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

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Submitted by moneymaker on March 8, 2017 - 11:14pm

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.

Submitted by Rich Toscano on March 9, 2017 - 9:14am.

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

Submitted by moneymaker on March 9, 2017 - 9:32am.

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.

Submitted by Rich Toscano on March 9, 2017 - 9:51am.

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!

Submitted by no_such_reality on March 9, 2017 - 11:36am.

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

Submitted by bewildering on March 9, 2017 - 12:17pm.

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/califo...

Submitted by Rich Toscano on March 9, 2017 - 12:38pm.

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

What's that got to do with it?

Submitted by Rich Toscano on March 9, 2017 - 12:47pm.

bewildering wrote:
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/

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.

Submitted by sdsurfer on March 9, 2017 - 2:49pm.

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.

Submitted by spdrun on March 9, 2017 - 2:55pm.

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.

Submitted by sdsurfer on March 9, 2017 - 3:15pm.

spdrun wrote:
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.

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

Submitted by AN on March 9, 2017 - 3:59pm.

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.

Submitted by gzz on March 9, 2017 - 8:00pm.

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.

Submitted by AN on March 9, 2017 - 8:53pm.

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.

Submitted by Reality on March 9, 2017 - 10:02pm.

Rich Toscano wrote:
bewildering wrote:
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/

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.

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?

Submitted by millennial on March 9, 2017 - 10:55pm.

I would agree that typically rates have an inverse correlation with price. But as others have pointed, is that inflation (natural or artificial) will counteract to a larger degree. If you're a renter holding cash you would be hoping for the former and owners will hope for the latter. Based on historical experience of watching the fed throw the kitchen sink in when necessary makes me bet on the latter. Sorry savers you should buy a house while you still can.

Submitted by spdrun on March 9, 2017 - 11:35pm.

You're assuming that nominal pricing of anything is linear, which it is often not. Especially when we've gone from no-drama Obama in charge to the drama queen in chief with his retinue of clowns.

A significant % of SD County's population is very worried right about now, and worried people don't like to sign long-term leases, spend money, or invest in property with family. It's depressing, because the situation of most immigrants (legal or not) isn't much different than my family's 40 years ago.

Question is, will the left side of the aisle do everything in its power to provoke chaos before the 2018 and 2020 elections? It's telling that Yellen (Obama appointee) is yipping about raising rates, even with crummy growth estimates for Q1-17:

http://seekingalpha.com/article/4053152-...

A recession might be seen as "less damage" than GOP being successful.

Submitted by AN on March 10, 2017 - 12:08am.

spdrun wrote:
A significant % of SD County's population is very worried right about now...
A significant % of SD County's population can't afford to buy here, so why does that even matter? In several zip codes, we have < 1 month of supply and anything house that isn't run down, on/back a busy street, and isn't way overpriced flies off the market pretty quickly. So, your assumption is totally off here.

spdrun wrote:
Question is, will the left side of the aisle do everything in its power to provoke chaos before the 2018 and 2020 elections? It's telling that Yellen (Obama appointee) is yipping about raising rates, even with crummy growth estimates for Q1-17:

http://seekingalpha.com/article/4053152-u-s-economic-growth-slowing-q1

For the sake of the nation, I hope that a fed chair isn't a political hack. I would assume she has more integrity than you and won't bring down a global economy just because she doesn't like the sitting president.

spdrun wrote:
A recession might be seen as "less damage" than GOP being successful.
Only if you're a total nut job.

Submitted by spdrun on March 10, 2017 - 12:24am.

A significant % of SD's population might not be able to afford to buy, but still drives rental prices, which in turn control valuation metrics.

Nutjobs -- yeah, there's enough crazy to go around this year and then some.

Submitted by AN on March 10, 2017 - 1:13am.

As long as they're still living here, then they can only drive rental price up, not down.

Submitted by millennial on March 10, 2017 - 1:47am.

AN wrote:
As long as they're still living here, then they can only drive rental price up, not down.

What if no one can afford to buy higher rental apartments due to wages not increasing?

Submitted by moneymaker on March 10, 2017 - 5:12am.

spdrun wrote:

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.

Not sure where you got this from spdrun but I suspect the numbers could be way higher. If Donald deported all illegals living in San Diego I believe it would bring down rents in San Diego due to the number of vacancies. I don't see this happening, but is something that is possible.
Now if rents were to drop, would that affect home prices? Is there any anecdotal evidence out there? Almost not worth worrying about, but none the less a very interesting point that I had not even considered.

Submitted by ocrenter on March 10, 2017 - 7:32am.

moneymaker wrote:
spdrun wrote:

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.

Not sure where you got this from spdrun but I suspect the numbers could be way higher. If Donald deported all illegals living in San Diego I believe it would bring down rents in San Diego due to the number of vacancies. I don't see this happening, but is something that is possible.
Now if rents were to drop, would that affect home prices? Is there any anecdotal evidence out there? Almost not worth worrying about, but none the less a very interesting point that I had not even considered.

Somehow I don't think the illegal population is responsible for driving up cost of rent...

Submitted by ocrenter on March 10, 2017 - 7:37am.

spdrun wrote:
You're assuming that nominal pricing of anything is linear, which it is often not. Especially when we've gone from no-drama Obama in charge to the drama queen in chief with his retinue of clowns.

A significant % of SD County's population is very worried right about now, and worried people don't like to sign long-term leases, spend money, or invest in property with family. It's depressing, because the situation of most immigrants (legal or not) isn't much different than my family's 40 years ago.

Question is, will the left side of the aisle do everything in its power to provoke chaos before the 2018 and 2020 elections? It's telling that Yellen (Obama appointee) is yipping about raising rates, even with crummy growth estimates for Q1-17:

http://seekingalpha.com/article/4053152-...

A recession might be seen as "less damage" than GOP being successful.

A recession will likely occur regardless of Yellen.

Reminds me of Gingrich blaming high gas prices on Obama.

Submitted by ocrenter on March 10, 2017 - 7:50am.

Rich's valuation graph: ...Rich's valuation graph: ...

Just roughly looking at Rich's valuation graph. Peak was 180, historic median at 105. That was roughly 40% reduction. You got a few folks that lucked out and hit 50% reduction, just like you had some folks that got 30% reduction, the average thus being 40%.

Now we are at 125, getting down to historic median of 105 takes a 15% drop, not 50%.

Very likely given timing wise we are due for a recession soon.

The question here is it is a no brainer to wait for the bubble crash. Is it worth waiting for a 15% cyclical adjustment.

Submitted by no_such_reality on March 10, 2017 - 8:23am.

Rich Toscano wrote:
no_such_reality wrote:
True, but only because the Government intervened and allowed all the weak hands to hold properties. Especially the banks.

What's that got to do with it?

In order for prices to fall, homes have to be allowed to sell. That banks were allowed to constrict supply, not liquidate their repos, not foreclose and float their balance sheets to prevent steeper falls on home prices. You add HAMP, HARP and HARP 2.0 and homes that would have ended up on the market were all kept off the market.

Submitted by Rich Toscano on March 10, 2017 - 8:42am.

no_such_reality wrote:
Rich Toscano wrote:
no_such_reality wrote:
True, but only because the Government intervened and allowed all the weak hands to hold properties. Especially the banks.

What's that got to do with it?

In order for prices to fall, homes have to be allowed to sell. That banks were allowed to constrict supply, not liquidate their repos, not foreclose and float their balance sheets to prevent steeper falls on home prices. You add HAMP, HARP and HARP 2.0 and homes that would have ended up on the market were all kept off the market.

I meant, what does that have to do with the current conversation? I don't see the relevance.

Submitted by AN on March 10, 2017 - 9:06am.

millennial wrote:
AN wrote:
As long as they're still living here, then they can only drive rental price up, not down.

What if no one can afford to buy higher rental apartments due to wages not increasing?

Then they would move out of SD or become homeless. If they're here, then they won't be driving down rent.

Submitted by no_such_reality on March 10, 2017 - 9:24am.

Rich Toscano wrote:
no_such_reality wrote:
Rich Toscano wrote:
no_such_reality wrote:
True, but only because the Government intervened and allowed all the weak hands to hold properties. Especially the banks.

What's that got to do with it?

In order for prices to fall, homes have to be allowed to sell. That banks were allowed to constrict supply, not liquidate their repos, not foreclose and float their balance sheets to prevent steeper falls on home prices. You add HAMP, HARP and HARP 2.0 and homes that would have ended up on the market were all kept off the market.

I meant, what does that have to do with the current conversation? I don't see the relevance.

I was responding to the comment that prices didn't fall 50% post bubble, which they didn't, but only because the market was massively tampered with.

For going forward it's not, other than we didn't have the shake out we should have and many are still priced in constricting supply. They can get the price they need to get out, but really can't get a new place short of leaving the State.

That actually points to continued rising prices. It's kind of like Irvine. Why are prices so high in Irvine? The answer is simple, IMO, from 2010 to 2015 Irvine has built several thousand homes, they've only built 4000 detached SFRs. Since 2010, Irvine's population has grown, from 2011 to 2015 the number of Irvine household's making over $200K/yr has grown by 4000+ households.

JIMHO, but for suburbanite living like in Irvine, the detach SFR is the style of housing the vast majority desire.

Submitted by moneymaker on March 10, 2017 - 12:25pm.

I realize my original post is not 100% logical, if house prices just keep up with inflation and interest rates rise from here on then now, and I mean right now, might have been a good time to buy, but going forward with rates potentially going up and house prices not softening then I would say no, it's not a good time. I guess I just want to be the first in a while to say we are in a bubble. It feels like 2003/2004 all over again with differences of course. Fewer ARM's most flippers being REIT's and have to prove income for individuals/households. Don't know what will pop this bubble, but I know it will deflate at some point. And as to house prices dropping only 15%, that would mean you would only save about $1000 on the average home reassessment,which would be a smaller savings.

Submitted by no_such_reality on March 10, 2017 - 9:15pm.

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

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