My first Voice of San Diego column, in which I made the case that there is no housing shortage in San Diego, drew some vaguely (and, in some cases, not so vaguely) hostile letters. This wasn’t too surprising in itself; what surprised me was that the letters all missed the point of the article. Each one berated me for failing to mention that there is a shortage of affordable housing in San Diego. Which is funny, because it sure seems to me like I have an entire website dedicated to discussing the unaffordability of Southern California homes.
This week’s Voice column, entitled Housing Is Unaffordable—For Now, discusses two issues. Part I explains that the point of the earlier Voice article was not at all to deny that there is an affordability problem, but to show that the standard rationalization for sky-high housing prices (too many people, not enough houses) is not valid. Part II discusses the fact that there certainly is a problem with housing affordability, but that due to economic realities this problem will eventually fix itself.
There are two points I wish
There are two points I wish to make about these complaints: first, they are only valid in a paradigm that says anyone other than the people buying the houses can control home prices; and second is that they assume that you can magically make a house for which someone is willing to pay market price cost less than market price. (I bet if you asked the objectioners, they’d say the govt. should provide these magic houses.)
The reason there are no affordable houses is that a lot of people are willing to pay a lot for most houses. According to the objections, there should be more houses for which people are not willing to pay a lot. And the only houses for which people are not willing to pay a lot are crappy houses in bad locations that no one wants. So yes, let’s have the govt spend huge amounts of our taxes to provide such housing! Great idea!
gov’t funded housing that
gov’t funded housing that provides “affordable” housing to low income earners are called “projects”.
go ask the occupants of “projects” in urban areas (LA, Detroit, New York) how nice it is to have “affordable” housing.
Most people can’t separate their emotions from financial decisions and this is what gets them into trouble. I can empathize with the drive to own a home to raise a family but the notion of “i better buy now at any price otherwise i will never own a home in california for the rest of my life” is just plain insanity.
“End of line.”
I agree completely! I
I agree completely! I hesitated naming the affordable housing, “projects,” and referring to New Orleans, et al because both ideas have a lot of political baggage. But you’re absolutely right.
There’s “simple demand”,
There’s “simple demand”, which in terms of the real estate market is comprised of that portion of the population which wants to own; and then there’s “effective demand”, which is a subset of the overall demand and is comprised of those people who not only WANT to own but have the means to effect those desires – those people who can AFFORD to own.
The two should not be confused with each other. Illegal immigration, new households being formed, young people leaving their parents’ homes – those are all examples of increasing demand that will basically mirror our population trends. However, very few of those entry level households will have the means to purchase at today’s prices. For now they shall have to be content with either renting here in SD, or else leaving town to own somewhere else.
Conversely, when some of those people who already own their home (or more accurately, hold a mortgage on that home) cash their positions out and take their equity out of state, they are reducing the effective demand by removing it (themselves) from the market. Combining equity flight with rising housing prices, increasing interests rates, the tightening of credit standards which is occurring even as we speak, and those are all contributors to how the level of effective demand can decrease at the same time the simple demand is increasing. An 8% affordability ratio isn’t indicative of a stable market. Market stability – and price sustainability – occurs when the affordability ratios are somewhere north of 15% of the population.
One thing I’d like to see Rich address is the effect of the demographics on our prices here. The Boomer generation is currently taking part in one of the greatest transfers of wealth in history as they inherit money from their parents, who are now dying off. There have been some opinions put forth that Boomers are foregoing savings and overspending on housing in part because they are either receiving or anticipate receiving windfalls as their parents die. In other words, some of the money fueling the real estate boom is not “earned” money, but is “inherited” money. Further, the theory puts forth that this trend will continue en masse until about 2010, at which point most of the transfers will have occurred and many of the Boomers will be nearing retirement in their own right.
How many of the retiring Boomers will be able to afford to stay in SD if they haven’t already retired their mortgages?
However, opinions are just that, opinions. I’d like to see some data and analysis that would address this one way or another.
I am a real estate agent
I am a real estate agent with a current license, that use to sell VA Repo’s to investors that wanted rental income. My rule of thumb is to value the property at 100 times the monthly rent. I quit selling in 1999
Bugs stated,” However, very few of those entry level households will have the means to purchase at today’s prices. For now they shall have to be content with either renting here in SD, or else leaving town to own somewhere else.”
I cannot sell an investor a house for 500,000 and tell him he’s going to get 5,000 dollars rent a month. The house I am living in right now is valued at $700,000 and I pay rent of $1,600 per month. It’s a nice house 2400 sq ft 4/3 in San Marcos.
My wife works for the Poway School District. Lots of money coming in with the new appraisals, from the new sales. The problem is, these people don’t have kids. School population is dropping.
Lets go a step further, “baby boomers are selling.” What do you do with a four bedroom house after the kids move out? Sell it to someone else with no kids?
I contend that if there was a shortage of housing, rental rates would zip through the roof. Also, its getting a bit peculiar to see 4 to 6 cars sitting outside some of these new landowners’ houses (the kids are moving home with families). Also it’s a little unnerving when you go to water the lawn and the sprinklers don’t pop up any more like they use to, the water pressure is dropping.
I think that the real problem is the banks, they will fund any thing to any body–in an up market, you cannot loose. I almost sold a VA repo, a condo, in 1998 that was on the VA’s books at 315K, and their listing was asking 75k and I thought that was insane at the time.
Well, its time to go figure. Like Mark Twain said, “History doesn’t repeat itself, it rhymes.”
Jim Brubaker wrote:
“I
Jim Brubaker wrote:
“I contend that if there was a shortage of housing, rental rates would zip through the roof. Also, its getting a bit peculiar to see 4 to 6 cars sitting outside some of these new landowners’ houses (the kids are moving home with families).”
Rents can only go up as much as wage earners can afford. Unlike ownership, there are no banks advertising “no interest rent subsidies” to enable folks to live in a more expensive place than they can afford. I think that is why rents have been relatively flat since early 2003. The rents have reached the level of what wage earners can afford to pay. (a 2 bedroom apartment at $1200 a month is “affordable” for a household income of $22.00 an hour).
Instead, the demand is being met with kids living at home, new college grads continuing their roommate lifestyles, immigrant families living in garages in the old neighborhoods, etc.
Here is a question which no
Here is a question which no one seems to ask, why all the new housing starts? What is teh relationship with new office buildings? Where are the new office parks? Where are all these new jobs being created? One does have to ponder where all these people are going to work? Housing is growing at 20% and jobs at 1% not to mention most of the jobs in this county are not going to pay the median price of a San Diego home mortgage.
Where is this growth the pro-housing people elude to? What housing shortage are they filling? As your story from last week the only industries soaring over the past 5 years were, real estate, construction and mortgages, they had a self sustaining party and we are going to be left with the check. While this will be a self correcting situation the question will be when. (not if)
They’ll build new office
They’ll build new office parks when they finally get occupants for all of the space they built in the late 80s.
Rich,
I suppose you’ll get a
Rich,
I suppose you’ll get a bunch of letters from people claiming you ought to fix the affordability problem.
The graph is priceless. That graph convinced me to sell my house. I pictured how it would look in a couple years, with the curve plunging to about 7.
Everytime someone quotes the CAR housing affordability index of 8, they should question the underlying assumption: who in the world has 20% to put down? And how often does it ever happen? When you consider that most people use 100$ financing, probably only 4% of people can afford the payments on the median priced home, which must be financed in its entirety. The other point is that everyone with a pulse has bought homes on the basis of stated income, 100% financing, partial-interest mortgages. The standards have really been lowered. Even the Fedex driver and dishwasher repairman own several rental properties!
And the real clincher: banks report the unpaid interest on Option ARMs as current income! What will happen when that interest is not repaid? How many banks will go under, similar to the S&L crisis in the 1980’s? This is a much larger scale though. And why hasn’t Fannie Mae reported its earnings in a couple years? What has gone so horribly wrong that they can’t figure out their earnings?
The point I’m making is that the housing bubble has permeated more than affordability. Its effects have extended to the possible bankruptcy of large corporations (Fannie Mae and large mortgage banks), and a sustained economic downturn as consumers stop spending. With that to look forward to, lack of housing affordability will look like a sweet dream from the past.
Well,not to worry. I’m
Well,not to worry. I’m already seeing first payment defaults on some of these $1,000,000 tract homes and the subsequent foreclosure sales. One broker in Carlsbad put 14 of them up at the beginning of January. If the Union Tribune’s knack for reporting real estate news long after it’s occurred stays consistent, we should start seeing articles on foreclosure activity sometime around June. Of course, even then they’ll probably just roll out the RE industry’s pet economists to say its just a blip.
Couched in the last
Couched in the last paragraph:
We live in an uncertain world, but I say the following with great confidence: unless wages start rising very fast, San Diego home prices will eventually have to fall. One way or another, the housing affordability problem will fix itself.
is the statement that housing prices must fall in real terms no matter what they do in nominal terms. That point is in there subtly, and I’ll bet the permabulls would miss that point. “Wages start rising very fast” is a polite way to say uber-inflation. In which case your “soft landing” of flattening nominal prices is a dramatic decrease in purchase power for the money you would get from selling a house. That still counts as a “correction” in my book, and I wish more people could recognize that. No, I wish more people could have recognized that years ago before this whole mess had grown to this point…
Alot of the comments and
Alot of the comments and lamentations I read on this and other sites alude to this notion that people should have realized whats going on in the past. Somehow that would have stopped the situation we are in. I don’t see how. Unlike stocks or bonds, until recently the tools to allow individuals to see the marketplace as a whole ie realtor, zip realty didn’t exist. People don’t make housing decisions for the most part based on some vague and unspecified notions of a marketplace. They make them for personal reasons. Factors such as family income, school districts, job locations etc. With the exception of people who are investors, most of us look to buy a house to make a home, and have a sense of permanence. How then could/should/would have more people recognized the mess years ago?
Thats like saying, I wish more people didn’t abuse their credit cards, don’t you know you have to pay them back? Obviously alot of people didn’t or couldn’t know and so we all pay the price.
Josh
Josh,
I can’t be certain
Josh,
I can’t be certain that you will continue to check this thread but here goes nothing….
You are certainly correct in your observation that everyone is different and their motivations for buying are equally different. However, to conclude that if people were more clairvoyant or more educated this whole “mess” as you describe could/should/would have been avoided. Sorry, I’m not trying to put words in your mouth but that is how interpreted your statement. Anyway, this is overly simplistic and certainly in no way excuses people from making financial mistakes.
The whole point of this site was to provide the community at large an objective, unbiased analysis of what were the causative agents for the rapid real estate appreciation. For years we have heard that the run up in real estate prices were fueled by too many buyers and not enough homes coupled with low interest rates. Read through the bubble primer and it becomes quite clear that this was not the case. So what caused the real estate run up? Out of control speculation fueled by overextended borrowers (in a nutshell).
Therefore, the credit card analogy is quite frightening when you consider that people treated their homes EXACTLY like credit cards and now have rung up hundreds of thousands of dollars in bills that can’t be paid when the I/O and option ARMs reset.
And how did people get into this predicament? Not because they weren’t savy in economics or clairvoyant but rather fell victim to emotions and hype regarding real estate. The whole mantra of “buy now or you will be priced out forever” will end in a nightmare for those that overextended their finances just so they can “own” a home.
“End of line.”
Then I suppose we agree. I
Then I suppose we agree. I for one watched my parents lose one house and almost lose a second in the last bubble. I also watched their marriage dissolve partly because of it. I am very gun-shy about real estate because of those experiences. I also tend to want to analyze things. That makes me, and by your being here you different.
I guess I see it in terms that people aren’t smart enough to do due diligence, and hence cannot avoid falling victim. This then leads to the concept that these bubbles in assets are unavoidable given that this is so. At what point does a crazy or risky behaviour become so commonplace its no longer crazy? We will see in the coming few years but of course caught in the moment I don’t believe most were capable of making an informed choice.
Alot of these people also bought Pets.com! Credit cards are an imperfect analogy, because by their very nature they are short term bad debt. Real estate by its nature is long term and can be very good debt. As I pointed out though and you agree people have used them in the same manner for the last few years, and that is shudderingly bad.
Despite the length of this post the real point is that regardless of our minor disagreements we do agree that what has happened is not good. Now going forward how do we avoid getting hurt ourselves and hopefully profit by the coming bloodletting?
Josh