November 7, 2006 at 4:42 PM #7863powaysellerParticipant
Another homebuilder article on money.cnn
Robert Toll has mentioned repeatedly that this housing slump is unique from the others he experienced. Usually housing markets bust due to rising unemployment or high interest rates, but this one is occuring in the face of record low interest rates and lowest unemployment.
“It is worth noting that, atypically, this housing market is weak in an environment of low interest rates and low unemployment,” said Robert Toll’s statement. “We believe weak buyer confidence is keeping many customers on the sidelines.”
Bob Casagrand wrote in his newsletter today, that the rising months supply is due to lower buyer demand, not rising inventory. He again said that our market is dependent on the first time buyer, because of the ripple effect up the home buying chain.
Since we are so dependent on the first time buyer, we need to think about the effect of eliminating the one method these buyers used to get into the market: stated income and teaser rate financing. I think the new lending guidelines are going to eliminate 90% of new home buyers at current prices.
Until prices come back in line with incomes, the first time buyer is a historic icon, and prices will drop 25% in the next year, as foreclosures rise and serious sellers have to drop their price enough for buyers to qualify based on sane lending guidelines.
That is why a drop to 2003 prices is not enough. 2003 prices were created on the back of teaser interest rates that have gone the way of the pumpkin. Until they return, there is no way that buyers can pay 2003 prices. That is the main reason I disagree with sdrealtor about a return to 2003 pricing. Pricing has to go down to a level where buyers can purchase a first time home paying no more than 40% of income with the current mortgage rates. A true mortgage, not a fake loan based on some teaser rate. If you look at it that way, today’s median home price should be half of what it is today.
Back to buyer fear. Psychology has definitely shifted. So the question is how long and how deep will buyer psychology go? Asset bubbles grow in greed and collapse on fear. My guess is that fear will increase through tens of thousands of foreclosures and some bank failures, and after some big price drops, buyers will start hunting for bargains. That is at least 2-5 years away, IMO.
Toll Bros. CEO Robert Toll should be taken seriously on this one. Buyer fear is increasing, and he sees no end to the housing slump. Neither should we…November 7, 2006 at 5:10 PM #39455(former)FormerSanDieganParticipant
That is why a drop to 2003 prices is not enough. 2003 prices were created on the back of teaser interest rates that have gone the way of the pumpkin. Until they return, there is no way that buyers can pay 2003 prices. That is the main reason I disagree with sdrealtor about a return to 2003 pricing. Pricing has to go down to a level where buyers can purchase a first time home paying no more than 40% of income with the current mortgage rates.
Prices going back to 2003 levels and pricing going to a level where buyers can afford a traditional mortgage at 40% of income are not necessarily mutually exclusive.November 7, 2006 at 5:24 PM #39456anParticipant
Prices going back to 2003 levels and pricing going to a level where buyers can afford a traditional mortgage at 40% of income are not necessarily mutually exclusive.
Correct, it’s all relative to the specific area you’re referring to. However, in most of San Diego, it’s quite different. In some area, we are already at 2003 price or early 2004 price. No one know how deep and fast this will fall. We just have to wait and see.November 7, 2006 at 6:20 PM #39457(former)FormerSanDieganParticipant
Agreed. Crappy condo conversions are likely already at 2003 prices. McDevelopment properties that went up in the last 5 years are already at 2004 prices. However, I have yet to see data that indicate to me that SFRs in established neighborhoods (e.g. central and central coastal) at those prices. At 2003 prices, many properties in these established neighborhoods would produce positive rental cash flow, so I don’t anticipate moves below that point. Then again, I’m only expecting the usual post-WWII business cycle recessions such as the early 1990’s or early 1980’s, not a ’30s -style depression.November 7, 2006 at 6:57 PM #39460gold_dredger_phdParticipant
What we’re going to get is probably what we don’t expect. Maybe 20 years of stagflation based on offshoring of jobs to China and India and $150 dollar a barrel oil in today’s dollars.
Peak Oil is here. Another oil shock along with huge debt burdens will drive the economy down just like in the mid-70’s.November 8, 2006 at 11:53 AM #39511
People that spout off the 40% of income aren’t thinking about what kind of income a first time home buyer actually has. Do we all remember when we were first time home buyers? I’m almost 48 now, but I remember back when I was twenty. I was broke most of the time. My wife and I married and I think our combined income was $35,000. Of course it is $150K now, but that’s 23 years of marriage and career changes. Anyway, I know that we couldn’t have put 40% of our income towards mortgage and do anything else. What is the average household income now…. $40K right? Now is that Gross? Doesn’t sound like much. Take home is 75% of that. Let’s say you figure the 40% of the 75% figure, or $30K. That makes it $12,000 a year to the house or $1000 a month. Let’s say the $1000 includes all the other fees (insurance, taxes, etc). So really, you got a mortgage of around $150,000. I plugged some numbers into a bankrate.com calculator and a loan at 5% for 30 years fixed is $805.23, before figuring in the other fees like insurance. 15 years is really what someone should shoot for, so the monthly payment would be $1186.00 + other costs. So, the first time home buyer, going by the 40% rule, can barely afford a $150,000 home with a 15 year fixed. Now, back when I was young and banks were more strict about loaning us young people money, the more common rule of thumb was 25% of your income. Of course, houses were also much cheaper. But back to my point, at 40% of take home of the average first time buyer, they have $18000 a year left for everything else they need money for. Food, clothes, cars, auto insurance, savings, vacation, kids. I just think housing is way out of line and something has to give. How many houses are in the San Diego area in the $150K range?November 8, 2006 at 12:13 PM #39512sdrealtorParticipant
Wow, time warp baby! Bikerider, the world is a very different place today than the one you remember. It is very common for two married 25 year olds a couple years out of college to have $50K+ jobs each with combined six figure HH incomes. These are the types of 1st time buyers we see in the market. The young couples with $40K combined incomes you are referencing is what we call renters in these parts of the country. Unfortunately, some were suckered into buying with no doc loans but they should have been renters not buyers.
I didnt bother to check your math but simply taking your $150K price and multiplying it by 2.5 (i.e. 100/40=2.5) we get to $375K. IMHO, when all is said and done there will be a healthy 1st time buyer market between $300K and $400K for nice places not dumps in SD.November 8, 2006 at 1:25 PM #39532renterclintParticipant
Sdrealtor, I really hope you’re right. I make a fair amount over the median income, and all I can really afford on a conventional 30yr loan is about $2500/month max. With PITI, HOA and/or Mello Roos combined, that puts me around $300k & I need at least 3bdrms.
I grew up here, moved away for a few years and owned a couple homes out of state. I thought I wouldn’t mind renting as long as I was back home, but I miss owning a lot more than I expected. Renting sucks (especially when you have kids). I love it here, and I really want to stay, but if there isn’t reasonable housing available at a realistic price in a couple years, I’m leaving CA for good.
Let’s hope there really will be new banking rules (with teeth) soon to stop the madness on the exotic loans, and bring first time home-buyer back into the market with a mortgage they can live with.November 8, 2006 at 1:28 PM #39533
sdrealtor, maybe time warp, maybe not. I was talking about the US as a whole, not just the California area which is a bit out of touch with reality. I guess I mixed too much data to then speak of what a median home price would be for your state. Not everyone has the opportunity to attend college. And those that do now typically exit with a nice big fat student loan to pay back. That debt load should figure in to how much house they can afford starting out. Home prices are too high. Realtors don’t want to hear that, because their commission comes from the sale price.
Your area isn’t the norm for the US salaries. Take a look here….
The sad thing is, that now both spouses must work to maintain a certain lifestyle. So, the kids get dropped off and raised by others. In my area, my salary is actually pretty good.
Not sure how valid this site it, but I think it is ok data… http://www.payscale.com/research/US/State=Virginia/SalaryNovember 8, 2006 at 1:35 PM #39535blahblahblahParticipant
Both parents “need” to work now because everyone tried to get ahead of one another back in the 60s and 70s. It started with one family on the block realizing that if mommy went to work and left the kids home to fend for themselves, they could afford a nicer house than everyone else. Once their neighbors saw how high they were living, they wanted in on the game too. Pretty soon everyone had two incomes, the prices of homes had been pushed higher, and we had a country full of kids raised by the TV.November 8, 2006 at 1:46 PM #39539powaysellerParticipant
renterclint, the state regulators are releasing their exotic lending guidelines on Nov 14. That will be the end of real estate as we know it, in my opinion.
After we remove stated income and qualifiying on teaser rates, will we have any buyers left? I think 1st time buyers cannot get into a house without these loans, and they will be completely shut out. Without the 1st time buyer, the entire chain breaks, and within 1-2 quarters, the move up market will come unglued as well. When will we see the big drop in sales resulting from these guidelines? If they take effect Nov 14, then offers made after Nov 14 are in trouble, and we will see the initial results in lower November sales. December sales will be the big test.November 8, 2006 at 1:53 PM #39540
I read more on the household income site I posted and it really blows me away. If you see what most Americans make, you really wonder how home prices got so out of control. It seems to me that so much is given up in order to afford a home. I understand WHY someone would want to own a home, but in current times, a lot is sacrificed to have one.November 8, 2006 at 3:27 PM #39549sdrealtorParticipant
Here is your quote.
“How many houses are in the San Diego area in the $150K range?”
I dont think I was mistaken in assuming that you were referencing a $40K HH income for SD 1st time buyers. Another trend that you failed to address is that people are having kids alot older now. Bright educated woman are graduating with great degrees and ambition. Many choose to put off having kids until 30ish to start a career. By that time their spouse has a much higher income and they often take a few years off only to return to work P/T or F/T once the kids are in school. My neighborhood is full of families living this exact life.
I don’t think there is anything wrong with not being able to or choosing not to go to college. While it certainly has been proven to give you a major leg up, I know plenty of successful people w/o college degrees. As for prices being too high, I agree and have absolutely no problem hearing it. I would love for prices to be more affordable. If they reach what I consider reasonable levels, I’ll buy another 2 or 3 properties.November 8, 2006 at 5:10 PM #39560AnonymousGuest
Concho, you’re talking like a social conservative; how dare you!
Not the best situation for kids, on average, when Mom’s (or Dad, on an exception basis) not the primary caregiver.November 9, 2006 at 5:27 AM #39574
sdrealtor, you’re right, I am probably yearning for the past. You make it sound like a good thing that both spouses work. What was the name of that book….”The Two income trap”. The double income is part of the reason (maybe the whole reason) we’re in the mess now. Home prices and prices for many other goods are out of whack. And the seller just extends the length of time we have to pay for things. I think maybe we have lost sight of some values, just to have more stuff than our neighbor. Or have the same stuff as our neighbor. I grew up in a very small town and my mom didn’t work. She stayed home and raised four children. Get this, mom and dad paid $5,000 for their home back in 1951. Granted, it was a small home, but they raised four children in it. My wife’s parents paid $25,000 for a split level home in Falls Church Va. Not sure of the date, but at least forty years ago I guess. I think the home now is assessed at $560,000. So I wonder, are prices in line now as compared to back then…. comparing salaries then with now and home prices then with now? To me, back then, you bought a house very cheap compared to how great your salary will increase over time. But today, you pay so much for a home, but your salary isn’t going to increase as much percentage wise as in the past. Am I making any sense this early in the morning?
This book is from 2004, but interesting.
“AT: [Laughs] Right. Of course, the notion that mothers are all going to run pell-mell back to the hearth and turn back the clock to 1950 is absurd. But that aside, a big part of the two-income trap is that families have basically bid up the cost of living. Housing is a big example. A generation ago, an average family could buy an average home on one income. Today you can’t do that in three-quarters of American cities. We all know that housing prices are going up, but what most people don’t realize is that this has become a family problem. Housing prices are rising twice as fast for families with kids. “
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