Impossible for Home Prices to Go Up 10% Annually

[powayseller]

I just wanted to debunk the myth that housing could keep going up 10%, 15% annually.

If they did, eventually today’s median $600K house would be worth $900K. With median wages around $60K, the median worker paying 10x income for a house today would be expected to pay 15x income. How would this be possible? How much negative amortization would be required to pull this off? Are the permabulls thinking that wages will grow 10% annually? I’ve never heard this mentioned alongside the housing appreciation statements, so I assume Not.

Perhaps the bank could give you a loan where you pay less and less of the interest. Instead of paying 80% of the interest each month, assume you would pay 40%, 20%, even 0%. All the interest owed is deferred. It would be deferred until you sell it. And then the new buyer would pay it all. But since the buyer doesn’t have the money, it’s deferred again. So the banks have so much deferred interest, that their profit margins are just exploding. Bank stocks soar! Wow – what a brilliant plan.

But wait! What investor of MBS would be comfortable accepting only 40% of the interest due? How low and how long can you defer interest? Second, since principal repayment kicks in when the loan grows to 110% of balance, the higher payment would kick in within the first year. How will Ms. Median Wage afford the fully amortized rate?

How in the H**< is it even possible for home prices to keep going up at last year's rate? Have any of the housing bulls ever thought this through?

[highpacific]

If all Mr. and Ms. Median Wage were forced out of town and replaced by wealthy tycoons who all want winter homes to enjoy the great San Diego weather. 10% per year could be practically guaranteed. The answer to your question, powayseller, is simple. The great weather will cause house prices to continue to rise.

[john67elco]

Ya it will always go up. Just like the 90’s. History never repeats itself.

[an]

I highly doubt housing bull ever do that calculation. Because if they did, even they would see that it’s impossible. If it continues @ 10%, in 10 years, the average median price will be $1.5M. How does that make any sense. When wage goes up at about 3.5% a year, after 10 years, the average wage will be around $91k. A person w/ $91k will never be able to afford a $1.5M house, even w/ a 0% neg-am loan.

[Jim Brubaker]

I don’t want to start a flame war, but I think that highpacific is playing in a different league.

I tend to agree with Powayseller’s view. But there is an issue here that needs to be considered. Its as if the US economy is on the blade of a knife, fall to the left recession, fall to the right, hyperinflation.

Hyperinflation sounds impossible doesn’t it. Well in the 1930’s Germany took that road and ruined everyone with a savings account. I’ve got a German postage stamp with 1,000 marks struck accross it in black ink. Real estate prices went into the zillions of marks.

Adolf Hitler rose to power only because he offered hope to all of those that had been ruined. Democracy had not worked, throw the bums out.

We are at a cross roads here, I don’t believe that our government would let it happen, but at least from reading this, you will not be blindsided.

[lostkitty]

Did you detect any unusual flavor in that Kool-aid you drank HighPacific? Feeling woozy?

[lostkitty]

So true. Plus, we all know that the $600k “average home” right now is a POS (piece of s*&t). That means a 1.5M “average home will be of similar quality. There are absolutely no “wealthy tycoons” that will put up with living in a dump just to have good weather.

[mixxalot]

I agree.. San Diego does not have the best weather. Actually south beach Miami does because to me, after 3 years of living in San Diego I see:

-six months of cold, damp rain cloudy crappy weather.
– horrible traffic
– high crime rate
-highest gas prices and high real estate overpriced

Only 3-6 months of decent sunny weather between July and November.

Actually San Diego is a boring place full of traffic and materialistic yahoos. I am only here for work. When I have the cash, I plan to move to Brasil or Venezuela coastal town which is cheap to live and has way better weather and friendlier people.

Why is real estate so expensive? Because of the stupid speculators and morons who are driving it up!

[lendingbubblecontinues]

Amen to that, Sir Mixxalot!

[sdrealtor]

I go to South Florida at least once a year and have been there over 50 times in my life. Last year I got out b4 the hurricane hit and crippled the place for months. Summers are unbearable there. The traffic is far worse compounded by 90+year old drivers that should have their licenses taken away. The violent crime is significantly worse there. The Sunshine Tax on wages is far greater than here and the land is very flat and boring. Other than that I love it! Cant wait to go back this June;)

[barnaby33]

No really, tell us how you feel. Ah the flight fantasy, this time its Brazil! Speaking as someone who logged over 1500 miles on crappy Brazillian highways this december; I can honestly say, lots of Brazil has very poor weather. I am also quite certain that the locals in those beach towns you are talking about are quite incensed about all those stupid foreigners who keep coming in and buying up all the good ocean view property. Its a matter of your starting point.

The only argument that seem to hold up over time about why housing is expensive in SD have to do with the climate. If you think Florida has better weather, more power to ya, but I don’t think most people would agree. Florida has even less months of pleasant weather, its usually far to humid and hot. Again thats just an opinion.

Josh

[Anonymous]

Is there a meterologist in here that could verify that the weather was terrible during the early 90’s? Since the great weather guarantees a 10% annual rise, it must have been uncharcteristically lousy during that period. I hope you are kidding with that post?

Please itleast convert your 125% loan to value interest only loan to something fixed to protect yourself,just for your own good.

[powayseller]

Funny 🙂

[powayseller]

Living near the beach guarantees lost of overcast days. That’s why I prefer living inland. I don’t like cold weather. Maybe I need more body fat.

Also a Q: isn’t FL full of mosquitos? I love not dealing with the flies and mosquitoes (spelling?).

If you live in the suburbs, you’re insulated from crime. I don’t even know the last time we had anything but a minor theft or traffic violation in Poway. I love living here – lots of sun, low crime, open space, and hardly any traffic due to building restrictions put in place decades ago. Come on to Poway, y’all.

[highpacific]

Alright. You caught my sarcasm. Damn, there are a lot of clever people on this message board.

What has me up at night is wondering:
Will the Fed be able to contain inflation? How much of the stabalization of housing prices will occur due to price drops and how much balance will be brought about by wage inflation? What about the net population loss in San Diego?

OOhh, the drama of it all…..

But, to be serious. I rent and would like to own. Just so I don’t have to worry about being kicked out and moving. But the risk of buying has me spooked.
I have lately been reading a lot of the market bull websites(realtor backers) out there to try and balance out what I read on this board. Still not swayed. For now I am betting with the odds and keeping my money in my pocket. I leave the odds to the professional real estate handicappers, (PMI insurance company), who have SD listed as the market with the highest risk of price correction in the country.

As soon as I can place a bet with the odds in my favor, I’ll be a buyer.

Ready and waiting.
-high

[Author]

Posts