Setting a New High Mark for the Next Housing Bubble

This article has 13 comments:

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  Ames
  Tiedeman

  Jul 25 07:04 AM

  My Website
  California real estate is no where near the bottom. It will be at least 3 years until things really start to hit bottom. 2011 looks like a bottoming period.
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  ArnoldCountr
  y

  Jul 25 08:26 AM
  I said it before and I will say it again, I like the facts that Tim presents in his articles. I am disagreement with the comment by Ames above. I beleive that what will happen will be what I call a "parity effect". That is the point in which demand will pick up just because it is cheaper to buy than it is to rent. In Sacramento, where I am at, the average 1700 sq. ft. home built in the last 10 years is going for around $250k in typical suburban neighborhoods. Assuming someone puts down 25k and secures a 90% new first, the payment will be somewhere around $1,750.00 per month PITI. Rent for that same house is around $1,400.00 today. It would seem that once the value of that home hits around $200k, the "parity effect" will come into play in which persons will buy just because it is cheaper than renting. Couple that with the tax savings, they will be ahead of the game. Not to say that it will spark an overnight frenzy, it will just start to inch up demand, which should level off the market and then inventory will begin its long process to normalize. Agreed we have some pain ahead of us. But, the "parity effect" most likely will be the defining moment in time when a bottom can begin to be seen. Dont get me wrong, even when we hit that, we will be flat for a long time as foreclosures are here for a while impacting inventory. I just dont think we will have 3 years more of declining value but believe we will flatten sometime next year as we hit the "parity effect" but I do think we could remain flat for 3 years. But alas... my crystal ball fell off the edge of the desk and broke. Darn, dont you hate when that happens?
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  Fabian Hug

  Jul 25 08:50 AM
  Arnold, I agree with the way you present the problem. However, to reach parity (without rent increases) it takes another 20% drop in market prices. In San Fernando Valley prices are still in the high 400k and mortgage rates seem to be on the way up.
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  irondoor91

  Jul 25 11:30 AM
  Arnold, this sounds good in a market where everyone is closely watching home prices, rents, mortgage rates, the ever-changing qualifying requirements, down payments, etc. But, they don't. What you fail to take into account is the overall cost of home ownership which includes taxes, maintenance, etc. Also, the cost of commuting from that house in the suburbs is significantly higher with $4.00 gasoline. I agree that the allure of owning one's own home is strong enough to encourage many of those renters who qualify now vs three years ago when prices were much higher. But, they may have learned a thing or two about the direction of home prices. There is no assurance that prices will not continue to fall and fail to even begin to recover until 2014 or later.
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  ArnoldCountr
  y

  Jul 25 11:55 AM
  irondoor... I dont disagree with you. You have excellent points. Those points can also work for the opposite result. All consumers may see is that a payment is cheaper than rent so I am better off buying without all the details of maintenance, etc. However, I have to agree with you, in the broader analysis, your points are excellent. I think you would agree with me, given the present environment, we will not even come close to seeing a turn around until the values get so low that it appeals to the broader market as kind of a no brainer and they start buying. Afterall, in my market, if the price falls so low that I can buy a 4000 sq. ft house for $50 a sq. ft. or 200k, I will buy it. Right now, at around $100 per sq. ft., no way.
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  User 223263

  Jul 25 01:00 PM
  Wouldn't rents be impacted by inventory? I think a better standard would be a reversion to historical ratios of home price to medain income in the area (after overshooting due to inventory.) Of couse, another factor could be higher mortgage rates if the current financial engineering by the govt negatively impacts LT bond prices.
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  gwinner

  Jul 25 01:41 PM
  A newer 3,600 sq. ft. home sold on July 10th in San Diego's 4s Ranch for $608k, which is a new low price threshold. That's down 30 to 40 percent from market peak for such a home. I previously "hoped" to see such a home in the $600k to $650k range by this winter. Expect more global cooling the Califoreclosia real estate market this winter to bring us back to reality.
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  longhold

  Jul 25 03:26 PM
  California is in for a long correction. Gwinner if a new house in San Diego is $168 a square foot then I expect that you will see another 26% decline before California is in parity with the mid west . In Ohio your $608k will get you 5000 square feet with a small farm for it to sit on! In some cases here we have Callifornia sellers buying twice the home and having half of their money left over. In 2007 California realest was 80% over sold compared to Ohio & Indiana where it was 20% undersold. This gap will close before California sees any upside.
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  gordon

  Jul 25 07:49 PM
  gwinner- we live in Carlsbad, that price is getting down there, I was thinking $150.00/sq ft might be the bottom, considering replacement value, although prices could overshoot replacement value initially.
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  The hand

  Jul 26 12:04 AM

  My Website
  the logic presented by all is good on when or what the bottom will look like. the factors relating to what a house is worth should not be any different than a commercial property - but it is. the housing prices did not get out of whack - the credit lenders did. they lent money to people who could no way afford it. and then the ripple began derailing the market.
  
  the bottom will happen when the supply of qualified buyers (translate this to mean people that can be approved for a loan) equals the amount of homes listed that month. it will then plateau until the backlog of unsold houses is reduced, and the homes which people did not bother to list because of the turmoil in the market are listed and that backlog reduced also.
  
  i am not sure how the baby boomers who are beginning to retire will effect this but i don't think their effect will be positive.
  
  
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  spievak

  Jul 26 04:40 AM
  You're all largely in line with your thinking and just disagree (somewhat) on how many years it will take to equalize. One factor that I think may not be getting sufficient consideration is that there are millions of households now in the process of losing all their cash and equity. Even once inventories start to get absorbed and prices begin to normalize (whenever that may be), we're going to have a nation of permanent renters who cannot afford to get back into "ownership" due to what will be at least temporarily sane lending standards.
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  ronh

  Jul 26 12:45 PM
  I agree with your premise regarding what you refer to as the "parity effect" however, one would expect that there is some "option" value to the possibility of real estate appreciation.
  In my view, a buyer would be prepared to pay something more to "carry" an owned home (total cost of ownership including opportunity cost on the down payment) over the cost of rental to enjoy the possibilty of capital appreciation. My sense is that premium would be somewhere between 10-25% over the equivalent cost of rental. When the total cost to carry a home approaches 125% of the cost of rental, I would think we will see prices stabilize.
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  gps_geek

  Jul 26 11:29 PM
  The National Association of Cry Babies (I mean Realtors), should team up with Fannie Mae and Freddie Mac to become a "GSCE"...
  
  Government Sponsored CRIMINAL Enterprise
  
  Senator Dodd could be it's CEO....