real estate prices

How the hell do you people out in California make it? With the entry price of housing so high, and salaries not really that much higher by comparison, it seems like everyone out there must spend 50% or more of their paycheck on a mortgage.

I mean, even if I doubled my salary, I'd have a hard time buying a $300,000 house, let alone a $500,000 house out there. OTOH, my $125k house here costs me around $650/month, which is about 18% of my take home pay per month.

Personal Trainer wrote:

How the hell do you people out in California make it? With the entry price of housing so high, and salaries not really that much higher by comparison, it seems like everyone out there must spend 50% or more of their paycheck on a mortgage.

I mean, even if I doubled my salary, I'd have a hard time buying a $300,000 house, let alone a $500,000 house out there. OTOH, my $125k house here costs me around $650/month, which is about 18% of my take home pay per month.

Try moving inside the beltway. $500 gets you a shoebox apartment in the ghetto.

Many people in California bought their homes 10 years ago, or earlier, and now have a huge cushion of appreciation. For those who have bought recently, many use creative financing, and I see a lot of people buying houses, then renting out some of the rooms to others to help cover their mortgage. But the bottom line is that the home ownership rate is low statewide (its about 16% in the San Fran area for example), so most people who didn't buy a house before the last 5 years can't even afford one with creative financing and having others pay part of their mortgage (or they don't want to share their house)

chuck d wrote:

i'd really like to know exactly how a crash in a market like real estate could occur. i'm not a sophisticated "junior economist" but it would seem that there would have to be some extreme speculation (possible in a few markets, but surely not across the country) and serious issues with supply and demand for one to occur. i don't see an oversupply happening anytime soon and i don't see demand falling all that much, either.

i don't think it would be all that difficult. i'm no expert in this area, far from it in fact, so take my opinion with a large grain of salt. here's how i see it happening in basic terms (assume that we are talking about vegas, san diego, miami, dc or one of the other mkts that have more than doubled in price over the last 5 years):

over the last 5 or so years, the percentage of homes sold to investors, rather than owner-occupiers, has increased and is now something like 15-25% of sales. these people will not play by the "normal" rules of buying and selling. in other words, while it may have been historically true that homes were not bought and sold like stocks, for an investor, this is far less true. now just to be fair and clear, even if 25% of homes sold in the past year were purchased by investors, this does not mean that investors own 25% of existing homes. that number is probably more like 10% or less. in the condo market in some cities, perhaps as high as 20-25%.

okay, so if we can all agree that there are now more investors than ever holding real estate property and that investors are more likely to quickly sell a property we can move on to the next step.

for multiple reasons, prices are likely to plateau. i think we're seeing this already so i won't waste a bunch of space talking about this aspect of my thoughts on the matter.

with a natural plateau-ing of prices, you next have to look at two external forces - the potential of rising interest rates and the potential glut of new homes, condos in particular. both of these things will add price pressure on existing investor-owners. for those owners who have a variable rate mortgage, especially one with a fixed rate during the first few years, the cost of owning will increase in the near future if interest rates go up.

at the same time, with new inventory coming on line, there will be other options for purchasers and renters.

in combination, this means that an investor who is putting, say, $3,000 per month into a 1 BR condo that he is renting out for $1800 per month is going to start to feel pressure to cut bait. that is, the monthly loss makes sense if appreciation continues, but without it, the monthly loss makes no sense. just sell for whatever profit you can get now.

so to recap, we have investor-owners who rely on appreciation to make the investment worthwhile (as opposed to a more traditional real estate investor who might be looking to make money on rent month-to-month); we have a lot of new supply becoming available; we have the likelihood of ownership costs increasing in the near future; and we have owners who are likely to be more willing and able to place the property on the market for sale at the drop of a hat.

in my mind, the combination of these factors could lead to a bursting bubble. in other words, a cycle in which investors see the potential for a meaningful drop in prices in the near future so they act pre-emptively to sell. once enough of them buy into the idea that there will be a meaningful drop in prices, there could be a snowball effect as more try to dump their properties before losing their shirts.

a sad side effect in this scenario is that "regular" owners (i.e. non-investors) would be hurt by the speculative behavior of a few.

and one last point - i believe that at any given time only about 4-6% of houses in a market are for sale. think about the shift in the supply/demand equation that would occur if even 3% more owners than usual put their properties on the market for sale at once and then think about what i said above about the percentage of buyers who are investors in recent years. i think you could easily see a rate as high as 10% of homes on the market in the near future in some markets and that would certainly have an enormous effect on prices.

note that i'm not saying this WILL happen. i'm just sketching out a scenario that responds to chuck d's question.

kaitainen wrote:

note that i'm not saying this WILL happen. i'm just sketching out a scenario that responds to chuck d's question.

What you are saying is true, but there is no room for alternative condos and such in the DC area, maybe others though, I am not sure...

Moving out to Loudin County is not an option due to commuting - as stated before. Sure, you can move out there, but the demand will not drop inside the beltway. I do see it plateauing though

As well, people may start to lose homes. Around here, where there's lots of land, new subdivisions pop up constantly. To get people into these houses, they often offer really low introductory payments, with the mortgage ballooning or increasing in 3-5 years. Frankly, these house are shit anyway and don't hold value, but I digress. So a lot of people get into them, but can't afford to hang onto them. If rates continue to increase, this will only get worse. As more of these come on the market, their value decreases, and these people end up owing more than the house is worth...not good. It's not uncommon to see people buy a $125k starter home here, and be trying to get out of it a few years later for $90k.

DCer wrote:

What you are saying is true, but there is no room for alternative condos and such in the DC area, maybe others though, I am not sure...

Moving out to Loudin County is not an option due to commuting - as stated before. Sure, you can move out there, but the demand will not drop inside the beltway. I do see it plateauing though

not sure that this is totally true. according to this washington post article, nearly 10,000 new condo units are scheduled to be opened within the next 3 years in the district alone.

for those who don't click on the article, it also gives numbers for annual condo sales in the DC area. in 2004, 9100 units were sold, in 2005 (record year), 13,700 units were sold. for the entire area, 51,000 units are planned for delivery within 3 years.

in other words, you'd need to have record sales for the next three years to keep up with the pace of construction.

You are right, I GUESS i AM THINKING ABOUT HOMES/TOWNHOMES. Wow, sorry, I am too lazy to go back and type again..

My wife and I bought a home in Los Angeles a little over two years ago for $429K. We got appraised for a refi and the house is now worth between 650K and 700K.

I don't think that this bubble will affect Los Angeles much, at least in the long run. We have the same issues as DC with commute, and all reports have LA gaining 2 million in population in the next ten years. The demand is only going to increase. Los Angeles is also unique in that it has one of the highest renter to owner ratio in the US. Thus there are more rental properties, and the supply of homes to own is proportionately lower.

chuck d wrote:

i'd really like to know exactly how a crash in a market like real estate could occur. i'm not a sophisticated "junior economist" but it would seem that there would have to be some extreme speculation (possible in a few markets, but surely not across the country) and serious issues with supply and demand for one to occur. i don't see an oversupply happening anytime soon and i don't see demand falling all that much, either.

The demand is actually fairly elastic and works off both income (and income expectations) and interest rates. And since a significant part of the increased demand over the last decade comes from lower income people with smaller down payments (less well capitalized than traditional buyers) and from hot money "spinners" (more sensitive to interest rate spreads and inventory levels), demand may turn out to be more elastic has been traditionally the case.

There has not been a NATIONWIDE decline in housing prices since the Great Depression, but there have been significant "corrections" in certain markets. Back in the early 1990's, the price of high end houses ($1 million+ back then) in Laguna Beach fell by almost 50% from peak levels. This happened starting about 1 year after the Federal Reserve managed to slow down the economy. Once the FED reaches it's objective this time around, certain markets like San Diego seem likely to see declines. The size of the decline depends on the extent to which the economy (and job prospects and expectations for homebuyers) slows down.

If you look at the UK, which is normally about 1 year ahead of the US in economic cycles, a year ago, there were some "experts" that predicted an average decline in housing prices of 20%. Those experts ended up with a certain amount of egg on their face, as what happened was a decline in the rate of increase of 2-3%. On a nationwide basis, history would argue for the same thing happening in the US. Changes in demand elasticity would suggest sharper spikes this time around.

That's not ENTIRELY true...I just moved to the area and I live in Arlington about 2 miles from Georgetown. I pay $592 for my share of rent (3 bedrooms, 1700 sq ft). I realize I found a pretty good deal, but I know I am not the only one. You just have to do your homework. That said, I live in a nice area, and if I wanted to buy one of the new condos down the street I couldn't. $38,000 a year doesn't really cover a $500,000 condo.

General observations:

Foreclosures are soaring. Inventory levels are at record or near-record levels. Speculators account for a huge portion of home sales in the last few years. They have purchased these homes with interest only loans and other creative finance options. Interest rates have been going up. There's a few more hikes in the works. After those, we can only speculate on the fed's plans. We've been flirting with an inverted yield curve. When 3 and 5 year ARMS adjust, the people with these loans will HAVE to sell because they can't afford to have their payments double.

The party was over last June. A 50% drop in home prices from June 2005 levels would not be unexpected. I won't respond to this thread anymore because of the obvious flaming to come and I'm not going to convince anyone of anything they don't want to hear. However I'll bump this thread about every six months and we'll see then.

i tend to think you are right. but what matters in the end is the behavior of buyers and sellers on a large scale. if a sufficient number of buyers continue to be interested at today's prices or higher, then people like you and i will be proven wrong.

if i had a crystal ball, i'd have a lot more money in my bank account than i actually do.

Hilton James wrote:

What you don't understand is the 190k house you can sell for 550k (which, in actuality, if that is your asking price, you will be lucky to get over 460k) doesn't mean you can buy 2.5 times the house you currently have. You sell on the peak of the market and you are forced to enter for a new home at the peak of the market. This is senseless.

There is not a single home on my block that has sold for under $500K for the last year and mine is the biggest one on the block. Why do you think I would somehow only get 460K? Like I said, home prices are ridiculous. I also mentioned renting for several years, so I don't reenter the market to buy yet another inflated house.

Newsflash - all you renters who were too afraid to pull the trigger on a purchase in the last couple of years or who were waiting for "the crash" have missed the boat. You just missed the biggest correction in RE history and the biggest opportunity to make some easy money.

As others have mentioned interest rates have been at insanely high levels for a very long time until relatively recently when they have come down to more realistic levels. The result has been that more people have been able to borrow amounts sufficient to purchase a home. The smart ones took advantage of this situation as soon as they could and got in. The net effect of low rates has been a high demand with, in certian markets, a very limited supply and rapidly rising prices as multiple bidders compete for properties.

The historicaly low rates we have seen in the last two years are beginning to creep up but they are still insanely low if you compare them to 10, 15 or 20 years ago. There are still more potential buyers out there than ever before and at in places like San Francisco for example, last time I checked they were not building any more land.

Prices have corrected themselves and are now at a realistic level, perhaps a few points over in certain markets. We will see a return to single digit gains in most housing markets, perhaps a few frothy markets will lost a point or two, but anyone waiting for a 50% drop in RE prices will be renting for the rest of their lives.

but if we only have low single digit appreciation in the long term, why is renting a bad economic decision? especially if you plan to move several times in the next 10-15 years.

Owning = single digit appreciation

Renting = paying for your landlord's retirement, 0 digit appreciation.

Take the money you save on mortgage payments and invest it, you might get a point or two more than RE appreciation...thats the price of owning your own place right now and being able to paint it any color you want, and have parties when you want, and knock out a wall if you want.

Everyone has to make their own decisions based upon their own lives and needs, but the bottom line remains that if you could have made a purchase a year or two ago and did not, you missed a great opportunity.

If you plan to move several times in the next 15 years then that freedom of movement limits your options when it comes to a purchase....though some institutions are offerning transferrable mortgages but they are very new products.

Personally I bought a home 18 months ago and it has appreciated 35% since then, over $200,000. When I buy my next home that $200,000 is going to help leverage a nice loan and in a cooling market I'll get a pretty good deal. I'll be able to rent my current place to a guy like you.

you're missing the point.

the past is completely irrelevant when talking about a current decision. it's great that you have seen appreciation on the place that you bought. but it has nothing to do with whether it makes economic sense NOW to purchase a place (or to retain ownership of a place).

the fundamental problem that i have with the opinion that many people have on real estate is that they are unable to separate the economic/investment side of things from the emotional side of things.

one thing that you said is in fact relevant - the ability to paint the place how you like or to make improvements as you pleaes is a benefit of ownership. but it, like anything else, has a value attached to it. for me, that value is lower than it sounds like it is for you. so that aspect of home ownership is worth more to you.

to wrap up this post - the overall point that i want to get across is that buying a home is an investment. it allows you to have rent-free living, it generally allows for various tax deductions, and it generally has positive tax treatment for capital gains purposes. but these are all just parts of the investment equation. on the other hand you need to consider things like rent increases and whether you can benefit from rent control.

bottom line, i think that anyone who claims that home ownership at any cost is a good investment is being just as short-sighted as someone who said in 2000 a technology stock is a good investment at any price. in my opinion, the rules of the market don't cease to exist when the item being bought and sold is real estate.

hoosier wrote:

That's not ENTIRELY true...I just moved to the area and I live in Arlington about 2 miles from Georgetown. I pay $592 for my share of rent (3 bedrooms, 1700 sq ft). I realize I found a pretty good deal, but I know I am not the only one. You just have to do your homework. That said, I live in a nice area, and if I wanted to buy one of the new condos down the street I couldn't. $38,000 a year doesn't really cover a $500,000 condo.

I am not talking about rent. Try buying a house in Lyon Park area around Clarendon. Nothing under a million. You are inside the beltway.

Unless the Govt. decides to move out of DC, real estate is remaining high.