Overpriced Housing Markets

[carlislematthew]

Usual stuff in this article regarding how overpriced housing is in a lot of places, including San Diego, of course.

http://money.cnn.com/2006/07/25/real_estate/housing_market_values/index.htm

My question to others is: If housing is 70% overpriced according to the article, then this approximates to a 40% drop in prices to get back to “fair value”. I don’t know what their definition of “fair value” is for a given market, but just try and ignore that for now…

It seems to me that people in SoCal have always said their real-estate was too expensive, even back in 2000. Sure, you look back on it and it looks cheap in comparison, but *at the time* a lot of people were saying it was over-priced.

So, if we assume that SoCal will always be over-priced (sunshine tax, whatever), how *much* overpriced does it deserve to be? 20% over-priced perhaps?

If you could come up with a figure for how over-priced you think it will be when the dust settles, then that would give you an amount that you could expect it to *actually* go down before it levels off to its final “mildy over-priced” value.

I know all this is very subjective, but I don’t care. This has all been analyzed to death anyway.

My analysis:

Real-estate will end up 20% “over-priced”.
It is currently 70% “over-priced”.
This 50% delta results in a 30% reduction in price.

Let’s say that this whole thing takes a few years, and that wages actually go up a bit (yeah, right!). Therefore, we’re looking at a wage-adjusted reduction in prices of somewhere between 20 and 30%.

I shall continue to repeat this as if it is fact and argue until I’m blue in the face with anyone that disagrees!!! This is the way of Piggington.

Thanks for listening.

[powayseller]

Two other metrics you can use: historical HAI (housing affordability index) and per capita income/median housing price.

The latter dropped to 7 after the last two housing busts. The Chamber of Commerce predicts 2006 per capita income is $40,661. With 2% annual increase, in 3 years we would have per capita income of $43,149, and median house prices should be $302K. BTW, that Chamber report is awesome! They talk about the lack of good jobs, reliance on real estate, and risks of exotic loans. Check out the link.

How is HAI computed? CAR acknowledges its weaknesses, but says it measures the health of housing. From their website:
“The current underlying assumptions for calculating the HAI are a 20 percent downpayment, current market rates for taxes and insurance, and a 30 percent qualifying ratio.”

Historical HAI, off the C.A.R. website, 1994 – 2006
40%, 38, 38, 38, 38, 33, 24, 26, 22, 19, 12, 10

Before the last RE boom started, HAI was 33. To get back to 33, we need homes to fall to a price that 33% of the population can afford with 20% down, at current interest rates, paying no more than 30% of income. I will leave the calculation up to you math whizzes.

What should be the median price, based on a reversion to the mean in 2009, if HAI = 33, and median income = $43K?

[rocketman]

I just read the San Diego Chamber forecast and I didn’t know if I should’ve been crying or laughing. I found so many inconsistent opinions about the health of the present and future economy that I was confused throughout most of the statement. On one hand it says that the population will increase by 10 – 12% then on the other hand it observes that only 1% will be middle income earners.

I like the apocalyptic “Perfect Storm” theory. I’ve never seen it described so nonchalantly. It appears they tried to stay upbeat throughout the paper with a lot of smoke and mirrors, however, the Chamber looks as confused as all of us and appears to be in a nervous “wait and see” mode for the next year.

[mrquoi]

My totally unscientific measure is that houses will still return to a level affordable by two average wage earners in any given area. Say, an elementary school teacher married to a policeman doing about the same — so somewhere in the neighborhood of $300K, which is still more expensive that most areas of the country.

Another unscientific measure is that the mortgage for a given area will be slightly more than rent. So, a house that now rents for $1600 in Mira Mesa would cost about $300K. Granted the houses I’ve seen rented for $1600 in Mira Mesa are not places you would want to raise kids.

[lamoneyguy]

Surprisingly enough, according to salary.com, a HS teacher in SD makes 52k, and a cop 49k. According to Financial Planning standards, your housing costs should not exceed 28% of your gross income. In thier case it would be around $2300.

If they put a downpayment of 20% (might be a big “if”), they could afford around $400k. The mortgage at 6.75% would be $2075. Add in other housing related costs and that’s probably too much. But we can assume that around $360-$375k should work.

~lamoneyguy

[Bugs]

How many $100K annual wage earners in SD can save $80,000?

Anyways, $360,000 (at 6.75%) is a lot different than $600,000. Back when houses really were selling at $360,000 the interest rates were higher.

[bob007]

i used to think median income would determine median housing proces. i see a lot of folks renting out rooms to meet mortgage payments.

[PerryChase]

Renting out rooms to meet mortgage payments is a common thing, especially in immigrant households. If you drive around in the evening and see cars parked everywhere, then you can assume that people are renting out rooms, even garages. That phenomenon is best illustrated in Clairemont and Mira Mesa.

The best neighborhoods are places where cars are parked inside.

I know an immigrant family (really nice people) who lives about 15 inside a 4 bedroom house. No wonder they can afford the mortgage and a Mercedes.

Young professional do it too in order to “invest” in the housing market. One of my friends bought a 2bd condo with I/O loan. He has a roomate that pays about $700/month. But he’ll be in trouble once his loan resets. But he can’t/won’t sell now because the market is down.

Selling is no simple task now; buyer don’t want to buy a messy occupied unit. You have to move out and incur more housing costs while your home sits on the market.

[carlislematthew]

If you drive around in the evening and see cars parked everywhere, then you can assume that people are renting out rooms, even garages. That phenomenon is best illustrated in Clairemont and Mira Mesa.

Absolutely right. I’m renting a place in Mira Mesa right now and the neighbors one one side are some reclusive old lady with the largest satellite dish you’ll ever see. On the other side is a huge 2500 sq foot ugly box with about 10 people in it. Luckily, they avoid the outside world and so it’s wonderfully peaceful as I sit out here on my quiet patio. They’re very nice people, but I’ve lived here for 6 months and I’m not sure if I’ve seen them all yet!

In addition to looking at how many cars are parked on the road, I also like to look at how many stupidly large RVs or boats are just sitting parked on the road. Mira Mesa seems to have a large amount of that too. I assume that CCNRs (?) prevent things like that in nicer neighborhoods…

[powayseller]

Our HOA prohibits trailers, RVs or boats parked on the street. This area of townhomes has 1 car garages, so there are a lot of cars parked on the street, but each home has only one family in my neighborhood. When we rented in a nicer area, while we were building our house in 2003-2005, the neighbors complained when my brother parked his car outside for a week. No cars were allowed on the street, garage doors had to be closed. But those homes had large driveways, so excess cars parked in the driveway, not the street. Boats, RVs, and trailers were kept offsite somewhere.

The car parking and RV eyesore is what kept me from buying in Rancho Penasquitos.

All in all, it comes down to how big the driveways and garages are. Most people use their garage for storage plus 1 car. The 2nd and 3rd cars go in the driveway if you are on a large property, or on the street if you are in a lower income property. If you cannot afford RV or boat storage, you leave that stuff on your street.

[dontfollowtheherd]

not many after Uncle Sam takes his 30% off the top… that 240k difference to most people would mean paying off the loan within a reasonable time frame…the interest for 30 years at 6.5% on that extra 240k would cost an extra 300k…

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