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

[no_such_reality]

Are we or are we really dealing with a dearth of product consumers want to buy but have to buy?

[bewildering]

What would have to happen for San Diego prices to drop 15%?

Runaway inflation as in 1978? This would not affect nominal prices. The 500,000 house is not reduced in price – it just costs less because the value of a dollar is reduced.

Increased interest rates? Unlikely. Rich has shown that interest rates do not correlate well with house prices in the USA. I think this due to the 30 year fixed mortgages available in the USA. In the United Kingdom, house prices are very sensitive to interest rate changes because there are no fixed 30-year mortgages. (Funnily enough, the UK and Canada have more expensive houses than the USA despite the absence of fixed mortgages)

Regulatory changes? Maybe. Say Trump kills Fannie and Freddie and the FHA. I think prices would drop due to market shock in the short term. But look at Canada and the UK – they do bubbles even without Fannie and Freddie and the FHA.

Tax changes? Possible. If Trump kills the mortgage interest deduction while increasing the standard deduction I think the luxury house market will fall at least 15%. Many wealthy people use mortgages as part of their tax strategy. But I doubt the sub-$1,000,000 market would be affected. If California got rid of Prop 13 then house prices might fall 15%, but i see expensive houses in states without Prop 13.

[spdrun]

In 2012, few people here assumed that the market in SD would rise 80-100% (nominal) from bottom by 2016.

In 2007, few people assumed that prices would fall 40-50% from peak.

All it would take for the market to fall a lot is for the market to fall a little. Falling prices = loss of confidence = more people selling = supply >> demand.

The reason inventory is low right now is that owners are holding hoping for even higher prices — if prices fall a little or even flatten, this goes away.

Psychology, not rationality.

[flyer]

Have seen several boom and bust cycles, and it will be interesting to see what the future holds, but most people we know who are holding never plan to sell any of their properties because, like us, they plan to pass them along to their kids, and/or rent them out if they should have to leave for employment reasons, etc., regardless of market conditions, so that might have some affect on inventory going forward.

[gzz]

AN, I think where Rich disagrees with us is not the importance of payment ratios, but that he thinks rates may revert to historical means and send prices down.

I think we are in a new normal with low rates caused by inequality (rich people get richer and save most of their new wealth, creating a huge growing pool of loanable funds), ageing reducing the number of creditworthy young people who want to borrow from that big pool, and a Fed that has gone from thinking 5% core inflation is OK, to a 2-3% target, to a 2% target, to a 2% max.

I really see no reason why long term rates in the USA won’t fall below 1% given they are around 0% or less in Germany, France, Italy, Holland, Switzerland, Japan, and Austria. Our population ageing is not quite as bad as those countries, but we are basically about 10-15 years behind them on that front.

My forecast for 12/2019 is 3.3% 30 year mortages and nominal prices 20-30% higher than 12/2016. I also think a new bubble is more likely than a 5% price decline. Finally I think rent growth will be 1-4% a year, but it won’t matter for prices as they are still low relative to rents.

[spdrun]

A more conservative Fed means HIGHER rates, not lower, since they’ll raise to keep inflation below 2%.

[FlyerInHi]

Gzz, i agree with you on rates.
I know people who have been predicting inflation and dollar debasement for a decade. Ron and Rand Paul have dialed back the rethoric a little bit but there’s stil huge following.

I’m hoping Trump does a border adjustment tax so we have a stronger dollar. That way I can buy a couple condos and retire abroad. That would work out nicely for me.

[Rich Toscano]

[quote=gzz]AN, I think where Rich disagrees with us is not the importance of payment ratios, but that he thinks rates may revert to historical means and send prices down. [/quote]

No. You claim rates and home prices reliably move inversely to each other. (For instance, in another thread, you said, “In the end, a house that rents for $2000 will go up in price with lower rates as surely as a bond that pays $2000 will go up.”)

But as described here, there has historically been very little correlation between rates and home prices. I argue that there are some good reasons for this, but whether you agree with those reasons or not, the fact is that rates have had little influence on prices in the past. You are claiming a correlation (a causality, really) that isn’t there.

That is my main point of disagreement.

Additionally, I happen to believe that rates are more likely to go up than down, but that’s secondary to my main disagreement.

On that second (lesser) topic…

[quote=gzz]I really see no reason why long term rates in the USA won’t fall below 1% [/quote]

Core inflation is at 2.3% and trending up. Median CPI (which according to Fed research has been the best predictor of the underlying inflation trend) is at 3.3%. So, there’s at least one reason for you.

If you want to make the case for sub-1% long term rates, go for it. But to say that there’s “NO reason” long term rates will stay above 1%, when inflation is significantly above that number… come on.

[an]

gzz, I don’t believe we’ll see a sub 1% long term rate. I agree with Rich on this point. However, Rich have made a case that price doesn’t move inversely with rate. I totally agree with that as well, since data proves it, so just because we have rising rate doesn’t mean we’ll have a decline/crash in price. I predict that rate and price will go up as well as inflation. If he gets through the minimum $125k for H1-B, that will definitely push up income for tech workers, which is a major buying population in CA. On top of that, CA minimum wage keeps on going up, so I don’t see how demand won’t keep on increasing.

[Reality]

[quote=Rich Toscano]

I argue that there are some good reasons for this, but whether you agree with those reasons or not, the fact is that rates have had little influence on prices in the past. You are claiming a correlation (a causality, really) that isn’t there.
[/quote]

So you’ve changed your mind from this?:

May-June 2013 Data Rodeo — Price Explosion

“This is big, in my view. Low rates have been a big driver of housing demand, for both investors (who are seeking out yield wherever they can find it) and residents (who are compelled to buy due to the favorable rent-vs-buy comparison enabled by super low rates). This rate increase will almost certainly undercut both sources of demand.”

[Rich Toscano]

[quote=Reality][quote=Rich Toscano]

I argue that there are some good reasons for this, but whether you agree with those reasons or not, the fact is that rates have had little influence on prices in the past. You are claiming a correlation (a causality, really) that isn’t there.
[/quote]

So you’ve changed your mind from this?:

May-June 2013 Data Rodeo — Price Explosion

“This is big, in my view. Low rates have been a big driver of housing demand, for both investors (who are seeking out yield wherever they can find it) and residents (who are compelled to buy due to the favorable rent-vs-buy comparison enabled by super low rates). This rate increase will almost certainly undercut both sources of demand.”[/quote]

Yes, I’d say I’ve changed my mind. I think that paragraph you quoted overstates the importance of rates, and it definitely overstates certitude, and I wouldn’t write that today.

That said I do acknowledge that rates are a piece of the picture, for sure. And I do acknowledge the possibilities that 1. low rates are helping keep home valuations high and 2. this could continue to be the case for some time.

What I push back against is this idea that monthly payments are all that matter, and that as long as rates are low, high purchase valuations are inconsequential. (Or, that homes are “undervalued” just because rates happen to be low right now).

Hope that clarifies where I’m coming from…

[SD Realtor]

I pretty much agree with you all the way Rich. For a study on how the housing market performed in a substantially higher rate environment one can look back at the early 80’s. Sorry guys no 50% pullback.

Conversely people conveniently ignore the value of a nice low fixed rate mortgage when the money supply tightens up. Over the past 10 years we have seen (what I would guess) staggering numbers of loans converting to fixed rate vehicles. Given a few years of tightening the money supply these mortgages will be very well positioned. Yes there may be depreciation but for those with a fixed payment that was established in 2007-2017 dollars, they will be in decent shape.

I do agree with your point rich that low rates don’t justify insane valuations. However those who are locked into those low rates from purchases made in the past 10 years (IMO) will be able to weather any storm caused by depreciation.

It will be interesting to see what a rollover will look like in a high rate environment as opposed to a low rate environment like we had in 2006/7.

Finally as per the norm, most people are missing the point about buying a home. Waiting 5 or 6 years to purchase, which I believe is what we will need to see a marked depreciation means your 11 year old is now close to 17 and about the move out. Or your 5 year old is close to getting our of elementary school. The single person or couple who do not plan to have kids live a life that is not even close to young families with multiple kids. Different lifestyles demand a different approach to this problem.

[an]

[quote=SD Realtor]I do agree with your point rich that low rates don’t justify insane valuations. However those who are locked into those low rates from purchases made in the past 10 years (IMO) will be able to weather any storm caused by depreciation. [/quote]I don’t think anyone is saying that low interest rate justify insane valuations. However, when P+I is equal or less than comparable rent, would you consider that insane valuation? Especially if you buy with a 30 years fixed? I’m sure if you bought in early 70s and see price tripled by early 80s, you’d think that’s insane as well. All the while, interest rates were rising as well. But yet, price never came back to yearly 70s price. So, just because valuation increased does not make it insane. Especially if rent and income rises as well.

Today is a very unique situation. Valuation is at the high point compare to recent history. However, it’s also at a low point when compare to income and rent. So, I contend that since majority in CA buy with a mortgage, monthly payment is more important than valuation. I viewed P+I vs rent as a much more important barometer for bubble than valuation.

[fun4vnay2]

SD housing prices can never go down ever now. What happened in the past was a one time thing.
Everyone wants to live in san diego.

I dont see any correction coming for next few decades

I know you have heard this many times before but just forget the last few crashes…

[fun4vnay2]

this seems hitting the nail

[Author]

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