November 1, 2006 at 10:23 AM #7814powaysellerParticipant
As much as I love Jim Klinge and his no-nonsense approach, his asute use of data, his honest look at what is going on today, even he is wearing rose colored glasses. Every once in a while he slips in a post which shows he is in dire need of a reality check.
First there was the post about the superior properties. He thinks they will lose only 10% off peak prices.
Today, he makes a case that reversion to the mean won’t happen. In the last few years, buyers overpaid based on emotion, and they’ll continue to pay for a house they love, regardless of the price. What he forgot is that buyers overpaid because they thought home prices will keep rising. Now this psychology is in reverse, and buyer fear is keeping them from buying. Next, he thinks the analytical buyes will get tired of “holding out”. It’s not as if we’re giving up sex or food, Jim. We’re choosing a low-priced rental over an overpriced house. I will NEVER tire of such a sweet deal!
He shows that with 4% appreciation from 1997, today’s Carlsbad house should be $408K instead of $709K. With 10% appreciation, today’s median would be $621K. So far, so good, except for one thing: where did he come up with 10% appreciation as normal? In the 40 years of history of San Diego real estate prices, we’ve never had anything over 4%. Thus his erroneous conclusion: if prices keep falling another few months, we won’t be that far from the price that it should be anyway, based on 10% appreciation since 1997. Since when do home prices appreciate 10% annually? I have San Diego data going back 4 decades, and the prices didn’t appreciate by half that much in 40 years! I can live with the 4% appreciation, but any argument based on 10% appreciation should just be dismissed.
His conclusion: “I hope buyers focus on buying the right house, as much as the right price. Trying to time the bottom will be VERY difficult, and the prices won’t matter, if you can’t find the right house. I don’t think you’re going to settle and buy just any old house, just because you found a cheap one. Are you?”
I vehemently disagree with him on this one. Reversion to the mean will happen, and in 5 years, the median Carlsbad house will be, most likely, $350K – $420K. And best of all,there’ll be plenty of prime properties at those prices. If you get a fixer upper, I think you can expect to pay much much less.
I didn’t add this to the comments over there, since I don’t want to once again be accused of “yelling fire” on his blog.
But heck, you can’t blame him for trying. He’s a realtor, and he doesn’t get paid unless he sells houses. Bottom line – when someone tells you “come and buy my product, it is not overpriced, and there is no such thing as reversion to the mean”, I smell desperation. He’s in an interesting position, wanting to be honest about this bubble, yet trying to keep buyers coming to the table.November 1, 2006 at 10:43 AM #38916BuyerWillEPBParticipant
It’s not like I want to time the bottom of the market, I am FORCED to wait for the bottom in order to afford to buy in. And by “afford” I mean a non-toxic, traditional, PITI type financing. I think there must be millions of others in my same shoes.
So I agree with you that the prices will have to revert back to the mean. Sooner rather than later (I hope).November 1, 2006 at 10:54 AM #38918blahblahblahParticipant
BuyerWillEPB said it all. Rational buyers are going to wait until they can TRULY afford to buy a home, that means 20% down, fixed interest — maybe an 80/10/10 for first-timers. The irrational buyers that have rushed into the market in the past few years will be knocked back out once they regulate against these toxic loans.November 1, 2006 at 10:59 AM #38919MHParticipant
Just a comment – more on concept that specifics…
I wonder if we’re not too hung up on “median” as a measure. I’m as bearish as the rest, but do think there is some increase in the median attributable to the newer / larger houses, no? One of the few reasonable things I heard the REIC say over the last few years is that the public is willing to pay more (both absolutely and as a percentage of income) for a house than we did a decade or two ago as the modern home is much more of a centerpiece to our lives than it used to be – w/ entertainment centers, computers, PlayStations, etc. Certainly not to the exagerated levels we’ve seen, but probably worth some thought.
In short, while I certainly am convinced prices are headed far south, I think something more than 4% might be reasonable merely due to comparing apples and oranges…November 1, 2006 at 12:56 PM #38929sdrebearParticipant
I’ve always felt personally that this market won’t come back down completely to earth until the financial market takes their hit and stops things from the lending side. I don’t even think it’s the rising interest rates that will kill it off. It’s when the sucide teaser mortgages get squashed due to lenders not being able to sell them anymore as mortgage backed securities (for lack of buyers). Once those are gone, all affordability is gone.
I remember when they used to report on the “affordability index” all the time. It showed what percentage of the population could “afford” a median priced home in an area. It was based on standard (looooooong history) lending standards of 20% down and fixed interest. It got so ridiculously small that they quit reporting on it all together. That’s because NOBODY was using those loans to get a house anymore. When we HAVE to go back to those loans, then literally, nobody will be able to afford current prices (even if they were willing to pay them).
So, the way I see it, we have just now started to see the national news coverage of the declining market. Starting next year (taking lag into account), we’ll start to see the news coverage of all the carnage with foreclosures. By late 2007 to 2008, I’d think the financial markets will really start to feel the sting of the failed mortgages. This should put any final nail on the wide-spread usage of “no-down”/”interest only”/”option-arm” type loans. I’m quite certain that the lenders themselves will NOT hold these types of loans on their own books.
These are of course personal opinions (not to be taken as statements, or predictions of fact).November 1, 2006 at 1:09 PM #38932no_such_realityParticipant
REIC say over the last few years is that the public is willing to pay more
Two main reasons why that doesn’t matter:
1. The public is willing to spend 105% of their income until they max their credit cards.
2. Spending more than 30-40% of your income on all housing costs typically is economically fatal.
Their heart may be willing, but their wallet isn’t up to the task.November 1, 2006 at 1:27 PM #38934sdcellarParticipant
PS– I think you’re actually allowed to make posts on Jim’s site, just be respectful of him (similar to how you ask [and expect] people to be respectful of you). Jim seems like a real good guy to me.
Sure, he’s got something of a vested interest in selling homes even today, but you have a vested interested in prices going down. Not really all that different and I think Jim’s pretty sharp about it most of the time.
I do think Jim’s off the mark today, but if you can overlook the seemingly overly optimistic 10% appreciation figure (which is just one of the examples he provides), the other phenomena he describes have some truth to them–the biggest being that people will continue to buy properties even as prices continue downward. I see a good many people who seem to be impatient and if they saw the right house at the right price, for them, they would buy it today. Jim, being a realtor, wants to serve those folks and help them get the best deal they can.
Make sense to me and I caught narry a scent of desperation in his article today (but I will admit the 10% figure threw me a bit).November 1, 2006 at 3:46 PM #38949AnonymousGuest
PS – If you read the comments at Jim’s blog, he now has realized that 10% figure was off base. He is now thinking about a 5% number – which in today’s world, might be OK. The good thing about Jim is that he will listen to, and learn from, rational argument – unlike so many real estate agents who are expert only at irrational discourse.November 1, 2006 at 7:13 PM #38975Mark HolmesParticipant
Exactly, buyerwill, I don’t want to “time the market,” I want to buy a house. But at 75K household income, we cannot afford a fixer-upper in Normal Heights – not at 450K plus. When our mortgage and insurance on a 2 bedroom cottage in this neighborhood matches or slightly exceeds our $1600 monthly rent, then we will be able to afford to buy.November 1, 2006 at 7:21 PM #38977Mexico ResidentParticipant
I like Jim very much. He adds a lot of insight to this site.November 2, 2006 at 5:01 AM #38993woodrowParticipant
I too think Jim was a bit off with his “10% appreciation” comment, but to chalk it up as “Realtor Desperation” is a bit unfair. Just because Jim has a different opinion doesn’t mean he’s “desparate”; rational minds can disagree. And as someone has pointed out, Jim revised his opinion in the comments section after reading reader comments and rethinking his position. What more can you ask for?
I love the ideas, data, and discussion Jim provides via his forum. It’s fine to disagree with Jim’s opinions, but I think powayseller is going too far when she suggests ulterior motives.November 2, 2006 at 7:08 AM #39000jimklingeParticipant
Love me? Sounds like you’re trying to bury me.
It sure sounds sexy to call a realtor desperate though, heck – let’s make that the title!
As always, I’m trying to give people something to think about, that’s it.
Who cares what the mean value is, or should have been, or might be someday. We’re just talking about it to gain some insight, and who knows, maybe learn something.
That’s the difference between me and you. I’d rather put it all on the table and examine it, while your agenda is to get everyone to agree with you – and those who don’t, you vilify.
You have given me a great idea though – I’m going to purposely write controversial things just to bug you, so you can blast me over here – and drive more traffic to my blog! Thanks!
Jim the RealtorNovember 2, 2006 at 10:08 AM #39026(former)FormerSanDieganParticipant
I don’t understand why something greater than 4% appreciation from the base year of 1997 unrealistic ?
I suggest you go to the Piggington home page and read the two primer articles and look at the charts. If you do so you will see that in 1997 home prices were about 30% below their mean value in terms of price to income ratio. If you believe in mean reversion it works both ways. If you do the math and assume incomes go up at about 3%, you’ll see that to go from 1997 to the same ratio as the previous peak results in about 7-8% appreciation. Not 4%.
Maybe Jim added his 3% commission to a realistic 7% appreciation number to come up with 10%.
I also went back and computed the effective compounded increase in home prices in SD county from 1982 to each year from 1983 through 2003. The lowest number I got was an effective 3.8% return from 1982 to 1996, which was at a low in housing. The typical numbers ranges in the 5-6% range.
I suggest that 4% is too pessimistic (housing bear) and 10% is too optimistic (realtor). I’d say 7-8% from a market bottom (e.g. 1997)is realistic.November 2, 2006 at 1:43 PM #39053powaysellerParticipant
I say he’s desperate because he’s trying to convince people that now is a great time to buy. We haven’t even started the massive foreclosures and bank failures yet… why would anyone be buying now? This is a horrible time to buy. His advice on superior properties is self serving. He’s trying to get people to buy now, because that his how he earns a living. He doesn’t get paid writing a blog; he gets paid when he buys and sells houses. I do respect him immensely for his candor, and his intelligence, but his attempt to say this is a great time to buy is simply false. This is one of the worst times in the history of the U.S. to be buying real estate. Buying a home in San Diego today is like buying AOL in 2000 (or whenever it was that Time Warner grossly overpaid). Sure, they wanted AOL and they got it, but wouldn’t it have been financially wiser to wait few years?
Jim, my post was respectful disagreement. I hope you make lots of sales, I wish you success, and I hope I can still link to your blog from my site. I like your data and candor, but disagree strongly that now is a good time to buy a house.
Your statement that prices won’t matter if you find the right house, or that it’s hard to time the market, is ludicrous. I may not be able to time the market, but I’m fairly confident that after every bank has a large REO department and AFTER $1 trillion of mortgages has reset, prices will be a lot better than they are today. But of course a realtor has to promote selling houses. Would you expect a broker to tell you in 2000, not to buy stocks?November 2, 2006 at 2:03 PM #39058no_such_realityParticipant
why would anyone be buying now?
Because this is the best time to buy.
1. You have selection, probably the best selection in literally a decade.
2. You have leverage on the buyers. In PS’ neighborhood, there’s three relatively similar homes for sale, that’s negotiation power.
3. You have homes available in prime shape. As the housing market sours, maintenance will be deferred, upgrades will cease and homeowner’s financial frustrations will be taken out on the home.
4. You have historically low interest rates.
5. You have a plethora of financing options to use smartly.
6. Most importantly, you have Sellers that are financially capable of selling.
Now is the best time to buy since 1999. Next year may be better, may be worse, may be a lot worse. Bank Repos don’t make a good housing market to buy in.
An unaffordable ARM reset payment ISN’T an opportunity if the owner doesn’t have substantial equity (and most of them don’t). It will be the two or three year death of the house.
Yes, two to three years. I get that long by guessing 6-12 months of the mortagee fighting to make payments, 3+ months of falling behind, 4 months of foreclosure and stripping the house to delay it, and then sitting as a Bank Repo on the bank books for 12+ months. Empty, abandoned, no power, no heat, no running water, squatters.
Then someone buys the abandoned, delapidated house and refurbishes it before putting back on the market looking to make their 20-30% profit above the cut rate price they paid the bank and the thousands of dollars they stuck into it.
Home ownership is a three legged stool, it’s time, it’s money and it’s effort. You’re only looking at the raw dollars and both time and labor (effort) are very expensive too.
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