting for who then?
Can you really rent for 5 + years, maybe more. If so, your in your early 20’s. If your 30-32 and starting a family, your not renting. If you don’t know why, then your about to find out. Try to keep your spouse happy while raising kids in a rental. Good luck with that!
Trying keeping your marriage and kids when you can’t pay your mortgage and you lose your house…REALLY good luck with that! I’d much rather be renting and be able to feed my family than have to have incredible anxiety and fear of how am I’m going to pay my $3K/month mortgage for my McMansion. Come on now…let’s be realistic. There’s nothing wrong with renting and it’s a part of life. This whole housing psychology is tied strongly into this mentality that something is wrong because you choose to rent rather than buy. It’s a very consumption driven mentality that’s right along the lines with everything else we “have to have” all the freakin time.
Your not going to see 8%+ interest rates, the Chinese need our t-bills. The long rate cannot go up.
It doesn’t matter…most people already can’t afford homes ever with lower interest rates…so who cares if cheap money is around? When monthly property tax payments are slowly equaling rents, do you think cheap money is going to help?
People still have income and the economy is sound. The only people who are screwed are the ones with the really bad ARM’s. (sucker loans for speculators with no downpayment.) They will get flushed out, you’ll see some correction, but, demand will remain. If your waiting for a large correction, I hope you don’t have kids, because they will be mostly grown before you can buy.
What incomes are you talking about? Which people? How much income? What sort of jobs? Economy sound? Are you kidding? We’re pissing away $3Billion a week on a war that has no end in sight, our deficit is out of control, consumption is out of control, living costs have gone up, housing costs have out-accelerated incomes by 3-4 times, how you can even possibility consider that the economy is sound? May be for people in La Jolla with their own businesses…but who gives a rats ass about those people?
Even people who bought along time ago and made money on their homes without touching their equity….what are they going to do now? They can’t do anything now in California. Why do you think all these equity holders left California and bought somewhere else? Because they couldn’t afford anything here EVEN WITH the money they made…and you call that a sustainable, realistic scenerio?
Excellent points, and all
Excellent points, and all well taken. They are the very reasons I banked and left. However, if I may respectfully point out, they are the same points made two years ago. Will we all be sitting here making the same points in 2009? Even more to your point, really, when you do the math, no one could afford the homes in 2001. I remember having the exact conversation which always ended with the question, “who is buying these homes?” If you had been renting since then you really missed out. Further, I would add that even if we are at the top, which we all agree, and if you accept that things will come down slowly as demonstrated by the example of 1990 to 1996, that being the precident. The conclusion is that you have at least 5 years to go. And that is assuming that their is no support generated by a new Fed Chairman who does not want a disaster on his watch. Any support, printing money as an example, would only delay things further. Which goes back to my initial point. Its going to be a long wait.
they are the same points
they are the same points made two years ago. Will we all be sitting here making the same points in 2009? Even more to your point, really, when you do the math, no one could afford the homes in 2001.
I’m sure these are the same exact words that were being uttered in the stock market scene when prices were incredibly high, people were becoming millionaires, and no end was in site.
ALOT more people could reasonably afford homes in 2001 versus today. You would have needed far less of a downpayment, would have paid FAR LESS property tax, could pay off your home far more quickly with bigger payments, and would not have had to resort to mafia loans to do so. There simply is no comparison
If you had been renting since then you really missed out. Further, I would add that even if we are at the top, which we all agree, and if you accept that things will come down slowly as demonstrated by the example of 1990 to 1996, that being the precident. The conclusion is that you have at least 5 years to go. And that is assuming that their is no support generated by a new Fed Chairman who does not want a disaster on his watch. Any support, printing money as an example, would only delay things further. Which goes back to my initial point. Its going to be a long wait.
Again, to say someone missed out because of renting is very pointless. My wife and I have been renting since 2001 and we’ve saved as much money doing this as have some people who’ve made a few hundred thousand dollars making fake equity. By doing so, we gave up the privilege or luxury (whatever you want to call it) of living in a home…not owning…living in a home. What we gained were the mobility, liquidity, far less debt, far less hassle, far less headache, no repair costs, no maintenance costs, no property tax costs. OK…so we didn’t have right offs….so be it…I write off part of my rent because I can work partially from home.
As far as how long we have to wait, it depends…no one can predict that. However, waiting 2 years versus buying now will produce vastly different results in the long term.
Bernanke is in between a rock and a hard place. Is he going to hold the entire US economy hostage so self-proclaimed RE successors can hold onto their “hard earned” equity gains? So what’s he going to do, stagnate the economy so that the housing prices don’t go down? Keep interest rates low while inflation goes crazy, living costs sky-rocket, salaries go no where, jobs go out of the country, the dollar turns into a peso valuation? What’s he going to do?
As a potential buyer..I can afford to wait. I can move up to a luxury condo or townhouse and rent at 50% of what I’d have to pay to buy…I can afford to do that without breaking a sweat. Sellers will have to wait just as long for their home prices to begin to rise again…if they do. In the meantime, how many home-owners do you think are going to sit on their equity and not touch it? Not get into more debt? Into more loan paybacks, buy more stuff for themselves with their free money? Do you honestly think people have the discipline?
Again, no one said it’s not going to a long wait…I’m sure it will. Greedy sellers coupled with (perhaps) no so stupid buyers will stretch things out…but the point is fundamentals will be in place…regardless of what people say think or do. Even when foreign money comes into play, fundamentals still are in action but perhaps not to the favour of buyers.
Regardless…as I said before, if things don’t turn around for us in California in the next year or two…it’s really no big deal for us. Since we’ve had the luxury of NOT having a large mortgage payment, we’ve travelled the world, we’ve taken long vacations, we’ve bought things for us that we enjoy without breaking a sweat and having money in the bank to boot (cash). So renting isn’t so bad. It really depends on your outlook on life…are you a consumer or an enjoyer.
And believe me, there are FAR better places to be than in California.
We need to get back to
We need to get back to basics here: supply and demand. We are at 10 months supply,and rising. Our inventory is fairly high now (despite a small seasonal drop) and sales are dropping. People are leaving San Diego. Many sellers, like guy1, leave San Diego after their sale, thus breaking the chain of the real estate sales.
So the most important question: how will we get more buyers into the market?
With months inventory rising, the prices will keep dropping. What will shift buyer psychology, and decrease months supply? Housing cycles take many years to play out, and why would this one be any different?
Nozferat,
I couldn’t agree
Nozferat,
I couldn’t agree with you more, you sound a lot like my wife and I when we were in our 20’s. I am also glad you are in a position to bank cash at this time. Most people do not. A final scenario that should be addressed is the real possibility of significant increases in rental prices. As you say, prices have put themselves out of most peoples reach, however, people still need a place to live. In the face of property prices being “Sticky” on the way down, and demand remaining for housing (rental or other), the increase in the demand for rentals will surly cause rental rates to spike. The only way for this not to happen is if property prices come down quickly or demand drops (ie: people leave.)
One could make the argument that all the suckers that are forced to sell and cannot will rent out their houses, and rental rates will drop. However, if they stay in CA, they then become renters. Get a rental and get a renter. Net change zero. The only way this really works is if the demand was never real in the first place. Which may be true otherwise rental prices would have gone up in the first place.
Nozferat- Although I agree
Nozferat- Although I agree with you on mosty points I have to disagree with the following …
Which may be true otherwise rental prices would have gone up in the first place.
One reason rental prices didn’t go up as much as housing prices is that they were articially suppressed by the exotic loans and implied appreciation that people buying homes were getting. Rental properties compete with properties for purchase. If you can buy a place and get 20% appreciation, the rent comparison has to be very cheap. In other words, as the housing price bubbled rents were suppressed by the same factors. Rents have or are in the process of going up to catch up (at least in the short run) as home sales prices decline.
The one thing you’re not
The one thing you’re not factoring in to your “get a rental and get a renter” equation is the significant number of homes owned by speculators. They need someone to occupy these places, they’re getting harder to sell, and as much as they’d like people to carry their full debt load, the typical renter refuses to.
This should help keep the rental market in check.
What worries me is how
What worries me is how stupid people are. They will destroy themselves to buy a home. The banks know this.
If they know that people are willing to throw their lives away to own material things, lending will remain easy and buying will continue.
It will eventually all collapse but the standards will be changed as they are already being changed. Now a $3K/m mortgage is almost standard…and becoming accepted.
What this housing market has shown is how ruthless what a bunch of aholes people really are. That’s the bottom line.
Excellent points, and all
Excellent points, and all well taken. They are the very reasons I banked and left. However, if I may respectfully point out, they are the same points made two years ago. Will we all be sitting here making the same points in 2009? Even more to your point, really, when you do the math, no one could afford the homes in 2001. I remember having the exact conversation which always ended with the question, “who is buying these homes?” If you had been renting since then you really missed out. Further, I would add that even if we are at the top, which we all agree, and if you accept that things will come down slowly as demonstrated by the example of 1990 to 1996, that being the precident. The conclusion is that you have at least 5 years to go. And that is assuming that their is no support generated by a new Fed Chairman who does not want a disaster on his watch. Any support, printing money as an example, would only delay things further. Which goes back to my initial point. Its going to be a long wait.
I respectly disagree with
I respectly disagree with your viewpoint.
First off, I live in California and I really don’t mind getting out. If I had made the equity you say you did from $375K to $1MM, I’d not even come back to California. There ar e better places to live period.
But that’s a different issue altogether. First off, incomes have NOTHING to do with a strong housing market. Very few people could, IMO, afford a home in the traditional sense. Most are leveraged to the hilt…especially in places like California. They are taking a gamble that home prices will continue to go up. Some gambled correctly, others did not, others are still in the middle and may win or lose depending on what the market does.
There are wealthy people in California but they are not the majority. So I don’t know how you think people are going to sustain this lifestyle unless it’s completely artificially maintained.
OK…so let’s say the only ones selling are the overleveraged crowds as you say. Let’s assume the prices still go up. How are current owners who are not overleveraged going to sell (even with their equity gains) and then turn around and buy another, more expensive house?
You for example…you paid $375K for your home. So you sell it for $1MM and make $625K. Then you turn around and buy a $1.2MM home….now you owe $525K…how is that an improvement for you? You owe more money, you pay more property tax, you’re now in more debt.
How do you suppose this will continue?
When few people are buying homes because prices are too high, let the owners sit on their home and eat away at their equity to stay alive…tough sh@t for them. It’s a lose lose situation in that case and will make the economy a disaster in the long run.
As you suggest that someone is paying for these prices…perhaps…but only the idiots who think being a $3-4K/month mortage at 100% ARM financing is a smart thing to do. Eventually, fundamentals will kick in…if they don’t for some screwed up reason, then frankly living in California is now so passe that I won’t be missing anything anyway if I have to move.
The OC market has turned
The OC market has turned too. The median still is rising, but actual sale prices on individual homes are not. Yes, that sounds strange, but basically, it’s the last of the move ups that you are seeing. The median rose 3%, however the mix shifted to SFRs heavily.
Sale volume was was down 24.9%, however sales volume on new homes was only down 10%, resale SFRs 22.8 and Condos 34.6%. In order value, the median on each was $772K, $665K and $440K.
Most importantly, the gains on each? 10% on new, 0% on SFRs and 0% on condos.
So basically, the market has been disemboweled, nobody will be buying a move up “new” home next year at $770K because nobody is making money on the bottom anymore.