housing bubble?

[livinincali]

[quote=skerzz]
Everyone is so concerned with a “bubble” and quickly appreciating prices. Anyone else believe that the price move we saw early this year was the adjustment needed to bring prices back to sustainable market levels after a post bubble over correction? From here, I project modest price increases (5% per year) coupled with interest rate increases over the foreseeable future.[/quote]

Here’s what the monthly payment people would be forced to come out of pocket with to meet your projection. Let’s assume $500K rising at 5% per year modest interest rate increases of 50 basis points per year.

Home Price | Interest Rate | Monthly Payment | Annual Salary
Year 1 | $500,000 | 4.5 | $2,808 | $112,306
Year 2 | $525,000 | 5.0 | $3,148 | $125,906
Year 3 | $551,250 | 5.5 | $3,521 | $140,824
Year 4 | $578,813 | 6.0 | $3,929 | $157,156
Year 5 | $607,753 | 6.5 | $4,375 | $175,001

The monthly payment for that exact same house goes up 56% in 5 years if your prediction comes true. Do you expect salaries to keep up with that kind of increase.

[skerzz]

Your payment and required salary figures seem high to me. In years 1 and 5, I compute monthly payments of $2,700 and $3,900 respectively. Assuming a 36% front-end ratio, then your annual salary figures are also overstated.

I think housing is still cheap compared to costs of renting, especially when you factor in tax benefits of owning. For example I am renting my $420K home (zillow estimate) in San Marcos out for $2,500/month. It would cost less than $2,300 to carry that property (PITI) with 20% down. After tax benefits the cost to carry is less than $1,900.

Therefore my opinion is that salaries won’t need to increase at the same rate as monthly mortgage (PITI) payments to support further housing price appreciation. A combination of catch-up in rent vs. buy analysis and salary increases will get us to 5% appreciation per year over the next 3-5 years.

[bearishgurl]

Again, folks … “salaries” (in relation to price of housing) only matters in *some* CA markets. In well-established areas, a much larger percentage of buyers use all cash or mostly cash for purchase money. Buyers utilizing 1031 exchanges typically don’t have to come up with very much cash because they trade “like for like.” Also, it is not uncommon in well-established areas for longtime neighbors to pay cash for a nearby prospective listing for a residence for other family members or gift a large downpayment to the buyer (typically a relative) OR tell distant relatives who will be cash buyers of a nearby prospective listing (before it is put on the MLS with the commensurate price increase). This can only happen if the listing agent/broker goes door to door telling neighbors of the listing before it is actually marketed (again, this is common practice in well-established areas).

In *newer* areas (attractive to worker-bee buyers who will typically get a PM mtg for 75%+ of the purchase price), the combo of HOA/MR can EASILY come to $500-$1500 mo OVER AND ABOVE PITI. THIS is what causes the out-of-pocket unaffordability to these buyers who are also paying high monthly PITI often IN ADDITION to simultaneously attempting to raise minor children.

It is the *newer* areas (built ~1993 or after but more likely those built after 2000) which will undoubtedly suffer price declines if fixed MIR’s go up significantly as the vast majority of the would-be sellers in those areas are in no position to carry a PM mortgage for a buyer who can’t qualify for a mortgage on the open market to pay them what they want for their properties. Higher MIR’s will affect the more established areas (in SD County, 20-90 yrs old) very little, if at all.

These are the two sides or “factions” of CA housing. The “truly haves” reside in the established areas and the “have-nots” who are “giving the appearance of having” reside in the *newer* areas …. by CHOICE. In doing so, they are CHOOSING to own in areas where their future property values depend on many more factors out of their control then the owners who reside in the established areas.

[SK in CV]

[quote=bearishgurl]Again, folks … “salaries” (in relation to price of housing) only matters in *some* CA markets. In well-established areas, a much larger percentage of buyers use all cash or mostly cash for purchase money. Buyers utilizing 1031 exchanges typically don’t have to come up with very much cash because they trade “like for like.” Also, it is not uncommon in well-established areas for longtime neighbors to pay cash for a nearby prospective listing for a residence for other family members or gift a large downpayment to the buyer (typically a relative) OR tell distant relatives who will be cash buyers of a nearby prospective listing (before it is put on the MLS with the commensurate price increase). This can only happen if the listing agent/broker goes door to door telling neighbors of the listing before it is actually marketed (again, this is common practice in well-established areas).

[/quote]

Can you name a single market where salary (or income) doesn’t matter because most homes are purchased for cash that is other than the very top end of the market? (it may be true in RSF. I doubt it’s true in LJ.)

[bearishgurl]

[quote=SK in CV][quote=bearishgurl]Again, folks … “salaries” (in relation to price of housing) only matters in *some* CA markets. In well-established areas, a much larger percentage of buyers use all cash or mostly cash for purchase money. Buyers utilizing 1031 exchanges typically don’t have to come up with very much cash because they trade “like for like.” Also, it is not uncommon in well-established areas for longtime neighbors to pay cash for a nearby prospective listing for a residence for other family members or gift a large downpayment to the buyer (typically a relative) OR tell distant relatives who will be cash buyers of a nearby prospective listing (before it is put on the MLS with the commensurate price increase). This can only happen if the listing agent/broker goes door to door telling neighbors of the listing before it is actually marketed (again, this is common practice in well-established areas).

[/quote]

Can you name a single market where salary (or income) doesn’t matter because most homes are purchased for cash that is other than the very top end of the market? (it may be true in RSF. I doubt it’s true in LJ.)[/quote]

I don’t know about LJ (since there are so many condos and PUDS in and around it) but it is true in typical “working class” areas of SD county where a large portion of longtime (30+ yr) owners are still in residence. For example, Lemon Grove, El Cajon, Chula Vista, National City and even popular SD areas such as Allied Gardens and San Carlos.

In these areas, a longtime former rental SFR could have been found in recent years for $200K to $300K and perhaps $350K now. These houses are typically 1100 sf to 2200 sf and vary wildly in condition. The “public” often never learns about them because they “sold” before being placed on the MLS (as “traditional sales”).

You might be shocked as to how many households have $300K+ lying around earning next to nothing.

I’ve stated it here several times. You can’t judge a book by its cover, its house or the car it drives :=]

If you never leave your “planned development” except to go to work in your “planned office park” and shop in your “master-planned strip mall,” you’ll never be able to see up front and personal how the (gritty?) “real world” operates :=0

[livinincali]

[quote=skerzz]Your payment and required salary figures seem high to me. In years 1 and 5, I compute monthly payments of $2,700 and $3,900 respectively. Assuming a 36% front-end ratio, then your annual salary figures are also overstated.
[/quote]

Looks like I had a bug in my excel formula. I get $2,600 to $3,900 which is still an increase of 50%. Of course I’ve also left out property taxes and any MID tax benefits. Not sure why you’d assume a 36% front end. Bankrate and other sites tend to say 28-30% percent front end and 36-41% back end. I made my salary calculation on 30% which I felt was pretty fair.

If your San Macros place appreciates at 5% and interest rates increase at 50 basis points per year I get the following.

The house is worth $510K. The monthly payment @6.5% is ~$3,250 and at 30% front end ratio a average annual salary of $130K. That average annual household salary would be in the top 20%.

[SK in CV]

[quote=bearishgurl]
If you never leave your “planned development” except to go to work in your “planned office park” and shop in your “master-planned strip mall,” you’ll never be able to see up front and personal how the (gritty?) “real world” operates :=0[/quote]

Actually, I grew up a stone’s throw away from one of those areas you mentioned and my sister still lives there, (in a house 3 blocks away from where we grew up, that she purchased with 20% down and a mortgage) and I have many friends that still live there. My sister certainly could have acquired through inheritance my mother’s house 8 years ago and kept the low taxes, but she chose not to. (Her taxes, btw, dated back to a pre-prop 13 assessment, and were over $1,000 a year.) It was a bigger and nicer home, but it wasn’t worth the hassle to her.

I’ve seen no evidence that anywhere near half of the homes there are being purchased for cash. Of the scores of people that I know that still live there, only two acquired their homes from their parents. I’m still waiting for any real evidence that there are neighborhoods were most homes are purchased for cash. My anecdotal evidence says otherwise.

[CA renter]

[quote=SK in CV][quote=bearishgurl]
If you never leave your “planned development” except to go to work in your “planned office park” and shop in your “master-planned strip mall,” you’ll never be able to see up front and personal how the (gritty?) “real world” operates :=0[/quote]

Actually, I grew up a stone’s throw away from one of those areas you mentioned and my sister still lives there, (in a house 3 blocks away from where we grew up, that she purchased with 20% down and a mortgage) and I have many friends that still live there. My sister certainly could have acquired through inheritance my mother’s house 8 years ago and kept the low taxes, but she chose not to. (Her taxes, btw, dated back to a pre-prop 13 assessment, and were over $1,000 a year.) It was a bigger and nicer home, but it wasn’t worth the hassle to her.

I’ve seen no evidence that anywhere near half of the homes there are being purchased for cash. Of the scores of people that I know that still live there, only two acquired their homes from their parents. I’m still waiting for any real evidence that there are neighborhoods were most homes are purchased for cash. My anecdotal evidence says otherwise.[/quote]

Agree with SK. We live in an older, established neighborhood in a very desirable area, and very, very, very few were purchased with cash.

In L.A., where Mr. CAR and I grew up, we also lived in older, desirable, well established neighborhoods. Didn’t know of a single person who bought with cash. There are some homes that have been owned by the same families for multiple generations (like my MIL’s house), but those are the exception.

[bearishgurl]

[quote=SK in CV][quote=bearishgurl]
If you never leave your “planned development” except to go to work in your “planned office park” and shop in your “master-planned strip mall,” you’ll never be able to see up front and personal how the (gritty?) “real world” operates :=0[/quote]

Actually, I grew up a stone’s throw away from one of those areas you mentioned and my sister still lives there, (in a house 3 blocks away from where we grew up, that she purchased with 20% down and a mortgage) and I have many friends that still live there. My sister certainly could have acquired through inheritance my mother’s house 8 years ago and kept the low taxes, but she chose not to. (Her taxes, btw, dated back to a pre-prop 13 assessment, and were over $1,000 a year.) It was a bigger and nicer home, but it wasn’t worth the hassle to her.

I’ve seen no evidence that anywhere near half of the homes there are being purchased for cash. Of the scores of people that I know that still live there, only two acquired their homes from their parents. I’m still waiting for any real evidence that there are neighborhoods were most homes are purchased for cash. My anecdotal evidence says otherwise.[/quote]

SK, if you are referring to “her” as your mom, why didn’t your sister “buy” your mom’s house from you and your other sibling(s)? Had she done so, she would have had a much lower tax bill and a bigger house in the same area she lives in now.

In light of the tangible benefits of taking over your mom’s home, I don’t understand why your sister thought it would be a “hassle” to do so.

Perhaps the area where you grew up (Del Cerro?) is now too expensive for most people to purchase with all cash or mostly cash. I was referring to neighborhoods in the $200K to $350K range in recent years as having a lot of all-cash or nearly all-cash purchasers (and they are not ALL “investors”).

Those with well-established parents who have real property holding(s) in CA are the ones who have and will end up being the “haves” going into the future while newcomers who come in and buy in newer areas will end up being the “have nots” due to the combination of taking out high-LTV mortgages plus having high carrying costs in the form of MR … and often HOA dues as well. This is just my opinion based upon what I’ve seen the combo of these monthly charges do to family finances in the long haul.

I would have to pull actual plat maps and then examine the corresponding titles to show the prevalence of recent all-cash or near all-cash sales in different areas. This would be a time-consuming but yet “interesting” endeavor.

Just like the “real” cause of the Vallejo (CA) BK which I had posted late last year that I planned to examine in detail and report my findings here, I just haven’t had an extended block of time to devote to the project.

I’m getting ready to leave on another road trip so won’t be able to devote any time to this right now. I promise that I am putting this task on my “to-do” list for my spare, spare time for the balance of 2013 :=]

Luckily, I already have a nice selection of county plat maps from “well-established” areas in my possession 🙂

[bearishgurl]

[quote=CA renter]. . . Agree with SK. We live in an older, established neighborhood in a very desirable area, and very, very, very few were purchased with cash. . . . [/quote]

As I recall, CAR, you posted here that you purchased a house on the same street and/or in the same subdivision as the one you had been renting for several years. You made your initial offer BEFORE it ever hit the MLS, and, I can’t recall exactly, but you later got an agent to represent you to make counter offers?? (I’m unclear if your house ever did get put in the MLS.) You heard from an elderly neighbor that she wanted to move, and, above all, you wanted to remain in your neighborhood. That is why it took you so long to find a suitable house to buy. There just wasn’t any available listings in your “established area.”

That’s how it is in MANY established areas in CA coastal counties.

This proves my point. Many “potential listings” in “desirable, established areas” in CA coastal counties are “sewed up.” Unless one is actually on the same block or walks by the same houses every day, they really have no way of knowing if someone wants to sell before they list.

If your house had been in the MLS, you may have had to compete with many other offers and perhaps would not have “won” the bid on it.

My understanding is that you “could have” paid all cash for the house, but since your spouse had provable W-2 income, you guys were a candidate for a mortgage so you CHOSE to take one out for part of your purchase money. Congratulations! LOTS OF PROSPECTIVE BUYERS TODAY AREN’T QUALIFIED FOR A MORTGAGE. This doesn’t mean they are “deadbeats” who have low credit scores. All it means is that they are “retired” or otherwise have assets but not enough easily-provable “income” (which are not one and the same in a lender’s eyes). These people are not any less of a buyer than those with W-2 income. Neighbors using all cash for a home purchase can actually close faster than a buyer who will take out a mtg and typically have a shorter window for or less contingencies and thus are less of a headache to deal with because they intimately understand the neighborhood AND the house they have made an offer on.

I think the biggest fallacy in CA coastal counties is in the conclusions people reach when comparing the perceived “lifestyles” of those residing in their “owned” *newer* mcmansions and those residing in their 1947 bungalows :=]

[SK in CV]

[quote=bearishgurl]
SK, if you are referring to “her” as your mom, why didn’t your sister “buy” your mom’s house from you and your other sibling(s)? Had she done so, she would have had a much lower tax bill and a bigger house in the same area she lives in now.

In light of the tangible benefits of taking over your mom’s home, I don’t understand why your sister thought it would be a “hassle” to do so.

Perhaps the area where you grew up (Del Cerro?) is now too expensive for most people to purchase with all cash or mostly cash. I was referring to neighborhoods in the $200K to $350K range in recent years as having a lot of all-cash or nearly all-cash purchasers (and they are not ALL “investors”).

Those with well-established parents who have real property holding(s) in CA are the ones who have and will end up being the “haves” going into the future while newcomers who come in and buy in newer areas will end up being the “have nots” due to the combination of taking out high-LTV mortgages plus having high carrying costs in the form of MR … and often HOA dues as well. This is just my opinion based upon what I’ve seen the combo of these monthly charges do to family finances in the long haul.

I would have to pull actual plat maps and then examine the corresponding titles to show the prevalence of recent all-cash or near all-cash sales in different areas. This would be a time-consuming but yet “interesting” endeavor.

Just like the “real” cause of the Vallejo (CA) BK which I had posted late last year that I planned to examine in detail and report my findings here, I just haven’t had an extended block of time to devote to the project.

I’m getting ready to leave on another road trip so won’t be able to devote any time to this right now. I promise that I am putting this task on my “to-do” list for my spare, spare time for the balance of 2013 :=]

Luckily, I already have a nice selection of county plat maps from “well-established” areas in my possession :)[/quote]

It was my sister’s choice to not move into my mother’s house. She didn’t want to. For her, it would have been too big of a hassle and not worth it. It is a perfect opportunity for what you think happens all the time. She’s not wealthy by any means, but she has her home that she can afford and for a few thousand dollars a year in tax savings, she didn’t want to move.

The area I was talking about was not Del Cerro, but Allied Gardens. I know at least a couple dozen people I grew up with that still live there. Only two in their parents homes. And I’m pretty sure none of the others were in a position to pay cash for their homes. And come to think of it, I know someone who lives 2 blocks from where he grew up and his mother died recently and he would have had the same option to move into his mother’s house with much lower taxes, and he chose not to, and sold her house instead.

[bearishgurl]

[quote=SK in CV][quote=bearishgurl]
SK, if you are referring to “her” as your mom, why didn’t your sister “buy” your mom’s house from you and your other sibling(s)? Had she done so, she would have had a much lower tax bill and a bigger house in the same area she lives in now.

In light of the tangible benefits of taking over your mom’s home, I don’t understand why your sister thought it would be a “hassle” to do so.

Perhaps the area where you grew up (Del Cerro?) is now too expensive for most people to purchase with all cash or mostly cash. I was referring to neighborhoods in the $200K to $350K range in recent years as having a lot of all-cash or nearly all-cash purchasers (and they are not ALL “investors”).

Those with well-established parents who have real property holding(s) in CA are the ones who have and will end up being the “haves” going into the future while newcomers who come in and buy in newer areas will end up being the “have nots” due to the combination of taking out high-LTV mortgages plus having high carrying costs in the form of MR … and often HOA dues as well. This is just my opinion based upon what I’ve seen the combo of these monthly charges do to family finances in the long haul.

I would have to pull actual plat maps and then examine the corresponding titles to show the prevalence of recent all-cash or near all-cash sales in different areas. This would be a time-consuming but yet “interesting” endeavor.

Just like the “real” cause of the Vallejo (CA) BK which I had posted late last year that I planned to examine in detail and report my findings here, I just haven’t had an extended block of time to devote to the project.

I’m getting ready to leave on another road trip so won’t be able to devote any time to this right now. I promise that I am putting this task on my “to-do” list for my spare, spare time for the balance of 2013 :=]

Luckily, I already have a nice selection of county plat maps from “well-established” areas in my possession :)[/quote]

It was my sister’s choice to not move into my mother’s house. She didn’t want to. For her, it would have been too big of a hassle and not worth it. It is a perfect opportunity for what you think happens all the time. She’s not wealthy by any means, but she has her home that she can afford and for a few thousand dollars a year in tax savings, she didn’t want to move….[/quote]

I understand. Correct me if I’m wrong, but your sister ALREADY OWNED her home in the same area as your mom’s home at the time of your mom’s death. Therefore, she possibly couldn’t “re-qualify” for a mortage at the time of your mom’s death to buy the rest of her siblings out (yourself incl) so opted to stay put.

This is perfectly understandable but I’m just wondering why the rest of you siblings weren’t interested in taking over mom’s home. The tax savings alone would have been a “gold mine” on into your retirement years.

[SK in CV]

[quote=bearishgurl]
I understand. Correct me if I’m wrong, but your sister ALREADY OWNED her home in the same area as your mom’s home at the time of your mom’s death. Therefore, she possibly couldn’t “re-qualify” for a mortage at the time of your mom’s death to buy the rest of her siblings out (yourself incl) so opted to stay put.

This is perfectly understandable but I’m just wondering why the rest of you siblings weren’t interested in taking over mom’s home. The tax savings alone would have been a “gold mine” on into your retirement years.[/quote]

You are wrong. She made an entirely non-financial decision. She likes the house she lives in.

My siblings and I all had homes where we were quite content, so, like most people in our position, we decided just to sell the house rather than to save a few bucks in property taxes and live in a house that none of us wanted to live in.

[bearishgurl]

[quote=SK in CV] . . . My siblings and I all had homes where we were quite content, so, like most people in our position, we decided just to sell the house rather than to save a few bucks in property taxes and live in a house that none of us wanted to live in.[/quote]

Okay, SK, fair enough. But, just so we’re on the same page, the tax savings is more than a “few bucks.” It adds up to many, many thousands of dollars over the course of the lifespan of a typical retiree.

If you all don’t mind, I don’t mind … but I (if given this oppt’y), would have done everything in my power to make “mom’s house” mine, whether or not I chose to actually reside there 🙂

Location and/or condition be damned.

[SK in CV]

[quote=bearishgurl]
Okay, SK, fair enough. But, just so we’re on the same page, the tax savings is more than a “few bucks.” It adds up to many, many thousands of dollars over the course of the lifespan of a typical retiree.

If you all don’t mind, I don’t mind … but I (if given this oppt’y), would have done everything in my power to make “mom’s house” mine, whether or not I chose to actually reside there 🙂

Location and/or condition be damned.[/quote]

It would have saved her about $3,500 a year. There are a lot of homes in Allied Gardens where the savings wouldn’t have been that much. Even with the low taxes, it wouldn’t have made a good rental, rents just aren’t high enough.

[Author]

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