"Right Price Equation? (9%, comparable, properties, Realtor)

[chuck22b]

Originally Posted by Humanoid

As I said before, you would need to take into consideration upgrades over time to really determine appreciation. I was mainly curious how you got your figures. But regarding inflation. Looking at the CPI is misleading, as for housing what is important is "wage inflation". In fact if the CPI goes up and wages do not that may put more downward pressure on housing rather than move it up!! Therefore, the numbers to look are so called "core inflation" which is currently around 2.5% as "wage inflation" will typically show up in this number.

True, I agree wage inflation/appreciation is really a key to affordability. But, generally speaking, "historically", median prices increased at a higher rate than "core" inflation... and a little higher than CPI.

Actually, Case-Schiller Index uses the price difference from selling the same home.... so... theoretically, it IS measuring appreciation, albeit it doesn't include upgrades but it also doesn't include sales within 6 months or condo/townhome sales. So essentially the Case-Schiller Index is the closest that we can use to show appreciation/depreciation in home values.

Housing in Los Angeles was affordable just 8 years ago, it didn't require bull-dozing anything. Like any big city Los Angeles has its wealthy communities, but historically housing outside of these areas (which are by far the minority) has been affordable. Is there a particular reason its not going to return to these historic levels of affordability?

I don't think LA has really ever been truly affordable to the medium earner... even looking at the Harvard chart of P/I the lowest point was at 3.8X income in 1986 (when there was interest rates in the teens!!)... So, a 3.5X for Mission Viejo today (with ~6.5% interest rates) would be lower than the lowest period in the 26 year history.

Yes, there's absolutely no reason why medium prices can't return back to historic ~4.5X income affordability levels. Prices have adjusted accordingly in the last ~2 years. I think it's around 5X right now... But, you can't just count the X times P/I, you also have to consider that interest rates are still lower than they ever have been before... which would support a P/I higher than historical average - 4.5X.
Bonus table

Also, I have really no idea why housing gamblers mention "built out" so much. Firstly, Los Angeles isn't built out in any meaningful sense. But even if it was...so what? There are other forces that will keep real estate reasonable, for example businesses will leave the area. The housing bubble has actually been very bad for non-housing related business in California. Its very hard to attract latent when a crappy 3-bedroom house costs more than half a million and in other areas you can get a huge house for 200~300k.

True, and that is probably one of the main reasons the Inland areas have grown as large as it has... and why many businesses/"talent" have moved out of LA Proper area. The Inland Empire has had double digit population growth rates for the last decade. Currently the Inland Empire has ~4 million people to LA's ~9 million?

Ha! No they didn't! But depending how far back you go, they also didn't have: computers,TVs, radios, cars, telephones, air conditioning, hot water, electricity and so...
McMansions hare no different then these other upgrades to our standard of living. So if American households need to downsize for "affordability" why stop at housing? Why not get rid of the computer, electricity and so on? This of course is ridiculous. To make your suggest even more absurd is that McMansions aren't really that expensive. They are built cheaply on very small lots, just 8 years ago in California many middle class families could afford one. Go outside of California and you'll find they are even cheaper, you can purchase a McMansion in nice areas of Texas for $200~250k.

True, standard of living has improved because those items you mentioned have proportionally gotten cheaper. A TV, computer, Ipods, telephones, even a car is proportionally cheaper now than they were in the past (few could even afford a computer 20 years ago... while now you can get a computer at Walmart for less than $200, same with the other items).

Housing on the other hand has other factors in play besides R&D/production costs (factory automation builds computers, etc. and has huge economies of scale)... Housing requires a large amount of labor, larger quantities of material, and most importantly involves a scarcer resource called land. Maybe the materials might be relatively the same, but housing takes up a certain amount of land... and land values have actually gone up over time. Therefore, to get the same amount of value, builders have had to cram houses on smaller lots. Some of the McMansions in the past had large lots and large houses... which average medium income American's should not of bought.

You can argue that land is a plentiful resource and should be cheap... but, livable land is far more expensive. The toll on infrastructure, utilities, water, etc. make land more difficult to develop for housing than say building a computer, etc. Not to mention the regulations/zoning, development impact fees, environmental impact studies, and other laws associated with it that didn't exist in the past. Restrictions on land use and land prices are a major reason why the same McMansion house in California is a whole lot more expensive than Texas (of course the California house also has stricter building codes).

Furthermore, there is a major problem with the distribution of homes. Over the last 10 years or so the only thing they've been building in California is McMansions. So if people truly started to down grade then this would push the prices of McMansions down (simple supply and demand). In fact it will push the prices down to the point where they become affordable to enough people to eat up the supply. The supply is huge so the price drops should be similarly huge. You are going to have to deal with the fact that your McMansion is worth much less than what you paid for it.

Depends on supply and demand... true... near term it'll push the prices down as we are seeing now... but in the future there'll be fewer McMansions available. Notice how there weren't many houses built in the mid 90s during the last bust? The same has been happening in the housing industry in the last year or so.

This is simply false. Lending standards today are still looser than they were 8~10 years ago. But there is one thing that makes them appear tightener at least in California - jumbo mortgages. But jumbos were harder to get pre-bubble, they are just required more now.

I'm not sure if they are looser or tighter... but I do know the amount of loans taken our are less than pre-bubble years... and that the number of sales are fewer than pre-bubble. At some point... these levels will have to get back to equilibrium.

Umm....except that Mission Viejo isn't an affluent community by any means. Its your standard middle-class city. Oh but it has a fake lake! Regardless, during normal markets housing in Mission Viejo is about 3.5 times income.

IMO, South OC, parts of East OC (Yorba Linda, Anaheim Hills, Brea), West LA, parts of the South Bay (Palos Verdes), Camarillo area in Ventura, and parts of Western I.E. are considered upper middle to upper class havens... and therefore should have a higher P/I than the whole LA metro area (4.5X).

Not all analysis is a guess, in my view what you are doing is guessing. Why? Because not only are you looking at a very small percentage of the available data you are using it in a way that makes no sense (e.g., using median price movements to determine historic appreciation). But I agree with your original post - that you can determine where prices are going to go by looking at their pre-bubble inflation adjusted prices. The problem is you need to look at "core inflation" and not CPI or some inaccurately obtained appreciation rates. But also, the typical behavior in a downturn is for prices to decline sharply for fews years and then for nominal prices to flat line or decline very slowly for another 4-5 years. Your "analysis" assumes a V shape to price movements, but this has never happened historically.

I don't think prices will be a V. It'll be more like an upward tilted L, or an upward tilted W (since we'll have a double dip with the Alt-A/Option ARM resets).

-chuck22b

[Humanoid]

But, generally speaking, "historically", median prices increased at a higher rate than "core" inflation... and a little higher than CPI.

Sure, but so what? It says more about people's willingness to spend more on housing (and housing related items) today than appreciation.

Yes, there's absolutely no reason why medium prices can't return back to historic ~4.5X income affordability levels.

The levels in a normal market are less than 4x, looking at the average includes bubble markets. But this is where you acknowledge something and completely ignore it. Los Angeles price to income ratio is inflated due to the wealth in the city. That is to say historically housing has been more affordable in the LA area than the ratio would suggest.

Restrictions on land use and land prices are a major reason why the same McMansion house in California is a whole lot more expensive than Texas (of course the California house also has stricter building codes).

When one talks about the housing bubble, they are also taking about a land bubble. They two go hand and hand. Land prices are crashing in California. Anyhow, these arguments based on an area being "built out", zoning restrictions etc are are all flawed. Not only that there is a good recent counterexample - Japan. Tokyo is by far more "buit out" than any US city yet prices crashed their after their historic housing bubble. In fact being restricted to a little island didn't save their land and housing prices.

Additional, my point was about standards of living. Increasing in housing size, computer etc all represent increases in our standard of living. What you are talking about is a decline in our standard of living and you focus this with affordability. You also, seem not to realize that any decline in standard of living will be highly deflationary on everything including your McMansion in the desert.

IMO, South OC, parts of East OC (Yorba Linda, Anaheim Hills, Brea), West LA, parts of the South Bay (Palos Verdes), Camarillo area in Ventura, and parts of Western I.E. are considered upper middle to upper class havens... and therefore should have a higher P/I than the whole LA metro area (4.5X).

Middle class areas behave much different than an upper class area. Only a few of the areas you mentioned have a lot of members of the upper class in them. Upper middle class are just middle class with higher incomes, there is no real fundamental difference between them other than income. As a result both are largely tied to their annual income therefore you do not see a big difference in the the ratio between a standard middle class community and an upper middle class community. Not only that, historically what you are saying is just inaccurate. Pre-bubble upper class area were around 3.5 and middle class areas around 3.0~3.2.

I don't think prices will be a V. It'll be more like an upward tilted L, or an upward tilted W

Another one of those times where you acknowledge something but ignore it. If you believe this then you are starting the clock to soon in your "analysis". Properties would only start to appreciate nominally in around 7+ years. Prices will return to their nominal pre-bubble value and then stand there for while. Note, if this is in the 2000 range then this will mean PITI < rent by a decent amount in many cases. But this fits in nicely with the fact that rents are over-inflated by about 15%, as PITI moves closer to rent it will drive rents down.

Actually, Case-Schiller Index uses the price difference from selling the same home.... so... theoretically, it IS measuring appreciation

The Case-Schiller is going to over report appreciation because it does not consider upgrades, even major ones. Although its going to do a better job than median price as at least its looking at same house sells.

[chuck22b]

Originally Posted by Humanoid

Sure, but so what? It says more about people's willingness to spend more on housing (and housing related items) today than appreciation.

The whole point of this analysis/exercise is to figure out a way to try to determine a somewhat "reasonable" level for housing prices. Through this thread two formulas came about...

1) One using historical appreciation rates over time on a none bubble base price.

Price = Base Price * (Appreciation Rate)^Years

2) The second using the historical P/I ratio to determine a potential price.

Price = Historic P/I Ratio * Current Median Income

To determine historical appreciation rates, I used the Case-Schiller Report and used prices between 1999-2002 as pre-bubble base prices. From there I calculated "possible" steady-state/balanced prices for the near future.

To determine historic P/I ratio, I used Historic P/I ratios EXCLUDING the years greater than 2000 to prevent bubble influence. Median Income I took from City-Data, and added a little bit more to it since City-Data had 2005 income levels.

Anyhow, basically what I'm saying is that I went from a formula and historic data to derive a price. I DIDN'T take current prices and worked backwards and worked out the numbers to make sense of current prices.

If you have a better methodology or a better idea where prices should be based on analysis/calculations or a combination of both... please feel free to show your logic/numbers/calculations.

The levels in a normal market are less than 4x, looking at the average includes bubble markets. But this is where you acknowledge something and completely ignore it. Los Angeles price to income ratio is inflated due to the wealth in the city. That is to say historically housing has been more affordable in the LA area than the ratio would suggest.

How did you get 4X? Can you cite sources and/or show calculations based on data? According to one of your favorite sites, "Calculated Risk", "...It is very likely that the median price to median income ratio (on a monthly basis if it was available) would now be around 7 or lower - well on the way to the historical norm of around 4.7." which is higher than the 4.5 that I've been using.

http://calculatedrisk.blogspot.com/2...-price-to.html

Japan's housing bubble has many similarities with ours... but it also has many differences... Housing in Japan appreciated over 300x pre-bubble prices. Supposively the price of only the land in Japan was 4X the price of all the land in the US. In LA, even at the peak, prices appreciated ~100%-120%. Furthermore, during the 90s decline... it took 7-8 years of 5-8% depreciation with a total of ~%50 depreciation (peak to through). We are currently already 30+% from the peak and only 2 years into our drop, with most of the drop occuring this year.

The Case-Schiller is going to over report appreciation because it does not consider upgrades, even major ones. Although its going to do a better job than median price as at least its looking at same house sells.

Isn't that basically what I said? That the Case-Schiller is the closest thing to being the best measure for appreciation? Also, it doesn't include condos/townhomes... which are the primary stock of homes selling in areas like NY, or downtowns. IMO, upgrades/improvements are all part of owning a home. The index includes both upgrades and homes that aren't upgraded at all that are falling apart etc. So, considering that it includes both decrepet and well maintained/upgraded homes, I think it does an OK job in measuring appreciation/depreciation.

-chuck22b

[Humanoid]

The whole point of this analysis/exercise is to figure out a way to try to determine a somewhat "reasonable" level for housing prices.

Yes, but you are doing it in ways that don't make that much sense. What you are trying to do is a sort of fundamental analysis, but you are only using one data point to do it. Generally you want to determine the fundamental value from many sources of data, when they all tend to converge you can be reasonable sure that you are onto something correct. But whey they disagree then the analysis isn't nearly as powerful.

1) One using historical appreciation rates over time on a none bubble base price.

This would work fine as a piece of a greater analysis, but the problem is you are merely guessing at the rate of appreciation. Furthermore, even if you could estimate the average historic appreciation, it is just that - historic. California's economy has grown nicely over the last 50 years and as a result you would expect to see some appreciation above the rate of appreciation. But no area will consistently appreciation above inflation, not only that its unlikely California's economy is going to grow as nicely as it has in the next 50 years as it has in the past 50 years. The only reason the state would see appreciation above inflation in the future is if the economy grows faster than inflation, but that is very unlikely at this point. California is bleeding bad. Although I don't think the state will collapse (say like Michigan), I also don't think its going to grow dramatically in the future either.

2) The second using the historical P/I ratio to determine a potential price.

This works okay for a wide analysis of a particular region but is a very poor way to determine value of a particular property or community. The problem is you don't have granular enough data.

So, considering that it includes both decrepet and well maintained/upgraded homes, I think it does an OK job in measuring appreciation/depreciation.

I don't. I'm not taking about putting in new carpet I'm talking about upgrades that are required to bring a old property up to code or up to current standards of living. How many homes from the 1950 do you think still don't have central air?

How did you get 4X? Can you cite sources and/or show calculations based on data?

I'd have to dig up the census data, but even if you look at the graph from CR you can see that Los Angeles was close to 4 after the previous bubble. You need to look at data before the previous bubble.

.. but it also has many differences...

You go on to cite a bunch of differences that have little to do with my original point which was "built out" or any other supply restriction the housing bulls like to talk about will not keep prices high. Japan is the prefect counter-example to that idea.

If you have a better methodology or a better idea where prices should be based on analysis/calculations or a combination of both... please feel free to show your logic/numbers/calculations.

Your calculations assume that from today will we see historic rates of appreciation and you project prices based on that assumption, that makes no sense as the market is declining. There are two issues, one is estimating approximately where prices will "bottom" and another is estimating how much homes will appreciate on average after the bottom. Anyhow, as far as SoCal I think the following will give you reasonable estimates to what the price for a particular property will be at bottom:

Let TR = The price an equivalent property rents for Today.

PITI w/20% down = TR - TR *.10

Of course this is a moving target as higher interest rates will drop the price

Or simply look at the inflation adjusted (core-inflation adjusted) 1998~2000 price. Both will tend to give you the same figure. But these are just estimates, you'd have to factor in other issues to come up with better estimate to the property's fundamental value.

[chuck22b]

Originally Posted by Humanoid

Yes, but you are doing it in ways that don't make that much sense. What you are trying to do is a sort of fundamental analysis, but you are only using one data point to do it. Generally you want to determine the fundamental value from many sources of data, when they all tend to converge you can be reasonable sure that you are onto something correct. But whey they disagree then the analysis isn't nearly as powerful.

Ok, no problem. So far I've been using historical averages to determine appreciation and P/I ratios. Instead I'll use the lowest values in history.

The lowest P/I ratios in LA in the 26 year period occured in 1985/1986 with 3.8X and in 1996 with 4X income.
Bonus table

Now for Medium Income I'll use 2006 Incomes:
Census Data 2006 -
Medium Household Income, LA County = 51k (10 million)
Medium Household Income, Orange County = 70k (3 million)
Medium Household Income, Ventura County = 72k (1 million)
Medium Household Income, San Bernardino County = 53k (2 million)
Medium Household Income, Riverside County = 54k (2 million)
Medium Household Income, San Diego County = 60k (3 million)

Weighing each Medium by its' population weight:
51k (48%) + 70k (14%) + 72k (5%) + 53k (10%) + 54k (10%) + 60k (14%)
Medium Southland Household Income was 57k in 2006.

And now current Medium Home price:
June 2008 Southland Medium was at 355k (dataquick).

So current P/I = 355/57 = 6.2X
If we used 3.8X P/I (1985) then median prices "should" be around: 3.8 X 57 = 217k
If we used 4X P/I (1996) then median prices "should" be around: 4 * 57 = 228k

So according to the P/I ratios of the last down turns, current medium price of (355k) is still 35%-38% too expensive. Currently, we've fallen ~30% from peak (505k), so, it would take a total fall of ~50% from peak to return back to the P/Is of the last down turn. 50% from peak is pretty much what most bubble watchers/experts have been predicting (http://www.inmoneytoday.com/2008/06/22/predicting-the-housing-future-los-angeles-and-orange-counties-using-the-case-shiller-index-to-find-a-bottom/ - broken link).

BUT, the biggest problem about using the P/Is from 1985 and 1996 as the basis of today's "bottom" P/I ratio is that in 1985 and 1996 Interest Rates were at 12% and 8% respectively. Today's interest rates are around ~6.5%. So, in order for today's interest rates to get up to 8% it'll have to increase 23%. For it to get to 12% they'll have to increase 85%.


Interest Rate Trends ~ Historical Graphs for Mortgage Rates


So, let's look at the P/I ratio of a pre-bubble time with ~7% interest rates. In 2001/2002 interest rates were around ~7% with a P/I ratio of 4.7X-5X.

With that, 5 * 57k = 285k, or another 19% drop from today's prices, or a total of ~40% drop from the peak. Considering today's rate is 6.5% than the P/I ratio today can be higher than 5X ratio in 2001 but less than the 6.2X of today. Since we've already fallen ~30% peak... that means we have ~10% more to fall.

P/I ratios are fun and all, but it doesn't account for interest rate fluxuations. Ultimately I think a better measure of affordability levels is to look at the HOI (home opportunity index). In Q1 we were at 2004 affordability levels. They still haven't released Q2s for where we are now... but I'd suspect we're in 2003 levels now.
NAHB/Wells Fargo Housing Opportunity Index (HOI)

This would work fine as a piece of a greater analysis, but the problem is you are merely guessing at the rate of appreciation. Furthermore, even if you could estimate the average historic appreciation, it is just that - historic. California's economy has grown nicely over the last 50 years and as a result you would expect to see some appreciation above the rate of appreciation. But no area will consistently appreciation above inflation, not only that its unlikely California's economy is going to grow as nicely as it has in the next 50 years as it has in the past 50 years. The only reason the state would see appreciation above inflation in the future is if the economy grows faster than inflation, but that is very unlikely at this point. California is bleeding bad. Although I don't think the state will collapse (say like Michigan), I also don't think its going to grow dramatically in the future either.

True, I agree with you here. According to the BEA, California GDP on average increased 8.37% in between 1964-2000s.
60s Growth Rate: 7.84%
70s Growth Rate: 10.6%
80s Growth Rate: 9.69%
90s Growth Rate: 4.3%
2000s Growth Rate: 5.04%

Of course with a maturing economy growth rates will slow. That's natural. That's also why I don't understand why people compare China's Growth rate with other developed nations.

So, unless California innovates like it did with computers/technology it'll slow down to a steady state growth rate. I think this is still very possible considering how much we put into R&D here, and the number of R&D institutions we have in California. California is still considered a pretty innovative State than most of the rest of the Union.

So, let's forgo historical 5.77% LA growth rates, and use steady-state which is around inflation or ~4% appeciation.

2000 Southland: 200k * (1.04)^9 = 284k which is VERY close to the 285k that we saw with the 5X income calculation. So, again, ~10% more down from peak. Convergence? Since we've been able to fall 20% this year alone... I think we should be able to reach another 10% depreciation by mid next year. A total of ~40% from peak.

This works okay for a wide analysis of a particular region but is a very poor way to determine value of a particular property or community. The problem is you don't have granular enough data.

True, I'm only doing a wide area (Southland) analysis. For more granular you'd have to go to the P/I for the region and the growth rate/etc. of that region.

I don't. I'm not taking about putting in new carpet I'm talking about upgrades that are required to bring a old property up to code or up to current standards of living. How many homes from the 1950 do you think still don't have central air?

I think there are a LOT of homes that were built in the 1950s that still don't have central air. Maybe some fans, and window mounted A/C units but I think the majority didn't get the memo to gut the house to install central air. My parent's house in the South Bay area (built in the 70s) doesn't even have A/C and so do a lot of other coastal houses.

Upgrading a home isn't mandatory, and if you've gone and looked at a lot of existing homes, you'll see a lot of home owners that didn't even bother to upgrade appliances in the kitchen. Not to mention that not all upgrades translate into increased value at sale (cosmetic/personalizations).

I'd have to dig up the census data, but even if you look at the graph from CR you can see that Los Angeles was close to 4 after the previous bubble. You need to look at data before the previous bubble.

Please do, it'd be nice to have more than once source for historic P/I ratios.

You go on to cite a bunch of differences that have little to do with my original point which was "built out" or any other supply restriction the housing bulls like to talk about will not keep prices high. Japan is the prefect counter-example to that idea.

Ok, but it's untrue, there are numerous studies out there that show that restrictions to supply by zoning/legal/land restrictions influence costs/price.
http://www.fanniemaefoundation.org/p...2_malpezzi.pdf
http://depts.washington.edu/teclass/...sing051608.pdf

Let TR = The price an equivalent property rents for Today.

PITI w/20% down = TR - TR *.10

Of course this is a moving target as higher interest rates will drop the price

Or simply look at the inflation adjusted (core-inflation adjusted) 1998~2000 price. Both will tend to give you the same figure. But these are just estimates, you'd have to factor in other issues to come up with better estimate to the property's fundamental value.

So, basically your saying that house prices will be "right" when the monthly cost of owning is 10% less than rent or when PITI is 10% less than rent.

Wow, that would be awesome... and if that were to happen investors would be jumping into housing by the handful. Because, not only would they be putting cash away through principal... but they also hold to cash in ~4%-6% annual appreciation on their down payment AND the steady-state appreciation rate of ~inflation or ~4%.

I don't know... but historically speaking in Los Angeles... since 2001, mortgage costs have NEVER gone bellow rental prices. And had a ~1.2X ratio.
HousingTracker.net: Home Affordability Measures for Los Angeles, California

Furthermore, rental prices historically have rarely fallen... and generally speaking has to be priced correctly since rent prices are based on the economic utility/value of shelter. In addition, technically speaking, if housing was in high demand during the boom, inversely that also means that renting was in low demand. So, because of that, rents should of had less potential to increase during the boom years.

Here's the BLS's historic index on Owner's equivalent and renting of primary residence. Through this data for Los Angeles, we see that the percent increase in rents since 1977 has been roughly 5% annually, and only once has rents had negative growth in 1995. Negative -.4%.

So, if your counting on rents to fall dramatically just because house prices are falling, historically speaking, it would be very difficult. Furthermore, in Los Angeles, since the mortgage/rent ratio has been higher than one... it'll also be very difficult for PITI to be 10% bellow rental costs.

If it does happen, that'll be great news! And many people including myself will jump in and buy another home to rent out

-chuck22b

[Humanoid]

the biggest problem about using the P/Is from 1985 and 1996 as the basis of today's "bottom" P/I ratio is that in 1985 and 1996 Interest Rates were at 12% and 8% respectively.

You seem to like to ignore real estate before the 1980's, the problem with doing so is that since the 1980's we've seen a number of issues that have distorted the market for almost half the time. If you look before the 1980's you start to see the real picture. I'm starting to think you are selectively picking date ranges intentionally to distort the truth. It doesn't make much sense otherwise. Regardless in normal markets rates are more in the 7~8.5 range. Interest rates are likely to get in the 7% range soon.

P/I ratios are fun and all, but it doesn't account for interest rate fluxuations.

No, it assumes that interest rates are in an historic range. Which currently they are very close so it ends up working decently. Furthermore, the way you are determining these (like usual) is not historically accurate. Although higher interests do reduce house prices they don't do it in such a linear and dramatic fashion. If what you said was true, you'd except to see house prices cut in half during the inflationary years of the 1970/1980s. That didn't happen. Similarly lower rates don't increase prices in this fashion either, one problem is down payments. Interest rates don't change the value of your down payment . I really don't know if there is an easy way to determine the effect of interest rates on house prices, but what you are saying is very historically inaccurate.

and use steady-state which is around inflation or ~4% appeciation.

And why would you pick 4%?

2000 Southland: 200k * (1.04)^9 = 284k which is VERY close to the 285k that we saw with the 5X income calculation.

I ask again why aren't you using actual inflation figures instead of a made up number? You are just inflating the number to go along with what you are saying, if you use real inflation figures the house is only worth around $250k inflation adjusted.

Upgrading a home isn't mandatory

Actually, if you want to sell often it is mandatory. For example, it would be rather hard to sell a house with a 50's built electrical system. It wouldn't be able to even handle a modern Microwave without turning everything else off. The houses that show up in the Case-Schiller index are ones that have sold not the ones that still have grandma and grandpa in it. Also your counter-examples are just straw man. The heat isn't so bad on the California Coast, I personally only use my AC maybe 15-20 days a year. I could easily do without it though. The story is much different in say the San Fernando Valley.

Ok, but it's untrue, there are numerous studies out there that show that restrictions to supply by zoning/legal/land restrictions influence costs/price.

Note, I said "keep prices high" in obvious reference to bubble peak pricing. Supply restrictions in any form will increase prices to a degree, to what degree completely depends on the substitutes. These restrictions existed before the bubble, so using them to justify elevated prices makes little sense.

Wow, that would be awesome... and if that were to happen investors would be jumping into housing by the handful.

The problem is this has happen in many times, not only in California but in other locations. Your counter-factual...isn't accurate. Also you seem to be ignoring what I actually said, I'm talking about the PITI after having put 20% down. Without a down payment, its roughly PITI = Rent. I consider the down payment, because well 20% down payments are going to become the norm again.

.. and generally speaking has to be priced correctly since rent prices are based on the economic utility/value of shelter.

if housing was in high demand during the boom, inversely that also means that renting was in low demand. So, because of that, rents should of had less potential to increase during the boom years.

Most of the increased demand was speculators, you are also ignoring changes in the supply of rentals. During the housing bubble a few things happened: 1.) Rentals were ripped down to build houses, 2.) Some nicer apartment complexes were turned into condos, 3.) House rentals were taking off the rental market to sell at bubble prices.

Also, declining home prices have an effect on rentals because investors that pick up good deals are able to low ball others. Furthermore, when I talk about rent declines I don't necessary mean nominally. 5 years of little to no nominal growth will bring prices back down to more reasonable levels.

And many people including myself will jump in and buy another home to rent out

Unless you have a lot of cash...it isn't going to happen (In which case why don't you pay down your mortgage?). I hear this comment a lot, but every time I hear it seems the person making it seems to not recognize that its not just prices that are changing. Other things are going to change dramatically too, namely lending standards. To get a loan for an investment property your down payment is going to have to be hefty in the coming years.

Regardless , there is one issue I'm undecided about. I have little doubt that house prices (and rents) will return to levels seen in 1998~2000ish. What I do wonder is whether the bubble in California runs deeper than this and whether prices will decline even more. I think things in the inland empire are going to be worse than what I've said above (haha....9% unemployment!!!), but less sure about other areas.

[chuck22b]

Your right Humanoid... and I give up... I think I've spent way too much time analyzing this when I should be enjoying my weekend with my family.

If things get worse, so be it... if things get better... that's great. Take care, and spend some time with your family too...

-chuck22b

[Humanoid]

I think I've spent way too much time analyzing this when I should be enjoying my weekend with my family.

Well, if you are only doing it to try to make yourself feel better about your home purchase near the peak of the bubble than yeah.....stop and enjoy something else. The damage is already done.

Some people on the other hand (like myself) enjoy economics and thinking about such things.

[Humboldt1]

Perhaps it is easier for you to analyze as you don't have any skin in the game. This could make those of us who have already invested in real estate not be able to see the forest thru the trees. I don't see you as cheering for price declines as a bitter renter. I just see you as smart for waiting to buy (If you ever do, as some people prefer to be renters due to what they have going on in their lives).

I certainly see price declines ahead, just not sure how much they will be. I am advising all my friends to rent if they can for the next year or so and even then I see prices staying flat for a few years once they hit bottom. I am not worried about missing bottom as I don't think this is really possible as I expect bottom to last for 12-24 months before we start seeing prices head up. Even the NAR numbers will reflect such a bottom.

I am a little more optimistic than you Humanoid, perhaps not as optimistic as Chuck, but give you credit for your in-depth analysis, particularly with regards to what is going on in California.

Just curious, when would be a good time for someone like me to buy property (non-foreclosure) in California as an investment? I am guessing you would say 5 years or more, which is fine for my time frame. Your insights are appreciated. Thanks.

[chuck22b]

Originally Posted by Humboldt1

Perhaps it is easier for you to analyze as you don't have any skin in the game. This could make those of us who have already invested in real estate not be able to see the forest thru the trees. I don't see you as cheering for price declines as a bitter renter. I just see you as smart for waiting to buy (If you ever do, as some people prefer to be renters due to what they have going on in their lives).

I certainly see price declines ahead, just not sure how much they will be. I am advising all my friends to rent if they can for the next year or so and even then I see prices staying flat for a few years once they hit bottom. I am not worried about missing bottom as I don't think this is really possible as I expect bottom to last for 12-24 months before we start seeing prices head up. Even the NAR numbers will reflect such a bottom.

I am a little more optimistic than you Humanoid, perhaps not as optimistic as Chuck, but give you credit for your in-depth analysis, particularly with regards to what is going on in California.

Just curious, when would be a good time for someone like me to buy property (non-foreclosure) in California as an investment? I am guessing you would say 5 years or more, which is fine for my time frame. Your insights are appreciated. Thanks.

I'm not totally optimistic... and I've already accepted my loss so I'm not delusional about what my house is worth.

If your thinking of investing in Southern California RE, it depends on what area/segment your thinking of putting money down. I think the inland areas will bottom first (sales have already been higher Y/Y for at least 3 months Prices down, sales up -- that's good news? | L.A. Now | Los Angeles Times (broken link) reducing the sub-prime foreclosure inventory), and then LA area will bottom mid/end of next year (the suburban, middle class areas)...

The coastal areas and more affluent areas (currently ~10% down) will be the second dip as they get hit by the Alt-A resets raising their total drop from peak to 25%-35%.

I also think once foreclosures are worked out of the market, that there would be a bump up in prices. As predicted by John Husing, an economist who has studied the Southern California area for over 40 years. Welcome!

My Prediction Overview:
Inland Empire: early/mid next year 2009
LA General: mid/end next year 2009
LA/OC Affluent/Coastal: mid 2010

Nationally, I'm not as sure since I don't know much about what happened elsewhere during the boom... but I'll venture to guess that nationally things should stabilize around early/mid next year too.

Basically, keep an eye on foreclosure inventory... if that inventory is increasing... then that area has further to drop. If that inventory is decreasing... then that area is stabilizing. The Inland Empire used to be the area with the highest numbers of foreclosures... after the second quarter we were number 4. INT: Inland foreclosure rate reflects state average

Of course, I'm a delusional home owner... so you can discount everything I said... because I have an agenda mua! hahhahahha!

It'll be nice if the impartial and just, Humanoid, can give a set time frame for his "predictions" since he's the smart one.

-chuck22b