California Home Sales up 65%

[nevergoingback]

Originally Posted by kettlepot

As for when to buy versus rent, ConsideringLA has a ratio of 14x yearly rent. I've heard a ratio of 17x yearly rent. I don't know what the proper ratio is, but I wanted to point out that I've heard 17x yearly rent is a buy signal, 27x the yearly rent is a sure fire sell ratio, and that 22x, is the typical ratio for California R/E.

Funny, in my old city on the central coast the high point of the bubble was around 22X. I think 14-17 is a more realistic figure for Ca RE.

Right now in that area it is somewhere around 14X, maybe a good indicator that this certain area is near bottom, or that it is just going to stagnate.

I moved to an area where it is about 10X. Sounds good to me. I guess thats why I'm positive cash flow on my rental.
Prices here are up 3.2 percent over last year.

Ca. RE is very localized, There will be big money to be made by smart, savvy investors!! Good Luck!!

[ITChick]

Originally Posted by ConsideringLA

Great writeup on Santa Monica's wild housing ride, told through the eyes of a single listing and the associated headlines in the context of the multiple turnovers.

Real Homes of Genius: Today we Salute you Santa Monica. When the Westside Comes Crumbling Down

Good link!

Sure explains why the market isn't moving like people wish it would.

[motoman]

Originally Posted by nevergoingback

Funny, in my old city on the central coast the high point of the bubble was around 22X. I think 14-17 is a more realistic figure for Ca RE.

Right now in that area it is somewhere around 14X, maybe a good indicator that this certain area is near bottom, or that it is just going to stagnate.

I moved to an area where it is about 10X. Sounds good to me. I guess thats why I'm positive cash flow on my rental.
Prices here are up 3.2 percent over last year.

Ca. RE is very localized, There will be big money to be made by smart, savvy investors!! Good Luck!!

To tag onto this, I did an analysis going back to the 1980s for California real estate. I was looking at total state data, not a specific market. I posted this stuff a while back on this forum. I'm sure you could find it if you looked hard enough.

But the gist of it is that the long-term median home price to median income ratio in California is just a little over 5x. So if the median income is $50,000, the median home price should be around $250,000. At the peak of this bubble the ratio was over 10x, or almost double the long-run average.

Looking back at the '90s bubble in California the ratio never got above about 6.5x median income. Nothing even remotely as bubblicious as this time around.

Based on statewide median household income (I can't remember the exact number I found), the statewide median home price, assuming the long-run median price to income ratio, should be around $325,000.

Assuming you could apply this to LA, that would be about 16x annual rent. I think the average rent in LA is about $1,700 per month.

The problem is that the recent sales figures are not indicative of a stable market. It won't be until every sale is distributed fairly well around that median that prices could be considered stable and the $325,000 median an accurate measure. Right now the dispersion in sales around that median is far too dodgy.

[Charles]

Originally Posted by motoman

But the gist of it is that the long-term median home price to median income ratio in California is just a little over 5x.

Is this in the ballpark for other cities, states?

[motoman]

Originally Posted by Charles

Is this in the ballpark for other cities, states?

I'm sure it probably is for places like New York and San Francisco, but not most. The rule of thumb is 3x gross income.

The reason for the skewness in the pricier areas of the country is that you have 1) much larger populations and density, and hence demand, and 2) a higher number of well-to-do people. The well-to-do are typically the homeowners, so they push the prices up. The median Joe is the majority of the population, so Joe determines the median income, but he can only afford to rent. What you get is a skewed distribution, higher prices relative to the median. And I would assume far fewer homeowners versus renters than the average city. This is one of the reasons current rent rates do not support current housing prices. Median Joe can't afford to spend $3,000+ per month for a place to live. I know the median has fallen a lot, but it is still well out of reach for the median earning family.

What the data will show is that the median income in Calfornia is not much higher than the nationwide median. But housing prices are multiples higher, particularly when you consider higher prices per square foot, physically less appealing properties, little to no yard, and things like that.

There is a premium for living here, for many reasons, and people are willing to spend more of their income to live here. They are willing to double up, where they might have lived by themselves before. Or to rent a room in a house. Or to buy a house but then rent out rooms to pay the mortgage. Things like that. You don't find much of that in most parts of the country.

Just as an example, a friend of mine works in the Dallas area. They live in McKinney or something like that, which is north of Dallas. It's a newer, fast growing area. They built a house there a couple of years ago for $174,000. She herself makes close to six-figures. And then whatever her husband makes. And they live in a nice area. Their incomes would indicate they could spend significantly more on housing. But why do it when you don't have to?

Why is the price so low? More land. Less density. Less overall demand. But the incomes are roughly equivalent to LA. Income-wise it is a much better standard of living. But you don't get all that LA has to offer. Some feel the trade-off is worth it. Others don't.

One thing to remember about real estate is that the cost to build a house doesn't vary much. A 2x4 is a 2x4. Sure, wages are a bit higher here and the building codes are different and such, but it doesn't cost three times as much to build a house in California than it does anywhere else in the country.

The way I look at it is, say you are buying a $500,000 house in California, what you are really buying is a $400,000 piece of land and a $100,000 house. Where as my friend in Dallas, she probably bought a $75,000 piece of land and a $100,000 house. Simple example of course.

[Charles]

Only posting this because the graphics are pretty neat:

Home Prices in Selected Cities Through August ’08 - Interactive Graphic - NYTimes.com