Bubble bursting in 2014? or not? (Santa Ana, Orange: apartment, rental, HOA)

[flo2900]

Originally Posted by JohnSoCal

We are a long way from that. Monthly rents are much higher than the mortgage payment would be including taxes and insurance.

That's why prices will continue to climb until a balance is reached.

[certsevtxert]

What bubble? We are still in a recession.

[CAVA1990]

Originally Posted by certsevtxert

What bubble? We are still in a recession.

Not amongst homebuyers and most owners.

[tiredofoc]

As long as you aren't purchasing a house you can't afford you will be fine. Prices are attractive right now in many areas. They aren't screaming deals but they still represent good long term assets.
If you plan on flipping in 3-5 years, I would pass. Real estate is a long term investment and transaction costs for most people make it hard to turn a profit in the short term.

If you are worried about interest rates rising and killing prices, well, that is something you can hedge.

[EscapeCalifornia]

Originally Posted by CAVA1990

Not amongst homebuyers and most owners.

Sure, as long as the 1% is making money, everything must be great.

[Calix]

Interest rates make a huge difference because people buy a monthly payment, not the price of the home. Let me illustrate, especially in terms of "affordability" and "qualifications". Lowest rates available today are at about 3.125%

Person is looking to purchase a home for 583k

Annual Income $100,000
Multiplier 30%
Monthly Payment Budget $2,500
Term 30

Interest Rate / Term (yrs) Purchase Budget Loss on 10bps increase Cumulative loss (%)
3.125% $583,600.20
3.225% $576,255.41 -1.26% -1.3%
3.325% $569,044.18 -1.25% -2.5%
3.425% $561,963.70 -1.24% -3.7%
3.525% $555,011.18 -1.24% -4.9%
3.625% $548,183.94 -1.23% -6.1%
3.725% $541,479.33 -1.22% -7.2%
3.825% $534,894.77 -1.22% -8.3%
3.925% $528,427.73 -1.21% -9.5%
4.025% $522,075.76 -1.20% -10.5%
4.125% $515,836.46 -1.20% -11.6%
4.225% $509,707.45 -1.19% -12.7%
4.325% $503,686.46 -1.18% -13.7%
4.425% $497,771.23 -1.17% -14.7%
4.525% $491,959.57 -1.17% -15.7%
4.625% $486,249.34 -1.16% -16.7%
4.725% $480,638.43 -1.15% -17.6%
4.825% $475,124.81 -1.15% -18.6%
4.925% $469,706.46 -1.14% -19.5%
5.025% $464,381.43 -1.13% -20.4%
5.125% $459,147.81 -1.13% -21.3%
5.225% $454,003.73 -1.12% -22.2%
5.325% $448,947.35 -1.11% -23.1%
5.425% $443,976.91 -1.11% -23.9%
5.525% $439,090.64 -1.10% -24.8%
5.625% $434,286.84 -1.09% -25.6%
5.725% $429,563.84 -1.09% -26.4%
5.825% $424,920.01 -1.08% -27.2%
5.925% $420,353.76 -1.07% -28.0%
6.025% $415,863.52 -1.07% -28.7%
6.125% $411,447.77 -1.06% -29.5%
6.225% $407,105.01 -1.06% -30.2%
6.325% $402,833.80 -1.05% -31.0%

Just an increase of 1% would push this person beyond the brink. All cash buyers only buy because its the best place to generate yield. However, if rates increase, yield would likely be found other places.

Of course, Realtors(TM) will tell you that prices are only going up, forever and ever, even if rates doubled from today, which would still be historically low.

Of course, that being said, the above illustration is based on a simple scenario: A household with $100,000 in annual income uses 30% of their income stream to purchase a home with a zero-downpayment 30-year mortgage. The question is, how much principle (purchase budget) does their monthly payment buy them which they can apply to a purchase transaction?

I know this is a simplification for many reasons:
1. There are other kinds of loan products available (ARMs of various terms, 15-year fixed, etc).
2. Making a down payment can increase the amount a household can “afford” at the same monthly payment amount.
3. Sellers who can’t sell for what they think their home is worth can keep their homes off the market indefinitely, avoiding sales to buyers who are unwilling or unable to pay the seller’s wishing price.
4. Not everyone in the market has $100,000 income.
5. The percentage of a household’s income stream used to make a home purchase can vary.
6. All-cash buyers are not constrained by interest rates.

Despite these any myriad other complications, the simple fundamental relationship between mortgage loan interest and purchase budgets remains: When rates rise from their current historically-low levels to 7%, mortgages financed over 30 years will provide for 30% less principle to finance a home purchase than they do at current rates.

And this is why I believe the Fed will do everything within its power to suppress mortgage rates and avoid taking away the housing market punch bowl, as otherwise they are likely to get blamed for popping the echo bubble. I’m sure they have at least a handful of economists in their stable who can replicate my calculation and understand the implications of allowing rates to revert to historic norms.

[Leonard64]

Originally Posted by Calix

Of course, a permanently high plateau in real estate. Hmm I've heard that before. Paging Dr. Fisher

"There may be a recession in stock prices, but not anything in the nature of a crash."
- Irving Fisher, leading U.S. economist , New York Times, Sept. 5, 1929
"Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."
- Irving Fisher, Ph.D. in economics, Oct. 17, 1929

The stock market crashed less than two weeks later.

Who said anything about a permanently high plateau?

I expect them to keep rising until there are more homes than buyers. Then they will drop. Since they aren't making anymore land and more people are being born, the likelihood is that over each decade prices will go ... up. Just look at prices 60 years ago and then at today's for the same house.

My childhood home new in 1952 (Fullerton, CA): $9,500.00. Same home today: $343,000.00. Several ups and downs but ... overall waaaayyyyyyy up.

[Calix]

Originally Posted by Leonard64

Who said anything about a permanently high plateau?

I expect them to keep rising until there are more homes than buyers. Then they will drop. Since they aren't making anymore land and more people are being born, the likelihood is that over each decade prices will go ... up. Just look at prices 60 years ago and then at today's for the same house.

My childhood home new in 1952 (Fullerton, CA): $9,500.00. Same home today: $343,000.00. Several ups and downs but ... overall waaaayyyyyyy up.

Yes I know, of course, the US economy was growing, the tax paying population base was growing, the country was young. The US was the manufacturing leader of the world, etc, etc, etc.

Now, as you of course know, past performance is no guarantee of future return (investing 101).

I'll give you that coastal CA is very desirable, I love my home and I love Orange County. I do however hate to see that prices are so high because I can't buy an even better house, or even a worse one without incurring more debt. So no real benefit to me unless I cash out and leave (which I don't want).

Housing should have gone down more, but it didn't purely through market manipulation. Pretty much all of this recovery is Fed driven. Once that slows, or stops, the correction will be in. Please refer to my rate table above. Investors are only piling in, because of ZIRP (Zero interest rate policy). ZIRP is squelching saving and forcing people into investment (malinvestment really) in order to chase yield. Real Estate is a non productive asset class, so from a macroeconomic view, I hate seeing real estate price inflation as no new wealth is created, only the exchange of debt and increase of taxes. Except for RealtorsTM, this is not a good thing for anyone, including the seller, unless they cash out entirely and live somewhere cheaper.

As for the cliche, they aren't making any more land, yes and no, you can make an infinite amount of vertical "land" by building upwards, once the price is right (Hong Kong, Tokyo, New York, etc). 95% percent of the united states is undeveloped land, so I think there is plenty. Now if you were to say, there isn't much highly desirable prime coastal property to satisfy everyone's demand, I'll grant that, but there is plenty of dry playa, hot desert, wilderness (anything east of the Santa Ana mountains) and a whole lot of flyover country. That being said, everything has an equilibrium and the belief that prices can go up forever is naive and sounds like a sales shill (aka RealtorTM).

Some lines used by house salespeople aka RealtorsTM

• Buy now or you’ll be priced out forever. (a favorite on CD)
• They’re not making any land.
• Real estate never goes down.
• You’re just kidding yourself if you’re waiting for prices to fall.
• Never a better time to buy! (especially if you are a RealtorTM on the hunt for a bigger commission check)
• It’s different this time. (yes it always is)
• _(insert location)_ is so desirable, people will want to live here no matter how expensive it gets.
• Boomers/immigrants/rich people will keep prices permanently high. (You used this a number of times)
• Prices have achieved a permanently high plateau/new paradigm/new rules
• You can’t lose in real estate –it’s a no-brainer.
  The last housing drop was caused by _(insert unique, non-repeatable event: 9-11, collapse of Soviet Union, earthquake, hurricane, etc.)_; it’ll NEVER happen again.

And the list goes on and on.

[CAVA1990]

Originally Posted by Calix

As for the cliche, they aren't making any more land, yes and no, you can make an infinite amount of vertical "land" by building upwards, once the price is right (Hong Kong, Tokyo, New York, etc). 95% percent of the united states is undeveloped land, so I think there is plenty.

Zoning laws and proximity to jobs do limit the supply of saleable properties.

[Joe Van Fossen]

Originally Posted by Calix

...Except for RealtorsTM, this is not a good thing for anyone, including the seller, unless they cash out entirely and live somewhere cheaper...That being said, everything has an equilibrium and the belief that prices can go up forever is naive and sounds like a sales shill (aka RealtorTM).

Some lines used by house salespeople aka RealtorsTM

• Buy now or you’ll be priced out forever. (a favorite on CD)
• They’re not making any land.
• Real estate never goes down.
• You’re just kidding yourself if you’re waiting for prices to fall.
• Never a better time to buy! (especially if you are a RealtorTM on the hunt for a bigger commission check)
• It’s different this time. (yes it always is)
• _(insert location)_ is so desirable, people will want to live here no matter how expensive it gets.
• Boomers/immigrants/rich people will keep prices permanently high. (You used this a number of times)
• Prices have achieved a permanently high plateau/new paradigm/new rules
• You can’t lose in real estate –it’s a no-brainer.
  The last housing drop was caused by _(insert unique, non-repeatable event: 9-11, collapse of Soviet Union, earthquake, hurricane, etc.)_; it’ll NEVER happen again.

And the list goes on and on.

As a Realtorâ„¢, I've never used any of those lines in real life or marketing. I also live in this economy and would like to afford to move up from a 2 to a 3 bedroom home, for my growing family, at some point in the near future. Not all of us are making 6-figures, driving luxury cars and living in 7-figure homes by the beach.