Rental cost and demand falling

[SK in CV]

I left Carmel Valley in June 2011.

I have no issue with anything you said about the past.

I was just taking issue with the best areas being the least interest rate sensitive. With the exception of the >$1.5 million areas, I don’t think that’s true, if by the best, you mean the most expensive. I’m not sure there is much in the way of “best areas” in central SD, south county or east county. Not none, but not much.

Out of curiosity, how do you know most of the sales are all cash? That really doesn’t sound like owner occupied. It sounds like investors.

[bearishgurl]

I just spent over an hour doing a cursory check on available listings in 12 close-in SF bay area zip codes I occasionally follow. None were in SF proper as they were all SFRs. The build dates were from 1930 to 1969 with an avg age of about 56 years old. The average SF was +/= 1550. The average list price was $575K. None had HOA or MR.

No listing came out before 4/5/13. Three were relists which were taken of the market for +/- 1 month (to ready them for sale to fetch a higher price?). Only three of about 30 listings I reviewed were short sales and they all were in the same zip code.

I saved them all and will check them again in 6-8 days. I expect them all to be gone. Two were in an urban area of a small city where all 12 public schools (Elem, middle and HS) were rated a “10” except one HS, which was rated a “9.”

Unlike SD County, it is interesting to note that buyers with young families likely gravitate to these homes because of their prestigious locations and schools. Yet they were ALL older homes with 6K to 22K lots.

[bearishgurl]

[quote=SK in CV]I left Carmel Valley in June 2011.

I have no issue with anything you said about the past.

I was just taking issue with the best areas being the least interest rate sensitive. With the exception of the >$1.5 million areas, I don’t think that’s true, if by the best, you mean the most expensive. I’m not sure there is much in the way of “best areas” in central SD, south county or east county. Not none, but not much.

Out of curiosity, how do you know most of the sales are all cash? That really doesn’t sound like owner occupied. It sounds like investors.[/quote]

In the lower tier, it has been investors (flippers) and boomers residing in AZ buying second homes. Believe it or not, zonies have bought up second homes in the $250K to $325K range in those dreaded “working class” areas such as west Chula Vista and Lemon Grove :=]

A couple of these zonies I am familiar with are native San Diegans who bought cosmetic fixers on the same street a relative lived on.

You must know that there are a LOT of areas in Central SD (inclusive of Pt Loma) but also in East and South SD County which are not only prestigious but have 1/2 to 2 AC lots.

A lot of these sales are on cash terms. I go to the recorder’s office in Chula Vista about once a month with a listing of closed sales to check out the terms of trust deeds filed. A good portion of the sales don’t have any trust deeds but I don’t know the exact percentage. In another portion of the TD’s I reviewed, the mortgages taken out were <=20% LTV. I haven't tried to figure out the percentage of all-cash purchases yet but will endeavor to do this by zip code. My own area would be considered mid-lower tier and there have been at least a half-dozen all cash closings around here (out of about 80 homes) since November. Two were bought by flippers who have already turned them again (I haven't checked the new terms). It is a new day. It is almost all organic "traditional" sales now in the areas I follow. I don't understand how wishful buyers out there think they're going to "steal a deal." Very few sellers are "distressed" anymore. Even REO lenders appear to be spending up to about $17K, if necessary, to fix up mid-high tier homes in their inventory before marketing them.

[spdrun]

I don’t understand what all these fence-sitters are waiting for. This isn’t Kansas. Do they understand how many 59.5+ year-olds everywhere have access to hundreds of thousands of dollars in cash??

For said 59.5+ year olds to either kick off naturally or be painlessly gassed to death under Obamacare? 🙂 🙂 🙂

[bearishgurl]

[quote=spdrun]

I don’t understand what all these fence-sitters are waiting for. This isn’t Kansas. Do they understand how many 59.5+ year-olds everywhere have access to hundreds of thousands of dollars in cash??

For said 59.5+ year olds to either kick off naturally or be painlessly gassed to death under Obamacare? 🙂 🙂 :)[/quote]

Uhhh, spdrun, if that happened, their heirs (young Gen X but mostly Gen Y) would (prematurely) be able to give their heavily-leveraged “peers” a run for their money out there in the housing market.

Either you compete in the market with cash-laden boomers … who generally don’t want the mcmansion in lizardland that you do … OR compete with their now cash-laden heirs … who will likely be your competition :=0

Pick your poison.

[bearishgurl]

I just spoke to a former co-worker a few days ago with whom I hadn’t spoken to in a few years. She and her spouse are just a bit older than the oldest boomers and have resided in the same house in ChulaV since 1961. Both she and her spouse are retired local gubment workers, like myself.

We were discussing retirement options within our plan (she and I are in the same plan) and this is what she told me:

“I don’t know why we fed the (IRC sec. 457) plan for years. When we were still working, we just went to the seminars and blindly followed their instructions. It was ridiculous to do that. We haven’t really made much money on it for the last 15 years and now have to pay taxes even on the little draw off of it that we take every year. We don’t even need the draw. We’re not world travelers. We just work in the yard and have local hobbies with other seniors at the community center and I go to my choral group once a week and [spouse’s name] got involved in a community group. We can’t even use the healthcare allowance so we don’t get it. [Spouse’s name] is a military retiree so we have Medicare plus Tricare for Life (for Parts B and D). We’ve never in our lives paid a dime in medical expense. Our grandchildren are in college now so we’re helping them and we don’t travel to see them much anymore because they’re too busy. My sister (in eastern seaboard city) doesn’t get around too well anymore to do things and sightsee. [Spouse’s name]’s relatives in (New England city) are all dead now so we don’t make that yearly trip anymore. We don’t need any more vehicles or home improvements. [Spouse’s name] just added more insulation to the room addition for something to do so we are very comfortable. I now wished we would have not contributed to the plan and paid taxes on the income while we still working and had three kids to support. Our property taxes are $400 per year. You can’t take it with you.”

Thousands of retired workers in SD are double-triple covered for all of their needs. I know because I’m surrounded by them. Don’t discount the longtime resident in that ‘hood which appears to you to be (gasp!) “working-class” as poor and ignorant. If Medicare goes away tomorrow, these folks can promptly apply for and get their healthcare allowances of nearly $400 month from their retirement associations to help them pay premiums. Their primary residences were were paid off long ago and many are just sitting on a pile of cash that is going nowhere.

All that money, folks … WHOEVER ends up using it, is your competition in the local RE market for years to come.

The local, long-established families in CA and their progeny will be the winners in this game. That’s the way it’s always been here, especially in coastal CA counties, where the land is valuable.

You can’t fix this.

Edit: I wanted to clarify here that my former (retired) co-worker and her spouse currently have five (5) monthly incomes and a paid-for house. Each has a public pension, each has SS and they have a military pension with medical benefits. This is all exclusive of the balances in their 457 plans. Even if all of these pensions were small (in this case, they aren’t), if you rub five nickels together long enough, they will eventually get hot.

I would venture that they are still saving a lot of money every month. What else would they do with it?

[Jazzman]

BG said: “The perils of the wanna-be Pigg buying crowd (yourself included in the first two categories, Jazzman :)) are threefold, in order of impact:

-waited too long to buy due to being overly picky

-perceived inventory shortages, leading to less ability to be picky

-interest rates could gradually rise, leading to even less ability to be picky, and even possibly being eventually shut out altogether”

Lest you have forgotten the recent past, many have earned the right to be picky. I’m reading the reaction of other posters here, and the popular sentiment is not exactly upbeat. As a Realtor you ignore that at your peril.

You are also guilty (again) of miscategorizing me. I bought a year ago, and invested in RE two years ago, just not in the over-priced markets. I bought well enough that I can now afford a second home. Inventory shortages were low, but nowhere as bad as they are now.

Less ability to be picky is just as likely to lead to more pickiness, which is far from being “shut out”. More like walking away, since home ownership is yet again proving to be a perilous and pointless exercise.

I don’t need to explain to you the potential impact of softening rents, on a housing market still in the throes of a crisis, as you know I know you know that.

If you are moving to the Bay area, and plan on buying a fixer good luck. You’ll need plenty of money. It must be nice not being picky about what you pay for something, or what it looks like, or who your neighbors are.

[CA renter]

[quote=bearishgurl]

If you resided in SD in the early eighties, certainly you must remember the ’81-’83 spike in interest rates. I believe FNMA fixed conventional rates were up to 15.5% at one point in either ’82 or ’83. Do you recall RE prices falling precipitously between mid ’79 and ’83 as fixed mortgage interest rates rose from about 8.5% to 12.5% and beyond? I don’t. I don’t remember prices going down at all. What I DO remember is sellers carrying back seconds and also offering financing. During ’88-89, the local market was on fire and fixed MIRs prevailed at 10-11%. Even from about ’97 to ’03, the local market was on fire and fixed MIR’s fluctuated between 6.5% and 7.5%.

Nothing has changed. During all those periods, a prospective homebuyer had to be decisive and make offers and hope they would be countered and/or accepted or the property would be gone within days, unless it had structural problems or was a heavy fixer, which took a little longer to sell.

I lost out on eight offers I placed (due to excessive overbidding) and cancelled one escrow (due to severe plumbing problems which the seller wouldn’t fix) before successfully closing escrow in 2001 on my current home.

The prevailing fixed MIR at that time was 6.75%.

I don’t understand what all these fence-sitters are waiting for. This isn’t Kansas. Do they understand how many 59.5+ year-olds everywhere have access to hundreds of thousands of dollars in cash?? This group understands as well as appreciates the value they see in properties as most of them have seen a few of these cycles in their lifetimes.[/quote]

BG,

You’re ignoring the two main reasons for the house price inflation of the 70s and 80s.

…

1. Baby Boomers entering peak buying years:

“From 1955-64 nearly 42 million births occurred in the U.S., an unprecedented expansion. The roots of the baby boom lie in the universal rush to early marriage and favorable economic climate for the relatively scarce young men born of the Depression cohort. The impact of the boom interrupted a century-long fertility decline. Pro-marriage, pronatalist norms were revived by the Depression cohort who formed families of at least 2 children or more. During the 1960-70’s schools, colleges, and universities were built to accomodate the boom and are now excessive for the baby bust cohort. Unemployment and crime rates rose and fell with the passing of the boom babies through late adolescence and early adulthood. In the 1980’s, boom babies will be aged 20-30. Demands for housing will be high. Annual birth numbers will increase even if the rate of childbearing hovers below replacement level at about 1.8 per woman. Per capita earnings and overall labor productivity should improve as the boom baby cohort reaches middle age in the 1990s

http://www.ncbi.nlm.nih.gov/pubmed/12309851

2. Women entering the workforce en masse, temporarily increasing the purchasing power of those households with two incomes until prices rose enough to offset it:

http://www.census.gov/newsroom/pdf/women_workforce_slides.pdf

http://www.brookings.edu/blogs/jobs/posts/2011/04/01-jobs-greenstone-looney

…

Without the increase in interest rates during that time, housing prices would probably have gone parabolic. Mind you, union participation rates were much higher then, and wages were going up for the majority of working people. That is no longer the case, and hasn’t been for at least a decade (much longer, for some professions).

There is a direct correlation between asset prices and interest rates, and it’s very pronounced in asset classes (like housing) where most purchases are made with credit. Just because prices/rates don’t move inversely at a given moment doesn’t mean that they aren’t correlated; there are other variables that can affect prices as well, masking the effects of interest rate changes.

Once again, people with cash will NOT overpay for something when the purchasing power of all their competition has been diminished by higher rates. Not only that, but people with cash will want to preserve as much of it as possible when rates are high (and cash is dearest) so that they can earn a return on it.

And when mortgage interest rates were in the 6-8% range in the late 90s/early 2000s, prices were a lot lower in most places.

[SK in CV]

Great points CAR. I’ve often read that higher interest rates haven’t historically had an adverse effect on housing prices, therefore if interest rates rise now, prices won’t be affected. I think that argument always ignores other market dynamics. We do know that in the past higher interest rates do not have a high correlation with falling prices. But what we don’t know is what would have happened to prices if not but for rising interest rates.

With identical market conditions, economists can predict what will happen to prices. But we rarely have identical market conditions. Population demographics can change sharply by decade. My own expectation is that shifting demographics will (within the next 10 years) decrease the need for some kinds of housing (large SFRs) and sharply increase the need for others (retirement communities catering to retiring boomers). Yet the facts are nobody knows what us aging boomers will do. We may stay in our houses until we die. Or we may sharply downsize. But whatever we do, it will affect housing prices, just as interest rates will.

[outtamojo]

[quote=Jazzman]

Lest you have forgotten the recent past, many have earned the right to be picky. I’m reading the reaction of other posters here, and the popular sentiment is not exactly upbeat. As a Realtor you ignore that at your peril[/quote]

I’d like to point out that the Piggington of today is not the same Piggington of 3,6, or 9 months ago – many post rarely some not at all, so
your sentiment barometer is not quite right.

[flyer]

Agree CAR and SK, that with the ever-changing dynamics, people, especially those who have purchased in recent years, should be extremely wary of considering real estate a “sure thing,” when it comes to their long-term financial solvency.

As a lifetime real estate investor, it’s clear to me that, some elements point to a continuing escalation, many do not, and only time will tell.

In the meantime, I think it’s very important to have diverse financial resources accumulated for retirement (and lots of them–if you want to survive) other than property. At least, that’s been my plan.

[Jazzman]

[quote=outtamojo][quote=Jazzman]

Lest you have forgotten the recent past, many have earned the right to be picky. I’m reading the reaction of other posters here, and the popular sentiment is not exactly upbeat. As a Realtor you ignore that at your peril[/quote]

I’d like to point out that the Piggington of today is not the same Piggington of 3,6, or 9 months ago – many post rarely some not at all, so
your sentiment barometer is not quite right.[/quote]

Not sure I really understand the relevance.

[earlyretirement]

[quote=CA renter]

Once again, people with cash will NOT overpay for something when the purchasing power of all their competition has been diminished by higher rates. Not only that, but people with cash will want to preserve as much of it as possible when rates are high (and cash is dearest) so that they can earn a return on it.

[/quote]

+1! I totally agree. I can’t wait for the higher rates to come. But it looks like it’s going to be a while. 🙁

[quote=flyer]Agree CAR and SK, that with the ever-changing dynamics, people, especially those who have purchased in recent years, should be extremely wary of considering real estate a “sure thing,” when it comes to their long-term financial solvency.

As a lifetime real estate investor, it’s clear to me that, some elements point to a continuing escalation, many do not, and only time will tell.

In the meantime, I think it’s very important to have diverse financial resources accumulated for retirement (and lots of them–if you want to survive) other than property. At least, that’s been my plan.[/quote]

As usual I totally agree with you flyer. It’s going to be increasingly important to be very well diversified heading into the future. Of course people with guaranteed pensions that they can’t lose including medical care are really fortunate but most people heading into the future won’t have that luxury.

I totally agree with you flyer it’s essential to be very well diversified and not have all your “eggs” in one basket. I’ve seen too many people in the past that were too concentrated in real estate, the stock market, or other assets and got crushed at one time or another.

For me, the issue hasn’t just been making money but as important is keeping it and also making it grow into a bigger pot. That’s not always so easy for today’s investor…especially if they aren’t diversifying properly and interest rates stay manipulated at extremely low rates.

Lately I’ve seen people being kind of forced to “chase” returns. Some are good calculated investments. Others I’ve seen is a total “gamble”.

[bearishgurl]

[quote=flyer]Agree CAR and SK, that with the ever-changing dynamics, people, especially those who have purchased in recent years, should be extremely wary of considering real estate a “sure thing,” when it comes to their long-term financial solvency.

As a lifetime real estate investor, it’s clear to me that, some elements point to a continuing escalation, many do not, and only time will tell.

In the meantime, I think it’s very important to have diverse financial resources accumulated for retirement (and lots of them–if you want to survive) other than property. At least, that’s been my plan.[/quote]

flyer, I understand that one can’t “eat” real property and that a retiree needs to be well diversified in order to survive the vagaries of the broader economy. However, housing is a “necessity.” Unless one wants to live with friends or relatives, they have to buy or rent housing if they (or their relatives) do not currently own a residence available for their occupancy.

I’m not “bullish” on housing as a “sure-fire investment,” per se. I just think people who “need” housing and can qualify to buy it should do so ASAP while the mortgage interest rates are extraordinarily low. I’m not referring to “luxury housing” here as it is not a “necessity.”

My point was that a few prospective homebuyers here who still don’t own their own residence today are still (halfheartedly) in the market because they have been shunning perfectly acceptable housing for years waiting for the “perfect house” in the “perfect location” and “perfect buying conditions” and these factors rarely, if ever, exist in tandem. It has now been about 3.5 years since the local housing “bottom” and those days are permanently gone for good.

If these posters are happy with renting, then so be it as they may have to rent much longer than they ever thought possible due to not being able to make a local housing buying decision and successfully consummate a deal.

You must admit it is not going to get any easier going forward for a young family to buy a home in coastal CA counties.

[earlyretirement]

BG,

I agree with your point I would NOT want to head into retirement being a “perma renter “. Rental prices in desirable areas will only go up. I don’t see that trend changing. Just as there were permabulls that thought prices would keep going up. There are still many permabears that still incorrectly think prices will fall again.

[Author]

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