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powayseller
ParticipantLet’s try to figure out the profile and number of bubble sitters. To me, a bubble sitter is a person who qualifies to buy a home that meets his expectations, but chooses not to. The lender has told them they qualify to get that $650K median priced house with a 30yr mortgage using less than 30% of income, but they will wait until prices come down. You need to earn $185K to buy the median priced home with a 30 yr mortgage, no money down. (3.5 x 185K = $650K). Less than 5% of San Diegans earn that much, and I think most of them already bought a home. Since less than 3% of San Diegans earn over $150K, and most of them already bought a home, at today’s prices o maybe 1/2% of San Diegans are bubble sitters.
Some renters will never qualify to buy due to low wages, low FICO, mental problems, unstable lives, unstable employment or finances). Other renters know they will be here only a few years, bec. of a temporary assignment, hopes to move up the corporate ladder, military moves, visa expiring, etc. These people are not bubble sitters. They are permanent renters in this market.
Ok, so I’ve covered the bubble sitters as the people earning enough money to afford a home with a traditional mortgage, one in which they are paying off part of their principal each month. I’ve covered the renters who will never qualify due to some problem or temporary living situation.
That leaves the group that is renting and not buying because they are simply priced out. They are not bubble sitters in my definition. They can’t really afford to buy, because buying would mean giving up retirement saving, shopping, traveling, eating out, maybe even the cable TV. The $120K engineers are priced out, and I would call them “wanting to buy but priced out”. The desire for homeownership is so strong, that these co-workers are just giving you a line, IMO; they desperately want a house, and would buy one if they could. They merely say they are bubble sitters because they really can’t afford to buy right now. They are priced out. Someone earning $120K/year, even with with $50K to put down, is priced out. How could they possibly make the mortgage payment on a $600K loan ($650K median priced house)?
In my opinion, and I want to be corrected on this, if there aren’t enough “wanting to buy but priced out” people in San Diego today to move the market. Most people who wanted to buy, have done so. Until 2004, you could get an ARM and make your median priced home affordable, i.e. less than 45% of income.
My thinking is that the “wanting to buy but priced out” people moved here after 2004, and wanted to buy, but were priced out. They didn’t want a suicide loan, and couldn’t qualify for a 30 year fixed.
So can you tell us about these co-workers who are renting? Is their rental choice due to not knowing how long their jobs here would last? Is there a chance their visa expires, and they didn’t want to be locked into a house? Did they come here after 2004 and were priced out? What are they waiting for to buy?
There is a difference between a bubble sitter, a renter who is never going to be qualified to buy, and a person who wants to buy but is priced out.
These co-workers who earn 6 figures, how much do they make? $105K? $199K? If they earn $150K, then they will qualify for a 30 yr fixed for a roughly $525K mortgage. That’s if they have no other debt, i.e. student loan, car payment, credit cards. Realtors, loan officers, please correct me if I’m a little off on my percentages. Usually total debt can be 33% of income, and mortgage can be 28% of income. That’s the traditional loan.
So I am very interested in how many people came here before 2004 and decided not to buy, vs. the people who came here in 2005 or 2006 and were priced out. I think most of the renters came to San Diego in 2005 or later and were priced out, and they will be priced out for a long time. Even if prices go back to 2004 levels, where they could have qualified for a $120K salary, they won’t want to buy bec. they don’t want to catch a falling knife, and lending standards are tightening too.
Schahrzad Berkland
powayseller
Participantjg, I read that study too. College and Beyond. They followed several thousand Ivy league accepted professionals, and found that the half of the group that turned down the Ivy offer and went to a non-Ivy school, earned $92K/year, vs. the $90K/year earned by the Ivy people. I will post more in the off-topic thread.
BTW, I think he’s hot. Roubini. Oh, I forgot I’m married….
powayseller
Participantjg, I am not a real estate investor, and am only learning about real estate from the realtors I met doing my research the last few months. In my opinion, you would buy a rental property when it is cash flow positive, but if that condition is met and prices are still falling, I would definitely wait. I am going to buy a home and/or rental property after the prices stop falling, which ought to take at least 5 years. The biggest drops are yet to come…. I expect the largest drops in 2008 and 2009. Poway lost 5% – 10% this year, it will lose 8 – 15% next year, and 12 – 25% in each of the next 3 years. That is just a wild guess, I have no data to back it up.
For advice on buying rental property, we ought to start a thread, and ask the landlords and realtors on this forum.
Calculated Risk has data, which I posted recently, about the percentage drop in CA in the last downturn; the biggest drops came in years 3-5, an dit was in the double digits in each of those years. We are in year 1.
What does Robert Campbell teach about timing the market? I know Chris Johnston speaks highly of him, so he must be a great resource.
August 26, 2006 at 2:12 PM in reply to: Looking for honest suggestions and strategies for selling a condo in this tough market #33418powayseller
ParticipantMonths inventory = Active/Pending, or Active/Sold? Pending is more current, but doesn’t include those that fall out of escrow. Sold is more accurate but lagging. Why not use both? Which one includes new homes?
For the denominator, why do you want to use a 6 month or 3 month average? Why not just use the current month? I would chart this as this year vs. last year, so the seasonal fluctuations would not mess anything up.
My idea for months inventory = Percent change in Active/Pending in July 06 vs. July 05.
What is the purpose in tracking expired, cancelled, or withdrawn listings? From my view, only solds matter. If something doesn’t sell, why do we need to know the reason? Are you saying that this category is smaller in times of high demand? If so, the high demand is already tracked by sales. What additional information is gleaned from tracking exp/canc/withdr?
When you say we should compare MI to pending, is that because you used Sold as the denominator? If so, why not have 2 metrics: MI using pending and MI using sales?
August 26, 2006 at 12:08 PM in reply to: 1 year ago — “Real estate guru: Local housing market stable” #33395powayseller
ParticipantJosh is right. I think they dropped 15-25%, depending on the area. For the SD County, it was near 15%. The exact data is on the OFHEO website. The Thornberg forcast chart is clearly wrong, and what is odd, is that that is the only chart is the entire report which does not have a source!!!!!!!!!!!!!!!!
I don’t know how much clearer I can be that I know his report inside and out.
Thornberg has a PhD in Economics, but the conclusions he draws are so erroneous, that I realized that you don’t need a PhD in Econ to make forecasts. You need common sense, and I’ve got plenty of that. I e-mailed Thornberg several times, pointing out the weakness in his forecasts. I’m done helping him out. He’s a nice guy, he’s charismatic, he’s real smart, but his forecasts are lousy. I think his popularity will dwindle over the years, as economists are judged by the accuracy of their forecasts, not their charm.
powayseller
ParticipantWhat could be 30% down, other than the most undesireable condos?
I am waiting for 30-50% down on SFHs. Even then, I would only buy if the bottom was hit, not if prices were still trending down. The biggest price drops ought to come in 2007 and 2008, as exotic loans reset and lenders tighten their lending guidelines, making it much harder to satisfy any existing demand.
Assume our sales go down to 20,000/year, which is half of 2005 sales (I think). At today’s rates and lending guidelines, any bozo can get a loan for a $1 mil house, so those 20,000 buyers will get their homes.
Now assume lenders want a 700+ FICO score, proof of income, max 28% of income to PITI, and 10% down. Subprime lenders are out of business and MBS investors got burned on bad loans, so that’s the reason for the higher standards. Now: how will those 20,000 potential buyers qualify for these homes? They won’t, so only 10,000 buyers can qualify, futher depressing demand and prices.
The change in lending standards, which has NOT even started yet, is going to drive prices down with a vengeance, IMO. We haven’t even seen the effect of ARM resets and tighter lending yet, nor the effect of buyer fear.
Anybody who thinks this is a good time to buy because we are back at 2005 or 2004 prices, hasn’t thought through all the factors that are going to bring this a lot lower.
Schahrzad Berkland
powayseller
ParticipantHardest hit, IMO, are outlying areas, condos, and builder tract subdivisions. Forget Temecula, Valley Center, San Marcos, El Cajon, Lakeside, and rural Poway where I sold my home (too remote).
Demand will stay high in coastal areas and near the cities. But who can buy these homes? So what if demand is high if the bank doesn’t want to give you a loan? What happens if the bank doesn’t have the liquidity to give the loans? Fannie Mae’s underwriting guidelines may seriously shift, and MBS investors might shun those products, instead preferring the high returns and safety of Treasury bills.
When credit dries up and buyers need 10% down, the demand for $1mil+ properties will shrivel up. How low will those houses go? The lot premium can really shrivel up; how about today’s $1.6 mil home for $800K? I can really see that happening, mainly due to the low wages here.
My musings are an extension of bugs’ comment above. We really don’t know how much lending will tighten up, but we need to remember that housing prices skyrocketed because subprime lenders, who are slowly going bankrupt, gave liar’s loans at 0% down to borrowers with FICO scores under 600.
powayseller
ParticipantThe auctions of foreclosed properties take place on the downtown courthouse steps at 10:30 am every Thursday, I think. An auctioneer calls off each house, and a group of bidders put in their bids. I wonder if anyone has attended these, just for fun. I wouldn’t buy a foreclosure because it’s way too early, and most important, you don’t get an inspection. You buy as is. What a stupid way to buy a house. What if it has 10% of its value in problems, like mold or leaky roof or cracked foundation?
August 26, 2006 at 8:18 AM in reply to: 1 year ago — “Real estate guru: Local housing market stable” #33368powayseller
ParticipantDaniel, I attended Thornberg’s conference in May 2006, and studied the forcast report he handed out at that time. I studied it in detail. I met with Ryan Ratcliff after the talk, and then spoke with some of the UCLA professors for almost one hour. So my comments about him are based on actual knowledge of his forecasts.
You may be relying on soundbites. For example,Thornberg says we are in a bubble, and many people wrongly interpret that to mean he thinks prices will drop. In his conference, he said, “A bubble means an asset price is disconnected from its fundamentals. It does NOT mean a price will drop. In the case of housing, prices will NOT drop, but wages will catch up. Don’t sell your house. That would be a mistake.”
Daniel, I don’t want to rewrite my analysis of Thornberg’s forecasts, but you can do a search, as I posted it all here, as well as on ocrenter’s site. If you want to debate with me, then please tell me where I am wrong in my analysis, or which of his specific conclusions you agree with and why.
powayseller
Participantsdrealtor, I don’t recall what you are talking about. The median is a lagging indicator, but it is the best we’ve got to show the pricing direction, albeit 1-2 years after the fact. I do believe in inventory, sales, and thus months inventory as a reliable indicator of the market. DOM is useless too, as it has the potential for abuse.
BTW, you were going to check with some oldtimers about pricing on coastal properties on the last downturn. Did you get any answers yet?
I don’t see that today is a good time to buy. As long as prices are falling, it’s a bad time to buy.
powayseller
ParticipantMr. Brightside, I love your blog. Yet, you are a mystery man. Can you tell us more about yourself, and how you get this juicy information. Have you ever attended the auction downtown?
powayseller
ParticipantI will hire a realtor. One of my leading indicators for a market turning is a realtor’s input, so I need to stay in touch with a realtor to know how the market is doing. I would NEVER use a person; i.e. pump them for information and then jump ship and buy from a cheaper competitor or without them. I would use a discount realtor.
SD Realtor, I can think of a long list of things that can go wrong if you don’t know what you’re doing, mostly having to do with the disclosures and repairs, that can end up costing you more than the realtor ever will. The repair list made by the inspector is a source of emotion, where deals can fall apart, because the seller is so hurt to see all the things wrong with his house, and can get real stubborn in refusing to fix them. The buyer is just as determined to not buy a house with problems and wants them all fixed. The realtors are the calm intermediaries, sorting out what needs to be repaired, vs. what is just cosmetic.
My realtors have worked every day on making calls to loan officers, termite guy, inspector, escrow officer, title company, and various others, to keep the escrow process moving.
When I sold my house, the buyers’ agent worked real hard for them. She was a ferocious beast, making sure every little repair was made, and she even got us to reduce our price by 5% by lying (I found out later) that the buyers had 2 other houses on which they would make offers, if I countered. When I asked my buyers about this later, they said, “Oh, we didn’t know we were interested in two other houses”. These people were first time buyers, and I could tell they appreciated having her there, to show them the ropes. Because so many problems and questions come up, and you want to know if your rights are violated, and without a realtor, who can you ask?
A realtor gives you the comps on the house you want to buy, letting you know if it’s a good deal or not. They know when a house is undervalued or overvalued. You can’t get that off ZipRealty. They negotiate on price, repairs, etc. They give you confidence that you are not being used by the seller.
If the seller has a realtor and you don’t, do you fell like you’re on equal footing? The seller has a pro representing them, but you don’t. Say your get your inspection done, and you have to make your list of inspection requests. Which one should you make that are considered common for our area? Say you ask for a roof repair. The sellers’ agent says “This is not something that is typically done in San Diego. Buyers have to do this on their own if they don’t like the roof. We will patch the leak only.” Will you go along with that answer? Does it seem fair? This is only 1 of 100 things that can happen.
When my realtor wrote our contract, she checked off so many boxes, based on what is typically done in this market. She entered “17” for “17 days to complete contingencies”, and various other numbers. How would you know how to do this without a realtor?
I would cast aside 95% of the agents I’ve met. I don’t want a used car salesman type of guy. One of those guys who is telling me the economy is strong now; I don’t want an ignorant fool like that.
I would hire the likes of Adam Rappoport (SD Realtor), Bob Casagrand, or Jim Klinge (bubbleinfo.squarespace.com). All three of these are professional men who speak the truth.
I’d say someone can do this on their own, as long as they know all the steps involved, their rights, and are very skilled at negotiating.
I used to say I would buy without a realtor, but in the last few months, I’ve changed my mind. I see their value.
But for those braver and more independent than I, what would be your source of info to know how to write contracts and negotiate? Don’t let me scare you, it certainly can be done on your own. But I really wonder if your representation is as good if you do it alone.
powayseller
ParticipantCarlsbadliving, I think the people in your category are so few, that I doubt they will move the market. I used “everyone who bought already did so”, as a figure of speech, a phrase that Ivy Feldman (analyst) used when talking about the effect of low interest rates, which shifted forward demand. She was asking the Toll Bros. “who still needs to buy?”
In my entire 6 years in San Diego, I only met one person outside of piggington who chose to rent not buy, and that is because she moved here in 2005 when prices were too high.
The people waiting on the sidelines are all on piggington. Maybe an exaggeration?
I think there is a group of people who are priced out forever, based on their career choices, so they may never be able to afford a house in San Diego. As harsh as it sounds, the premium on San Diego real estate and low wages means that many San Diegans will never be able to afford to buy a house. They call it the Sunshine Tax. Don’t confuse those people with people waiting on the sidelines.
Finally, people who are determined to own a house, have already left San Diego. The number of people who want to own in San Diego and haven’t bought yet, is very small in my opinion. Like I said, I am a big talker, and I know only one family in that category. The rest are young people who work at gas stations and restaurants such, and they say they would like to buy a house, but they never will. Their jobs don’t pay enough.
powayseller
Participantspeedingpullet, I make links on my Macbook using Safari.
I couldn’t figure out how to do it with the new rich-text editor though. Thanks rankandfile!
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