Hope springs eternal: talk that housing has bottomed

[SeanO]

Re: Hope springs eternal: talk that housing has bottomed

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.

Actually I'd challenge you to show when it has ever held up. Home prices are a function of income AND loan terms. The reason "the last 8 years or so have been anything but normal" is that we had a huge credit bubble that dramatically changed loan terms. First lower interest rates as Greenspan tried to reflate the dot com bubble, then interest only loans and finally negative amortization. All of the price increases from 2000 to 2007 can be explained by this simple fact (and the 20% increase in incomes). And the entire drop in prices from August 2007 to today can be explained by the removal of those loan products from the market.

[jimmygu3]

Re: Hope springs eternal: talk that housing has bottomed

Actually I'd challenge you to show when it has ever held up. Home prices are a function of income AND loan terms. The reason "the last 8 years or so have been anything but normal" is that we had a huge credit bubble that dramatically changed loan terms. First lower interest rates as Greenspan tried to reflate the dot com bubble, then interest only loans and finally negative amortization. All of the price increases from 2000 to 2007 can be explained by this simple fact (and the 20% increase in incomes). And the entire drop in prices from August 2007 to today can be explained by the removal of those loan products from the market.

Very cool, Sean. I have not heard anyone put it that way before.

Another point I would add is that jumbo mortgage rates were almost as low as conforming during the bubble but now are about 1.4% higher. This, combined with the unavailability of "piggyback" seconds (e.g. 80/10/10), puts a lot of downward pressure on high-end house prices. And of course, FHA doesn't do jumbo loans. I'm trying to sell a house in Atlanta, a non-bubble market, and it's tough. We actually had a potential buyer lower their target price range by $200k so they could get a conforming loan.

When we do sell, we're moving to L.A. and renting for a year, then possibly buying. I'd be interested in your opinion of when that market will bottom. Thanks.

Jimmy

[Guest]

Re: Hope springs eternal: talk that housing has bottomed

Hey. Jimmygu3 is moving over to the left coast. He's gonna shake rattle and roll Los Angeles with some serious rolling thunder on his way in - but he's just gonna be window shopping over here for a while folks. Get ready.

[mesyn191]

Re: Hope springs eternal: talk that housing has bottomed

Actually I'd challenge you to show when it has ever held up.

Actual data I don't have, I do know that was one of the standard ways of checking for creditworthiness for decades though. It started to go away in the 1990's, and vanished entirely by the 2000's.

Home prices are a function of income AND loan terms.

I don't see that way, at least not over the long run. Loan terms only become an issue with bubbles/busts since after a while the only way a person can get into a home is with loose/crazy lending, their regular income just isn't enough. Of course once the lending stops and wages can't compensate look what happens...

And the entire drop in prices from August 2007 to today can be explained by the removal of those loan products from the market.

I know, but those bubble years are the exception that proves the rule, not the other way around.

[SeanO]

Re: Hope springs eternal: talk that housing has bottomed

When we do sell, we're moving to L.A. and renting for a year, then possibly buying. I'd be interested in your opinion of when that market will bottom.

Tough to say, LA is large and diverse, and I don't know the submarkets down that way well enough to offer an opinion.

I think an easy exercise everyone should consider before buying is to take a look at area incomes and employment. Then consider home prices given those incomes.

Something I'm working on now is to look at populations within income ranges against housing inventories. I think one of the problems we face in parts of CA is that we built too many unaffordable "big box" homes. The issue with these isn't just payment, but utility and maintenance costs. So we may find areas where we have a glut of inventory in one price range, with limited population to support it, while at the same time having an absolute shortage of the inventory the population needs.

[SeanO]

Re: Hope springs eternal: talk that housing has bottomed

Actual data I don't have, I do know that was one of the standard ways of checking for creditworthiness for decades though. It started to go away in the 1990's, and vanished entirely by the 2000's.

I don't see that way, at least not over the long run. Loan terms only become an issue with bubbles/busts since after a while the only way a person can get into a home is with loose/crazy lending, their regular income just isn't enough. Of course once the lending stops and wages can't compensate look what happens...

I know, but those bubble years are the exception that proves the rule, not the other way around.

It is nonsensical to suggest loan terms don't matter. Consider what happened to home prices when Paul Volker raised interest rates in the 80's. Are you suggesting 3x income made as much sense as a "creditworthiness check" when rates were at 18% as when they were at 9%???

I really struggle with your concept that bubbles cause loose lending. The vast majority of people buy homes on credit... so how exactly do prices rise to create a bubble without loose lending???

[jtabeb]

Re: Hope springs eternal: talk that housing has bottomed

While that may be a rational thought for the state as a whole, it is also a gross generalization that does not take into account the reality that some areas are off 15% and others 70%. You are not likely to see much if any further correction in the areas that are off 70%.

Exactly! Which makes me wonder how in the hell the places that are only off 15% are going to "catch up" to the areas that are down 70% in only two years?

[jtabeb]

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.

That's EXACTLY what I'm basing my purchasing decision on. If you factor in dollar depreciation, it's strange to say but true that houses are CHEAP in these terms. (watch not only how easy credit drove up prices, but dollar depreciation as well)

[mesyn191]

Re: Hope springs eternal: talk that housing has bottomed

Consider what happened to home prices when Paul Volker raised interest rates in the 80's. Are you suggesting 3x income made as much sense as a "creditworthiness check" when rates were at 18% as when they were at 9%???

Sure, home prices will go down accordingly if rates that high become sustained. Or wages go up, or they meet somewhere in the middle.

I really struggle with your concept that bubbles cause loose lending.

Why? It happened before, prior to the Great Depression they were called Balloon Loans, but they were just as bad or worse as some of the loans given out during this recent bubble. We've had booms after that of course but nothing like this since that time in the US.

so how exactly do prices rise to create a bubble without loose lending???

Speculation or gov. intervention are the only ways I can think of without loose lending. Bubbles are mass economic manias though, almost everyone gets involved in them by default which is why loose lending is such a major part of them, so instead of your avg. J6P it'd be investors or the gov. taking out the crazy loans/economic stimulus/housing assistance/development/whatever terms you want to couch it in.

Exactly! Which makes me wonder how in the hell the places that are only off 15% are going to "catch up" to the areas that are down 70% in only two years?

Not all places will devalue the same amount, a rare few will only devalue a little bit, but bear in mind that those places that are down now 70% 2 years ago were worth almost 70% more than they are now.

You guys gotta learn to wait, housing busts are sloooow. The bust in the early 90's was much smaller in scale but took until around 1995/1996 to play out depending on where you lived. This one we're going through was ever so much bigger. Factor in the job losses, inventory glut, and negative wealth effect and there is no way no how this won't get a whole lot uglier.

[jtabeb]

Re: Hope springs eternal: talk that housing has bottomed

You guys gotta learn to wait, housing busts are sloooow. The bust in the early 90's was much smaller in scale but took until around 1995/1996 to play out depending on where you lived. This one we're going through was ever so much bigger. Factor in the job losses, inventory glut, and negative wealth effect and there is no way no how this won't get a whole lot uglier.

As a NON-homeowner, I hope so (selfishly speaking as one desirous of home ownership, SOMEDAY, at the right price).

[jimmygu3]

Re: Hope springs eternal: talk that housing has bottomed

I think one of the problems we face in parts of CA is that we built too many unaffordable "big box" homes. The issue with these isn't just payment, but utility and maintenance costs. So we may find areas where we have a glut of inventory in one price range, with limited population to support it, while at the same time having an absolute shortage of the inventory the population needs.

This plays right into EJ's 'subdivided McMansions' prediction.

Thanks for the reply, Sean.

Jimmy

[cjppjc]

Re: Hope springs eternal: talk that housing has bottomed

Something I'm working on now is to look at populations within income ranges against housing inventories. I think one of the problems we face in parts of CA is that we built too many unaffordable "big box" homes. The issue with these isn't just payment, but utility and maintenance costs. So we may find areas where we have a glut of inventory in one price range, with limited population to support it, while at the same time having an absolute shortage of the inventory the population needs.

Over short periods of time I would agree with the above. However longer term, the market will adjust prices down where there is a lack of buyers.

[SeanO]

Re: Hope springs eternal: talk that housing has bottomed

Speculation or gov. intervention are the only ways I can think of without loose lending.

You simply can't have speculation in housing without loose lending. There aren't enough cash buyers to move the market. Government intervention in housing manifests itself in changes to loan terms... for example Greenspan lowering rates after the dot com bubble. From my read of history I see no point in time where you had a cash based housing boom that in turn led to loose lending as you suggest.

Not all places will devalue the same amount, a rare few will only devalue a little bit, but bear in mind that those places that are down now 70% 2 years ago were worth almost 70% more than they are now.

I can see how one could have that perception, but it simply isn't true. Even in places like Stockton, CA that have seen the wildest swings a 70% decline brings prices back to 1998 levels when housing last bottomed. People often forget how percentages work and therefore misuse them... you need to remember a 70% decline offsets a 233% increase.

You guys gotta learn to wait, housing busts are sloooow. The bust in the early 90's was much smaller in scale but took until around 1995/1996 to play out depending on where you lived. This one we're going through was ever so much bigger. Factor in the job losses, inventory glut, and negative wealth effect and there is no way no how this won't get a whole lot uglier.

I don't think anyone is suggesting the "housing bust" is over. My only suggestion was that in certain markets we've seen sufficient price declines that price is no longer the problem. The real problem now in those areas is efficiently clearing the negative equity. IMHO our economy has zero chance of recovery while 20% of US, and 30% of Californian homeowners with mortgages have negative equity.

The only part that isn't clear at this point is how the negative equity will be cleared from the system. Obviously it will be some combination of inflation and debt reduction (foreclosures, short sales, loan mods, bk cram downs or some type of debt jubilee). The questions are in what combination, and over what period of time.

[mesyn191]

Re: Hope springs eternal: talk that housing has bottomed

You simply can't have speculation in housing without loose lending.

If the area is undeveloped period and you get some big investors coming in to buy it all up and build on it you can see land/home prices sky rocket. There were all sorts of areas in the 90's bust and 70's too that "were going to be big" but ended up turning into ghost towns. Leathal Weapon 1 or 2 (can't remember) was shot on location in one of those, the owners were greatful to have the movie guys destroy it all for them since they were supposed to pay for demolition IIRC.

Government intervention in housing manifests itself in changes to loan terms...

There are also tax credits/exemptions or in some cases they actually just start giving people money directly to buy homes.

Even in places like Stockton, CA that have seen the wildest swings a 70% decline brings prices back to 1998 levels when housing last bottomed.

I was talking about where the prices were 2 years ago, it just so happens that they also are where prices were ~10 years ago. ;)

My only suggestion was that in certain markets we've seen sufficient price declines that price is no longer the problem.

I see where you're coming from, and I agree that not all areas will tank as bad as say Riverside, I just don't think you're appreciating just how catastrophic the job losses and long term job drain out of CA and other major bubble states will be for their respective housing markets/economies. Personally I think things are going to get fairly bad in CA (no, not Mad Max bad...), and I don't plan to stay there much longer.

The only part that isn't clear at this point is how the negative equity will be cleared from the system. Obviously it will be some combination of inflation and debt reduction (foreclosures, short sales, loan mods, bk cram downs or some type of debt jubilee). The questions are in what combination, and over what period of time.

If they were truly interested in keeping people in their homes you'd see them do cram downs IMO. I think they just care about the banks' balance sheets though so you're going to see more variations of loan mods similar to Obama's plan, at least until its clear that such plans aren't and won't work. I don't think that is going to be clear to the masses much less congress until late in this year at the earliest.

[mesyn191]

Re: Hope springs eternal: talk that housing has bottomed

I think this goes here...
Why Are These Renters Smiling?

WHEN Whitney Pettyjohn and her 19-year-old sister, Chelsey, moved to Brooklyn last August, the best deal they could find in their price range was a two-bedroom in Bushwick with unreliable heat, nine blocks from the Morgan Avenue stop on the L train. It cost $1,700 per month.







When they looked again this year, they found a very different market. Four weeks ago, they moved two stops closer to Manhattan, into an apartment with more character and more storage for the exact same price.
“We’re one block from the subway,” Ms. Pettyjohn, 24, said. “It’s like living in a dream!”


Rents are down throughout New York. According to the February Manhattan Rental Market Report produced by the Real Estate Group, a New York brokerage firm, rents in the borough have fallen “across the board.”
The biggest drop was in studio apartments in doorman buildings, which have fallen 8.33 percent from the same time last year.
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Ok so its for NY and not CA, but still.