Do you think housing prices are STILL going down in California? (Los Angeles: rent, condo)

[Winston Smith]

Originally Posted by califantastic

Actually if the dollar rises and property values rise foreign investors will do very well.

Surely you meant to say the "falling" dollar, no? The dollar is at an all-time low, and as a result Canadians, Europeans and Asians are finding bargains in U.S. real estate. With the strength of their currencies and a plunging U.S. housing market, it's a great time for them to buy. Or, maybe you're referring to foreign investors who have already invested. Yes, in that case they will do well as both the real investment and the cash-out currency value increase (if both real-estate and the dollar bounce back). Well, we should all hope that the dollar strengthens. It's quite deflated these days.

[motoman]

Originally Posted by sheri257

All of this is great in theory but, does anybody really believe that prices in LA are going to drop to $250,000? I don't. If you're waiting for that ... you'll be waiting forever.

In some areas they will fall to $250,000. The median, the last I saw in the LA Times, I believe, has already fallen over $100,000 to around $350,000. And given that there are a lot more foreclosures and a lot more inventory that will be coming onto the market over the next year, it will certainly put a lot of downward pressure on prices.

And again, you have to take incomes into consideration. Based on every source I have seen published, real wages in LA haven't changed much over the last five years. So how is it people can afford to pay significantly more today for a house than they could five years ago? They can't. They are just stretched significantly further. Which is one of the reasons the savings rate is basically zero. That will be great for retirement. Socialism anyone?

[motoman]

Originally Posted by sheri257

It would be nice if you were right but ... you're not taking other factors into consideration.

California homes have always appreciated more than wages. Why? Because people have always been willing to pay more to live here.

Even during the Great Depression, prices depreciated 30 percent. What you're talking about is a lot more depreciation than that which may be possible, but not likely ...

That's funny. The last I saw prices have fallen over $100,000 at the median in LA. How is a falling housing price a rising housing price?

In the long-run, home prices cannot increase more than wages. You have to have a wage to buy a house. You can't spend 100% of your income on a place to sleep.

People are already maxed out when looking at debt-to-income and home price-to-income levels. How in the hell can they continue to go up from this point unabated? They can't.

Do you not remember 5 years ago when prices were half what they are today? Why weren't you willing to pay $500,000 for a $250,000 house then? Nothing has changed.

[motoman]

Originally Posted by JTGJR

Just as a point of reference, I purchased my home in the early 90's prior to the last bubble burst. At the low, it dropped about 25% in value. Today, it's worth 3x what I paid for it and, so far (knock on wood), has not dropped in value based on comps. Could I sell it today for that? Possibly. Do I want to? No. Will it drop 25%+ in the next 18 months? No. That is, unless, we have an earthquake on the Newport/Inglewood fault at the magnitude of this week's China quake. But, even then, the masses will be looking to move to Cali after the rebuild since the next "Big One" would have already occurred.

People who have been in California for the past 5 years can afford the higher home prices because they have a combination of income and equity that enables them to "buy up." Those who purchase at the bottom of this bubble will be in that same position in 5-years. It wasn't any different when we bought our first home back in '86. Appreciation and salary increased enough for us to stretch just that little bit beyond our means to move up to a larger home.

I don't know exactly the year you purchased your home, so let's say 1995. That was 13 years ago. If your home price has tripled, that is an 8.8% return over that 13 year period, with most of that gain occurring in the last 2-3 years. If you were to back out the rise in the last few years, your house would be worth closer to 1.5x-2x what you paid for it, for an annual increase of about 5.5%. Not a particularly stellar return, particularly after you adjust for all of the money you've put into your house over that 13 years, like your mortgage payment, property taxes, insurance, maintenance, etc. You could have done significantly better in the stock market, perhaps even Treasurys.

Let's look at an example. Let's say you bought a house in 1995 for $200,000 that is now worth $600,000. Over the last 13 years, assuming 100% financing, you spent $187,000 on mortgage payments (before any tax benefit), $26,000+ on property taxes, probably another $20,000-$30,000 on maintenance, etc. So you've spent probably $250,000 or over the last 13 years on your house. And you would still owe about $150,000. So you could sell your house for $600,000, less at least 6% for closing costs. So you'd net $564,000 on the sale and then $414,000 after paying off your mortgage. Running an IRR calculation on those cash flows, your annualized return is 7.3%. If you net just $50,000 less on your sale, ($364,000 rather than $414,000), your annualized rate of return would be 5.5%. Reduce your net proceeds by $100,000 and your annualized return would be just 3.4%. I have not assumed any tax benefits on your mortgage payments, so you would get a little bit of a kicker from that. Regardless of the scenario you pick, that's not a particularly stellar investment.

And if you take the run-up of the last few years out (which will come out eventually), what do you get...ohhhh, don't say it...you get price appreciation that is pretty much in line with wage inflation. Get out of town!

What you are also assuming is that any future home buyer in California: 1) currently owns a home in California with significant equity they can tap to put down towards another purchase in California, or 2) will be making income that places them in the top 5% of wage earners in the entire country.

Do you really think that is realistic? That every single home buyer in California is either flush with several hundred thousand dollars in cash (the average 401k has $50,000 in it), or is in the top 5% of wage earners in the country?

I ran some numbers a few months back that showed, given the income you would need to purchase the median priced home at the peak of the bubble in California, 60% of US households making a six-figure income would have to live in California. That isn't remotely possible, particularly given that California makes up just 12% of the population.

[motoman]

Originally Posted by califantastic

Actually if the dollar rises and property values rise foreign investors will do very well.

You corrected me on this. Thank you. I don't know what I was thinking when I wrote the post you were referring to here.

What I should have said is that a rising dollar will be great for those that have already bought in the US. But once the dollar strengthens, it will make property investment in the US unattractive. As a result, the demand we see from foreign buyers now will dry up.

What happens to the market when this demand goes away? Will people in the US be making enough money then, and will there be enough demand, to offset the fall in demand from foreign buyers? I don't know. But I am guessing not.

[motoman]

For those that have not seen this before, take a look at this graph that shows the inflation adjusted prices of homes in the US since 1890. After looking at just this graph, if you can look me in the eye and with all seriousness tell me that home prices are not going to fall in California, which is even more extreme than what this graph represents on a national level, then I have a state full of overpriced homes I'd like to sell you.

[JTGJR]

Originally Posted by motoman

I don't know exactly the year you purchased your home, so let's say 1995.

'91

Originally Posted by motoman

You are also assuming that any future home buyer in California 1) currently owns a home in California with significant equity they can tap to put down towards another purchase in California, or 2) will be making income that places them in the top 5% of wage earners in the entire country.

This is what I said: People who have been in California for the past 5 years can afford the higher home prices because they have a combination of income and equity that enables them to "buy up." Those who purchase at the bottom of this bubble will be in that same position in 5-years.

Originally Posted by motoman

If your home price has tripled, that is an 8.8% return over that 13 year period, with most of that gain occurring in the last 2-3 years. If you were to back out the rise in the last few years, your house would be worth closer to 1.5x-2x what you paid for it, for an annual increase of about 5.5%. Not a particularly stellar return, particularly after you adjust for all of the money you've put into your house over that 13 years. You could have done significantly better in the stock market. Or maybe even Treasurys.

"IF you were to back out the rise-" Fortunately, I don't have to. And I can only wish that my 401Ks would realize the growth of the property values.

[motoman]

Originally Posted by JTGJR

'91



This is what I said: People who have been in California for the past 5 years can afford the higher home prices because they have a combination of income and equity that enables them to "buy up." Those who purchase at the bottom of this bubble will be in that same position in 5-years.



"IF you were to back out the rise-" Fortunately, I don't have to. And I can only wish that my 401Ks would realize the growth of the property values.

So if we've reached the bottom at $350,000, and you say in five years prices will have doubled again to $700,000, the median home buyer will need $140,000 in cash as a down payment and will need to be making $200,000+ per year in income to afford it? Yeah, that's realistic.

If you don't have to back out the rise, does that mean you're selling now? Or are you in one of those markets that goes up forever, because people will forever be getting 8% per year raises where you live and are already making $150,000-$200,000 per year?

Let me ask you. If $500,000 for a house is now a bargain, why weren't people paying that 5 years ago? Their incomes haven't double since. Tell me what has changed where you live that would justify a doubling of house prices in just 5 years when the long-term return on real estate is less than 5%?

[sheri257]

According to this website the average home in Los Angeles sold for $350K-400K five years ago ... not $250K.

Los Angeles, California (CA) Detailed Profile - relocation, real estate, travel, jobs, hospitals, schools, crime, news, sex offenders

And according to DataQuick, the average LA home price in March was $440K ... not $350K.

Southland home sales still ultra-low; median price slips again

So it seems that you're data is off by about $100K. For the last 30 years California home prices have appreciated about 7 percent annually ... even if you take the latest boom years out of the equation so ...

You can certainly dream on but ... that's all it is: a dream. It would be nice if you were right but, it's just not practical to expect LA homes to get that cheap.

[JTGJR]

Where, precisely, did I mention home prices doubling in the next 5 years? And where, precisely, did I say that $500K is a bargain price for a home? Stop moving the target.

Let's use real basic numbers. You buy a $350K home today. Assuming that you're smarter than many of those who purchased in the past couple years, you put 20% down so you have a mortgage of $280K. In 5 years, let's say you knock off $10K in principle so you now owe $270K.

Conversely, let's give you a conservative 10% increase in value, in total, over those 5 years. Your home is now worth $385 so, theoretically, you now have something in the neighborhood of $100K in equity, assuming you didn't use your house as an ATM. So that's a down payment for a $450-500K buy-up to either a larger home, or a home in a little bit better area. Of course, this assumes that you've also received moderate wage increases over those 5-years as well.

So, as I previously stated, People who have been in California for the past 5 years can afford the higher home prices because they have a combination of income and equity that enables them to "buy up." Those who purchase at the bottom of this bubble will be in that same position in 5-years.