More evidence that house prices in the area have already bottomed out (San Francisco: for sale)

[Majin]

Broswing articles on MSN and came across this:

Where U.S. Homes Are Most Overpriced - Forbes.com

Out of 40 of the largest metro areas, the Sacramento Metro ranked 39 out of 40 on the most overpriced metros, just ahead of San Francisco.

I've been saying for awhile home prices in the area have already bottomed at least 6 months to a year ago in most price ranges despite claims on the contrary on this forum. If you were looking to buy in at the bottom you are already too late. And no, this does not mean I think we are in any kind of strong recovery, just that this area is one of the stronger home markets in the country.

Take it for what you will be interesting article at least and just one of the many things that confirms my experience and the experience of the real estate agents I have worked with.

Also note that the vast majority of the overpriced home markets are in the south and midwest. Gee, who would of guessed

[NewToCA]

I kind of agree with you, Majin. It seems to me that the metro Sacramento prices hit the wall a little over three years ago, and came down very rapidly. I now see homes on the market for a very short period of time, and frequently occupied by new families within a few months of their initial listings.

I have noticed, however, that once homes hit around the $450-$500K and up price range, I don't see much activity at all. I suspect that the lower portion of the market has "hit the price bend", while the upper end of the market may still see some minor (less than 10%) declines.

Regarding the Midwest, I can tell you that the problem there is very different from here. They never had the big price run ups that took place here and in other places, their price appreciation was always very modest (usually in the 0-5% range). They have had affordable housing all along, but with the big lending boom the larger metro areas built some spectacular home developments, commonly referred to as "McMansions". When the market turned bad, these became unmarketable, and now you are seeing the glut of huge homes cascade into "price crunching" on more modest homes.

I can cite a couple of personal examples from my own background. I bought a 1700 square foot home in suburban Cleveland, Ohio back in 1977 for $60K. It "price peaked" at $190K about two years ago. Today, according to the real estate tracker I believe provides the most accurate data for that area, it would only sell for around $150K. That is less than a 3% increase per year, and at "peak" the appreciation rate still averaged at only about 4%.

Likewise, in 1992 I bought a 2400 square foot home in suburban Columbus, Ohio for $195K. According to the real estate tracker I use for that metro area, the price for that house peaked at about $285K two years ago, and has now declined to about $260K. Again, this only amounts to less than a 2% annual price increase, and at peak the average appreciation was only about 3% per year.

And, both of those markets are still considered "overpriced" today, so the decline likely has some room yet to go.

[edwardius]

I am not convinced we are through with the price drops. If you look strictly at the medians prices, then it looks like prices have stopped falling, but if you look at the price per sqft, then it seems that prices are still falling year over year. What seems to be occuring is that prices now are falling in the high end homes as well as the low end homes and the greater abundance of homes selling at the high end is shifting the composition of the median upwards. But price levels themselves are still falling.

DQNews - Sacramento Bee Zip Code Chart

There was an article in the Bee yesterday saying that people expect foreclosures to be up next year over this year because next year there won't be foreclosure moratoriums to contend with.

Home Front: Foreclosures in Sacramento region expected to jump in 2010 - Sacramento Business, Housing Market News | Sacramento Bee (http://www.sacbee.com/realestatenews/story/2405284.html - broken link)

For the high end homes the problem is a lack of move up buyers. The housing market normally functions like a legal pyramid scam. When a first time buyer buys a home, the person selling that home needs a home and usually buys something more expensive. The housing that person buys results in the person moving out buying an even more expensive home and so on. So the housing market functions as a series of linked transactions up the price ladder.

But right now homes its banked owned homes that are being sold. When these homes are sold there is no one with out a house who is looking for something more expensive.

The only people with the capacity to buy really expensive homes right now are people who make a lot of money. Right now there is just way to much housing supply for the number of people with the income to buy these normally move up homes.

The other thing that has me concerned is the number of people buying with essentially no money down. In northern California 76% of the homes are sold to people using government loans. The problem is that they are using the tax rebates as there down payments for these loans, so essentially they have nothing invested. If the market goes up, they make money. If housing prices fall they can walk away under California's anti deficiency statute.

FHA Backs More Than Half of Loans for New Homes - Developments - WSJ

http://www.dumanlaw.com/newscol/andef.html

Basically buyers are buying with government cash. If the market goes up they keep it and if it doesn't the feds are left holding the bag. I see this as essentially a phantom market. When the tax credit expires, I could see this entire part of the market disappearing.

At the very low end of the market I think the price drops are probably done. But on stuff priced above 250k, I think prices could still drop.

I also wonder about the effects of double digit unemployment and 30% plus of the housing being underwater. Remember the 90 day deliquency rate on mortgages is still 11% right now. When people don't have a job and they are underwater on there home, a lot of them are going to give the keys back to bank.

Sacramento's housing price tops a year ago - Sacramento Business, Housing Market News | Sacramento Bee (http://www.sacbee.com/realestatenews/story/2405380.html - broken link)

[NorCal Dude]

When home prices are as low as a fully loaded honda accord at the bottom of the low end market, which they are now, I think it is safe to say we are at or near a bottom.

[edwardius]

Yet asking prices continue to keep falling.

HousingTracker.net | Median Home Asking Price & Inventory Data for Sacramento, California

[NorCal Dude]

That is at the upper middle-upper end of the market, it is always the last to decline and the first to rebound. Hence why the median still drops. Same thing happened when real estate tanked in 91. Home prices at the lower end of the market are not going anywhere and have not for months, otherwise the homes would be worthless now, but they have been hovering at car prices for months.

[KC6ZLV]

Prices are probably going to wander up and down for awhile.

The bottom line is median home prices and income have to come into agreement somewhere. In the past lenders have kept it roughly around three times income. In Sacramento County the mean household income in 2006 was close to $69K. That equates to home values about $210K. Maybe a little higher depending on how much cash people have for down payments.

People are earning less now and I don't think wages are going up anytime soon, and I think the wage losses we have experienced over the recession are more or less permanent.

[edwardius]

One the big drivers of the housing boom in the early part of the decade was the fact that interest rates on 30 year fixed rate loans were cut from 8.5% to less than 6.25%. What happened is that each time interest rates were cut, people could afford to buy more housing for the same payment. This is how cuts in interest rate transfer into cheaper housing.

http://mortgage-x.com/images/graph/r_30_prime.gif

Because interest rates are the lowest they have been in my lifetime, its highly unlikely that going forward interest rates are going be cut significantly more. It much more likely that interest rates are going to be raised going forward. When interest rates go up, that reduces purchasing power of buyers. That is going to push down housing prices.

The other thing that is going on is that the home buyers tax credit is going to expire in April. When those go away, X15 pointed out, there goes another 76% of the local market.

The major employer in this community is government. All of the projections are that next years budget is going to be as bad or worse as last years budget. When the local unemployment rate is in double digits and is going up and when the major local employer in the area is facing cutbacks and possibly layoffs, then housing prices aren't going up any time soon.

Its not 30%, 44.45% of all homes in this region with a mortgage have negative equity.

http://www.sacbee.com/static/weblogs...e%20equity.pdf

The 90 day deliquency rate is 10.99%. This year the 90 day deliquency rate has risen each month of the year since January.

http://www.sacbee.com/static/weblogs...reclosures.pdf

The only reason the foreclosure rate is going "down" is that the feds are pressing the banks to extend trial modifications. But that just pushes the problem forward. Few of these loans are being turned into permanent modifications. It just lengthens the foreclosure process.

HAMP Conversion Drive – Pushing hard to sell homeowners the most exotic mortgage yet | ForeclosureTruth

More importantly the number of foreclosures scheduled for sale continues to increase.

http://www.sacbee.com/static/weblogs...e%20Report.pdf

[NewToCA]

Originally Posted by edwardius

When interest rates go up, that reduces purchasing power of buyers. That is going to push down housing prices.

I know you put a lot of research and work into your posting, but the assumptions you make with the above comment are simply not true. When the rates started dropping in the early to mid 80's, prices actually declined a bit. Similarly, I have been through periods of rising interest rates where people "hurry" to get into houses before the rates go higher, causing rates and prices to simultaneously increase.

One would think your statement would make sense, and if you want to complicate things by factoring in psychological "lag" periods we may be able to build a somewhat accurate consumer behavior model. But, on the surface, the assumption just isn't historically correct.

[edwardius]

I see my point as more of a mathmatical relationship than an assumption, but in any case, I think its a very reasonable assumption. In 1981 the interest rate on a fixed rate loan was 18%. To keep the math simple, let's say the rate today is 5%.

For each 100k you borrow, its going to cost you 1507.09 a month when interest rates are 18%. When interest rates are 5% its going to cost you 536.82 a month. If you only have 1500 a month to spend on housing, when interest rates are at 5% vs 18% you can afford to borrow almost three times as much.

One of the big things that allowed housing prices to grow during that 30 year period was that interest rates generally were falling quite significantly.

Over the next thirty years and especially the next 10, I think its more likely that overall trend in interest rates is going be up rather than down. I don't know that interest rates will go up to 18% again, but I wouldn't be surprised if they hit 10%. What I would be truly surprised about is if the next 30 years interest rates dropped from 5% to 2%.

As long as you think the trend in interest rates is upward (and I do), I think its reasonable to assume that higher interest rates are going to put downward pressure on housing prices.

Mortgage Calculator - Bankrate.com

Maybe there was some brief period in the early to mid 80's where that relationship didn't hold perfectly, but it was a very brief period.