State of the economy and affect on housing in S California

[utcsox]

[quote=rockingtime]
I feel that a decently earning ( ~$100K/year ) middle class family can’t really live here …[/quote]

You shall read this link and see how you can make $60k a year and save enough money for a down payment.

http://piggington.com/budget_fictional_couple_each_making_15hr

[Jazzman]

[quote=FormerSanDiegan][quote=rockingtime]Since you have lot of money for cash down, I’d say invest in some good relatively safe place to get you 4-5% return.

In couple of years, when and if the interest rates hit high, I am sure the prices would come down

Real estate prices in CA are cyclical in general and if anyone says otherwise, please look at the history.

Of course no one knows the future..[/quote]

If you look at the history of housing prices and interest rates you will note that the periods of interest rates increasing (notably mid 1960s to 1980, for example) coincided with home price increases.

SO, higher rates does not necessarily equate to lower prices. In fact, historically it has been the other way around. Higher interest rates generally track over the long run with higher inflation.[/quote]

It may be difficult to show a direct relationship. Some argue rising rates first impact demand, but supply and demand then influences price. A more recent debate focusses on the effect that prolonged periods of monetary easing has on the housing market. These researchers seem to have found a corelation:

An exogenous 100 bps decrease in the short rate results in about a 50 bps decrease in the long rate on impact, and an increase in mortgage loans to GDP of about 0.5 percentage points. Yet the effect of the initial shock keeps building over time, and by year four there is about a 3 percentage point increase in the ratio of mortgage loans to GDP.In light of the response of long-term rates and mortgage lending, one might expect house prices to increase in response to an exogenous decline in interest rates. The bottom-right panel shows that this is indeed the case. A fall of the short rate of 1 percentage point builds up over time and leads to a 4% increase of the house price-to-income ratio after four years. (Or alternatively, an exogenous increase results in a sizeable decline instead.) Various robustness checks and sample splits further strengthen our core result that monetary policy has indeed a powerful influence on households’ willingness to take bets on the house. https://agenda.weforum.org/2015/02/what-history-teaches-us-about-house-prices-and-low-interest-rates/

Interest rates have been declining consistently for many years. In the last 20 years, the 30 year fixed rate mortgage has halved. House prices in San Diego, on the other hand, have increased 180% over the same period. So while price and interest rate indices mat not track each other precisely, there is more than coincidence at play here. And it’s probably not without good reason that imminent central bank tightening has everyone on tenterhooks.

[poorgradstudent]

Job growth is always a lagging economic indicator. We’re in the late stages of what I like to call the “Obama Boom”, when Joe Six Pack finally starts to get his share of the growth.

“calling for a recesssion in the next few years” is like calling for rain sometime in the next few months. It’s such a big window it’s basically guaranteed to be true, and gives you zero information on if you should pack your umbrella today or not.

Those of us who closely watched this most recent bubble learned first hand that while markets are somewhat predictable, government actions can be all over the board. Predicting a specific policy response is kind of a fool’s errand.

I think this is where it all then comes back to fundamentals. Fundamentally San Diego county real estate is probably slightly overpriced right now. Someone looking to buy a home or investment property should tread very carefully. But rents arguably can support current prices in most areas. There’s still an untapped resevior of millenial basement dwellers who are bound to emerge sooner or later and prop up the rental market.

These sort of grand predictions can attract attention, but are often pure speculation.

[wallers]

Just fyi today from my realtor. I should buy!

I just wanted to update you on the Felton Home.
Seller received 5 offers and will be in escrow this week.

Agent didn’t disclose if they are over the list price yet but I assume they have gotten at least $515K offers.

I know that you are a bit discourage about the market in the metro area but more and more people want to live here and they are driving up the prices.

Best Wishes,

[FlyerInHi]

[quote=poorgradstudent]Job growth is always a lagging economic indicator. We’re in the late stages of what I like to call the “Obama Boom”, when Joe Six Pack finally starts to get his share of the growth.

“calling for a recesssion in the next few years” is like calling for rain sometime in the next few months. It’s such a big window it’s basically guaranteed to be true, and gives you zero information on if you should pack your umbrella today or not.

Those of us who closely watched this most recent bubble learned first hand that while markets are somewhat predictable, government actions can be all over the board. Predicting a specific policy response is kind of a fool’s errand.

I think this is where it all then comes back to fundamentals. Fundamentally San Diego county real estate is probably slightly overpriced right now. Someone looking to buy a home or investment property should tread very carefully. But rents arguably can support current prices in most areas. There’s still an untapped resevior of millenial basement dwellers who are bound to emerge sooner or later and prop up the rental market.

These sort of grand predictions can attract attention, but are often pure speculation.[/quote]

I like your writing. Very measured and accurate.

[XBoxBoy]

While reading The Economist last week I ran across this statistic:

[quote=The Economist]Last year authorities in the Houston metropolitan area, with a population of 6.2m, issued permits to build 64,000 homes. The entire state of California, with a population of 39m, issued just 83,000.[/quote]

Now I don’t know what everyone else makes of that but my sense is that we simply aren’t building enough new housing in California, and thus housing prices are gonna go up. Plain and simple.

XboxBoy

[Balboa]

[quote=wallers]Just fyi today from my realtor. I should buy!

I just wanted to update you on the Felton Home.
Seller received 5 offers and will be in escrow this week.

Agent didn’t disclose if they are over the list price yet but I assume they have gotten at least $515K offers.

I know that you are a bit discourage about the market in the metro area but more and more people want to live here and they are driving up the prices.

Best Wishes,[/quote]

I looked that place. I actually really liked it, but I couldn’t talk myself into paying that much to continue share a bathroom. The seller lived there on her own — must have been nice!

[CA renter]

[quote=Jazzman][quote=FormerSanDiegan][quote=rockingtime]Since you have lot of money for cash down, I’d say invest in some good relatively safe place to get you 4-5% return.

In couple of years, when and if the interest rates hit high, I am sure the prices would come down

Real estate prices in CA are cyclical in general and if anyone says otherwise, please look at the history.

Of course no one knows the future..[/quote]

If you look at the history of housing prices and interest rates you will note that the periods of interest rates increasing (notably mid 1960s to 1980, for example) coincided with home price increases.

SO, higher rates does not necessarily equate to lower prices. In fact, historically it has been the other way around. Higher interest rates generally track over the long run with higher inflation.[/quote]

It may be difficult to show a direct relationship. Some argue rising rates first impact demand, but supply and demand then influences price. A more recent debate focusses on the effect that prolonged periods of monetary easing has on the housing market. These researchers seem to have found a corelation:

An exogenous 100 bps decrease in the short rate results in about a 50 bps decrease in the long rate on impact, and an increase in mortgage loans to GDP of about 0.5 percentage points. Yet the effect of the initial shock keeps building over time, and by year four there is about a 3 percentage point increase in the ratio of mortgage loans to GDP.In light of the response of long-term rates and mortgage lending, one might expect house prices to increase in response to an exogenous decline in interest rates. The bottom-right panel shows that this is indeed the case. A fall of the short rate of 1 percentage point builds up over time and leads to a 4% increase of the house price-to-income ratio after four years. (Or alternatively, an exogenous increase results in a sizeable decline instead.) Various robustness checks and sample splits further strengthen our core result that monetary policy has indeed a powerful influence on households’ willingness to take bets on the house. https://agenda.weforum.org/2015/02/what-history-teaches-us-about-house-prices-and-low-interest-rates/

Interest rates have been declining consistently for many years. In the last 20 years, the 30 year fixed rate mortgage has halved. House prices in San Diego, on the other hand, have increased 180% over the same period. So while price and interest rate indices mat not track each other precisely, there is more than coincidence at play here. And it’s probably not without good reason that imminent central bank tightening has everyone on tenterhooks.[/quote]

During the 70s and 80s, we had the Baby Boomers entering their peak buying years. At the same time, women were entering the workforce en masse, increasing the amount that people were willing to pay for housing (and other purchases). Nixon also took us off the gold standard in the early 70s. All of these things would certainly affect housing prices, and were likely the cause of most of the inflation during that time…and it was that dramatic and rapid rise in inflation that caused the Fed to increase interest rates they way they did in order to cool things off.

Higher interest rates do not cause housing prices to rise. All else being equal, they will cause housing prices to fall commensurately. Most people buy based on the PITI payment; interest rates can affect monthly payments dramatically. Note that when the Fed wanted to slow/stop the decline in housing prices and other assets, they dropped rates to zero. They are, in fact, causing people to pay more for assets than they would pay if interest rates were normalized.

[fun4vnay2]

I agree and believe from my common man/sense perspective that a rising interest rate would decrease the prices of the homes as most of the people buy based on monthly payments..

[Balboa]

I also agree with CA renter. I’m currently renting, but have a pretty good nest egg. If interest rates increased enough to push down prices, I think I’d be okay buying at the higher interest rate because I would be able to make a substantial down payment and have the prospect of eventually refinancing.

What I’m wondering is, who sells their house when high rates have depressed prices and the house in question is financed at a record low interest rate? Will inventory be limited sellers who are desperate or lucky?

Seems like it could be years before that’s a relevant question, I guess. a quarter percent bump by the Fed every so often doesn’t seem likely to do much to prices…

[SD Realtor]

It is a really difficult question to answer. Interest rates relative to price is also something that we do not have much data on. Certainly the rates we saw in the late 70s and early 80s would have a substantial impact on prices. However when we had those rates in the early 80’s there was no real estate catastrophe in San Diego. Yes it was affected but not in an “end of the world” sort of way.

Given the pricing we have now I am not sure how the market will react. No doubt that if we are in a situation where mortgage rates are at 7 or 8% I believe we will see a definite decrease in the number of buyers.

How about sellers?

I think there are several dependencies that while subtle can be overlooked. Think about the following factors…

– Homeowners locked into low rate 30 year or even 15 year mortgages.
– Is there wage inflation?
– Are there accompanying factors that also are going up? Rents? Cost of fuel, food, etc?

These factors may play a much greater role then the reduction of buyers in the pool. One can make a case that it may be easier and financially beneficial to not sell and either rent the property out, (especially if rents are high which is the case in high interest rate environments) or just sit tight. While the asset (home) may be depreciating, it is being serviced using a low interest rate vehicle at a time when the supply of money is very tight. Why sell?

So…

I guess my point is that one can make an argument in either direction as to what happens when (not if) rates go up again… or perhaps we are a big version of Japan and we sit with low rates for 20 or 30 years. Hey we have done it for more then 10.

It is a tough call to make.

[CA renter]

Definitely a tough call. No doubt that sellers who bought when prices were lower and then refinanced using these lower rates are in a pretty good place for as long as rents stay high and other investments look overbought.

There are a lot of variables. I just like to point out that looking at the 70s and 80s as indicative of how the housing market should fare if rates rise isn’t necessarily a good idea because there were other factors at play during those years. Of course, there may be entirely different factors in the future that could affect the housing market in a similar way, but we just can’t know until we’re deeper into it.

[an]

SD Realtor, I totally agree. Those of us who locked in at this low rate, why sell when rate rise? Especially if rate rise above the current mortgage rate. If anything, I would drag that out as long as possible, since my money would be earning a higher interest rate than the bank is charging me.
If rent and income rises, why would you sell when your monthly cost to rent a similar place would be higher than your mortgage and your take home pay would make servicing that mortgage even easier.
I think the only way we’ll see lower price is if we have job loss and declining income. I.E. if we see deflation, not inflation. You won’t see rate rising with deflation.

[CA renter]

[quote=AN]SD Realtor, I totally agree. Those of us who locked in at this low rate, why sell when rate rise? Especially if rate rise above the current mortgage rate. If anything, I would drag that out as long as possible, since my money would be earning a higher interest rate than the bank is charging me.
If rent and income rises, why would you sell when your monthly cost to rent a similar place would be higher than your mortgage and your take home pay would make servicing that mortgage even easier.
I think the only way we’ll see lower price is if we have job loss and declining income. I.E. if we see deflation, not inflation. You won’t see rate rising with deflation.[/quote]

Depends on why deflation is happening. Look at the PIIGS, for example, or even the U.S. when the financial crisis was coming to a head. Rates went up drastically until the central banks of the world intervened together.

What happens when/if central banks run out of ammunition? We’re already at ZIRP and with each successive QE intervention, the effects become smaller and smaller.

[an]

[quote=CA renter]Depends on why deflation is happening. Look at the PIIGS, for example, or even the U.S. when the financial crisis was coming to a head. Rates went up drastically until the central banks of the world intervened together.

What happens when/if central banks run out of ammunition? We’re already at ZIRP and with each successive QE intervention, the effects become smaller and smaller.[/quote]
Interest rate is something the central banks set they only raise rates when there’s inflation. Your example about when happened in the US when financial crisis was coming is a prime example. When the data show that there is negative growth/recession, they dropped rate. They only raised rates when the data was still showing growth/inflation. Tell me, what did they do in 2008-2009?
As for PIIGS, that’s a different scenario, because PIIGS is only part of the EU and the European central bank have more to worry about than just PIIGS. That’s like saying, a few states w/in the US is seeing recession, do you think the Fed will lower rate?

[Author]

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