Poor San Diego - in my estimation the #1 bubble market in the country...
Poor San Diego... This report too on home prices dropping hit yesterday... we're on our way folks
The Southern California real estate market, however, is anything but typical, and there is no good reason to think that the ride down will be any more typical than the ride up. As a matter of fact, there are several factors that pose great risks to the standard-issue "soft landing" scenario:
If prices were to permanently flatten out right now, given current wage growth, it would take over 16 years for home prices to get down to the historical average of 9 times income, and 23 years for prices to get down to the historical post-boom low point of 7.5 times income. Keep those figures in mind the next time someone tells you that home prices "will just flatten out for a while until incomes catch up."
December 03, 2005
Risks of a Serious Home Price Decline - San Diego Home Prices Dropping
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12 comments:
Your point about relating income and home price is noted but still fails to take into account the cost of the average person to buy a home today. A good article giving a good example shows that it was actually more expensive for the average person to buy in 1980 than it was today! See here (I appologize that I could only find a google cache of the story). An excerpt reads:
Last year’s average home buyer financed their purchase with a 5.5 percent, 30-year fixed mortgage, leaving them with monthly payments of $1,403 — or about 2.7 paychecks of $528, the average weekly wage in 2004. But for our 1980 homebuyers, the $808 monthly payment on the average 30-year fixed mortgage — of 15 percent — would have burned through 3.4 paychecks, when weekly wages averaged $240.
when you buy an asset should you not look at the price of the asset? that's what you would argue - only look at the payment.
And that's the attitude which has caused this bubble - people are only looking at their monthly payment - and not looking at how horrifically overpriced the underlying asset is.
Kind of like a car dealer who asks you what you want your payment to be, then structures a loan (or lease) to get to that number, meanwhile, you've wildly overpaid for that car.
I only look at the price of an asset before I purchase it - I could care less what the monthly interest charge or payment is. Period.
But I do agree, monthly payments in a 5% interest universe would be much better than in a 15% universe.
But interest rates change. And when they do go up, if people only buy based on monthly payment, then the price of the asset will have to come down. period.
100% agree with Keith.
Car sales are a perfect example. If people shopped based on price the Kia Rio would be the best selling car at 9,999. ($220 a month/48 months). Buying on payments has also allowed people into big SUV's which many would never pay for with cash ($500 a month/72 months) is more palatable than laying down $44,000 at once.
In response:
Your example of a car payment that is low but what the customer pays over the lifetime of the loan is higher than the purchase price of the car, is not at all like the comparison I made. In my example the total cost of the house over the lifetime of the loan in 1980 would have been higher in terms of number of paychecks to pay the loan off. In my example, a lower payment means a lower total cost of paying the loan off because I was comparing 2 loans, namely one in 1980 and one in 2005, that have fixed payments and the same total number of payments.
Most Americans, borrow money to purchase a home, especially their first home. Therefore, the price to own the home if one were to pay it all in one lump sum, is really just as equally as important as the interest rate on the 30 yr loan to most Americans. You seem to be only fixed on the purchase price, which would be the only thing that mattered if you were only paying with cash, no loan.
Quick Example:
at 5% interest, and a 30yr term, monthly payments, a 500k loan would, the payments would be 1,610. The total cost of the loan is 580k. Same terms but the loan is for 127k, 15% interest, the payment 1,612 and the total cost of the loan is also 580k. So here you have it. A bubble inflated home actually costing the same as the home in a non bubble market.
Keith B: I put to you a fundamental question:
Is it purchase price of the homes we should be so concerned with or the affordability of a home to the average person? I would submit that the average person mostly cares about owning a home that they can make payments on that they can afford. People paying with cash they do not have to borrow, only care about the purchase price. But, how many people buy with unborrowed cash?
Michael - thanks for your insightful posts. I don't think we disagree. I believe people foolishly look at their carrying costs, not asset price.
And that's why we're in trouble. Too-low interest rates created too-low carrying costs, which allowed out of control asset price inflation.
Now interest rates (and the majority of loans which are ARMS) will rise, and thus carrying costs will rise.
As carrying costs rise, asset prices will come down to keep carrying costs relatively level for new purchases.
So what homeowners will have is increased carrying costs and decreased asset value. In other words, a march to Chapter 11.
Why the 1980 buy is better:
Wages were increasing (inflating) 8+% each year- so you expect that 3.4 paychecks figure to go down a lot each year after you buy the house.
Interest rates can potentially fall pretty far from 15%, so you can refi and lower payments over and over if this happens. (From 5% rates can fall no more that 5%, probably very little more)
As "affordability" goes up with potentially lower interest rates, house values are bid up, so you see price appreciation (cash out with the refi, or use equity to "move up.")
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The exact opposite is true of 5%- interest rates are likely to rise decreasing affordability and reducing bid prices, so you can lose equity, can't cash out, can't sell, can't refi to lower payments.
Sounds like a nightmare.
Responding to:
>Quick Example:
at 5% interest, and a 30yr term, monthly payments, a 500k loan would, the payments would be 1,610. The total cost of the loan is 580k. Same terms but the loan is for 127k, 15% interest, the payment 1,612 and the total cost of the loan is also 580k. So here you have it. A bubble inflated home actually costing the same as the home in a non bubble market.
>
No, the bubble inflated home cost $500K, a lot more than $127K. Yes the payments are the same for now. But, the $127K home has a greater potentional for interest rates to go down and lower payments with a refi (see above post).
The real kicker is that the $500K house could BE THE SAME HOUSE as the $127K one, just several years separated. So they have the same monthly payment at either time you buy- when would you rather buy?
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