can anything save this sinking ship?

[jrock]

ps-If the Fed acts reactively to bail out a collapsing housing sector by engaging in a rate easing campaign, it could have the opposite of the desired effect. The market is unhinged from fundamentals, operating on psychology. Overt action by the Fed to counteract a housing collapse would signal to everyone that even the Fed is nervous about housing and this might serve simply to increase the sense of panic in people whose monetary well-being depends on steady or increasing housing values.

[(former)FormerSanDiegan]

I meant to say a decade after the trough before prices get back to the peak.

Perry – Thanks for clarifying. Now it makes more sense.

By the way, regarding the comment that you are long on RE. People need to realize that when you buy a house near the bottom of the market (e.g. mid-1990’s) it might make sense to keep it, especially with CA’s property tax structure.

n_s_r is right in regard to pre-2001 purchases. People who bought during that time should do well under most scenarios.

[asragov]

Rates down is not a given anymore – there are more and more observers anticipating a Fed increase in 2007. There are two prevailing economic ideas supporting this, I think:

1. Sales are not increasing enough, so companies raise prices to get some income. These price increases cause the Fed to tighten

2. Rates rise as part of an effort to slow the dollar’s slide

These two are not necessarily exclusive.

It is interesting that six months ago or so, rates down was nearly universally anticipated. However, now the economic forecasting landscape seems to be decidedly mixed.

[highpacific]

Wage inflation could save the ship.

Many good points on the posts here. I think that significant wage inflation say 10% in the next year could really bouy up the market. If a significant percentage of the population moved into the affordability range. Yes that would help.

Not a very likely scenario in my opinion. But it is good to keep an eye on the affodability and risk indexes. They take this all into account.

Like the PMI Groups reports. Latest was back in Fall 2006 and showed San Diego topping the Risk Index chart ( 60% chance of a price correction )

http://media.corporate-ir.net/media_files/irol/63/63356/ERETFALL2006.pdf

Here is a better link:

http://www.pmi-us.com/lenders/media_lenders/pmi_ERETappndx_06v1.pdf

-Sane

[Anonymous]

Thought-provoking (for me) question from Edward Lazear, now working for President Bush, when he taught my economics class at U. of Chicago in ’92:

Which is cheaper to live in?
1. House bought in 1950, now fully paid off.
2. Identical house next door, bought in 2007, financed 100%.

Answer: ignoring taxes, the cost is the same.

By living in house 1, you forego selling it for what the buyer of house 2 just paid for his house. Alternatively, you forego the rental income from renting it out (which, in normal times, provides a rational return to your purchase price or has a reasonable resemblance to a mortgage payment).

Summary: in San Diego, no matter when you bought your home, ‘rationally,’ you should sell it now and rent a home, instead (given that the price-to-rent ratio is still sky-high, and given that there will be downward pressure on rents from non-selling homes and condos). Just food for thought.

[blahblahblah]

Which is cheaper to live in?
1. House bought in 1950, now fully paid off.
2. Identical house next door, bought in 2007, financed 100%.

Answer: ignoring taxes, the cost is the same.

By living in house 1, you forego selling it for what the buyer of house 2 just paid for his house. Alternatively, you forego the rental income from renting it out (which, in normal times, provides a rational return to your purchase price or has a reasonable resemblance to a mortgage payment).

Huh? The question is “Which is cheaper TO LIVE IN”. Both of the options the econ. prof lists (sale or rental) entail NOT LIVING IN THE HOUSE. I don’t get it, but of course I don’t have a PhD in economics.

But definitely agreed that selling and renting is a good option for those who can. Probably won’t find too many that disagree with that around here!

[PerryChase]

Ceteris paribus is the first Latin phrase I learned the first day of Econ 101. 21 years later, I still remember the professor who said it.

It might cost the same to rent or own, but it assumes you have the income to rent, or you can invest the rent money if you didn’t live in the house. If you have no income or are too old or sick to work, then you certainly can’t pay the rent.

The house below has a property tax basis of $89,742. That means that they pay $897/year to live a La Jolla. It’s hardly possible to ignore taxes.

List Price: $1,200,000 – $1,200,000
Bedrooms: 3
Full Baths: 1
Partial Baths: 1
Square Feet: 1,600
Lot Size: 5,663 Sq. Ft.
Year Built: 1945
Listing Date: 01/16/07
On Market: 0 day
Type: SFR
Status: ACTIVE
MLS #: 076004365
http://www.ziprealty.com/buy_a_home/logged_in/search/home_detail.jsp?listing_num=076004365&mls=mls_sandiego&cKey=m0qc4n34&source=SANDICOR
http://sdlookup.com/PropertyDetails/tabid/53/forumid/1/view/topics/pid/A53EE495/Default.aspx

[Anonymous]

Perry, that 1,600 square foot home rents for $2,650 per month (that’s what we pay for the same size home in La Jolla, same era, much larger lot, beautiful tree-lined street).

Sell the home for $1.0-1.2MM, invest the proceeds in gold/gold mining stocks (or even TIPS), and rent the identical home for $2,650 per month.

Even earning only 3% on your $1.0-1.2MM, you have your monthly rent covered, without eating into your principal.

No matter when you bought, sell high (i.e., now) and rent cheaply, but only if you’re interested in being rational.

[BikeRider]

A house built in 1945 is surely a total piece of junk. Everything not visible to the naked eye is OLD. Unless it has been gutted and all the plumbing and electrical brought up to code. How in the world can it be worth a million dollars? I don’t care HOW pretty the weather is. Crazy is all I can say. 1600 sq ft ?? The tax basis is what that house is actually worth.

[sdrealtor]

BikeRider
Location, Location, Location. The value is in the dirt not the structure. That house is a couple blocks from one of the most desireable locations in the Country.

[(former)FormerSanDiegan]

jg –

How do you draw a conclusion to sell and rent from an example that compares the cost of living in two identical homes ?
Selling and renting was not one of the two options. An entirely different calculation is used.

Also, the reality of Prop 13 is that you can’t ignore the 6-10K or more in property tax for real world examples of homes in the 500-750K range.

Additionally, even if you ignore taxes the costs are not the same. You typically cannot rent the house out for the equivalent of the debt service. Rent is more like 5% of gross today in 2007 as your example specifies.
Also, you cannot find any guaranteed investment at the same rate you are paying for a mortgage (If you could, then the market would be assuming zero defaults).

[Author]

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