Hope springs eternal: talk that housing has bottomed

[SeanO]

Re: Hope springs eternal: talk that housing has bottomed

One market that seems to be holding on but is slipping slower than the other markets is Davis. UCD is there. This little college town offers a lot of reasons why prices slide less than the surrounding communities in the valley.

Again... EJ's Geographic Regions Cascade theory fairly well explained this. The most desirable pockets will be the last to fall back to affordable levels, and it won't be over until they do.

I always get a chuckle reading the "10 best places to buy" articles as they inevitably focus on areas that have seen values drop the least - yet those areas are the ones most likely to still correct. I'm a believer in location, location, location, but when only 15% of residents can afford a home you have a problem. When 70% can, you don't.

[Sharky]

Re: Hope springs eternal: talk that housing has bottomed

A number of these Central Valley markets in California are now off 50-70% and affordability based on current incomes is nearing record highs. Prices could deteriorate further if interest rates or unemployment rise significantly, but for now these harder hit areas have likely bottomed as they are affordable to first time buyers, and attractive to investors given current rents. Further, REO's have slowed and it is not unusual to see multiple offers on well priced properties (there is still inventory that is overpriced, and not selling).

Why do you think that property that has already gone down 50 to 70% can't continue to go down? I suspect that the days of "affordability" being based only on monthly payments are almost over.

Why would risk-averse lenders be eager to lend to first-time buyers? First time buyers of today are going to need a much larger downpayment than they would have a few years ago. Will they have that cash? Are their jobs secure?

What do you think will happen as the prime and Alt-A resets continue to hit this year? More foreclosures, or less? As unemployment goes up, will there be more foreclosures, or less? As people eat through their savings after having lost their jobs? As businesses close down and move out of the area? As interest rates increase from their current historically low levels?

It's hard for me to imagine a bottom in the current market environment, much less a recovery.

[nero3]

Re: Hope springs eternal: talk that housing has bottomed

How expensive is house prices if they are deflated by the rise in health care costs, energy, or cost associated with transportation, as measured by the dow jones transportation index?

I think prices are lower than most think they are.

[Guest]

Re: Hope springs eternal: talk that housing has bottomed

SeanO - I've been reading your comments in this thread with interest and I think you are spot on. I am in San Diego, and I've seen homes with a mortgage cost after 20% down that would give all the comparable condos in their neighborhood a real run for their money. The city's valuations have taken a serious beating, but the rental rates have held rock steady city wide all through this, and (I think) we were one of the earlier markets to correct so we are fully two years into full blown correction. Rental rates are going precisely nowhere in response to this weakness. Some astoundingly cheap deals are now cropping up, in absolute terms. This is a notably geographically constrained city with a healthier job market (relatively) than other parts of california, but I'm seeing (a few) attractive 3 bedroom homes approx. 1500-1600 square feet, right smack in the solid center city neighborhoods near SDSU, in prime rental areas, falling out of bank sale escrows and in a couple of instances they are selling for $250K? These neighborhoods had a median between $550K and $600K two years ago. Median income in SD is around $60K, so you can see the affordability quotient you are talking about cropping up right in the middle of California's second largest (and quite sought after!) city right now. I therefore think your comments are alert, macro-trends-agnostic, and highly observant.

Again... EJ's Geographic Regions Cascade theory fairly well explained this. The most desirable pockets will be the last to fall back to affordable levels, and it won't be over until they do.

I always get a chuckle reading the "10 best places to buy" articles as they inevitably focus on areas that have seen values drop the least - yet those areas are the ones most likely to still correct. I'm a believer in location, location, location, but when only 15% of residents can afford a home you have a problem. When 70% can, you don't.

[SeanO]

Re: Hope springs eternal: talk that housing has bottomed

Why do you think that property that has already gone down 50 to 70% can't continue to go down? I suspect that the days of "affordability" being based only on monthly payments are almost over.

At the end of the day people need a place to live, and people have capital to invest. When purchasing becomes cheaper then rent, and ROI's rise to the point it's worth the hassle of being a landlord, properties will sell.

Why would risk-averse lenders be eager to lend to first-time buyers? First time buyers of today are going to need a much larger downpayment than they would have a few years ago. Will they have that cash? Are their jobs secure?

Thanks to Uncle Sam, lending within conventional loan limits remains easier than during most of our history excluding just a few years. Certainly easier to get a loan today than it was in 2000, yet prices in the hardest hit areas have fallen well below 2000 levels.

What do you think will happen as the prime and Alt-A resets continue to hit this year? More foreclosures, or less? As unemployment goes up, will there be more foreclosures, or less? As people eat through their savings after having lost their jobs? As businesses close down and move out of the area? As interest rates increase from their current historically low levels?

There is little evidence that resets are now, or have ever, driving foreclosures. The simple truth is that price declines and negative equity drive foreclosures. The Boston Fed did a good study on this, as have others. These areas were the first to start dropping in price - due primarily to overbuilding and builder discounting. These price declines triggered those with the least to lose (subprime borrowers) to walk - thus resulting in many people dubbing this a subprime crisis. As those folks walked the loans that enabled the artificial appreciation that occurred from 03-07 went away (subprime, pay-option, interest only, 100% financing, etc.), and at that point prices began crashing back to levels people could afford based on the now available loan terms. As prices fell back to affordable levels sales activity returned and the markets in these areas have begun to stabilize.

Clearly if household incomes suffer significantly, or interest rates rise significantly prices will have to adjust to levels that are affordable at those incomes and rates. Though some pockets within these areas have already over-corrected to a point where I think you could have a 10%+ decline in household incomes and prices would still be affordable. (At 70% off that puts us back at mid-90's prices when incomes were 25% lower and foreclosures were high due to the last wave of overbuilding).

It's hard for me to imagine a bottom in the current market environment, much less a recovery.

The issue is that is an over-generalization. As EJ explained in Geographic Regions Cascade, different areas will be at different points in the curve at different times. When people suggest that the market has bottomed, you have to ask "which market".

[GRG55]

Re: Hope springs eternal: talk that housing has bottomed

At the end of the day people need a place to live, and people have capital to invest. When purchasing becomes cheaper then rent, and ROI's rise to the point it's worth the hassle of being a landlord, properties will sell.



Thanks to Uncle Sam, lending within conventional loan limits remains easier than during most of our history excluding just a few years. Certainly easier to get a loan today than it was in 2000, yet prices in the hardest hit areas have fallen well below 2000 levels.



There is little evidence that resets are now, or have ever, driving foreclosures. The simple truth is that price declines and negative equity drive foreclosures. The Boston Fed did a good study on this, as have others. These areas were the first to start dropping in price - due primarily to overbuilding and builder discounting. These price declines triggered those with the least to lose (subprime borrowers) to walk - thus resulting in many people dubbing this a subprime crisis. As those folks walked the loans that enabled the artificial appreciation that occurred from 03-07 went away (subprime, pay-option, interest only, 100% financing, etc.), and at that point prices began crashing back to levels people could afford based on the now available loan terms. As prices fell back to affordable levels sales activity returned and the markets in these areas have begun to stabilize.

Clearly if household incomes suffer significantly, or interest rates rise significantly prices will have to adjust to levels that are affordable at those incomes and rates. Though some pockets within these areas have already over-corrected to a point where I think you could have a 10%+ decline in household incomes and prices would still be affordable. (At 70% off that puts us back at mid-90's prices when incomes were 25% lower and foreclosures were high due to the last wave of overbuilding).



The issue is that is an over-generalization. As EJ explained in Geographic Regions Cascade, different areas will be at different points in the curve at different times. When people suggest that the market has bottomed, you have to ask "which market".

Even though I am not in the market for a California house [or any other house for that matter], this is a fantastic thread because of the front lines knowledge of so many of the contributors.

Having witnessed the housing crash in the oil sector economies of Alberta, Texas and Oklahoma in the 1980s [iTulip member World Traveller has also posted about his experience during that time in Houston, Texas], I very much get the impression that some markets are at the point of maximum pessimism, and SeanO recognizes what may be hard for others to see.

But just because it may have hit bottom doesn't mean any local market is coming back any time soon...

[mesyn191]

Re: Hope springs eternal: talk that housing has bottomed

but I'm seeing (a few) attractive 3 bedroom homes approx. 1500-1600 square feet, right smack in the solid center city neighborhoods near SDSU, in prime rental areas, falling out of bank sale escrows and in a couple of instances they are selling for $250K? ... Median income in SD is around $60K

That is still too much though. $250K is over 4x an avg. yearly income of $60K. When it gets to 3x or less avg. yearly income then that is the time to buy.

Also you guys have to remember that boom went on for so long that rent was pushed up accordingly. I remember renting out a 2 bed/bath for $1100 in Lake Forest, 4-5 years later though the price had risen to over $1600 and for no good reason whatsoever. Other than a paint job they had done no work on the place at all. AFAIK rents are starting to fall in some areas, and there is no way a housing bust can truly end while unemployment is still rising rapidly. After all unemployment like what we've been getting historically was enough to cause a mild-moderate housing bust all by itself.

[Guest]

Re: Hope springs eternal: talk that housing has bottomed

Mesyn191 - I would be extremely surprised if rents had not risen in your area from $1100 to $1600 in the past decade, as the USD purchasing power has most definitely witnessed that much in generalized decay. Shouldn't that be thoroughly factored into the rent increases from 1998 to 2008 pretty much across the country? I try to not get a giddy head about anything real estate related in metro San Diego, but one thing I have a quite high skepticism about is that I'm going to see *any* rent decreases down here in the next five years - and that's pretty much anywhere across the city - there may be some softness in rentals when you get all the way out into the San Diego satellite small townships out to the east, but that's where you get into the high desert in depressed Imperial County. To the south, right smack on SD municipal borders (housing is very dense right down to the border on the US side) we have Tijuana. To the North Camp Pendleton with LA squashing down onto it from the north. West is ocean. These rents are higher today largely because of USD purchasing power decay in the past decade. A little bit maybe from increased property prices. There really are not a lot of vacancies in rentals in SD. It's hard for renters to catch a break down here even in this economic climate.

That is still too much though. $250K is over 4x an avg. yearly income of $60K. When it gets to 3x or less avg. yearly income then that is the time to buy.

Also you guys have to remember that boom went on for so long that rent was pushed up accordingly. I remember renting out a 2 bed/bath for $1100 in Lake Forest, 4-5 years later though the price had risen to over $1600 and for no good reason whatsoever. Other than a paint job they had done no work on the place at all. AFAIK rents are starting to fall in some areas, and there is no way a housing bust can truly end while unemployment is still rising rapidly. After all unemployment like what we've been getting historically was enough to cause a mild-moderate housing bust all by itself.

[Guest]

Re: Hope springs eternal: talk that housing has bottomed

Good, so it's settled. Everyone can now go back to being perennially gloomy on housing. ;)

[Guest]

Re: Hope springs eternal: talk that housing has bottomed

Meanwhile Nero3 is going along his maverick way here. :rolleyes: I like this guy. His ideas sound totally off the wall to most mainstream iTulip theses.

How expensive is house prices if they are deflated by the rise in health care costs, energy, or cost associated with transportation, as measured by the dow jones transportation index?

I think prices are lower than most think they are.

[mesyn191]

Re: Hope springs eternal: talk that housing has bottomed

Mesyn191 - I would be extremely surprised if rents had not risen in your area from $1100 to $1600 in the past decade, as the USD purchasing power has most definitely witnessed that much in generalized decay.

I hadn't though of that, it still seems too much though. Other than for greed, if the building owners were cash flow positive at $1100 than I don't think they would've had to raise it that much.

There really are not a lot of vacancies in rentals in SD. It's hard for renters to catch a break down here even in this economic climate.

More and more I'm seeing people leave CA for other states, most notably AZ and NV but even to TX or farther out east. Mostly this is due to job issues, more exactly the businesses are moving out of state because its too expensive to operate in CA for them now, the Sunshine Tax has gotten to be too much. I think more and more people are going to go where the jobs are and that will open up the supply of rentals.

[cjppjc]

Re: Hope springs eternal: talk that housing has bottomed

I think prices are lower than most think they are.

This will make your colon tight.

Purchased in March 03 $340,000
Just under contract $119,900

It's a Condo/Hotel. The worst real estate investment in the world. I had to talk a few friends out of purchasing. One of my finer moments. I used to argue with the in house sales staff of these things all the time. Forget the loss of capital, the monthly costs would bury you.

P/I 1800
Taxes 500
Maintanencei 300
Special insurance 200

That a monthly nut from hell. And at 340,000 this guy got in early at a good price. There are people who paid in excess of 1/2 million for later phases.

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[cjppjc]

Re: Hope springs eternal: talk that housing has bottomed

I hadn't though of that, it still seems too much though. Other than for greed, if the building owners were cash flow positive at $1100 than I don't think they would've had to raise it that much.

Supply and demand set rental prices for the most part, Not greed. As a lot of homeowners become renters, rents will rise.

[SeanO]

Re: Hope springs eternal: talk that housing has bottomed

That is still too much though. $250K is over 4x an avg. yearly income of $60K. When it gets to 3x or less avg. yearly income then that is the time to buy.

I'm not a fan of the "times income" analysis (3x vs. 4x)... too simplistic as it fails to take into account changes in interest rates. We may get to 3x prices, but it will only be because rates jump significantly, and our current govt seems hell bent on keeping mortgage rates low regardless.

Lukester - thanks a bunch for the kind words!

[mesyn191]

Re: Hope springs eternal: talk that housing has bottomed

Normally I'd agree, the last 8 years or so have been anything but normal though.

SeanO: I agree it is simplistic, but it holds up since wages haven't changed much or have actually gone down over the years. People can only afford to pay so much, after you extract food, car payment, insurance, taxes, etc. 4x your yearly income of debt+interest is A LOT after all of that.