housing bubble?

[SD Realtor]

FLU great posts.

AN good to see you.

Before I go on this post is for local San Diego housing. I think we will see inventory return to more normalized levels. I have seen a slowdown in buying activity compared to the frenzied levels we saw in the fall/winter/spring as predicted. Similarly we have seen the return of the “entitled seller” who feels justified in pricing his home above comps. That coupled with rising treasuries has been enough to push away buyers who were on the fringes of affording a home in the neighborhood they may have desired.

Investor activity to me will not change the market dynamic much. Those who were getting outbid by investors for the most part were in the lower end and even more affordable housing market along with a lot of investment grade condos. That inventory can be consumed by lower end owner occupant buyers who have suffered the most by being consistently outbid by investors. There are some exception cases but not the numbers many on this site claim.

I have already debunked the 30% cash buyers in Carmel Valley myth and showed that most of those purchases were the lowest end homes in CV which would be bought up by owner occupants if not for investors.

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I believe that the pace of the treasury yield curve will have a good deal to do with how we see things play out in the housing market. While pricing has risen much faster then it should have, and inventory is growing I don’t really see a bubble that will lead to a crash. I see a market that was driven by a staggering lack of inventory causing pricing to lurch forward. I believe we will now slow way down but not see a massive gain in inventory due to foreclosures, distress, and lots of unemployment.

I think the housing market is now acclimated to the new normal employment wise here in San Diego. We busted 2.9 on the yields this week and saw a small pullback Friday. (side note I have been in and out of TBT during the past few months and am kind of kicking myself for not getting back in Friday) so we have seen almost 130 basis points since May…. not freeking bad… however on a historical basis we are still in bouncing near the bottom of yields.

This economic recovery is and will continue to be different then those of the past. This one will be characterized by the new normal lack of quality jobs but with plenty of crappy menial jobs. However in San Diego that is not much as true so the housing market will be supported okay. At some point on the yield curve though, buyer supply will start to suffer. I believe we still have perhaps… 150 – 200 basis points. That puts us at around 5.5 – 6% 30 year fix. However even here it doesn’t get dicey. At 7-8% it gets dicey but I don’t see that happening until maybe year 3 or 4 of the presidency.

I don’t have much knowledge on price declines against mortgage rates though. It is dangerous to assume they will be substantial, but I do think there will be some effect.

Why?

Because there are plenty of people with money out there.

Now you get to 10% or more and yes I believe we see some good price declines.

Don’t know if it will ever happen though.

[an]

Wasn’t the last time we get 10%+ in mortgage rate, people were getting raises left and right (I hear people who work back then get 10-15% raise each year easily) AND CDs were in high single digits as well? If that happen, all those who bought a lot in this last crash will be freaking golden. Their monthly payment is fixed but now, then can raise their rent 5-10% each year. Talk about cash flow.

I sincerely hope we’ll we will see below 2008 price again AND someday, we’ll see 10-15% mortgage rate. My dream would be us experiencing the 70s-80s again. Add in the fact that we’re in CA and have prop 13, our property tax will be crazily low relatively (just look at the people who bought their house in the 60s/70s before the 10%+ rate hit.

[Jazzman]

BG said “In a nutshell, today’s family-raising buyer’s “expectations” are w-a-a-a-y too high for life’s little realities, IMO. Those soaring “expectations” have kept more than a few prospective buyers perpetual renters.”

You make it sound like renting is a bad thing? Not everyone is fated to be a home owner. If memory serves, only 50% of LA residents are home owners. If you are disappointed because your expectations are not being met, might it be that “life’s little realities” are at fault, not your high expectations? I like to think of my expectations as being rooted in higher standards, which is not always synonymous with higher prices.

[bearishgurl]

[quote=Jazzman]BG said “In a nutshell, today’s family-raising buyer’s “expectations” are w-a-a-a-y too high for life’s little realities, IMO. Those soaring “expectations” have kept more than a few prospective buyers perpetual renters.”

You make it sound like renting is a bad thing? Not everyone is fated to be a home owner. If memory serves, only 50% of LA residents are home owners. If you are disappointed because your expectations are not being met, might it be that “life’s little realities” are at fault, not your high expectations? I like to think of my expectations as being rooted in higher standards, which is not always synonymous with higher prices.[/quote]

Completely agree that not everyone is “fated” to be a homeowner, Jazzman.

However, I was dicussing a handful of Piggs who posted here for months or years that they wished to buy a local home for their families but didn’t end up doing so, even during the 3+ years while the barn door was left open for them. So many of us Piggs tried to coach these posters and assist them though multiple threads and yet they never managed to be able to seal a deal. Or if they did, they never posted here that they finally bought.

Perhaps these supposedly-qualified-to-buy posters really didn’t want to be homeowners but initially thought they did. Who knows? I just think that if parents residing in CA coastal counties have a stable local job(s) and minor children in school or headed in that direction that they would make a much more stable life for their children by buying a home for them to grow up in. But that’s just me.

As for “my own (homeownership) expectations,” I never hesitated to purchase a home when I needed one and so they have always been been met. I’ll be right behind you in seeking to purchase a place to “retire” in, Jazzman. And in that search, I will be entirely realistic 🙂

[SD Realtor]

Well AN I remember those days really well. There was an extreme tightening of the money supply which was the way Volker dealt with the inflation issues in the mid to late 70’s. I cannot say what wages were because I was still in school although I worked in the labs at school and we were paid well for not doing crap. I do not believe people were getting the kind of 10-15% raises that you wrote about although some will claim that they did. I don’t buy it or if it happened it was the exception and not the rule.

So yes what you said about being in the catbird seat for owners is true however we will absolutely see asset depreciation in those cases of high rates. The golden question is how much. Now if you will be holding the property anyway and have it as a rental then yes, You will be raking in monthly income while paying out on a 3.5 or 4% mortgage. Nice.

Yes there were golden opportunities not long ago. They may come back but I don’t really think they will unless they are accompanied by rate shock, not foreclosure shock. I guess we will see.

[an]

Here’s the historical data from the census:
1990 14,387
1989 14,056
1988 13,123
1987 (21) 12,391
1986 11,670
1985 (20) 11,013
1984 10,328
1983 (19) 9,494
1982 8,980
1981 8,476
1980 7,787
1979 (18) 7,168
1978 6,455
1977 5,785
1976 (17) 5,271
1975 (16) 4,818
1974 (16)(15) 4,445
1973 4,141
1972 (14) 3,769
1971 (13) 3,417
1970 3,177
1969 3,007
1968 2,731
1967 (12) 2,464

Look at the per capita income in the 70s, it seems like a consistent 10% increase every year. So, what some people said about their salary in the 70s wasn’t the exception. Income went up 145% between 1970-1980. Income went up only 85% between 1980-1990. Income went up only 55% between 1990-2000. Income went up 19% between 2000-2010.

[livinincali]

[quote=SD Realtor]
So yes what you said about being in the catbird seat for owners is true however we will absolutely see asset depreciation in those cases of high rates. The golden question is how much. Now if you will be holding the property anyway and have it as a rental then yes, You will be raking in monthly income while paying out on a 3.5 or 4% mortgage. Nice.
[/quote]

It will certainly be interesting to see what happens with 30 year fixed rate mortgages if rates to start a general trend upwards. There’s really no assets out there that can be levered with 30 year fixed rates other than residential properties. Bonds, commercial property, stock margin etc are all based on a short term floating rate when they are levered up.

If you’re lucky it will work like prop 13. You’ll get to keep the rate as long as you hold on to the property. If you’re not government will probably adjust your 30 year fixed rate higher in the name of fairness, especially if you’re renting a second home.

[SD Realtor]

Well AN I guess I stand corrected on the salary increases. Note however that the rate hikes really started in 79 and continued for about 5 years.

Anyways the biggest problem as I see it has to do with employment and quality jobs. The job growth in both quality and quantity of jobs was extraordinary in that time frame. Outsourcing was just barely starting. These days… well not so much. As your data shows a 19% increase from 2000-2010… pretty pathetic….

Finally what is not shown is the great deception. Although rates have not gone up much, cost of living has. We love to hear inflation is tame but over the past few years we have all been paying much higher prices for food, water and energy.

Anyways I will not digress on that stuff. Getting to your main point, yes buying in 2008 was not only great due to lower prices but mainly for lower rates. To me investors buying with cash were foolish. Saving a cash pile for the day when rates are high seems to make more sense. Then you have a bunch of properties leveraged at a low rate AND you have cash to buy high yielding bonds. Again, the only crux is that you have a lower valuation on that RE but if you are holding it for a rental, so what.

[an]

Yes SD R, I totally agree. Buying with all cash in a low rate high price environment is definitely not for me. However, I think most who did that bought for cash because that allow them to actually buy the property at a good price. There’s no way to know if they refi out after they purchase. I think they would if they decide to hold and rent. For those of us who were not able to drop down several hundred thousands of dollar for investment properties, then yes, 2008-2011 was a great opportunity.

I’m still not sold that price will go down when rate goes up. Just look at what price did in 1970-1980. Rate sky rocketed and so did price. When you get income increasing 10% a year, it’s pretty easy to afford higher monthly payment. Obviously, past performance does not guaranty future performance. However, I don’t buy the logic of lower price when rate increase. Maybe it’ll be different this time, but like you said, if you’re holding it as rental and already are cash flowing positive, who cares. All this mean is you’ll be cash flowing even better every year. Which would make it that much harder to sell, since the cash flow is so good.

Again, I sincerely hope CAR is right and we’ll see sub 2008 price again (hopefully soon). Being able to pick up SFR house in MM in the low to mid $200k would be another golden opportunity that I’m not missing. This is assuming that PITI is lower than 2008’s PITI.

[The-Shoveler]

From what I remember about that time I think people were saying something to the effect that getting a loan on a “as is” foreclosure was somewhat problematic

Also it may have been a lot easier to qualify for a loan and the rates even better had they waited and had a few years retail income verified. but what do I know..

What AN just said.

[spdrun]

livinincali – are you implying that 30-year rates aren’t actually fixed, and that the loans may be called in for rental properties? If so, the excrement is really going to hit the propeller, much worse than 2007-2009.

[SK in CV]

[quote=SD Realtor]Well AN I remember those days really well. There was an extreme tightening of the money supply which was the way Volker dealt with the inflation issues in the mid to late 70’s. I cannot say what wages were because I was still in school although I worked in the labs at school and we were paid well for not doing crap. I do not believe people were getting the kind of 10-15% raises that you wrote about although some will claim that they did. I don’t buy it or if it happened it was the exception and not the rule.
[/quote]

I agree with this, and was in the work force full time through most of the 70’s. There probably were some getting 10% or raises every year, but absent promotions, that was the exception rather than the rule. (Volker, btw, didn’t take office at the Fed until ’79, and he did jack up interest rates in order to quell the inflation that took hold in the years before him.) And it wasn’t across all industries.

[an]

[quote=The-Shoveler]From what I remember about that time I think people were saying something to the effect that getting a loan on a “as is” foreclosure was somewhat problematic

Also it may have been a lot easier to qualify for a loan and the rates even better had to waited and had a few years retail income verified. but what do I know..[/quote]Wasn’t problematic for me. But then again, all of my income were extremely easy to verified. I’m not talking about no doc loan though and my DTI is well below their limits.

[bearishgurl]

[quote=AN]Here’s the historical data from the census:
1990 14,387
1989 14,056
1988 13,123
1987 (21) 12,391
1986 11,670
1985 (20) 11,013
1984 10,328
1983 (19) 9,494
1982 8,980
1981 8,476
1980 7,787
1979 (18) 7,168
1978 6,455
1977 5,785
1976 (17) 5,271
1975 (16) 4,818
1974 (16)(15) 4,445
1973 4,141
1972 (14) 3,769
1971 (13) 3,417
1970 3,177
1969 3,007
1968 2,731
1967 (12) 2,464

Look at the per capita income in the 70s, it seems like a consistent 10% increase every year. So, what some people said about their salary in the 70s wasn’t the exception. Income went up 145% between 1970-1980. Income went up only 85% between 1980-1990. Income went up only 55% between 1990-2000. Income went up 19% between 2000-2010.[/quote]

AN, are these numbers nationwide statistics or for SD County? And what do the numbers in the parentheses mean?

All by themselves, these numbers really mean nothing unless you put the average SFR sold prices for that year next to them. Then list the average size family in that locale during that year. (Remember that the “avg family-size” was larger 40+ yrs ago.) And, just for fun, list the average prevailing (conventional) 30-yr fixed interest rate for that year next to each year.

I maintain that at all times, the AVERAGE price paid for a SFR in a given area was 4-6 times the total gross household income for that area, depending on locale.

And this is still true today in all but the most expensive locales (SD County not being one of them).

It didn’t matter what the prevailing mtg interest rate was or is or whether gas was .34.9 or $3.95.9.

With this census data, are you attempting to infer that life in the US was easier for the “average” parents in the ’60’s thru ’80’s or that the “avg” buyer could buy more house in those eras than you or I could buy today?

[The-Shoveler]

A lot of these were not loanable in the “as is” condition.

[Author]

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