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Motoman if you are so certain that you are correct why do you care what anyone else thinks? Just sit back, relax, wait for prices to reach your desired levels, and then buy.
Motoman if you are so certain that you are correct why do you care what anyone else thinks? Just sit back, relax, wait for prices to reach your desired levels, and then buy.
Good point. I do get worked up sometimes. I guess I just wish people would take a minute and actually think about what has happened. But then, were it not for people making irrational decisions, I wouldn't have a chance to take advantage of them and profit.
In short, at no point since 1982 has the median home price to median income exceeded 7x in California. The long-run average is about 5.5x. Anything above that should be considered "bubble" pricing. It would be unrealistic to assume that prices will not return to their long-run price-to-income averages, and should be expected to fall about 40% from the peak, to about $320,000 to $325,000.
I should caveat the above by saying, this is true unless you believe interest rates will never go up again. Not a very good assumption to make.
Maybe your price estimates will come true someday, but I think that the ultimate effect of the housing bubble is that distressed/unattractive/less desirable/distant areas will be what brings these numbers down. People who are looking for desireable, centrally located homes are going to have to continue to pay premiums for these locations. Sure there has always been a premium for these types of locations, but I think that this premium will be increased as energy prices, food prices, and inflation will make it cost prohibitive for people to have such long commutes. Places like Irvine/Costa Mesa/Newport Beach and West LA/Santa Monica/Beverly Hills where many high paying jobs are located (the types of places where I would want to live by the way) will still have high demand for the local housing keeping prices from dropping excessively like we're seeing out near Riverside and Lancaster. I even think some of the high end bedroom communities like Thousand Oaks, Valencia, and San Clemente will be hit pretty hard. However, I just don't see huge price decreases in the locations centrally located to where the jobs are located.
Maybe your price estimates will come true someday, but I think that the ultimate effect of the housing bubble is that distressed/unattractive/less desirable/distant areas will be what brings these numbers down. People who are looking for desireable, centrally located homes are going to have to continue to pay premiums for these locations. Sure there has always been a premium for these types of locations, but I think that this premium will be increased as energy prices, food prices, and inflation will make it cost prohibitive for people to have such long commutes. Places like Irvine/Costa Mesa/Newport Beach and West LA/Santa Monica/Beverly Hills where many high paying jobs are located (the types of places where I would want to live by the way) will still have high demand for the local housing keeping prices from dropping excessively like we're seeing out near Riverside and Lancaster. I even think some of the high end bedroom communities like Thousand Oaks, Valencia, and San Clemente will be hit pretty hard. However, I just don't see huge price decreases in the locations centrally located to where the jobs are located.
Why don't you see prices falling in higher priced areas? They experienced the same type of bubble appreciation as all of the other areas. Sure, these people make significantly more money than the median, but nevertheless they have limits to what they can spend as well. And with the price of everything else going up, there is less to go towards housing. Not to mention that the haves and have-nots disparity existed before the bubble. It isn't a new phenomenon.
I think this data also shows how skewed the market is. At a 5.5x price-to-income ratio, that assumes if you make $100,000 per year you can afford a $550,000 house. But you can't. The assumptions you have to make to get those numbers to work don't make any sense. I need to dig into this a little more. This is getting more interesting now.
I wonder how many people in homes today are priced out of them? I bet it is a very large percentage of the homeownership population. So who buys from them? There aren't enough high-income earners to go around.
Alright, here's the deal, I don't disagree with you, I'm just trying to point out that there are some externalities in LA that don't exist elsewhere in this state, let alone elsewhere in the country. In fact, I hope you predictions come true, that would be great for me and my wife who will be looking into buying a home as early as next near. However, no one really knows how this whole thing is really going to turn out or how long it will actually last. I'm just playing the role of devil's advocate to your posts since you seem so certain that you know the future.
Why don't you see prices falling in higher priced areas? They experienced the same type of bubble appreciation as all of the other areas. Sure, these people make significantly more money than the median, but nevertheless they have limits to what they can spend as well. And with the price of everything else going up, there is less to go towards housing. Not to mention that the haves and have-nots disparity existed before the bubble. It isn't a new phenomenon.
I think this data also shows how skewed the market is. At a 5.5x price-to-income ratio, that assumes if you make $100,000 per year you can afford a $550,000 house. But you can't. The assumptions you have to make to get those numbers to work don't make any sense. I need to dig into this a little more. This is getting more interesting now.
I wonder how many people in homes today are priced out of them? I bet it is a very large percentage of the homeownership population. So who buys from them? There aren't enough high-income earners to go around.
What a great discussion this is. That chart you posted, Motoman, was fantastic. BTW Sheri, I wish you all the best luck (and eveyrone else out there) no matter what ultimately happens with the market.
However, for the time being, in the affluent/desirable areas, there are those with excess wealth to buy up properties, particularly the overseas investors we've previously discussed. So they will be 'artificially' propping up the prices in the good parts for the time being, from the looks of things. Many have been buying due to opprtunities or the perception that they are already getting good 'value', whether due to the weak dollar or due to property discounts/negotiation, etc.
As for the average 5.5 factor of median home prices to median incomes in Cali for the years 82-2001 or so, that was quite eye opening. The "safe" and acceptable multiple is 3 or 3.5 times income max, right? Well that just shows the added California premium that has long been here, the added price for living here, which results in the additional 2x multiple...call it the Cali/LA premium.
But that also indicates a historic trend of much higher ratios here, thus people may continue to pay the higher prices in relation to median incomes because that has been the historic case. So we may not see prices drop to an ideal 3x or 3.5x multiple of income.
Or maybe we'll see something even crazier, a dip down to those 3 or 3.5 multiple levels and beyond, if the market overcorrects. That would be very nice.
In any case, I'm only looking at those 'good' or desirable areas, so I don't have a tremendous amount of optimism on how low things will go (as my watching thus far has left me little to get excited about). the demand is still incredibly strong (as mentioned as well, with so many people waiting in the wings like vultures...like me...for any hint of deals), and the thoughts of yeterday's prices still hold tight in sellers' minds. Psychology plays such a huge role...we really need the resistance of individual sellers to be broken, and for the huge REO holders, banks, builders with excess inventory etc., to get with the program. Reports indicate they've done so quite heavily in the inland areas.
I will just continue watching the monthly trends on sold properties and wait for a leveling pattern to emerge, and if I wait too long and buy on the rebound, no biggy. I plan on living in the house for a nice long term, after all, that's what it's for primarily. Income/commercial property is ridiculously overpriced but that bubble and run up here is a year or two behind the residential run up. It will deflate as well, particularly with the smaller rental units 2-4plexes etc.
Alright, here's the deal, I don't disagree with you, I'm just trying to point out that there are some externalities in LA that don't exist elsewhere in this state, let alone elsewhere in the country. In fact, I hope you predictions come true, that would be great for me and my wife who will be looking into buying a home as early as next near. However, no one really knows how this whole thing is really going to turn out or how long it will actually last. I'm just playing the role of devil's advocate to your posts since you seem so certain that you know the future.
I don't pretend to know anything, actually. I just look at data, trends, and try and assess what is realistic, and then I make my own conclusion. I could be totally wrong.
I will fully admit that I will not, without pure luck, be precise as to how much things will correct or how long it will take. There are just too many variables to take into account. The best you can do with something like the real estate market, which is so large and varied, as you point out, is get relatively close.
And it's much easier to get close on things like an entire state or a large city than it is on a particular neighborhood. What prices will do in Santa Monica, or Beverly Hills, or Torrance, or whatever, I have no idea. But when looking at it from a very high level, I think it is reasonable to assume certain things.
Certainly there are externalities that exist, but they also exist in other areas. San Fran costs more than LA, for example. So does the OC. And Santa Barbara, and things like that. There are pockets of people with a helluva lot of money that will always skew things, one way or another. And then there are pockets of people with little money that will skew things. Hence medians, and means, and fun, misleading things like that. But what else do you do? You take a guess.
Had I been in California before this bubble started I would most likely have missed it because I never would have been able to make sense of it. Well, that assumes I wasn't already in a house. And there is no way in the world I ever would have been able to predict home prices doing what they did. Again, it just didn't make sense to me.
As with all markets, reversion to the mean always wins at some point. It isn't that real estate isn't valuable in California. It's just that things have to work together. Incomes, interest rates, inflation, etc., all play a part in how much people can spend on things. When those relationships get out of whack, they have to adjust, up or down.
What got me so interested in this whole thing was that when I was in Dallas, my ex-wife and I had to jump through hoops to get qualified for a $200,000 loan. We made low six-figure income at the time, had a couple of car payments, minimum credit card debt, etc.
Then I moved to LA where everyone was buying $500,000 houses like they were candy. I got a decent raise moving out here, but after taxes, higher rent, etc., I was about breakeven. And even though I make a six-figure income, I can't come close to affording even a starter home out here.
So then I started thinking, if I make this kind of money and can't afford a house, how are all these people doing it? What is different out here? People on the whole don't make much more in LA or California than they do elsewhere. Maybe 10%-15% from numbers I've seen.
My conclusion is simply that were it not for abnormally low interest rates and creative financing, none of this would have ever occured. Sure, we would have seen price appreciation along with wages, but we never would have seen the run-up we did.
The only thing I am arguing is that we have to get back down to more realistic price levels simply because that is all people can actually afford. People weren't sitting on a big wad of cash and understating their incomes when looking to buy houses prior to this bubble. When people buy houses they typically buy as much as they can. Creative financing, primarily, helped them "qualify" for prices that they really didn't qualify for. So all of that excess has to work itself out. We haven't reached some new revelation in house buying. It's basic economics.
So then I started thinking, if I make this kind of money and can't afford a house, how are all these people doing it? What is different out here? People on the whole don't make much more in LA or California than they do elsewhere. My conclusion is simply that were it not for abnormally low interest rates and creative financing, none of this would have ever occured.
I completely agree. Most of us have been in the same position you were in--in Dallas--when you tried to qualify for a loan; before creative financing, it just wasn't possible to qualify for a mortgage, here or anywhere, without the 30% ratio. And anyone who's owned a home for twenty-plus years remembers interest rates in the double digits, so that even with a modestly priced home, one still ended up with a $2000 mortgage.
How are all these people buying homes? A lot of us have just stayed where we were and watched the paper value go up (and hopefully didn't borrow against the increased equity). I would say the majority of us couldn't afford to buy our own homes right now. And that's not in just in California. We will undoubtedly see prices drop, and continue to drop, until supply and demand evens out.
Does anyone recall what average CD's, savings accounts, Treasury bills, etc. paid during those years of tremendous inflation and extremely high interest rates (stagflation), during the 70's and early 80's? Back when standard 30 year mortgage rates were well over 10%, or at or around 20%?
I'm just wondering if and when that happens again, what sort of returns one can expect on the most standard investment vehicles, particularly over the long term. I.e. would it be worth it to get 10 or even 30 year Treasuries at some outrageously high rate of return.
Outside of that, I wonder if we'll see events very similar to Japan after their enormous land bubble. Anyone have that chart available? It's unreal.
Ah, here's a similar one, not the official one I'm looking for.
Prices dropped tremendously from their peak and just plateaued for the last few years if I'm not mistaken. They're just now beginning to trickle upward ever so slowly, still at half or less what they were at the peak, about 15 years ago.
And the prices are/were so insanely high for property, at least in and around Tokyo, that there are multigenerational mortgages - 40, 50, and even higher year mortgages are not uncommon.
Of course, the Japanese FED attempted to fight off their recession as we all know with incredibly low interest rates, including 0% for quite some time, similar to our early to mid 2000's (though even lower). Cheap and even free money.
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