How things normalize

User Forum Topic
Submitted by Escoguy on July 7, 2017 - 9:09pm

So yes prices continue to rise in SD. Inventory is tight and rents are rising.

But somehow methinks there are subtle trends below the surface which are happening and will gradually bring us to a more sustainable place.

Not that price need to fall, but they certainly don't need to rise faster than wages and overall inflation, thus the fixation on housing can be allowed to fade some so we look at it rationally.

While some of this is anecdotal or even tongue in cheek, there are hard facts here too.

Trends which may moderate housing price growth:
1. gradual increase in interest rates, 10 year at 2.386%
2. Chinese funds have cooled off, at least for now and usually the Chinese govt waits a few years to reverse policy
3. less immigration to US (legal and otherwise) under DT
4. rents flat or declining in some major US markets like San Fran, Silicon Valley,
5. High end sales flat in places like New York
6. signs that not every millennial wants to have 3 roommates to live in San Fran to afford the $4K/month rent for a 1BR
7. low inflation helps offset some of problem of low wage growth
8. the endless debate about repeal or replace ACA/Obamacare causes some to put of making long term financial decisions (greater uncertainty)
9. everyone wants to buy a Model 3 now as that's a more fun way to spend money
10. days like today are too hot to look for housing (seasonal effect is actually quite pronounced in SD)
11. SD has been "discovered" already and everyone who wanted to buy has :)

OK, this doesn't meant there is suddenly more inventory in San Diego at <600K but some of the short term pressure might be taken off which would allow more deliberate decisions on the part of renters/investors about whether to buy/hold/sell.

I can see how older investor owners who don't have family to leave the homes to might want to consider selling in this market especially if they own multiple properties.

Perhaps this is just wishful thinking but in some ways, the most boring scenario is actually the most interesting for most owners. I.e. that prices stabilize and don't see a massive swoon downwards due to some unforeseen economic events/banking crisis/ funny mortgages etc.

Please chime in if you think this thought process is off base.

Submitted by spdrun on July 8, 2017 - 9:34am.

I take issue with 9. a rental house makes money. A rolling iPad costs money. I'd rather have an electric motorcycle. 0-60 in 4s without the nannycrap and 24/7 tracking of the Model 3.

Submitted by moneymaker on July 9, 2017 - 8:18pm.

In regards to #3 I've heard that deportations are twice what they were with Obama. If this continues or accelerates it could definitely impact rents. During the last housing crisis rents were reasonable. what started the snowball last time was layoffs. If companies start laying off i.e. like Microsoft did and is doing then more companies may see this as a way to prop up stock prices which would grow the snowball. It's all about jobs! Good jobs are good for the economy...

Submitted by gzz on July 10, 2017 - 8:58am.

It takes years to deport a non-felon illegal immigrant who has a lawyer. Nothing Trump can do about that. The only way he could significantly increase deportations is trying to find the estimated 950,000 people who already have removal orders but are hiding out. But that is 0.3% of the US population.

Any large reduction in immigration would have to pass the Senate, which will never happen because most senators supported Rubio's bill to increase immigration.

Submitted by harvey on July 10, 2017 - 9:55am.

moneymaker wrote:
In regards to #3 I've heard that deportations are twice what they were with Obama

Gee, I wonder who's reporting that "news"

Quote:
If companies start laying off i.e. like Microsoft did and is doing then more companies may see this as a way to prop up stock prices which would grow the snowball. It's all about jobs! Good jobs are good for the economy...

Great line of reasoning.

Submitted by spdrun on July 10, 2017 - 12:37pm.

gzz - this assumes Trump is willing to operate within the law. Good luck suing from outside the US.

Also, this doesn't take the chilling effect of arrests and harassment into account.

Submitted by bewildering on July 10, 2017 - 12:54pm.

Escoguy wrote:

Trends which may moderate housing price growth:
1. gradual increase in interest rates, 10 year at 2.386%
2. Chinese funds have cooled off, at least for now and usually the Chinese govt waits a few years to reverse policy
3. less immigration to US (legal and otherwise) under DT
4. rents flat or declining in some major US markets like San Fran, Silicon Valley,
5. High end sales flat in places like New York
6. signs that not every millennial wants to have 3 roommates to live in San Fran to afford the $4K/month rent for a 1BR
7. low inflation helps offset some of problem of low wage growth
8. the endless debate about repeal or replace ACA/Obamacare causes some to put of making long term financial decisions (greater uncertainty)
9. everyone wants to buy a Model 3 now as that's a more fun way to spend money
10. days like today are too hot to look for housing (seasonal effect is actually quite pronounced in SD)
11. SD has been "discovered" already and everyone who wanted to buy has :)

Please chime in if you think this thought process is off base.

1. Interest rates remain at historic lows. Even 5% is low.

2. I do not think the Chinese were ever a large part of the San Diego market - more OC?

3. Immigration will continue, and I have no doubt that population growth in San Diego will continue, Whether from abroad or from other parts of the USA.

4. Rents in SF are insane and make San Diego rents look cheap. Rent will rise until fewer people look for houses.

5. High-end sales seem to be flat everywhere - I see loads of places for sale in La Jolla. I am never sure who is buying 1.5 million+ houses?

6. When millennials start having kids, that is when they look for SFHs. My feeling is that people are delaying having a family.

7. IMO inflation is not low, we just do not count inflation properly. Wage growth is also high for high-income people, we also do not count wage growth properly, an average is pointless.

8. People buying houses are not worried about healthcare. They are middle-aged and mostly get insurance through a job.

9. People do not want a model 3 when having a family.

10. Dunno about weather effects.

11. :)

Bonus point: Trump is putting more money into military, which always helps San Diego.

Submitted by FlyerInHi on July 10, 2017 - 1:25pm.

Normalize? Maybe not.

Maybe the gap between first tier cities and third tier cities will grow wider.

Submitted by harvey on July 10, 2017 - 3:33pm.

spdrun wrote:
gzz - this assumes Trump is willing to operate within the law. Good luck suing from outside the US.

Trump is not above brazenly ignoring the law but I'm sure most of federal government is not.

The checks and balances of our system don't just include the other branches. We also have to give credit to the thousands of people working for the executive that have the courage to stand up to his bullshit.

Quote:
Also, this doesn't take the chilling effect of arrests and harassment into account.

There will be some of that, but I don't see it influencing housing prices.

Submitted by spdrun on July 10, 2017 - 3:42pm.

True. But the long term effect of the BS is to make the US a more unpredictable place and increase uncertainty. Case in point: he just pulled a subclass of entrepreneur visas. People who feel their residency is at risk are less likely to want to invest.

Submitted by KristopherSD on July 13, 2017 - 3:01pm.

28 year old millennial reporting in. I wasn’t in a position to buy during the the bulk of the prices increases over the last few years. I could have conceivably purchased in 2015 but thought that prices couldn’t go much higher. Clearly I was dead wrong! I’m looking in the Talmadge area and prices are absolutely skyrocketing. I’m talking $100k+ increases in a single year between very similar properties.

The money is flowing everywhere here and i’m unsure how people are doing it. Looking at the average downpayment for the area over the last few months people are putting down under 7% and prices are $675k+. So somehow they are managing $4000 or more payments for these places. That requires two hefty incomes. I’ve saved enough to put well over 20% down but am getting hammered by people offering above asking almost immediately after places are listed.

Looking further east even to Santee places are going for over $500k. These are starter homes that need work. I dont see how any first time buyer can afford these prices without either seriously stretching or help from mom and dad. I feel fortunate to have saved so much but at the same time like a fool for missing out on the massive price increases. Savers are apparently losers!

I don't see how things can normalize at this rate. To me it's people with equity from price increases trading with others with equity. I doubt there are many organic first time buyers at these prices. Things will keep going higher and higher and either it flattens out or violently crashes again.

Submitted by gzz on July 13, 2017 - 4:35pm.

Mostly agree with bewildering, but not here:

bewildering wrote:

5. High-end sales seem to be flat everywhere - I see loads of places for sale in La Jolla. I am never sure who is buying 1.5 million+ houses?

...

7. IMO inflation is not low, we just do not count inflation properly. Wage growth is also high for high-income people, we also do not count wage growth properly, an average is pointless.

In the 92107 zip that I track closely, the 1.2m+ range was slow 2012-2015 even as the mid to low end of that market was very hot. In mid-2016, the high end joined the rest of the market and you started seeing lots of sales in that range, and average time to sell $1.2m houses go pretty suddenly from ~6 months to 1.5-2 months.

June 30 saw two different $2.5m sales in one day, one a tear-down and new construction, the other one a 1912 7,000 sf mansion that had been on and off the market for years.

As for inflation, I disagree that it is higher than what the government reports. People have a cognitive bias where they remember prices that are going up better than prices going down. A number of private efforts to measure US inflation all come very close to the official US Gov number, which itself is one of several measures that are all pretty close to each other (CPI-U, GDP deflater, etc).

Submitted by gzz on July 13, 2017 - 4:42pm.

KristopherSD:

"So somehow they are managing $4000 or more payments for these places."

Remember that $4000 monthly payment includes maybe $1000 going to equity and another $1000 off your income taxes. So are they getting something better than they could rent for $2000? Because that is the effective price they are paying, not $4000.

I made my first purchase in SD at the bottom of the market when I was 30. Did not get family help, had to save the 5% down payment myself. Best financial decision of my life, between rent and tax savings and appreciation, I might be up half a million dollars on it. And I like living there too. I refinanced into "no cost" 20% down loan about 10 months after the purchase. This was easy to do, and would be my suggestion given the difficulty of saving from working 20% of the typical San Diego home.

Submitted by Friend on July 13, 2017 - 7:09pm.

KristopherSD,

I'm coming from a very similar situation, thanks for sharing and know that there's another millennial that shares the same perspective :)

I've been hearing about (and seeing) the $100k increases myself and it's wild.

Submitted by moneymaker on July 14, 2017 - 9:03am.

Similar to gzz and others I have refinanced 3 times since buying in 2009, first was to get out of PMI, second was to get a lower rate and shorter term, 3rd time was for the same reason. I'm glad I'm not looking for a place in this market because I feel that the chances of a 20% increase in equity is about the same as a drop in value. Tough call! "Cash Call" wants everybody to use their house as an ATM, sound familiar? Obviously, I would have probably been better off to not pay points the first time around. Did not pay them the last time and still got an amazing rate.

Submitted by bewildering on July 14, 2017 - 10:34am.

gzz wrote:

In the 92107 zip that I track closely, the 1.2m+ range was slow 2012-2015 even as the mid to low end of that market was very hot. In mid-2016, the high end joined the rest of the market and you started seeing lots of sales in that range, and average time to sell $1.2m houses go pretty suddenly from ~6 months to 1.5-2 months.

June 30 saw two different $2.5m sales in one day, one a tear-down and new construction, the other one a 1912 7,000 sf mansion that had been on and off the market for years.

As for inflation, I disagree that it is higher than what the government reports. People have a cognitive bias where they remember prices that are going up better than prices going down. A number of private efforts to measure US inflation all come very close to the official US Gov number, which itself is one of several measures that are all pretty close to each other (CPI-U, GDP deflater, etc).

You could be right regarding high-end properties. My only evidence is based on looking at Redfin. I live in Bay Ho, and there are not many houses for sale (all under 1million). When I scroll across to La Jolla there seem to be lots and lots of houses for sale (all above 1 million).

I always judge inflation studies with a little suspicion after reading "The 2 income trap". I guess Warren convinced me that 'necessities' have outstripped the published inflation rate: such as utilities, housing, education, healthcare and childcare. Whereas 'wants' such as cars, fast food, restaurants, and consumer goods have all been in deflation.

Submitted by harvey on July 14, 2017 - 2:58pm.

The title of the OP is flawed.

There really is no thing as a normal market, but there's nothing abnormal about the current market either.

Get used to it.

Submitted by Escoguy on July 14, 2017 - 11:10pm.

As far as normal, usually if everything else is in balance, real estate prices should track increases in personal income.

As there have been so many extraordinary factors in the SD market in the past 20 years, there has been excessive volatility which has created both massive wealth destruction and creation.

So when I say normal, which SD will likely never be completely, its more like what would it take for the market to be driven entirely be fundamentals such as incomes/rental values and not speculation or a reaction to short term rates.

If speculation and low rates play a lesser role, then things are more normal.

Some markets go through long periods of stagnation after long periods of increases.

I spent years in Germany in the early 90s and recall how prices were increasing greatly there only to stop in the late 90s and not move for over a decade.

Prices in Berlin got really cheap at 5 times annual rent around 2004-05.

Now, they've almost doubled again. That was partly driven by capital flows out of Germany to other parts of the EU prior to the financial crisis.

The closest comparison I can think of in the US would be for investors to realize the cash on cash return (non appreciation) is so much higher in other parts of the US that the market in places like SD becomes more focused on the owner occupied rather than investor crowd.

Submitted by moneymaker on July 15, 2017 - 7:57am.

Graphs are always good https://fred.stlouisfed.org/series/SDXRSA
As far as normal, yes even for San Diego there is a normal.

Submitted by harvey on July 15, 2017 - 8:53am.

Tell us how that graph defines San Diego's "normal" - in particular how the definition applies to the year 2017.

Submitted by moneymaker on July 15, 2017 - 2:07pm.

The graph does not mention San Diego nor do I intend to imply that 2017 is/was normal. But it is normal for real estate to go up and then down. We are in a similar situation as 2005, when people thought it couldn't keep going up and yet it did until it didn't anymore. Rates are obviously much lower now than they were then so things could continue on for some time possibly.

Submitted by sellshomes on August 1, 2017 - 5:03am.

I'm in real estate. There's definitely buzz about resetting home mod loans defaulting. This could bring some more inventory to the market. Definitely building inventory in the above average home price here. And plenty of higher end luxury homes to choose from (buyers market). There is a shift coming to this area, not sure how SD will play out but personally don't see how the sunshine salaries are going to keep the housing market so propped up. Love to hear different points of views on this.

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