“but the flipper still needs to find a greater [fool] who still has to get a regular loan.”
Spot on. So all this short-term stuff is interesting (and I want to buy a home before I’m really old), but the biggest question is what happens in the long run (including what a regular loan looks like then), and how far into the future that is.
I think it’s likely that, in the very long run, Southern California home prices will be driven by what people in the very top layer of mobile world society can afford. Everyone else will be either competing with them, if they are wealthy enough to buy a nice home in a nice area, or providing services to them. So prices in the best areas will be determined by the average wealth and income of the top slice of mobile people in the world. If the pattern of the last 20 years continues, that means the market for the best places in S Calif will go up faster than average world growth. I don’t have stats, but 5-8% a year wouldn’t surprise me. Take a look at the growth in wealth of the Forbes 400 in the last 20 years.
Will the land and buildings we “service providers” live in go up at the same rate? No. The wealthy living in the best spots will pay more to get their kids educated, and their trusts arranged, and so on, but they don’t want to fork over all their money on that. So incomes for us paeons here will go up by maybe 1-2% more than incomes elsewhere in the US.
Boil it all down, and maybe supportable home prices in the paeon areas go up by 5-7% a year over very long periods.
Are current prices the right base for this future appreciation, or prices 10 years ago, or something in between? That all depends on how much of people’s income can go to a loan payment. Clearly, if the market price was supported by people who could only afford their loans in the long run if their future salary increases averaged 10% for 30 years, then that’s not the right base. But I think there are enough people ready to fork out over 50% of their income to live in S Calif that the base should be a lot closer to 2006 prices than 1996 prices. And lenders are getting ever more ready to provide loans. Looking at the history of the last 100 years, loans are constantly being made more readily available. Maybe this last credit contraction is a step back, but there are 2 steps forward for every one back.
If underlying appreciation is 5-7% a year, how long would prices have to stay level to get us back to a situation where the 30th percentile household could afford the median home, assuming mortgage payments are 50% of income and they also increase by 5-7% a year? What are the numbers for that? I am sure someone here on Piggington knows the 30th percentile household income in S Calif. Let me just suppose it’s $100K, or say $70K after tax. Then a 30-year fixed loan at 6.5% that increases by 6% a year requires a first year payment of about 3.67% of the principal. So the 30th percentile household forking out 50% of their current and future income on the mortgage could “afford” a $950K loan. That’s actually slightly higher than today’s prices.
Do I like the idea that the ceiling for median paeon house prices might be $1 million? No, but…. it might be. It all depends on the ingenuity in the mortgage industry and the government guarantees and the investor risk aversion/desperation for yield. There’s no invisible hand that will just force it below that level, regardless of circumstances.
