San Diego Housing Permits the Lowest in 10 Years

[powayseller]

Roger Showley reports in today’s Union-Tribune that the number of housing permits fell 41% this quarter vs. 2005 Q1. This is the lowest level in 10 years.

You can read his article, which is fabulous, and here are my comments:

It seems to me that housing permits are a leading indicator for the health of the housing market and for construction employment.

The cycle of indicators goes like this:
real hourly wages/interest rates –>consumer spending –> production–>capital spending –>employment.

Let’s apply this to housing.

In this case, I’ll skip over the real hourly wages, which have been flat anyway. Higher interest rates have sapped the consumer. As consumer spending on housing declined, builders adjusted their production capacity by filing fewer permits. [Sidenote: remember the unusually high number of permits in January? They turned out to be Jan + Feb starts, since Jan was warm and builders got an early start on building. Feb starts were lower than usual for that reason.]

Builders are still in high production, finishing up the houses from last year’s high demand. They are still using materials and labor and retail services to build these homes.

In a few months, the reduced permit effect will ripple through to those involved in production. I guess that would be lumber, granite, windows, Home Depot, and landscapers. Let’s also add all those stores that benefit from consumers buying stuff for their new homes.

A few months after production decreases, capital spending for the housing industry follows. Home Depot’s sales will decrease, so they won’t want to install those new phone and inventory systems. They’ll stop looking for those new locations to expand, and will shut underperforming stores. The granite guy is going to cut back on his plans to expand his shop, and will stay in the old building.

Everyone will think of cutting costs, laying off employees, perhaps increasing their marketing budgets and any capital spending would be on efficiency/cost reduction strategies.

So the story started with reduced sales on the resales side, and lower building permits on the new home side. And so the slide goes on….

[sdrealtor]

Here’s the other side of the coin…..we’ve been in a building boom for about 5 years. New home sales have cut into resales ALOT! The reduction corresponds to about 10,000 less new homes being permitted over the next 12 months if the trend continues. There is a lag in these homes coming to market so they probably would be 2007 new home sales. The MLS shows that there were 41,171 sales of attached and detached homes for 2005 (the last full year of data). A 25% decrease in new inventory would help the resale market and aid in a soft landing. Resales volume will go back up and Home Depot will be busier than ever as people remodel the 25 year old home they just bought. The Granite Guy will buy a new Ferrari and his wife will get a new set of boobs! Not sure if this will happen but you need to look at both sides to be fair.

[an]

Of course less new homes will help resale homes. Unless the builder expect demand to drop 25% in 2007, when these houses will come online. Then there would be 0 effect to the resale market. If the demand drop more than 25% and the new homes undercut resale homes in price, which they can very easily, then it would still hurt resale homes. But we don’t know what will happen until 2007 when it happens. But I’m sure those builder have a much better insight in the market than you or I.

[powayseller]

Unfortunately for housing bulls, realty is not a coin tossing game. If it were, you’d have a 50-50 chance of a soft landing.

But if you want to use statistics, I’ll give it a 99% probability of resales continuing their slide.

Demand for homes is reduced by 25%, and builders have responded by reducing their supply. But that won’t help the resale market, as asianautica already explained. In addition, the resale market will keep adding to inventory, as people try to cash out, speculators get cold feet, and homeowners try to get out from adjusting mortgages. At the rate of 50/day, could we hit 40,000 homes on the MLS next spring?

Just curious, sdrealtor,what leading indicators are you following that give you hope for a flat, rather than declining market?

[sdrealtor]

None…I expect a slow decline just not a major crash like so many of you. My best guess is about 20%. If you consider that a major crash sobeit. I consider it a reversion back to where things made a bit more sense payment wise.

[sdrealtor]

None…I expect a slow decline just not a major crash like so many of you. My best guess is about 20%. If you consider that a major crash sobeit. I consider it a reversion back to where things made a bit more sense payment wise.

[an]

That’s a little contradicting, don’t you think? Even if rates doesn’t go up, in order for the price to reverse back to where things made a bit more sense, it would have to drop by at least 30-40%. I use rent cost and income to be consider where payment make sense.I can rent a 550k house for $1800. So, even if rent go up to $2k, and rates stay the say, in order for mortgage payment to be anywhere near $2.5k, price would hav to drop under $400k. That’s more than 40% to my calculation.

[sdrealtor]

If you consider renting equivalent to owning (as does powayseller) than you are correct. I do not consider it equivalent to owning. There are many benefits to owning renters dont enjoy and which homeowners are willing to pay for.

[an]

To a certain extent, I agree. But please tell, have you ever seen a market that does not over shoot or undershoot? Also, tell me how much more than rent do you think is enough? Of course i’m not saying it should be exactly the same. I would personally pay about 100-200/month more. But 20% drop would still mean at lease $1000/month more. In that case, no thanks, I’ll put that $1000/month to my retirement and retire early rather than buying my house.

[sdrealtor]

You must be in a very low tax bracket. If you were in a 37% marginal tax bracket like most homeowners around here a 2500/month rental payment is about the same as a 3700 mortgage+tax payment. Through in a couple hundred bucks for happiness associated with owning your own home, a couple more for not worrying about having to move when your landlord sells (havent moved lately but imagine it would cost at least 5K when you factor in all the costs), a couple more for the prinicipal you are paying down each month and then a couple hundred more to account for your rent rising over the next 5 to 10 years and I’d say it’s worth a little more than $100 to $200/month.

But here’s my 64K questions…ARE YOU SAVING $1,000/MONTH FOR YOUR RETIREMENT RIGHT NOW?

[an]

I’ve been saving more than $1k/month for retirement since I was 21. Now that we got that out of the way.

You’re correct, I’m not in the 37% brack. I’m on the border between the 25% and 28% bracket. Where do you mean by around here? Obviously, you’re not talking about San Diego wide. Maybe in Rancho Santa Fe? Oh, and btw, there’s no such thing as 37% tax brack, the highest is 35%. In order to be in the 35% bracket, you have to make well over $300k/year after all the write off. So tell me again, where exactly are you talking about that most homeowners make well over $300k/year? Tell, if you make $300k/yr, would you buy a $500k house? I highly doubt it.

Let assume your variables, rent = $2500/month. In order for then to be that high in San Diego, the house has to be around 2300-2500sq-ft and be around Scripps Ranch, Carmel Mt, Rancho Bernardo area. Houses that size in these area are in the 800-900k range right now. So lets assume the lower end, around $800k. W/ 0% down, and today’s rate of 6.5%, the monthly payment would be $5k. If it drop 20%, the house would cost $640k, the monthly payment would be $4k/month. If you’re in a 35% tax bracket, after tax write off, that’s about $2600/month. Lets assume tax+HOA+MR+Insurance = 2%, that’s about $1100/month. That would bring th total back up to $3700/month. So, tax save is about = to tax+HOA+MR+Insurance. Tell me again, is $1200/month worth it for you to know you don’t have to move again?

[sdrealtor]

Last time I checked you had to pay state taxes also….maybe you don’t but I do as does everyone I know. SO here it is in B&W….28% marginal tax bracket for federal+9% marginal tax bracket for state = 37%. GOT IT?

[sdrealtor]

Nice attempt to change the topic but just admit you were wrong…you said it was worth $100 to $200 and YOU WERE WRONG! What it is worth is very personal and specific to each person and not for you or I to decide. A simple I was wrong would suffice.

[an]

Alright, that still doesn’t change anything. Tell me, is $1k/month – $1200/month worth it to you to know you don’t have to move?

[an]

Please reread my post, then plese, a simple I was wrong would be suffice. I said to ME, it’s worth $100-$200 more. My question to you was, with 20% drop, it would still be $1k/month more. Is $1k/month worth it to you. My math proved my point.

I did say, for ME, I would take that $1k difference and put it toward my retirement. So please refrain from the personal attack. But if you do have to resort to that, please get the information correct first before attacking. It just make you look like a jacka$$ that can’t read.

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