How High Can Prices Go?

[spdrun]

Nah, the proper way to fix it is to tighten so that flippers get a kick in the junque while holding the bag.

[SK in CV]

[quote=mixxalot]Yes, San Diego is in a MAJOR bubble due to low inventory. Banks are intentionally holding back large amounts of off the book foreclosure real estate to drive up speculation and prices. Look at how much people make. A couple makes low income for the high prices.[/quote]

If I had a nickel….

No. They’re not. They weren’t doing it in 2009, when everyone “knew” they were doing it. They weren’t doing it in 2010. They weren’t doing it 2011. or 2012 or 2013. There is no shadow inventory. There never was any shadow inventory. And in particular, shadow inventory that lenders were “intentionally” doing anything with.

Banks (and I use that term generically, because very seldom are the mortgage holders traditional banks) are incredibly shitty at managing distressed assets. (And not just real estate, it’s all kids of distressed assets.) Horrible. You can’t believe how bad they are. They have no clue what they’re doing. They make a lot of mistakes. So if you see a particular property that looks like something shady is going on, it’s probably not. Lenders really are that bad.

[Coronita]

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[FlyerInHi]

I agree that banks are really bad managing distressed assets. There is no vast conspiracy but there a lot of shady stuff going on at the local level. Not a conspiracy but a confluence of perverse incentives.

In Vegas, my friend sold his house in 3 days at $5000 over asking, in the mid $200s. 20% profit over 2 years. Doesn’t like Vegas and doesn’t want to a landlord. Vegas is still well below peak because they are plenty of new houses.

Housing bubbles do form on the coasts first, though I think we still have a ways to go in San Diego

[XBoxBoy]

[quote=profhoff]I’m just trying to make sense of the market. Prices don’t seem tied to fundamentals.[/quote]

This is the thing that amazes me too. In the lower end, (less than a million) I get it. There is a shortage of inventory and so prices are going up. Totally understandable. But as you pass a million and start working your way up the price ladder, there is not really a shortage of inventory.

The best explanation I can come up with is that there are a lot more people willing and able to buy multi-million dollar homes than there used to be. I suppose we could blame wealthy Chinese, or others from out of town, but I don’t find that a very compelling argument.

A couple weeks ago I went and looked at a 3.4mil “fixer” in LJ. Admittedly a great location but a house in need of a teardown remodel on a 7000 sq ft lot. The place is pending, so I guess 3.4m for a teardown is the going price? It’s crazy, but at the same time I don’t see a price drop in our future. So that’s got me baffled.

XboxBoy

[joec]

[quote=profhoff]Nice post. I’m just trying to make sense of the market. Prices don’t seem tied to fundamentals. Not to middle income wage increases, not to high income investment returns. I don’t get it.

I currently own a home in NCCSD SW C’bad, but would like to live closer to friends and colleagues which means SB, DM area. Good luck with that.

I think we’re priced out. :([/quote]

One thing that I think people need to also accept in general is that to live in CA and if you think of a “coastal” place, those places and most places in metro CA (SF, SV, LA, SD) will never be affordable for “middle” income people.

Middle income americans weren’t meant to buy homes here at the 700-1mil min to play price when you can go to Vegas or Texas and buy a nice decent place for 200k.

I actually think we will be more like Europe and most people will just end up renting moving forward in a lot of areas in CA.

With a global economy and wealth all over the world, people who have the wealth (stocks/houses) aren’t in any rush to sell and supply is still pretty limited overall here.

[livinincali]

[quote=joec]
One thing that I think people need to also accept in general is that to live in CA and if you think of a “coastal” place, those places and most places in metro CA (SF, SV, LA, SD) will never be affordable for “middle” income people.

Middle income americans weren’t meant to buy homes here at the 700-1mil min to play price when you can go to Vegas or Texas and buy a nice decent place for 200k.

I actually think we will be more like Europe and most people will just end up renting moving forward in a lot of areas in CA.

With a global economy and wealth all over the world, people who have the wealth (stocks/houses) aren’t in any rush to sell and supply is still pretty limited overall here.[/quote]

Affordability matters at some point. Maybe we end up being a renters society but even then local incomes will control how high rent can go. There’s always going to be pressure on housing prices from the interest rates and the buy or rent calculation. It’s never going to get too extreme one way or the other because it will get arbitraged eventually.

There’s 10’s of thousands of people in San Diego that live in a house they couldn’t afford to buy at today’s prices. When they die those homes will rent or be purchased by something affordable for the middle income of that area. The house in Mira Mesa that is occupied by an aging boomer who bought it 30 to 40 years ago on a military salary will eventually be occupied by somebody else.

[sdsurfer]

[quote=XBoxBoy]in expensive areas, we’ve had steady price increases of around 10% a year for 5-6 years, while neither the economy nor inflation has kept pace anywhere close to that.

[/quote]

I’m definitely always trying to figure it out, but it seems like this statement might have something to do with it. Is there anything else you could invest in over the course of the past 5-6 years and make 10%+ (without even factoring in the leverage gained through cheap financing)?

As far as the fundamentals aspect I think there is one strong fundamental at play here which is simple supply and demand along the coast. The whole reason we are even having this discussing is because someone that does not live in Del Mar would like to.

I actually wonder how high the rents will go? People not only want to live by the coast so bad that they will pay more, but many of them will actually live in a rental vs. owning just to be in the place they want to live and that is what justifies the investor buying the duplex at a higher price because they know they can rent it to the person that cannot buy in the area which perpetuates the whole cycle.

[bearishgurl]

[quote=livinincali]. . . There’s 10’s of thousands of people in San Diego that live in a house they couldn’t afford to buy at today’s prices. When they die those homes will rent or be purchased by something affordable for the middle income of that area. The house in Mira Mesa that is occupied by an aging boomer who bought it 30 to 40 years ago on a military salary will eventually be occupied by somebody else.[/quote]With props 58 and 193 still on the books in CA, that “somebody else” will more than likely be occupied by the “aging boomer’s” child or grandchild. Why not, when the “aging boomer’s” ultra-low tax assessment can be passed down into perpetuity? They (and their heirs) would be fools to sell. Hence the low, low SFR inventory we in almost every single well-established community in the entire state!

Millenials (with no “aging parent/grandparent-homeowner living in the state) don’t care about this anyway. The vast majority of them want “newer” construction for their first home (high MR/HOA dues be damned). They don’t want an “old person’s” ’70’s “open concept” MM home with sparkly acoustical ceilings and few walls (pun intended). They just want “new” or “newer” because they can have it in SD County! This is so because SD City/County officials sold their longtime “constituents” down the river in approving a breathtaking amount of subdivision permits over the past 29 years (this has been most pronounced since 2003). These horribly unwise actions by our elected officials have severely adversely affected the quality of life for ALL residents of SD County.

Millenial prospective homebuyers have no choice in LA County as well as in at least five bay area counties. They must buy what is on offer (older home or even very old home), pay exorbitant rent closer to work or buy a home so far away from work that the commute severely impacts their daily lives for the worse. This is due to few to zero CFD’s being formed since the inception of the Mello Roos CFD Act (1982) due to their city/county officials electing to take their responsibilities as wise stewards of their constituents’ environments very seriously. As it should be.

Millenial homebuyers are “spoiled” in SD County with a HUGE selection of suburban and exurban newer construction tracts to choose available listings from. There are far more listings in these tracts than there will ever be in the established communities in SD best locations (Del Mar incl). The sole reason for this is the presence of Props 13, 58 and 193 on CA’s books, plain and simple.

Within the past ~2 months, two more of my “neighbors” (60-something “boomers”) just inherited another neighborhood home (one each) and promptly moved their (renting) kids (and their families) into the homes. Nothing will change in this regard until such time as CA voters have the will to ask our Legislature to repeal Props 58 and 193 and that likely won’t happen until h@ll freezes over :=0

CA coastal counties were never meant to have available inventory for first-time homebuyers …. at least not in the most desirable locations closer to the coast. This will never change, even IF Props 13, 58 and/or 193 are ever successfully repealed.

[FlyerInHi]

BG, if San Diego has/had too many new developments, and if there’s a huge selection, shouldn’t prices be depressed?

[mixxalot]

Exactly! I may just save up another 500k and expat to Chile or Uruguay and since I am fluent in Spanish and have spent plenty of time there, would love it and much cheaper than San Diego.

[bearishgurl]

[quote=FlyerInHi]BG, if San Diego has/had too many new developments, and if there’s a huge selection, shouldn’t prices be depressed?[/quote]No, even though the selection is much better at any given time in newer tracts, we have ~75% of homebuyers trying to bid each other out on heavily encumbered (MR/HOA) “mcmansions” situated 6-8 feet apart. They don’t even want the aging Poway rancher situated on 1/2 AC+ in the same (debt-riddled) school district (hopefully not run by incompetent, greedy clowns anymore but the damage is already done). The vast majority of these (Gen X-Y) homebuyers would rather have the crackerbox with stairs where they can carry heavy vacuums and their laundry up and downstairs and hear their neighbors’ toilet flush when they open a window :=0

The other 25% are buying in established areas and usually paying 70-100% cash for their home purchases. This is why the long-established areas in CA were not anywhere near as hard hit (with distressed property) as the newer tracts were from 2008 to 2012. Old-timers have good memories and the “rich” have good counsel and so therefore these groups traditionally make offers of well-priced properties situated in an excellent location, especially if the property has a view and/or “good bones” but can be had for an under-market price which makes sense to them … as they will often set aside cash to rehab it prior to moving in. And, of course, the longtime residents in these areas have tons of equity. On some blocks, over half of the homes are free and clear!

The 1st, 2nd and 3rd time family buyer with minor children in school usually must get a mortgage of 70% or more and don’t have the cash, time or expertise to do any major work to the property prior to moving in. They are often willing to up-bid each other and pay up to $300K more for the same house in a particular public school attendance area when a comparable house could be had up to $300K less and with a bigger lot in a different school attendance area in the same city.

It’s amazing to me that SD County parents are willing to prostrate themselves with huge mortgages and huge MR and in some cases, two or more monthly HOA dues obligations to live in an inferior location to the well-established communities when the CSU and UC don’t care where your kid went to HS. Yes, let me repeat that, they don’t care! As a matter of fact, all the CSU campuses but SDSU actually honor their agreements with neighboring school districts to allow in local freshman applicants with a ~3.1 GPA and a reasonable ~1100 SAT (excluding writing score). This is so these kids (many from lower and moderate-income homes) won’t have to live in the (now very pricey) campus housing their first year and it is as it should be. And the course, the UC “guarantees” admission (no choice of campus) to each and every applicant who meets the criteria for Eligibility in the Local Context:

http://admission.universityofcalifornia.edu/counselors/q-and-a/local/index.html#1

For a “smart kid,” it’s far easier to be in the top 9% of one’s senior class in a HS rated a 7 or 8 than it is at a HS rated a 9 or 10. And those HS’s rated a 7 and 8 often have just as many AP offerings as the HS’s rated a 9 or 10. Some of them even offer the IB program where a HS rated 9 or 10 does not. And why would one pay all that extra money (more expensive home/high MR) so their kid could attend a “10” elementary/middle school when homes feeding into a school rated an 8 or 9 are much cheaper for the same type/size home, often have larger lots, more convenient locations and no MR? (Yes, they’re usually older.) CA public university admissions boards only considers transcripts from grades 10-11 (and transcripts from 1-3 classes from Grade 9) for admission purposes (and later re-vet the already-admitted freshman applicant thru their final transcript from Grade 12). Transcripts before Grade 9 are never sent for by CA public university admissions boards.

Families are wasting all this money up-bidding each other in the same housing tracts and paying MR thru the nose for decades for naught, IMO. They could be putting those thousands of dollars every year into their retirement accounts and college funds for their kids but many of them are no doubt too “house poor” to do this.

When push comes to shove and your kid is applying to a CA public university, it doesn’t matter in the end where they attended grades K-12 … only that they graduated and fulfilled all the requirements for entrance into that particular system (CSU or UC) and the degree program they are applying to. A kid who attended public schools rated 9-10 from K-12 could easily turned down for admission to their top 3 campuses of choice in favor of another freshman applicant who attended CA public schools rated a 5-7 and who had lesser qualifications than the first applicant … especially if the 2nd applicant met ELC requirements and thus is “guaranteed” admission. This is why I advise that a HS senior apply to at least four campuses of each system (CSU/UC), assuming they’re qualified to apply as a freshman to both systems.

[End of lecture] I’m beginning to sound like Elizabeth Warren here lamenting that having children (and insisting they live in certain school districts/attendance areas) is the biggest single reason for personal BK filings in the US. And I am actually fundamentally opposed to many of her views :=0

[poorgradstudent]

If I was thinking about buying right now I’d be very concerned with how high prices are. I’m still hesitant to throw around “Bubble”, although we’re creeping in that direction. Lending standards are still a lot tighter than they were during the Bubble.

Some fundamentals are off (income ratio) but others like the Rent/Buy ratio are fine. San Diego, especially the “Desirable” areas of San Diego County does have a supply crunch. Especially if you’re not looking to but a $1.2M giant home on a small lot in Del Sur. New construction of “starter” homes is basically non-existant.

Since supply is unlikely to catch up with demand in the short run, it’s more likely that rising rates will be what finally slows prices. It’s entirely plausible that coastal SD County will be a lot like San Francisco in 10 years, where most people who work in the city can’t afford to live anywhere near the city.

[profhoff]

It seems one argument against high prices reflecting a bubble is if buyers are owners as opposed to speculators, investors, etc. So just the other day I was talking to a colleague who lives in Del Mar and he told me that in the past few weeks two buyers came in and paid stupid money priced in cash for nearby houses. One was from Taiwan and one was from Brazil and neither are going to be owner occupiers.

This surprised me because we know this is happening with real estate in NY, SF, Orange County, parts of LA, but I didn’t realize it was happening here in the village of Del Mar.

So, that helps to explain the crazy increases in list price and adds to fears that normal people are being priced out. I can’t compete with foreign cash.

[spdrun]

In NYC, foreign buyers (with no roots in the US) are a tiny % of the market. Most co-ops won’t sell to non-occupiers or rental investors, and 90% of apartments are in co-ops. The publicity about sky-high prices is due to a small % of condos, not the average apartment.

The NYC suburbs (other than very expensive ones) are still full of foreclosures and shorts. Down 20-25% over 2006. Thankfully!

Most people in foreclosure are not victims but rather fools.

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