Housing Market??

[motoman]

Several of you have made some very good and factual statements. I think only a few things have been left out.

1) The real estate "bubble" and subsequent crash in California back in the 1990s was mere child's play compared to this bubble. If you graph out home prices, price to income ratios, etc., the 1990s mess doesn't even register on the graph. It looks like nothing more than normal market fluctuations. This bubble is very clearly evident, with the median California home price peaking at over 10x median household. This compares to a long-term price-to-median income of 5x-5.5x. At a minimum then, you should expect the median home price to fall about 50%.

2) The peak to trough back in the 1990s was five years, and the median price in California only fell a total of about 20% over those five years. Given that this bubble was many multiples larger, you can reasonably expect it to take longer than five years to bottom. That would put us beyond 2011 for a bottom. Prior to this bubble burst, the single largest one year decline in home prices in California was 8%. The first year of bust this time around was 40%. Hopefully that gives you some perspective on the magnitude of this fiasco. And no, just because the first year of the bust fell 40% doesn't mean we will just get to the bottom faster. It just means the bubble was that much larger. It will take time, read years, for the remaining excesses to get worked out.

3) Prices today are certainly cheaper than they were, but on the whole they are no bargain, as mentioned in the WSJ article posted above. Price to income ratios are still way out of whack. You will find handfuls of transactions that appear to be priced well, but those are distressed and foreclosure properties, they are not normal market activity. In fact, the majority of homes listed on the market today in California are distressed and foreclosed properties. Not until these types of listings become a very small part of listings could we even begin to consider the market to be operating under normal conditions.

4) This past bubble was driven entirely by debt, and we are piling on more debt to try and save ourselves from it. What does that mean? It means inflation. You don't throw $2 trillion into an economy and expect there to be no inflationary impact. Interest rates are at all-time lows in the US, including mortgage rates. But at some point interest rates will have to rise to offset that inflation. An example, 30-year Treasury bonds are trading at 3.6% or something thereabouts. That means the real rate of return to the investor is less than 1% long-term. How many of you would lock up your money for 30 years for less than a 1% real rate of return? No intelligent person would. So interest rates must rise.

5) Home prices and interest rates are inversely related. As rates rise, home prices fall, all else equal. An example. If you bought a $300,000 house today using a mortgage with a rate of 5%, your monthly payment, assuming no money down, would be $1,610 per month. Now, holding that monthly payment constant, because let's assume that is a reasonable monthly payment given income levels, when mortgage rates rise to 8%, that house will then be worth just $219,000. Another way to put it, if mortgage rates were to rise from 5% to 8%, for you to be able to sell your home for the same $300,000 you paid for it, the buyer would have to have an income 37% higher than yours. So unless wages increase faster than interest will increase, which simply will not happen, then any recovery that we may see because people are once again finding jobs, will be greatly hampered by the inevitable increase in interest rates.

So to the original poster, a short answer is, there is no reason to be in any hurry to buy. The mentality that "I am afraid prices will rise too far and I won't be able to get in" is exactly the mentality that created the incredible debacle we are now living through.

[Radical Raul]

Originally Posted by teach1234

Yes, I find myself dangerously tempted by those adds.

You are basically locking yourself in with a two year lease and supposedly the management firm will help you find financing, and a portion of the rents paid will be applied to your down payment should you qualify to buy.

[NewToCA]

A couple of indexs provide some interesting insights into LA housing.

Case Shiller is frequently cited as a pretty accurate housing index measurement tool. According to Case Shiller, the metro LA area had a January 1987 index (base year for index) of 59.33, and a January 2009 index of 166.54. The peak Case Shiller index for the metro LA area was in Sept 2006, with an index of 273.94.

So, according to Case Shiller, the LA metro area prices have dropped 39% below their peak prices, indicating a possible end in sight for the slump.

However...

The Bureau of Labor Statistics publishes an annual inflation calculator. Using the inflation calculator, a value of 59.33 in 1987 equals an inflation index price of 110.82. So if you view housing as linked to overall inflation, which should also roughly track changes in wages, the market would still be about 33% over valued.

Just something to keep in mind.

[motoman]

Originally Posted by NewToCA

A couple of indexs provide some interesting insights into LA housing.

Case Shiller is frequently cited as a pretty accurate housing index measurement tool. According to Case Shiller, the metro LA area had a January 1987 index (base year for index) of 59.33, and a January 2009 index of 166.54. The peak Case Shiller index for the metro LA area was in Sept 2006, with an index of 273.94.

So, according to Case Shiller, the LA metro area prices have dropped 39% below their peak prices, indicating a possible end in sight for the slump.

However...

The Bureau of Labor Statistics publishes an annual inflation calculator. Using the inflation calculator, a value of 59.33 in 1987 equals an inflation index price of 110.82. So if you view housing as linked to overall inflation, which should also roughly track changes in wages, the market would still be about 33% over valued.

Just something to keep in mind.

That's good info. Thanks for sharing. Where did you get the Case Shiller information? Is it just a simple Google search? Apparently I'm too lazy to look myself.

[cmw2133]

Originally Posted by motoman

Several of you have made some very good and factual statements. I think only a few things have been left out.

1) The real estate "bubble" and subsequent crash in California back in the 1990s was mere child's play compared to this bubble. If you graph out home prices, price to income ratios, etc., the 1990s mess doesn't even register on the graph. It looks like nothing more than normal market fluctuations. This bubble is very clearly evident, with the median California home price peaking at over 10x median household. This compares to a long-term price-to-median income of 5x-5.5x. At a minimum then, you should expect the median home price to fall about 50%.

2) The peak to trough back in the 1990s was five years, and the median price in California only fell a total of about 20% over those five years. Given that this bubble was many multiples larger, you can reasonably expect it to take longer than five years to bottom. That would put us beyond 2011 for a bottom. Prior to this bubble burst, the single largest one year decline in home prices in California was 8%. The first year of bust this time around was 40%. Hopefully that gives you some perspective on the magnitude of this fiasco. And no, just because the first year of the bust fell 40% doesn't mean we will just get to the bottom faster. It just means the bubble was that much larger. It will take time, read years, for the remaining excesses to get worked out.

3) Prices today are certainly cheaper than they were, but on the whole they are no bargain, as mentioned in the WSJ article posted above. Price to income ratios are still way out of whack. You will find handfuls of transactions that appear to be priced well, but those are distressed and foreclosure properties, they are not normal market activity. In fact, the majority of homes listed on the market today in California are distressed and foreclosed properties. Not until these types of listings become a very small part of listings could we even begin to consider the market to be operating under normal conditions.

4) This past bubble was driven entirely by debt, and we are piling on more debt to try and save ourselves from it. What does that mean? It means inflation. You don't throw $2 trillion into an economy and expect there to be no inflationary impact. Interest rates are at all-time lows in the US, including mortgage rates. But at some point interest rates will have to rise to offset that inflation. An example, 30-year Treasury bonds are trading at 3.6% or something thereabouts. That means the real rate of return to the investor is less than 1% long-term. How many of you would lock up your money for 30 years for less than a 1% real rate of return? No intelligent person would. So interest rates must rise.

5) Home prices and interest rates are inversely related. As rates rise, home prices fall, all else equal. An example. If you bought a $300,000 house today using a mortgage with a rate of 5%, your monthly payment, assuming no money down, would be $1,610 per month. Now, holding that monthly payment constant, because let's assume that is a reasonable monthly payment given income levels, when mortgage rates rise to 8%, that house will then be worth just $219,000. Another way to put it, if mortgage rates were to rise from 5% to 8%, for you to be able to sell your home for the same $300,000 you paid for it, the buyer would have to have an income 37% higher than yours. So unless wages increase faster than interest will increase, which simply will not happen, then any recovery that we may see because people are once again finding jobs, will be greatly hampered by the inevitable increase in interest rates.

So to the original poster, a short answer is, there is no reason to be in any hurry to buy. The mentality that "I am afraid prices will rise too far and I won't be able to get in" is exactly the mentality that created the incredible debacle we are now living through.

A lot of people, myself included, thought stocks looked cheap right after the tech bubble popped. Turns out they weren't cheap by any means. It just took time to bear that reality out. Housing may follow the same path.

[NewToCA]

Originally Posted by motoman

That's good info. Thanks for sharing. Where did you get the Case Shiller information? Is it just a simple Google search? Apparently I'm too lazy to look myself.

Standard and Poor's website:

S&P | Indices > Alternative Indices - S&P/Case-Shiller® Home Price Indices - Home Price Values

[greatmover]

Originally Posted by LABornandRaised

I'm with you Tasksgirl as I'm sure a lot of first time home buyers are. Nobody wants to spend more than they have to and that's the trick of the game or the luck of the draw so to speak. My recommendation (and this is from a future first home buyer talking out of his arse) is when you see a house you want and the price is within the range you budgeted yourself for, go for it.

My partner and I are saving up to buy an entry level home and we too are hoping the housing prices will continue to drop, as they are practically only in ranges where investors can afford. (No offense, but I feel like investors have forced a lot of potential first time home buyers to rent). With investors buying up all the homes as income properties, all that leaves are homes to rent.

great and clever advice

i wanna ask: what is the REAL price of a home in a "simple" area, with 1-2 bdr, with sqr footage under 1000 in LA and area around it up to 30 miles away? The type of the home is no matter. Just need a simple and cheap (if i can say so about LA ) place to live in.
Cuz I've searched real estates sites and i've seen there a few homes at a price about 150-170-200k. They weren't foreclosures and short sales... And they were at the edge of LA (north edge), but i dont'n know, what kind of locations there were at..