3 trends in the current housing market – Can home prices remain stagnant until 2020? Detroit home prices back to 1994 levels. California all cash buyers at record high.
We are naturally programmed to look ahead. It is wired in our DNA and financial blips like lost decades seem to run counter to this idea. I was talking with someone about real estate and they seem to believe that California has yet to face any sort of correction. Curious to hear his explanation he responded, “my neighbors house sold for the same price they paid at the peak.â€Â As it turns out this person is in a rather select community like many that we cover here. The fact of the matter is that home prices in California are now back to levels not seen since 2002 or 2003 depending on what county you look at. A lost decade is already here if we factor in inflation. A lost decade is virtually etched in stone even on the nominal front. But can home prices remain stagnant for another decade? This question would have seemed downright preposterous back in 2006 or even 2007 but has a lot of merit today given demographic shifts in our country and the massive amount of distressed homes on the market. We don’t have to look overseas for two lost decades when we can simply look at Detroit real estate. California cash investors seem to think this is the bottom in select markets. Are they right?
Home prices stagnant until 2020?
Home prices even on a national level are still inflated even after the massive correction. Looking back to 1890 with carefully gathered Case Shiller data we can see this trend more clearly:
Housing for nearly 100 years was a rather bland investment aside from regional housing bubbles. Nationwide housing seemed to track inflation. Then in the late 1990s a mania set in fueled by toxic mortgages and prices went to the moon. The crash has rippled so deep into our economy that many think, “how can things get worse?â€Â Many have never lived through a deep recession so this is new territory for many and given our 24 hour news media solutions are demanded instantly. There is no quick solution to this. Home prices nationally are back to 2003 price levels on a nominal basis. Inflation adjusted we have already reached a lost decade.
A decade long stagnant housing market is pretty much what we have if we sand out the massive peaks and valleys of the last decade. Many in the mainstream press are now openly talking about 15 to 20 percent price cuts on national housing values:
“(CS Monitor) Further, while nominally (i.e. not adjusted for inflation) home prices may have gone a long way into correction territory, in real terms (i.e. inflation adjusted), national home prices are still significantly elevated (possibly by as much as 15%-20%) above long-run norms.â€
It is hard to see why we won’t have this. In many still inflated markets like California the correction will be deeper. Keep in mind you have many baby boomers that will be looking to sell in the next decade. Who will they sell to? A young professional class that is deeper in debt and is earning less in wages? Are they hungry to take on more debt for their smaller family needs? The demographic winds do not favor higher home prices. With a glut of supply and large vacancies, pressure will remain on home prices to move lower. The only thing that would cause home prices to move up in the coming decade is sizeable wage gains for workers. Simply adding low paying service sector jobs is not going to support home prices in certain markets.
Local economics drive real estate markets – Case of Detroit
People seem to think that decade long declines are things only foreign nations experience like Japan. This is not true. We can look at Detroit to see a market that has lived through nearly two lost decades in housing:
Home prices in Detroit are back to 1993 levels. In less than two years it will be two lost decades for a mighty city that once had 2,000,000 residents and is home to the American automakers. Detroit currently has 951,000 residents and a sky high unemployment rate:
You are seeing the above chart correctly. Currently California has a higher unemployment rate than Michigan. Why? California as diverse of an economy as it is relied heavily on housing to drive growth. Clearly the economy has an impact on real estate and having one of the highest unemployment rates in the nation does not bring confidence to growing housing prices.
Out of curiosity I pulled a state with a low unemployment rate, Nebraska at 4.3 and took a look at their largest metro area for their median home price:
Omaha Nebraska median home price:Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $115,000
Median family income is at $56,000. Compare this to places like Los Angeles where the median home price is $300,000 and the median household income is roughly $65,000. Ultimately local area families need to afford the homes in their immediate vicinity. Sure toxic mortgages can sustain a bubble for years but eventually things return to the mean.
All cash buyers in California
We already know that many investors are buying homes in distressed markets. But in California January 2011 was a record:
Source: DQ News
30.9 percent of homes purchased in January were from all cash buyers. This is the highest percent on record for California. Before you say these are people buying homes to move into 51 percent were absentee buyers. In other words the tax bill will be sent to another address and these are likely investment properties. It is highly unlikely that these are vacation homes since they are occurring in depressed markets. Take a look at SoCal for example:
Almost 40 percent of all sales in San Bernardino were all cash last month and 35 percent in Riverside. For Southern California the 10 year monthly average is closer to 13 percent so clearly this is way above that average. The median price paid for these all cash purchases was $160,000 signifying a thirst for cheap properties. But places like the Inland Empire were built during times of cheap oil. These areas are sustained by a cheap energy infrastructure. Lower incomes mean higher gas prices are felt deeper here. This isn’t something an investor would want to hear if they are out for the long-term because what happens if oil hits $150 a barrel or higher and stays there? Can families even afford to rent out in these markets? Who will they flip to? I’ve talked to a few folks who are buying out in these markets and they are looking for cash flow. Today things might look decent but with the volatility in oil these markets are shaky at best and this goes for Nevada and Arizona as well. People tend to forget that not everyone lives on the beach.
The all cash buyer is likely to be part of the pent up demand from the decade long bubble. These prices do seem fantastic in contrast to the bubble days but does the price warrant a purchase? Only time will tell but many thought the same thing in Detroit. Unless the local economies of the Inland Empire or for example Sacramento (37 percent all cash buyers in January) grow then these areas will continue to see price declines. I am certain that right now you are seeing a short-term feeding frenzy where some are buying for say $140,000 and flipping them for say $170,000 since money is definitely moving off the sidelines. Yet this is unsustainable and is another round of musical chairs. Cash flow is good today but what if the place sits vacant? Taxes? Repairs? Today the Antelope Valley was seeing wind gusts of 70 miles per hour. Long-term investors in challenging climates realize the costs associated with owning property in these areas. I wonder how many of these all cash investors realize the long-term costs today? The good news is they will never be underwater and won’t need a bailout no matter what the market does.
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86 Responses to “3 trends in the current housing market – Can home prices remain stagnant until 2020? Detroit home prices back to 1994 levels. California all cash buyers at record high.”
Omaha here I come, right back where I started from. To hell with (overpriced) California. Let it fall into the sea.
Besides Warren Buffet, Omaha is home to a very stable employment base, and surprisingly FINE WOMEN, of Nordic/Scandinavian stock. ;’)
Something also tells me they did NOT participate in the recent housing bubble, which is to say the local banks maintained their lending standards… and their moral integrity. Perhaps also, their state regulators actually DO THEIR JOBS? Say it ain’t so!
A large cost of a home is the land it sits on, Omaha has lots of it. In SoCal (except the desert) it is built out, and compressed between the mountains and the ocean. The zoning and environmental regulations here add to the cost of housing also.
Detroit’s pop in 2000 was 951K.
Predictions for 2010 census range from 750K to 850K.
Re-iterating the obvious, Detroit’s population nearly HALVED. Common sense that far-fewer housing units are required. Where’d they all go?? Hotlanta? I’d love to see that kind of attrition rate in So-Cal, we need some elbow room. It be a fight against the calif fantasy & perception nearly the entire planet has that this is the promised land. Everybody loves hollywood, everybody wants to be a surfer, etc.
I think you are living back in the 1970’s. I’m a Native Californian who has lived/worked in other states. The stereotypes I overheard most about Californians is that they aren’t particularly intelligent, faux wealthy, overdone plastic surgery, state is overrun with illegal aliens and the welfare dependent. Never heard any mention movie stars or surfers. Sorry.
Why does at least every-other TV commercial have ocean/beach scenes in them then? Most Filmed at Westward beach> It sells. Some native you are.
Detroit is a special case. There were riots in the 60’s. I still remember military tanks, surrounding the Detroit Institute of Arts, to protect the Van Gough’s and Rembrandt’s.
Final nail in the coffin was when Detroit started a CITY income tax on all salaries earned in the City. My company moved just across 8 mile road, about 100 feet outside the city limit, to avoid the tax. Then the flight to the suburbs began in earnest.
Many of these all-cash purchases will be held 90 days and then “sold” to fha buyers with 3.5% down for double what the all-cash buyer paid, The going rate for a fha qualified buyer is about 10% of the purchase price paid in cash under the table to the “buyer”. Needless to say the first payment is never made and the buyer gets to stay in the house for about a year courtesy of the taxpayers who insured the fha loan.
F**K US!… I think you’re right… Not sure about DOUBLE the price, but that’s the latest scheme in a series of “game Duh Gov” scams… still NOTHING compared to “Champion” level at which Goldman, Wells, and BofA play the “game”! 😡
I agree. And that’s why I think that DrH is wrong here. His argument is based soley on the charts, and a reversion to the mean. If things continued like they are now, yes, I’d agree with the good Doctor.
However, people seem to forget that, as far as the meltdown of 2008 is concerned, almost nothing has changed which caused it. The Feds have officially whitewashed they affair, with a report that essentially said “We dunno”.
In the meantime, the Banks have learned that they can break the law, do whatever they like, without fear of any prosecution whatsoever. Worse, they’ve learned that they can gamble to their hearts delight, and stick the American taxpayer with the bill. Consequently, they have gone back to their old ways, and it’s only a matter of time before another stock market crash occurs, tanking the economy and housing industry even further.
This won’t end until the Banks are made Not To Big To Fail.
So forgive me, good Doctor. I think you are an optimist here. And if anyone thinks I’m wrong, especially those who are gambling by buying or owning a house, please do describe the structural changes which taken place to prevent another collapse. I sincerely wish you the best of luck, and am eager to hear anything beyond a rationalization.
What? Really? I have never heard of the scam you talking about and I work the auctions. And the 90 day flip rule is bank by bank, it is not a FHA rule or a governmental rule. Many banks will lend FHA on flips. Though, if a house is priced to sell there will be more than one offer, and cash and conventional offers are always chosen before FHA. FHA buyers pay a hefty FHA premium in my shop.
Bingo! It’s happening all over the Inland Empire as I type!
I completely agree Dr. HB. Housing prices have to come back to historical income to price ratios now that loan standards have reverted back to the “normal” historical standards. It’s honestly pretty straightforward math. Couple that with the huge overhand of shadow inventory and the very slow bank supply leak (thanks to mark-to-market changes – complete corruption) and you’ve got the perfect recipe for years of lower pricing pressures. And I didn’t even mention the demographics shift, as that’s just icing on he cake and not even needed in the recipe for price declines.
There’s a GREAT article on another blog (I am not affiliated with it) that discusses the “Magical 2.2” ratio that seems to hold within 5% over decades. This implies that we’re due for another 30% nationwide median price correction lower in the coming years and, when you break down the math, if incomes don’t change significantly than prices will HAVE to fall if today’s loan standards remain the same.
I would HIGHLY recommend everyone read this (including Dr. HB): http://www.mybudget360.com/the-magical-2-housing-ratio-between-median-nationwide-home-prices-and-household-income/
Figures don’t lie (unless they have been published by the NAR!) 🙂
Good luck to everyone,
Investor J
thanks for that mybudget360 blog. Excellent articles.
No comparison between California and the Detroit housing market. I don’t care how stagnant wages are it won’t affect California the same way. I have worked in apartment housing for over 20 years in the California, Arizona and Texas markets. It always amazed me how much people are willing to pay here to have good housing and cars. It’s been that way since the 80’s. You will always have people stretch their bottom line beyond good financial guidelines here more than Arizona and Texas or elsewhere for that matter. Too many people are still willing to pay inflated prices just to live here. You cannot account for the psychology that goes with wanting to live and own here. A lot of what I read on this site is people wanting to know when to buy again-like the total massacre was not enough and they are still willing to take their chances despite all the charts. California is unreal in almost every aspect. For this reason I do not think budget cuts, gas, earthquakes will stop people from California dreaming. I would love to see this market dip another 15-30% but it won’t really matter much in the end, you have countless numbers of people who are dying for the chance to jump into this market-demand will always be there. No one is packing up and moving-they are just waiting to time their buying of a home here. No one on this site rent as a way of life-they rent till the time is right to buy. We are driven to buy, more so if your have a successful career. Even people who lost homes want to jump back into the saddle again and buy a home. People will lose equity, people will lose jobs but one thing for sure they all want to live in California, why else would prices be so over inflated for so long? The “shadow inventory” is still too high. This recent mortgage fallout really pumped up our already over inflated market but California has been too expensive compared to wages for a very long time. Go ahead buy, unless California drops into the ocean people will always desire to live here. It all comes down to the price people are willing to pay and they will pay a premium to live the California lifestyle. If your lose your shirt in Vegas not too many people vow not to go back-the loss is considered recreation. Losses in the California real estate market are recreational not life changing. There is a sucker born every minute! Can’t stop the machine.
you can wish all you want to buy something, but if you don’t have the cash, it will not happen
have you seen how people are struggling to buy stuff above the $729k limit in socal?
the market above that cut off is pretty much dead.
Jason, I agree with you to some extent. The average Joe is shut out. All I know is where I live and I have lived here for some time and have watched the market in this neighborhood for many years. My experience has been that in my neighborhood (800,000 and well over 2 million) it has been one of the greatest years for my local real estate agents. They are loving all the people who have waited to buy and are ready now with big down payments. The realtor gets paid when you buy and when you sell a home that has lost equity-are they sad, no…they still get paid! Their commission is not that greatly affected by prices going down. I come from large apt rentals and for every person that you rent to and skips out or breaks their lease, it affects my bottom line and I don’t get paid for that rental commission. Too bad that was not the same for the realtors and lenders. They get you coming and going. When I listed my house November 2010 I did not expect such interest in the 1.2 price range. I sold in 15 days with two offers on the table and overflowing open houses on the two weekends with appointments to see my house sometimes two a day before it sold. I am an expert in staging but give me a break, I’m not that good. My buyer put over 500,000 down and the house did not appraise for what I was asking but they went forward and did not ask for any price adjustment. Something else is going on here. I was gearing up to have my house on the market for over a year with all the headlines. Statistics I love but I don’t always see them play out in my corner of the world. There is a lot of money still in the over 800,000 price range. I don’t know where it is coming from? I am a bit mystified. Sales are better than ever here.
Christie, wake up. Incomes don’t support prices in huge swaths of prime California. The credit faucets have been tightened now that there is no longer appetite for mortgaged back securities. The things you’ve observed re cars and housing tastes were financed using fantasy credit.
The “demand” to live in California will always be there and median prices will likely always be above the national averages in select markets, but only a small fraction of that demand will ever have the resources to afford $500k+ homes using appropriate underwriting standards.
your buyer put down 500k to get the loan under 729k……
Christie we agree with you. We moved to AZ years ago from LA and never looked back we love it, but family and firends still think Cal is still the “cat’s meow” go fiqure?
I own several rental properties in Socal. And yes I paid cash. Low turn over, very few tenant problems and no vacancies. With a 10-12% return on my investment makes me wonder why your comparing us with Detroit.
Does Detroit have white sandy beaches, blue ocean waters, sunny warm blue skies all winter long, national parks like Yosemite and the Sierra’s? the list go’s on… Bottom line, who the hell wants to live in Detroit?
A while back, folks from down south moved to detroit to get away from a culture and seek jobs. Today, those similar (few geneartions removed) folks seeking jobs and a rejuvinated southern culture, are now migrating to Hotlanta and areas south. Big govt and high taxes pushed them out. The herds move / vote with their wallet. Im headed to CA DMV this afternoon, I expect to get raped to the tune of $200…and that is for a little kids DIRTBIKE!!! In GA, no such fees are due…and to register a car is very cheap…like $20….in CA we have to pay THOUSANDS to pay for that little sticker.
and some of us are born here, choose to work in non-profit for the joy of helping people and just have to make do on those wages. We live with it. Either that or leave the network of friends and family we grew up with and acquired over the years. It’s not that easy to just pick up and move to another state because you could buy a house there and not get raped by the DMV, etc.
Wow, so much meat, and so much fiber, and so little time. Great work, DHB.
First off, my guess is that people think in terms of the house sale that’s the exception to the rule as part of the larger mindset of exceptionalism: “This person (a proxy for my dreams for myself) is not affected by the rules/trends that affect everyone else.” Eventually that mindset only wants to see things that fit with its patterns, cherry picking data to support itself. Then exceptionalism becomes economic and social autism.
Second, though I concur in the main with Doc’s view of the larger trends as represented in the Shiller chart going back to 1890, the Shiller numbers may be comparing apples and shoephones: the uber model for economic growth now is very different than in 1890. In 1890, the formula was expansion uber alles–much of the Midwest was urbanized under this model. 90-100 years later, when the real housing woes started to set in, it was clear that just throwing go forth and multiply at an economy couldn’t work forever, and particularly in places that had been settled/developed for 200+ years already.
This is what Alan Greenspan was hired to do in 1987: to keep alive the illusion that had seemed to work so well for the previous century. This is where the ongoing models of expanding population through immigration come from, and the idea that if a birth rate, never mind a population, decreases, it’s some sort of nightmare. When Detroit goes from 2 to .9 million, that surely violates every rule of Exceptionalist American Expansionism of the 19th century. How to assess it? That’s more complicated.
In an age of Peak Everything, the very models have to be rethought. In my experience working always in a range of issues related to “sustainability,” those with a lot staked on the old Expansion Uber Alles models were not willing to do that rethinking. They still aren’t.
Yet the truth is, those old models had in fact hit the wall about the time the Baby Boomers started buying their first ranchos, in the 1970s. Those of us who came after watched in dismay as houses were scarce and expensive, and available only at 18% on the dollar. Then we were told that we could afford housing by adding one- and two-hour commutes from our suburban Reaganvilles to our city jobs, squandering personal/family/life time, and having to buy out of pocket all the goods and services that go with private car transportation.
Then we were told that it could all work if we just threw two wage earners into the job arena, paying still more into the consumer economy AND hiring others to raise our kids, and groom our pets and lawns and hair, and provide therapy of various sorts when all our relationships came out fucked up, because there was no time, focus, or relaxation for anything as boring and non-profit-producing as being human.
Then our jobs were suburbanized as well as our houses, and then we were expected to relocate every few years to keep up with the Chainsaw Als of the world. How many people I’ve known–Generation Jones and younger–who have spent 15 or more years of their lives in the first three to five years of a mortgage! The only equity they could get was Monopoly Bubble Money, because with one and another economic glacier bearing down on them–the cold truth of expansionism’s gotterdammerung–they had to keep moving, moving, moving.
This is why I rented till my mid-40s, when I could afford a 40-50% down payment on a place with a fixed 30 I could pay ahead to 15 in 6. I suppose I’ll still take a hosing in the long term, and who knows what will happen to our ability to keep earning.
As Doc says, looking ahead seems to be the human condition. And for a long time, looking ahead was always a happy bunny thing–just think of Dutch Reagan’s wrinkled mask of grandfatherly pitchman enthusiasm.
Back in ’07 and thereabouts, DHB used to ask readers to comment on whether they thought we were facing a lost decade. My opinion was that we were closing out one, and perhaps two to three. I.e., an entire lost generation economically speaking. Somewhere there is a Hemingway for that generation. For a long time I thought it might be Joe Strummer, now I’m not so sure.
Amen.
Lost decade in Detroit?
If you look in the right (or should I say wrong) areas, you can find evidence of a “lost century”. And remember this: In the 1950’s and 60’s, Detroit WAS location, location, location.
According to Dianna Olick the Attorney Generals of 50 states are (or were) meeting in DC. Part of the talk is mortgage principal reduction/write-down. The momentum is building and this time it looks like it’s going to happen. The fear of “moral hazard” it creates is losing steam.
My 401(K) lost 40% in the fall of 2008 and to this day is still down 20%. Will someone make up the loss I suffered?
Call me crazy but I think L.A. is pretty near the bottom, at least in some markets. And I’m one of those people who want to jump in and buy before I get priced out. I think there are a lot of hidden factors that make the L.A. housing market less inflated than people thing–like a gigantic amount of unreported income (under the table work, black market, illegal immigration, etc). LA is a cash economy. Ever worked retail here? It’s astonishing how many people pay cash–way more than in other places. I live in an affluent area and I bet half the people on my street have significant income streams that aren’t captured in that data–we have a lot of Hollywood types, musicians, artists, shrinks, etc. And almost every house has an illegal guest house rental in the back and that’s cash too.
On top of that, this is a highly desirable place to live. I don’t see housing declining longterm here or in Manhattan or SF or London or Paris. There’s just a premium paid to live in highly desirable places. And renting sucks. It just does. Especially if you have stuff (storage really sucks) and kids and god forbid want to have a dog. After awhile, you just want your own place.
Ahhh hahaha Marina, Marina, Marina. You pathetic little NAR/CAR shill. Who are you, really? Lawrence Yun? Or just some laughable Real-turd (I no longer like the term “real-tard”, as it gives the poor, defenseless mentally handicapped a bad name)?
One of those people who want to “jump in and buy before you get priced out”? By all means, go right ahead and jump – just because you’re late to the party and didn’t jump with all the lemmings of the bubble years, doesn’t mean you can’t join them in their grave error.
Your ‘arguments’ in favor of buying are nonsense, and have been debunked time and time again. “Renting sucks…it just does” – what a well thought out point.
“I don’t see housing declining longterm here or in Manhattan or SF or London or Paris.” What about Tokyo? Certainly a world class, top notch, highly developed global city. Prices still down 40-60% from peak, which was over 2 decades ago.
Um Foolio–why so hostile? I don’t think all real estate markets are destined to stay prime. Tokyo’s not on my list for a reason–I think I’d rather live in Detroit. And as a regular working person (teacher but don’t yell at me people– I work at a private school), I completely avoided the housing craziness and saved my money. I plan to be here a long time. I don’t think 300K for a nice 3 bedroom house is insane and I see places in my area going for that. My area has seen major correction (at least 50% and I see plenty of places selling for 70% below their 2006 sale prices). How much farther is it supposed to go? It seems like people on this site are hysterical. Do you really think houses in L.A. are going to start selling for the price of a Honda Civic?
As far as renting goes…We’ve tried to rent somewhere bigger ever since second kid was born a year and a half ago but can’t find anything–no one renting anything we’d want wants us (the dogs, the kids!) even though we have solid income and great credit. And I do hate renting. I rented for fifteen years…I know all about renting. Landlords come in without permission and look through your stuff when you’re not there(sure it’s illegal but it happens constantly), landlords decide to “improve your place” by taking out your nice perfectly functional gas stove and putting in a horrid electric range (they pay gas, you pay electric–you figure it out), not wanting or being able to fix the place the way you want it because it’s a waste of money or the landlord won’t let you do it anyway, endless crap when your landlord decides to sell the joint and you have to let realtors come night and day only to get evicted once the place gets sold. And whenever you leave a place, they always try to steal the security deposit– (yeah that pinprick from where I hung my calendar is enough to sacrifice my $3000 deposit!.) Don’t tell me about renting. I KNOW.
How is $300 K not affordable? What is it that people spend their money on anyway? I make $60K; my husband 50K and we live off about 30K annually. And we live well. I don’t get it.
“After awhile, you just want your own place.”
Yes, but wanting doesn’t provide affordability or money for actually buying it.
An example: I rent an apartment for about $900/month and the “value” of this apartment is about $235 000 now. I’ve economic surplus about $2-400 month, but that’s not enough to pay mortgage back in any realistic time scale (20 years fixed). I’d need at least double surplus for that and another 10 years to collect the 20% pre-payment. That means 30 years with personal economy streched to absolute limit. It’s not going to happen.
So buying is not about wanting, it’s about income and/or prices. Income won’t raise no matter how much I want it, but prices can go down. About 50% down and even I can afford to buy. Another thing is do I want to, even then: Huge capital tied and no interest nor raise in value in foreseeable future.
We are a couple of young professionals and used to live in OC. We left to WA for a healthier job market. We have cash in the bank and were going to buy a house in the Inland Impire for the kind of prices the doctor mentioned in this article. We wanted to some day move back and live there mortgage free. However, we decided against it, the for same reasons: long commute, few jobs in IE, who would want to rent in EI when they can be closer to work and avoid long commute. So for now, we are just saving our money and investing elsewhere. When the risks of a deflating market no longer exist in the future, we will be ready to buy (hopefully with a lot of cash) in an area that will be closer to jobs.
Brilliant, This is no way going to be a V shaped slump, It will take years to pull this market out of the mud, Why not wait a bit, at least through this spring season, see how many people can or even want to buy this market, remember if you get something within 20-30% of the eventual bottom, you have done really well long term, lets take a deep breath, Im with you on that.
Marina,
Nice try realturd!
No, prices are in freefall and will continue to downtrend. The budget deficit, unemployment, and Case/Schiller (and the good Dr. right here) all say you’re wrong. If interest rates creep up, it will put further downward pressure on prices. There is simply no rationale for prices to go anywhere but down, and then STAY at the bottom for a loooooooooooooooooooooong time. Look at Japan doofus.
“If interest rates creep up, it will put further downward pressure on prices…”
I’d say they will. There’s no other direction to go and as EU is already rising their rates, US has to follow, sooner or later.
The LAUSD is going to send out 7,000 pink slips next week. There are no signs whatsoever of recovery in CA., and no good news on the horizon. But larceny in the heart of every realtor forces them to pump RE every chance they get. Thing is, now everybody is wise to their BS.
3 trends in the housing market:
1) Down
2) Down
3) Down
Numbers don’t lie. People do.
I grew up in Orange County, CA… in an apartment. The same apartment my mother and father still live in, to this day.
I was actually teased and treated differently here, because of where I grew up. Only poor kids lived in an apartment. The rich kids all lived in nice homes, and got cars. Being in an apartment as opposed to a home was a frequent point of argument between my parents. Especially since my father was highly educated. He always said, my entire childhood, that there was “something wrong with this market.” We always thought he was crazy.
He had his MBA in finance from Berkeley, circa 1970. Before calculators… when MBA’s were worth a damn.
Because of sound investment strategy that NEVER included owning a home in unsound markets, my father recently entered the top 1% of both wealth and income on the planet in 2008. He had 30% ROI the year everything collapsed. 25 year averaged ROI is 23% per year. He is still recruited by top firms in his late 60’s.
Most people I grew up with are worth nothing now. They never were. Only unrealized paper assets.
Not bad for an orphaned first generation immigrant.
Next year I go to Harvard for my own MBA. Worked my ass off to get in, after time in the Marines and working for 12 years (since 16). My folks are finally looking to buy.
250K is my father’s price limit, and it has to be a damn good value for that price. Why? In his words, “Prices still have a long way to fall for the next several years, and I’ll get twice the home by the time you graduate, son.”
For those of you with rental properties making 12% with steady tenants… beware. You may own your tenant’s residence, but your tenant may own you.
HD,
Fantastic story. Please send my congrats to your father. He has a lot to be proud of, not the least of which is your pending Harvard MBA! As a Wharton MBA, I can tell you that your education will serve you very well and your network will serve you even better. Congrats-in-advance on the achievement. Clearly persistence and focus pays off.
Very interesting comment you made re. tenants. Although I am sure that there are a lot of single family investors who read this blog, I have always chosen the “passive” route by being a very small piece of a bigger property that had a very diversified tenant base (ie. Multifamily – over 100 tenants). I give up control and essentially “hire” an experienced Operator in exchange for slightly reduced returns. But, in the end of the day, I have a lot less worries over any single tenant. I don’t perceive myself as being held hostage to any of the tenants (aside from the fact that I am passive) because they are in fact our clients in our “business” (ie. apartment building). Without enough clients our business with fold but at full capacity it will flourish.
Real estate investing is definitely a business – if you’re holding 1 home as an investment because you’re stuck in it and have to rent it then you never approached it as a business to begin with. It’s an important distinction that a lot of people probably don’t think about that can make the difference between planned success and “unplanned” failure. Hopefully this makes sense…
Congrats Again,
Investor J
Many thanks Investor J… and thanks go to you too!
You are clearly an actual real estate investor. You own an asset, and produce a fair income from it, and hire professionals to help you do it. You serve a valuable role in society. Where would I or my family be without individuals like yourself?
My comment at the end was directed to real estate speculators, which run rampant here in southern california. These are people who buy home a looking at comparables sales prices, and not comparable rents. Then, when they get into trouble, they may to rent out their purchase only to find comparable rents do not cover their monthly asset service costs (mortgage, insurance, taxes, etc). In other words, they discover real estate valuation the hard way. Thus they end up being “owned” by their renters.
Obviously, since you know what you are doing, this doesn’t apply to you.
HD,
Thanks for your reply. I now understand what you mean about being “owned”. I have a heavy cash flow focus so I never made a ton of money when the market went up but I could always sleep well (and I continued to do so when the market came down, as rents don’t adjust on a % basis nearly as dramatically as home values). But I completely agree with your being “owned” philosophy for the speculators. While I never wish another investor bad on an investment, if you’re going to roll the dice then you have to be prepared to deal with how they look when they land.
Good luck to everyone,
Investor J
“250K is my father’s price limit??? ” Well then, your dad may just end up living in a teepee ! Or, he could just move to Omaha! Tell your dad to not be such a cheapskate. I too am wating for housing prices to come to rational levels, but I’m not such a cheap bastard. If as you say “my father recently entered the top 1% of both wealth and income on the planet in 2008,” then tell him to splurge a little. Hell, if what you say is true, he could burn greenbacks in the fireplace.
Tell daddy he ain’t gotta live like an Ethiopian anymore. Tell him to treat your momma right and go out and spend $500,000 or more on a nice home. Otherwise, he will end up in a town like Compton. Or, if he wants to move out of LA and into the Inland Empire, then were talking $250K houses! But in the greater LA area, daddy’s only gonna find a schitt box for $250K.
LOL. What can I say to this sad, angry post? Why would anyone retired and educated with lots of money want to live in LA? To be around people who use words like “aint” “daddy” and “momma”?
Not without a huge discount.
He is looking at large places in palm springs. Several available to him. And he’ll spend more in a state with less property tax. But when I say large, I mean 4 bed, 3 bath, gated, close to former senators. Unlike the McMansion you are likely associating with the rich.
My father, growing up poor and away from America, does not have the same values you do. In your opinion (shared by many, no doubt), he is cheap. In my opinion, he is prudent, disciplined, and unwasteful…. and you are not. He does not live to spend, and neither do I. Money does not buy health or happiness.
We don’t all aspire to be winning like Charlie Sheen, and surround ourselves with pornstars (Interesting fact, my family has more liquid financial worth than him, excluding property. But that’s because Charlie is poorer than you think). Some of us define winning in terms other than LA housing, leased cars, coke binges and fancy vacations. Some of us define winning in far less expensive and more valuable terms, like family and security.
So your father is in the top 1% in the world and you think its worth bragging about ? Being in the top 70 million on the planet, that is less than 500k usd of wealth for your information ( there are about 10 million millionaires ) . For a person to do an MBA in the 70’s and to now be worth that little in my book ranks as major failure if saving money was important to them. If you then compound that failure by failing to have the common decency to care enough to house his family well in times when housing was cheap.
If you can compound money for 30 years at 20% a decent house is a triviality a long time ago even if you are only saving 10-20% of your income.
He sounds like an old miser to me, Its easy to see that housing is overpriced now but there have been many times in the past when it has made a lot of sense, why didn’t he provide decent housing for his family then.
And what is all this bragging about where he and you plan to go to school , Jeez , to be honest you sound more like a Charlie Sheen egomaniac than the guy you are abusing …
There are a lot of smart people who have avoided buying in the last 5 years and who will continue to wait, the story of your dad is the story of a loser who had ample chance over the years than those frustrated now…
who says his dad didn’t provide “decent” housing? You sound like a snob – this guy sounds like he’s got his act together, and so do his parents………..you’ll get it one of these days
Loved the post, HD. LOVED IT! Please post here more often! Same to the rest of you brilliant logical thinkers, who refuse to chug the Koolaid and have the wool pulled over their eyes. To hell with the bleating sheep!
thanks for that post 🙂
This video shows a lady in Arizona with a master’s degree happy to land an $8 an hour job! Others in the video also seem desperate for a job. Same trend is happening here in California. These kind of wages spell disaster for American standards of living and for the housing market.
http://www.shtfplan.com/headline-news/americans-ready-and-willing-to-work-jobs-traditionally-reserved-for-illegal-aliens_03082011
Scroll down the page to see the video.
Watched the vid with the Master’s Degre working for 8 bucks an hour. Interesting how the major was not mentioned. If it is a Masters in Native American studies, then $8/hr is probably overpaid. As far as her business…. well, it was obviously a failure if she is looking for other work. Why didn’t she work with contacts in her field for a job? Because her business was so small that she has no contacts that survived the downturn? Or did she pick an industry with inherently bad economics (indicating poor business judgment from the outset)?
What happened to the profits from her business? Did she blow it on useless crap like most of america during the boom? That would be the first question to ask her in an interview (likely the last, depending on her answer).
I hate seeing anecdotal evidence like this. Take a stat class, and realize how pointless this lady’s story is. All it proves is that A) in America you can be dumb and still survive (and can even own a business), B) AZ has tremendous fear of immigrants (perhaps justified) and C) media outlets frequently blow things out of proportion.
Those news folks are probably journalism / communication majors. How would they know statistics, lol?
Man, your story sounded really good until you mentioned your Harvard MBA. Then your buddy dropped his Wharton MBA and all the connections you are going to have. Typical of the sorts that go get their MBAs at prestigious universities and then look down their noses at kids like you once were. Your dad was right. He just used his common sense. You should tell him to keep renting, because as much as I hate to say it, things are just getting started.
Then again, Harvard boys like yourself will figure out a way to burn the “less educated” when you team up with your “connections”. Best of luck.
It seems to me like the corrections will only be in areas that have geographic and climatic draw. I mean, people will always want to live in warm weather and opulence. The fact is that many people were not effected by this downturn, and the high end of the market will still exist to serve them. The greater questions come from places that have lost their edge, and do not have an inherent draw to bring people back. Look at Cleveland. Their industry has left in droves, factories all gone. Now there is nothing left but a town without jobs and with poor weather. There is no mass exodus of people heading to the wonders of Missouri or Illinois, instead it is the same rich people buying homes in the same rich areas. Looking at California as a case study for an upturn in the market overall is like looking at growth in China as an indicator of growth in the United States. Bottom line the market conditions are different, and really the consumers are different. As long as California keeps its cultural attractions and its weather, there will always be a more insulated housing market there. Not because the rest of the country is about to do better…maybe even exclusively because the rest of the country is doing so poorly.
I take it you’re unaware that California has been one of the States hardest hit by the meltdown? And that the title of the epicenter of the subprime disaster has been given to one of the cities here?
So much for the “good weather” thesis. You might try shifting your argument to the areas which are only now starting to melt down. But I do believe that the good Doctor has covered that topic as well.
“Insulated market” or not, housing costs have to be justified by incomes and demand, in which case CA. is in for a double dip market correction.
exactly! I remember when this all got really crazy, my question was, “did everybody suddenly get some huge raises? if not then something is very wrong. It is a bubble and it will, indeed, burst”. We weren’t a sunshinier state than before. So if the hypothesis is that we are sunny and won’t be hugely affected, then wouldn’t we have to get sunnier for a 1BR condo to go from avg. 100k to 500k? and that is down to scattering around the mid 200k now. Yes, I think it will go even lower. And where I live is an hour from the beach. Lovely, but no surfers here!
Don’t waste money puting things in storage. You will pay $3,000. a year, to store stuff that you could replace, NEW, for $1,000.
Do you think you are going to wear your tie dye shirts from the 60″s to the senior citizen center??
“Don’t waste money puting things in storage. You will pay $3,000. a year, to store stuff that you could replace, NEW, for $1,000.”
Storage is cheap, I won’t buy that statement at all. An example: I pay about $300 in a year to store property worth of $20 000. And that property can’t be bought as new as none of it is made nowadays.
So where did you invent that kind of numbers, show us an example?
Storing ties in a box will cost you about zero, even in the long run and I’ve ties which cost about $100 a piece when new (in current money), those won’t be thrown away, ever. Most of them has already gone as gifts to relatives.
Thomas- Don’t know where you find storage for $300. a year, but you have an exceptional deal- I have a friend who is paying over $1,000. a month.
Real life example- An aquantace mentioned she and her husband had a storage locker. I asked her what was in it, and what it cost. She said it was stuff from her kids- old wedding dress, high school yearbooks, old toys, clothing.
She had no idea what it cost- Her husband “takes care of all of that.”
He passed away, so she asked her kids to take their stuff. Turns out, they didn’t even want it. Then she added it up- storage cost around $10,000. over the years.
In 1960, there were no self storage lockers. Today, there is over 2,000,000. Square feet.
In the end, Americans have too much crap.
We truly will need to decide what we can do without soon. It’s surprising how much better life is without objects and bankers owning you. Keepsakes–make digital copies, put them on fliker or the like and give or throw the crap away. It’s people that are important–not places and things.
If you “get something within 20 to 30% near the eventual bottom” you’ll be okay?
What on earth are you smoking?!!!!!!!!
That’s a lost DP my friend!
Most people would not willingly throw away 100K.
By all means, run out and catch that falling sword before you get priced out forever!
NEWS FLASH: EVERYBODY THAT COMES ON HERE AND SAYS THEY ARE GOING TO BUY A HOUSE IS NOT A REALTOR.
The bottom line is that if you sit back and wait for more homes to come on the market and not fall in love with one particular house you can get one now at 20% plus below market. It is basic probability at play. If you offer low on enough homes someone is going to bite because they really need to sell, bought years ago and still are making an excellent return, the house is in probate, bank looking to unload, etc. etc. etc. It is especially easy in the $650K range as these homes are absolutely NOT MOVING. Inventory is going to build in this segment with very few buyers. The business school i went to said that when there is a large supply of something with few buyers you usually can find a pretty damn good deal.
*Unless the market is rigged by zero interest rates, Fed QE buying Treasuries, Banks bailed out so they can hold losing loans in the shadows indefinately. You might get a good deal, but you probably won’t right now. There is not mass capitulation and markets working–there is still Fed and Gov-backed market manipulation. If things are at the bottom, why is the Fed target still zero? Have you ever seen an historical high in gas prices without a severe recession? Have you been reading the Doctor for the last five years and seeing the news unfold in much the same manner as he’s predicted? This time is different only in that it is worse–we’ve been bluffing for over 40 years and now the rest of the world has called our bluff. We have to show our hand now and all we got is a pair of jokers…
Freaking realtor. Heh, just kidding, “Renter”.
And your business school taught you the incredible concept of supply and demand? I should hope so!
HD – please, please send me a link to a house for $250K in Palm Springs! I just can’t wait to see it. Show me. Show me. Oh, wait. Now I remember. You are going to Harvard NEXT year. Well, when you’re at Ha’Vaad, make sure you take a real estate class.
But seriously, if you find any properties in Palm Springs for $250K show us the
link(s). My eyes are burning to see them. And one more question – if your dad has cash coming out of his ears, why is he being such a tightwad? When he dies, none of his money is going with him.
I love to read this DHB. While good news is my knowledge increase, bad news is I am more complicated.
Currently my house remodeled minimum, granite countertop, interior painting, etc for listing April. My house is 2400 sq ft. If I am lucky, it may be sold as $630,000.
According to knowledge of DHB, renting seems best option. But I cannot persuade my wife for renting. She rather drives 3 hours per day in stead of renting. Therefore renting is not an option.
Couple weeks ago I submit offer $1.16M with 35% down payment for $1.15M listing.
http://www.redfin.com/CA/La-Canada-Flintridge/4035-Dover-Rd-91011/home/7249873
3500 sq ft & 1.3 acre lot
Other offer was accepted. One day I just visit that property, which I love to see again.
I happen to see the to-be new owner and listing agent for final inspection. I asked her what happens. She told me. 21 offers and 2/3 are all cash. Therefore conventional loan is excluded. Also my price is out of target.
I will check later sale price.
Now I have a dilemma. If price correction is very obvious next couple of years, I should buy smaller house, about +2500 sq ft. If I consider toward median house in that area, I should target $1.5M. If I move in the area, I will stay minimum +7 years for my kid school. If I sell my current house, I can get a special loan of $700,000.
Any comment for buying house is appreciated.
Buy ASAP!! If you are not stuck on La Canada, and rather live a few minutes from ocean, ill sell you my place for a cool $million
I decided La Canada for relative closeness to LA downtown and school.
Do you have any reason to suggest “Buy ASAP?”
I was kidding. Instead be an avid shopper in your chosen area. Become an expert on prices, neighborhoods, spend a few years tracking all this info mostly in your head, and youll know more than any realtor before too long. Meanwhile, accumalate a larger downpayment, and you’ll score a better place, at a better price than you would have if you bought ASAP. Good luck!
Get a new wife?
I do not need another headache. I guess one is enough.
Long time ago she told me fortune teller said, “She will be $50M rich.”
I need to live longer enough to see it’s true.
Also a new interior decorator
True that. Better still, go put on a pair of pants and tell her the script. No, it’s not easy, but it’s better than ending up in bankruptcy court and saying “I told you so”…
HAHAHA, 21 offers and two thirds are all cash. Bitch please! How appropriate that property is on “Dover” road…it should be renamed Ben Dover.
These suckers are all knife catchers, nothing more. We aren’t even close to any sort of bottom – we’re just coming out of the dead cat bounce/bull trap. Years and years of downward spiralling prices dead ahead!
The irony to this story, and ALL other “housing bubble” stories, is simply Fannie, Freddie, Chris and Barney. And the truth is if you don’t know about Chris and Barney, you will NEVER understand why Fannie and Freddie are not regulated under the newly instituted Federal Financial Reform Act.
Just saw a 3BR/ 3Ba 2060 square foot townhouse listing in Jupitor FL for 195K. The listing indicated the price was reduced 220K.
Shave & a haircut..
Yeah, I think the long, skinny-on-the-streetfront, and nearly windowless faux-townhouse has pretty much lost its momentum, in So-Fla anyway… No one ever sells one and buys another.
4+ decades ago Christopher Alexander showed this was exactly the wrong way to configure townhouses, but no one listens… peeps just GOTS ta have their car RIGHT OUT FRONT… 🙄 I live near some that are 19.12 ft. wide… one owner w/ a Lincoln Town Car can’t fit his land-yacht in the available curb space, LOL.
An earlier poster mentioned that not much is moving above $729K. I do believe that limit is set to expire in October and go down to $625K. That’s going to compress that price band even further. Whether sellers want to get out in front of that or not, I don’t know.
Jobs and money leaving Calif/U.S.
See green cards, work visas, etc. by company, industry, state, etc.
www. myvisajobs.com/Reports
Hundreds of thousands of jobs outsourced, or worked here BY foreigners.
Brian…..
Now follow me here closely…….
Go to your wifey’s purse. Remove your testicles from the purse. Put them back in their god given natural position.
When the wifey comes home after her 3 hour commute tonight, prepare the pimp hand. If she barks, whines, protests, whatever….layeth the smackdown.
What ever the consequence…submission, arrest, divorce = profit.
I know its not intuative. You’re just gonna hafta trust me on this one.
LMAO!… you just know that if the wifely-unit is behind the wheel THREE FRICKIN’ HOURS per diem, plus 8+ in the cubicle, then there’s a hubby who ain’t gettin’ his needed “tune ups” except maybe every other weekend… so he’s not even p-whipped, he’s just whipped. ;p
“History doesn’t repeat itself – at best it sometimes rhymes†by Mark Twain.
Generally, California is the last state which goes into recession and the last to come out of.
It appears that the question by the good Doc “… Can home prices remain stagnant until 2020?…” is an excellent and accurate observation. The first chart shows some parallels from 1954 – 1970 (vs the prior decade) and 2006 – 20?? (vs the prior decade.)
Four-dollar gas will completely derail even the shadow recovery. Unless this time it’s different. The hyperinflation/demand-deflation two-headed monster on the loose now will drive the nations to fight for commodities and the territory they are in (as all wars have been). After WW III, there will be massive employment to replace global infrustructure destroyed. Depending on how many people survive, all debts will be erased as the remnants of civilization put the pieces back together again. That’s about the only scenario I see for a revitalized housing industry. Or perhaps the thousands of college grads saddled with binding loans will be able to afford inflated housing with their jobs at Staples and Old Navy.
Bah. $4 a gallon isn’t going to do anything but spark some more whining. Thinking themselves righteous, some citizens will demand a government bailout for gas. Still others will demand we drain the strategic petroleum reserve, because an extra $0.50/gal is a /STRATEGIC EMERGENCY/. At $8/gal then we might see a few SUVs replaced with smaller cars. Some misguided senators will talk about a gas tax holiday. Subsidies for renewables will be phased out, due to oil lobbying. At $15/gal some might actually consider carpooling to work. At $20/gal a few enlightened employers might decide letting people work at home is a good idea after all, because then they can pay them less. Citizens might actually walk to the grocery store. Amtrak makes a profit.
Gasoline can not be too expensive.
these real estate agents and sellers are all lying
I put in an offer for a bel aire property about 1 month ago.
Their agent calls me back says there are 7 offers in, all above asking, 6 are cash, what am I going to do?
I told agent I am going to eat a pizza and watch a movie.
1 month later property is still for sale. Agent calls me back today asking if I am still interested in buying. I said sure, but now my offer has to be reduced another 10% as a penalty for lying. Silence on the other end.
Was classic.
Jason – I had a real good laugh when I read your comment. “Their agent calls me back says there are 7 offers in, all above asking, 6 are cash, what am I going to do?
I told agent I am going to eat a pizza and watch a movie.” Classic!
What are your going to do?…… “Oh, oh, oh, let me see… I’ll throw in another $100K to squish all the other little worms (potential buyers).” Ferk off real estate agent. Ferk off. Go somewhere else to find your fool… and don’t bother me with my pizza!
Jason – you are right – there is so much deception and lying going on.
I have been reading this blog for a while. Comments to this post are best ever! Hilarious! Thank you, guys! Big pleasure 🙂
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