How Low Will California Home Prices Go? (loan, house)

[sheri257]

Originally Posted by shannon94

Sheri..Where did you get 10% for normal appr. for Cali?

If you go back to 1982 ... places like Orange County appreciated about 10 percent a year for the last 18 years up to 2000 before all of the insane lending started happening.

In '82 an average OC home was $129K ... in 2000 before all this crazy lending ... average homes were worth about $318K ...

So that ends up being about 10 percent average annual appreciation in a normal marketplace, including the '92 correction and bust.

Historical Median Home Sales Prices From 1982

Ten percent is still higher than the national average of 6 percent but more normal for California than the 20-25 percent plus gains you saw after 2000 with those crazy loans. Afterall ... California incomes did go up, but not by 20-25 percent a year.

Prices didn't get so high because people were making a huge amount of money ... it was mostly because people were able to borrow a lot more than they could afford.

[katie45]

Those who are desperately wanting to buy a home in CA are on the side of the fence who are hoping and counting on home prices dropping a lot.

Those who are paying a mortgage for a home in CA are on the other side of the fence and hoping and counting on home prices NOT dropping more than a percent or two...or that the prices will stabilize, or hopefully continue to rise.

And many who have paid off their mortgage and are a true "home owner" would love to see the values stay where they are, or increase.

What will happen will happen. Some will profit, others will not.

Time will tell, and right now all the hoping and wishing isn't going to change a thing.

I don't want to see anyone in foreclosure or anyone lose mega bucks. But the insane prices of property in CA is a disaster just waiting to happen.

[Axiom]

Originally Posted by justsomeguy

I don't think you fully understand the economic fallout from this. It creates trouble in the financial markets, the construction industry (which is rather far reaching), the labor markets, and consumer spending. In other words it will have a ripple effect that will resonate throughout the entire economy.

If people don't have jobs, they don't spend money. If they don't spend money, GDP shrinks. When GDP shrinks, you have recession, and soon the job and the house that will be in trouble WILL BE YOUR OWN. Understand?

Oh I think I have a fairly well informed understanding of the situation.

Private sector saving, private sector investment, household consumption, government spending, government revenues, capital flows, and trade balance all react upon one another. It's a complex system, the imbalances of which are enormous right now, much more so than at any time in the past.

But it's my opinion that any economy that is being sustained by smoke and mirrors (ie: federally directed artificial fiscal and monetary stimulus) is ultimately bound to fail. Yes, a restoration of balance would be ugly and not only would it affect ME, it would most likely be felt globally.

But longterm how sustainable is an economy, much as described in sheri's post above, that is driven by a declining savings rate, strongly rising personal debt, and that is dependant on rising home home and equity prices to keep it in check? Never mind throwing in record trade and current account deficits.

The problem as I see it is that all the attempts to artificially forestall what is probably inevitable (granted, not everyone will agree with this... but many do) only puts us in a much more precarious position when the correction does take place. All the artificial economic revivals of the past few years not only leave the work of a naturally occuring depression undone, they add new maladjustments of their own that have to be worked out.

One well respected economist predicted that what is coming "is not likely to be gentle, but will likely take the form of a financial and economic hurricane." I tend to agree.

So do I understand the economic fallout to your satisfaction?

[Humanoid]

Pittsburgh is coming along nicely. It's established suburbs are doing what much of the rest of the country is doing in this market.

Pittsburgh is not doing well, but its suburbs are certainly doing better than the city. But there are no young high value areas in the city, only in the suburbs, contrary to the picture you are trying to paint.

I do my homework.

Then where is the data? It should be fairly easy to find the numbers to justify/refute what you are saying.

Getting 2 people to make 100k in Southern California isn't terribly difficult.

And yet the HOUSE HOLD median income for Southern California is much below 100k, even in high income areas like Orange County its 82k.

Every weekend I see pretty young couples unloading their moving vans.

You should supply them with dunce hats. In the current market its cheaper to rent under any situation (Whether you have the cash, taking out a loan etc). This is the problem though, I can rent the same house for much less than I can purchase it. So why purchase it? Unlike homes rents have to come from real money, not neg-amortization nonsense.


Anyhow, one shouldn't even talk about Manhattan or NYC when talking about LA real estate, they cities are so different any comparisons are useless.

[justsomeguy]

Yes, Axiom, you are entirely correct, everything you mentioned is happening and is a recipe for economic disaster, BUT, the Federal Reserve System is engineered to "steer" the economy to better manage the boom and bust cycles of the Business Cycle (and historically speaking the data shows success at reducing the extremes of peaks and valleys over the last 50 years). Through fiscal and monetary policy, we have discovered that we can do a better job "keeping the wheels from falling off", so to speak. Your notions remind me of Herbert Hoover's "do nothing" approach at the onset of the Depression, allowing for the marketplace to just correct itself.

In other words, there really is no reason why we should allow an "economic hurricane" to happen, when we have the tools at our disposal to better manage economic downturns and keep some degree of control over our economic future. If the wheels do start to fall off, it's better that we have people waiting in the wings to put them back on. One could argue that we are simply delaying the inevitable, but, oh well, if possible let the next generation deal with it.

At any rate, the coming economic malaise that you speak of has VERY LITTLE to do with a "bailout" that will allow a small percentage of homeowners to refinance at lower rates, and everything to do with a whole slew of economic fundamentals that are out of whack in the U.S., which I will not delve into here.

Final point: Bush's plan is not really going to have a significant effect on everything that is wrong with the current economics of the U.S.

[Humanoid]

Time will tell, and right now all the hoping and wishing isn't going to change a thing.

Most people are giving arguments and trying to understand what is going on, that is dramatically different then mere "wishing and hoping".

But in reality the folks that purchased homes over the last 4 years (Or cash-out refinanced themselves into trouble) need to hope for a miracle, these are usually the people not not giving any sort of justification for their position. On the other hand the people that decided not to purchase a home over the last 4-5 years can always leave the bubble-zones (Many areas of the country have only seen modest price increases) to purchase a home if the prices never drop.

Its unfortunate that people started to gamble with homes as if they were a commodity, but they did and the realities of the situation will come crashing down. Of course the point of disagreement is now things are going to correct, a pricing drop isn't the only thing that can happen.

[Humanoid]

One could argue that we are simply delaying the inevitable, but, oh well, if possible let the next generation deal with it.

Fortunately people that handle monetary policy generally aren't this short sighted. Not considering the long term ramifications of a particular policy could destroy a country.
The fed has in the past inflicted pain on the current state of things to aid the economy in the long term. It would be pretty hard to argue that the best long term solution is to keep the housing bubble inflated. Also, given what has happened so far it seems the fed is going to be pretty powerless to stop a hard landing, its already started and is gaining momentum as we speak.

[goodbyehollywood]

Originally Posted by justsomeguy

I imagine it will be very difficult to qualify for this "bailout" program. I don't think they are going to reduce any mortgages - they are just going to reduce the interest paid on the mortgage - that is why the "price" of the mortgage will be lowered. So an ARM mortgage that resets to say, 10% or something next year will instead be re-financed at a low-fixed rate, maybe 5 or 6% or something I'm guessing.

This is exactly what's happening in SoCal right now. Homeowners facing foreclosure are being offered fixed-rate loans at up to two percentage points below the market rate. No points, no qualifying, no documentation. You get to keep your house and you get a great loan. The only catch is, you have to be able to make the payments.

If you're a normal, responsible buyer, however, you're quoted market rate (1-2 percent more), you'll pay points and you'll be put through a very stringent qualification process with full documentation.

Gee, that seems fair. That'll really teach those irresponsible buyers to not buy homes they can't afford. Of course, if they can't make their payments, they'll be in trouble. But most will probably find a way... at least until the next bailout comes along.

[it's all good]

Originally Posted by justsomeguy

LoL. That quote makes no sense at all.

L O L too, that's just what I thought. What a deal for the banks.... : )

[it's all good]

Originally Posted by justsomeguy

The number of people that will be helped should be limited - maybe around 80,000 people nationwide. Speculators or people that lied on their loan app. probably won't qualify. In fact I imagine it will be very difficult to qualify for this "bailout" program. I don't think they are going to reduce any mortgages - they are just going to reduce the interest paid on the mortgage - that is why the "price" of the mortgage will be lowered. So an ARM mortgage that resets to say, 10% or something next year will instead be re-financed at a low-fixed rate, maybe 5 or 6% or something I'm guessing.

It shouldn't keep prices artificially high, but it will create a "soft landing" most likely rather than a hard drop - by keeping a lot of homes from being foreclosed on and put out on the market. Even without those homes foreclosed on, there is still a glutton of homes inventory on the market and demand is still low b/c of credit problems, overpriced homes, and market psychology. Supply still outstrips demand so prices will still lower. Hope this answers your question.

Oh, okay, thank you for explaining that so well.