Why it’s not a good time to buy a house in San Diego!

[moneymaker]

Average house here is $530,900. Let’s say we enter into a recession and house prices drop in half, you could then get your property reappraised and save half on your taxes $3,185 now on the other hand lets assume rates go up by a reasonable amount because the economy takes off and we are not in a recession. If 30 year is 4.2% now then in a bustling economy 7.2% might be reasonable, so 3% increase, that’s $15,927 a year more. Just saying it is easier to refi a loan when rates drop than to reassess when prices drop,and then the cycle repeats. Just glad I’m not looking to buy or worried about rates.

[Rich Toscano]

So your plan is to wait for a 50% home price decline? That didn’t even happen after the bubble…

[moneymaker]

Yes it did Rich. Got my house for 46% of the bubble price. I think the best way to predict future home prices is to look at the rate of change in incomes. If incomes start to curve up then 4-5 years later home prices also go up. Makes sense as good income is needed over a period of time to save for down payment.

[Rich Toscano]

True, some individual homes fell more than 50%, but in aggregate (per Case Shiller) they fell by less than that — about 42% or so overall.

But, my point was more that you can’t expect or plan on something like that… that decline was the result of a giant bubble with epic overvaluation, nothing like what we are seeing now. And even then, the typical house didn’t drop by 50% — why would you expect that to happen now, when the valuation level is substantially more tame?

Great job buying your house, btw!

[no_such_reality]

True, but only because the Government intervened and allowed all the weak hands to hold properties. Especially the banks.

[bewildering]

There is zero chance of a 50% drop in house prices. There is a link between house prices and rent prices. Unless rent prices collapse then house prices will not fall by 50%.

Think about it. Even with a 20% drop in San Diego prices, it makes financial sense to buy a property and rent it out.

‘Nominal’ rental costs have never fallen in San Diego and demand for rentals remains high: http://www.deptofnumbers.com/rent/california/san-diego/

[Rich Toscano]

[quote=no_such_reality]True, but only because the Government intervened and allowed all the weak hands to hold properties. Especially the banks.[/quote]

What’s that got to do with it?

[Rich Toscano]

[quote=bewildering]There is zero chance of a 50% drop in house prices. There is a link between house prices and rent prices. Unless rent prices collapse then house prices will not fall by 50%.

Think about it. Even with a 20% drop in San Diego prices, it makes financial sense to buy a property and rent it out.

‘Nominal’ rental costs have never fallen in San Diego and demand for rentals remains high: http://www.deptofnumbers.com/rent/california/san-diego/%5B/quote%5D

Exactly. The post-bubble plunge happened because prices had become massively unhinged from rents (or incomes or any other fundamental). That’s just not the case now, to anywhere near that degree.

To put some numbers on it, here’s the price decline it would have taken to get to the historical median valuation (price to incomes and rents)… assuming there was no growth in rents/incomes during the price decline:

bubble peak: 42%
now: 16%

Just no comparison. If you are expecting a 50% decline, that means you are expecting prices to fall to their historically typical valuation, and then drop another 44% from that point, which would of course make them far cheaper than they’ve ever gotten. And that assumes no intervening rent/income growth, which of course there would be. It’s a mathematically indefensible forecast.

[sdsurfer]

I’d think there is an assumption in your logic that they would allow the rates to continue increasing with prices going down. I’d think the past cycle shows they would do the opposite. I’m also thinking that if rates are going up so are incomes so people could potentially afford more depending on the ratio driving demand.

I think it’s all supply. There is not enough homes for the people that want to buy them and until there is pressure will push prices up.

[spdrun]

Prices increased mostly in certain cities, not middle America that’s the core of the GOP constituency. I’d argue that there’s a certain part of the GOP that WANTS to punish residents of coastal cities. As long as the national average isn’t decreasing (by much), they can let SD, LA, and SF fry.

There are also people on the other side who are interested in provoking a recession before 2018 to flip Congress and make life hard for Donnie.

Thirdly, a 7-10% of SD County’s population are people who could be directly affected by immigration policy, hitting rental demand at the lower end.

[sdsurfer]

[quote=spdrun]Prices increased mostly in certain cities, not middle America that’s the core of the GOP constituency. I’d argue that there’s a certain part of the GOP that WANTS to punish residents of coastal cities. As long as the national average isn’t decreasing (by much), they can let SD, LA, and SF fry.

There are also people on the other side who are interested in provoking a recession before 2018 to flip Congress and make life hard for Donnie.

Thirdly, a 7-10% of SD County’s population are people who could be directly affected by immigration policy, hitting rental demand at the lower end.[/quote]

I’d have to agree with all three of your points. We’ll have to see how they play out.

[an]

Just because rate goes up does not mean price have to come down. Just look at what happen to the 70s/80s when rate increases and stayed high for a long time. Specifically early 70s to early 80s, price went up like crazy. Rate doesn’t increase in a vacuum. If rate goes to 7%+, most likely, we’ll also have robust employment and wage growth. I don’t know what will happen here on out, but my guess is, the probability of us seeing another bubble pop like 2005 is as likely as we seeing big inflation happen like the 70s. Those are the two extremes. I predict we’ll probably see flatten prices for awhile and wage and inflation increase and we’ll be back to historical average valuation again.

[gzz]

We could also revert to the historical payment ratio median, which would mean home prices go up about 22% even with no rent and income increases in 2017. And using the historical average rather than median, plus assume rent and income growth of 5%, we would see prices go up about 40% in 2017.

That won’t happen without loose lending, so instead we will have ultra low inventories in 2017 because prices are below fundamentals and stuck going up about 7-8% a year as banks keep using conservative comps when lending.

Trump could well loosen up money soon if he wants a boom, in which case those 20+% increases could happen again, as well as overshooting their fundamentals. I think that is more likely to happen in 2018 however.

The “flat prices” scenerio mentioned needs to explain how that will happen with inventory levels that in the past here and elsewhere in the USA are associated with strong price growth.

[an]

gzz, I totally agree. I believe the monthly payment vs rent is much more important than price. I had this debate with Rich in the past, so there’s no point rehashing it. We’ll see soon enough whether it’s price or payment that matter more and which will mean revert first.

With all of the talk about protectionism, $1T of infrastructure spending, lower taxes, tax holiday for corporation, etc. I personally think we’ll see higher inflation and higher interest ahead.

[Reality]

[quote=Rich Toscano][quote=bewildering]There is zero chance of a 50% drop in house prices. There is a link between house prices and rent prices. Unless rent prices collapse then house prices will not fall by 50%.

Think about it. Even with a 20% drop in San Diego prices, it makes financial sense to buy a property and rent it out.

‘Nominal’ rental costs have never fallen in San Diego and demand for rentals remains high: http://www.deptofnumbers.com/rent/california/san-diego/%5B/quote%5D

Exactly. The post-bubble plunge happened because prices had become massively unhinged from rents (or incomes or any other fundamental). That’s just not the case now, to anywhere near that degree.

To put some numbers on it, here’s the price decline it would have taken to get to the historical median valuation (price to incomes and rents)… assuming there was no growth in rents/incomes during the price decline:

bubble peak: 42%
now: 16%

Just no comparison. If you are expecting a 50% decline, that means you are expecting prices to fall to their historically typical valuation, and then drop another 44% from that point, which would of course make them far cheaper than they’ve ever gotten. And that assumes no intervening rent/income growth, which of course there would be. It’s a mathematically indefensible forecast.[/quote]

I can’t help but wonder if banks are still holding inventory from their bad loans. If would be buyers can’t find homes to buy they will rent, increasing that demand and cost.

While supply and demand explain current housing costs, do fundamentals? Are there that many more people living here to explain a seemingly significant housing shortage?

[Author]

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