Foreclosure amnesia – California distressed inventory still larger than non-distressed properties. The psychological push to buy with low interest rates. The new marketing to purchase homes.
There is a danger with keeping mortgage rates artificially low for such a long time. I’ve seen countless marketing pitches from those in the industry now using the historically low interest rate as the major impetus for people to buy. Ignore the weak income growth or massive budget deficits both at the state and federal levels because low interest rates are the elixir for all the ills in the world. Little analysis is even conducted on the transition between baby boomers that currently own homes to a younger less affluent generation. Rates are reaching rock bottom levels and as you are witnessing in Europe with the credit markets, rates can turn up quickly. Nationwide housing prices might be at a bottom but this aggregate trend is being applied to regions in states like California that still have bubbles. No need to look too far in the past to see how much buying leverage is being injected into the market by lower rates. The problem happens when the market gets addicted.
The low rate mirage
Just going back 10 years we can see how much leverage is being inserted into housing because of low interest rates. Take for example a $400,000 mortgage:
Even going back to 2008, the difference in principal and interest for a $400,000 mortgage is significant. From $2,500 to $1,800. Again, this is only for the principal and interest. I’ve seen countless e-mails and campaigns citing only these figures and luring in many people without knowing the full scope of other costs such as:
-Taxes
-Insurance
-Mortgage Insurance
-Mello-Roos
-HOAs
Especially with condos and new projects in Orange County the last two items are significant. There are some serious problems in the underlying economy. For example, there was a headline saying that in March, unemployment claims fell by 108,000 in California. In the same article we are told that 673,000 Californians had fallen off the unemployment rolls after maxing out benefits. There isn’t clear data if this group even found any subsequent work!
Here is some more clarity on the situation. A quick snapshot on Zillow shows the following inventory in California:
Source:Â Zillow
At a quick glance around 192,000 single family homes are available for sale in California. 80,000 of these are foreclosures. In other words, roughly 41 percent of California MLS listed homes are foreclosures. Looking at another source for data, we find 217,000 homes in California in some stage of foreclosure. In other words, 137,000 distressed homes are simply lingering in the pipeline. This is larger than the non-distressed MLS inventory currently listed and we are supposedly in a recovery? It is true that many operate under a form of cultural and economic amnesia. The shadow inventory is being cleared out but just at a quick glance, housing issues still run deep because of a weak economy. When we are juicing unemployment figures it is easy to make things look better than they really are.
For example, the transition of housing from baby boomers to subsequent generations requires that an upcoming generation have the buying power to take over the current home at an agreed upon price. So far, that has been a losing game so the buying has been occurring at the distressed side of the equation. Yet younger Americans are less affluent:
1 out of 3 younger workers in the US are underemployed. Since it appears that the system has given up on building up a middle class, the entire focus for solutions has been on the banking side of the equation hence the low mortgage rates. Yet this entire edifice assumes rates will be low for a very long time. Once again, examine the chart above. Only 10 years ago the 30 year fixed rate mortgage was nearly twice as high at 7 percent. Should rates only go back to this level buying power will be severely curtailed. In other words, the big reason to buy in today’s market is low interest rates. It is not a healthy economy. It is not a balanced budget. It is not rising incomes. From most of the marketing pieces I have seen pushing folks to buy, most of it is centered on the low mortgage rate fixation. That is, buy now because of awesome mortgage products. That has a familiar ring to it.
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79 Responses to “Foreclosure amnesia – California distressed inventory still larger than non-distressed properties. The psychological push to buy with low interest rates. The new marketing to purchase homes.”
An investors and investment groups are now buying up lots of homes. This is the future for the younger generation…..renters.
The term “investor” has lost its meaning. Investment properties are supposed to show positive ROI, and the traditional rule of thumb says the purchase price should average no more than ~ 100X the expected monthly rent. Put a pencil to paper and you quickly find that most of these RE “investors” are delusional posers. Remember, only the Big Boyz get bailouts, the rest just get screwed.
An investor doesn’t play with borrowed money, so as long as it is rented you have positive ROI. Yes, a purchase price of 100 X rent is the definition of a smoking deal, but money can be made at lower multiples. What else are you going to invest in? CD’s, bonds, T bills, Facebook stock? I tried day trading stocks for a while, but that didn’t work out too well either.
I have a friend who is a realtor. 2 weeks ago he put a property on the market and has 33 cash offers — all real cash based on money in the bank. 32 of these offers are from investors. Only 1 person actually intends to live in the place. I thought this was interesting.
Yup, supply of rentals is going up (check craigslist – realtor is overpriced) and rents have been declining since January. What happens when the new landlords don’t get the return they expected? Anyone want to bet that Rental properties are the next bubble?
I hope you’re right…this is only anecdotal – but I haven’t seen the rent decreases.
I just don’t see the increase in rents either. I’ve been loosely looking for a rental on the westside over the past couple of months and keep seeing the same properties relisted over and over. Just do a quick CL search with the keyword “reduced” and see the boatload of listings that come back. I’m also seeing first month free and other similar types of discounts. That doesn’t sound like a landlord’s market to me. But what do I know, I’m just someone who is actually out there scouring the listings.
Like John, we too were in the market as tenants. Luckily our landlord had given us plenty of notice (5 months), so we’ve been looking at rentals for over 6 months if you include looking at the previous rentals on craigslist. Rents are down about 15% in Ventura county (and parts of LA county that my family lives in). We found a rental and will be moving on June 1. The rent for this place is about $500/month higher than if I bought it with a 20% down loan. However, it is almost exactly 15% lower than comparable properties just a few months ago. I expect home prices to decline at least another 20% or so over the next 3-4 years, so we’ll hold off buying a while. Tip: never use realtor to look for a rental. The homes there are over priced. Drive around the neighborhoods you like and use Craigslist.
Dr HB-Thanks for this most interesting article. Food for thought for many of us thinking buyers.
I heard from our buyer’s broker FHA 3.5% downers are getting in with all their closing costs financed, low FICOs, and high DTI (some 40%) right now. We can’t find a fairly priced home due to the low interst rates, FHAers willing to overpay (they default, so what risk?), and tight inventory in east Ventura County, and a selling season premium as well.
All I hear is lowest interest rates of our lives BS on that Sat night KABC Radio R E Infomercial, pretending to be a radio show. People are idiots. Love it here, the contributors are great.
Seeing the same thing here in oregon, why should we have to compete with the federal government? This is just what is happening, people that did as they were told and saved are now to be punished by the federal government, we get nothing for our savings and when we go to buy an investment house so we can make a little off the rent we get hit again.
I hear you. We decided to continue renting for 2 more years, even though our rent is $500 more than a mortgage would be. Rents are slowly coming down, so the difference should decrease. If the ‘new’ landlords decide to walk from their still-overpriced properties, this mess is going to get even worse. This may not be as far fetched as it sounds as the landlord-investors will view it as a ‘business’ decision and are likely to cut their losses if prices continue to plunge (and cashflow dries up) in bubble areas.
Most investors I work with pay cash, why would they just walk away with 100% equity? Also, when you purchase a house cash as a rental investment, you will at some point get all of your original investment returned, even if rental rates go down over time – it just means it will take longer than you projected. Can you say that for stocks, bonds, or Credit Default Swaps? This real estate crisis was caused by a debt bubble. Just imagine if all real estate in the 2000’s was paid for with cash, would we have a foreclosure crisis today?
Perhaps the investors YOU work with pay cash but the vast majority don’t pay cash, especially if you can borrow money for less than 4%. If these guys lose their equity as prices continue to decline AND the property stays empty for a while because they can’t (won’t) reduce the rent, they are going to be in a world of hurt. Expect them to head for the exits when things get worse.
DTI’s are more like high 40’s into 50’s on pre-tax, pre-medical, pre-retirement, gross income…you can thank good ole computer underwriting for that one. many just one small life change away from a default. you can bet if you preform a net income vs. outgoing expense test many would fail…..as we have seen with defaults from 2009 till present. only to get worse.
Have a realtor friend that talks about buyers paying with cash. Not risking 3%…not 20% but 100% for houses. These homes are in south OC and are averaging $600K-$800K. Some are shorts and are in need of serious updating and repairs. Houses are sold “as is” and people are still paying all cash! Then they have to dump thousands more to get them cleaned up. My friends says most of the buyers are NOT investors but families looking to buy a home. Crazy!
RUKrazy, other than the “foreign cash buyers” and “all cash auction buyers” I think your realtor friend is giving you examples far from the norm. Most working stiffs who buy a 700K OC tract house are not buying with cash. The bubble money is fast disappearing, from here on out people will build equity by paying off their mortgage principal…a concept that was unheard for decades. I mentioned repeatedly, anybody buying today should expect no price increases in housing for a decade. If you find a house that you plan on staying in for a LOOOONG time, your finances line up and you have a stable job then it might not be the worst time to buy (it’s certainly not the best).
I hear the same tripe from realtors. I think the ratio of hype to reality favors the former, but even still, it would not surprised me: there were loads of regular old doofs who were in the right place/right time that became suddenly fabulously solvent after offloading their houses during the bubble. Some sat on the money and rented awhile but are now gradually jumping back in (what do they care? It’s like Lotto winnings…there is a mentality about windfalls v earnings: windfalls hurt less to lose) or investing in rentals. It’s much like how a hound buries its bone in the same spot again and again.
I think there’s still quite a bit of unwind left in this thing.
Indeed Hamsung. Tripe fed to Doofuses.
This is why Dr. Housing Bubble doesn’t rely on anecdotal “stories” from friends.
Lots of asians in that area. They are savers and tend to buy with cash. They will likely take a hit in equity but asians typically tend to view homes as temples and foreclosure is typically a no-no from a cultural perspective. This could be good OR bad, depending on your perspective…
I hear the same thing about families purchasing properties with all cash. Are there really that many people with hundreds of thousands of dollars just sitting around? I live in Orange County, and most people I know have average middle class incomes. Maybe it is because I am of the “less affluent” generation, but it doesn’t make any sense to me. Where is all this cash coming from?
> I hear the same thing about families purchasing properties with all cash. Are
> there really that many people with hundreds of thousands of dollars just sitting
> around? I live in Orange County, and most people I know have average middle
> class incomes. Maybe it is because I am of the “less affluent†generation, but
> it doesn’t make any sense to me. Where is all this cash coming from?
First of all, the recent recession was brutal on the middle class, because they have most of their wealth tied up in housing. Housing, as you may have learned here, has performed poorly as an investment, losing perhaps 30% of its value.
On the other hand, if you behaved like the upper class, then you would have had most of your money in investments. It’s fallen in the last few weeks, but for the most part, the stock market has regained all of the ground it lost since 2008. So, if you are one of this crowd, then you will notice that you are sitting on a pile of stock that has enjoyed a long bull run that might not continue, and real estate is at bottom.
Buy low, sell high.
…or, if you prefer…
It was the best of times. It was the worst of times.
Some of them are probably looking at it as investment income. Invest $700,000. If rents are $3000 / mo. then you pull in 5% return on a reasonably stable typically inflation protected asset. (I really don’t know what they are in Orange County.) You’ll pay out 2% of that on property tax and insurance and maintenance. A 3% dividend plus potential for appreciation is still better than TIPS.
You’ll be happy to know that your continued support for Proposition-13 makes this activity more attractive, since they can enjoy a reduced tax rate in the years to come in their investment business, as our schools go underfunded. They can own the home as long as they like, because they have no requirement that the rental be near their workplace. It will just keep getting cheaper and cheaper to own.
The cash is coming from people who called the bubble and sold from 04 to 06, and sat on the cash. Now they are buying. It will run out.
RUKrazy (how cool and creative-kudos)
Thanks for the tip. We were thing of moving to the OC for my career path.
Now I know we’re priced out there, although we’re in a much lower price range, but OC is insanely expensive in general. We’re 100% cash as well. We’re in the range FHA buyers are looking, below $425K.We sold a long time ago (regular sale), and are renting in a tenement waiting .(48 units/3 Americano units)
Your post was an awakening. Thank you.
*$425K is a lot of money to us. Our 4,000 sq ft home cost us $400K in 1998. Even had a FP in the master w,a built in fridge, and it was a view home. Incomes here higher back then and good jobs could be had. This housing market pisses me off. D*mn govt meddling.
Sounds like those are just “stories” & reminds me of claims fellow hot-rodders have of how fast their cars are. “Oh yeah it will run 10 seconds in the quarter-mile” Show me the timeslip!! I personally know ONE person who could pay / has $800,000 cash….but isnt stupid enough to dump it into a south OC house. How many do you know? Call B.S. when you hear it, dont just nod your head.
Have a used car salesman friend that talks about buyers paying with cash. Not risking 3%…not 20% but 100% for cars. These cars are in south OC and are averaging $6-$8,000K. Some are with over 100,000 miles and are in need of serious updating and repairs. Cars are sold “as is†and people are still paying all cash! Then they have to dump hundreds more to get them cleaned up. My friends says most of the buyers are NOT investors but families looking to buy a car. Crazy!
Not only does low intrest rates cause housing prices to be Miss-appraised, but at .5% intrest paid on money in savings accounts, it also causes the value of money saved to be greatly under valued.
This also leads to miss pricing of metals, oil, and about any other alternative means of attempting to store wealth.
RUKrazy,
This realtor must be lying through his/her teeth. Who has $600K+ cash to buy a house
these days. She must me citing 1 such sale in 1000 as a marketing campaign. I simply
do not believe that 80,000 homes or even 10% of them can be bought by all cash
buyers. Americans have debt coming out of their ears. This is realtor BS and it
should be called. Heard this only from realtors. Yet, to meet 1 single cash buyer and
I meet with some pretty wealthy folks.
Was this not what they were saying in 2005-2006 when multiple bids were coming
on “fixer-upper” property? What happened to all those cash buyers from that time. Are they sitting pretty in their homes or they never existed in the first place. That was pure unadulterated cow manure! Were they real or some unicorns the realtors were claiming to see to get some debt-lemmings to buy.
Next time you see such propaganda ask them the statistics? What is the fraction of
cash buyers, 0.01%?
Ditto. I talked to a realtor friend yesterday about this. he said the same thing. The good deals are being snatched up by cash buyers. I hate those pricks. Rich flippers. I hope they all die.
My friend said that he knows people who’ve tried many many times to get foreclosures, but the cash buyers always get the houses. The bankers buddies and wealthy dirtbags.
This country is soooooooooooooooooooooo screwed up.
What exactly is screwed up about buying something for cash. Heaven forbid you should be able to afford something before you buy it! What is screwed up is the expectation that you will buy everything on credit. What is screwed up is that we should have a massive government tax write-off (the mortgage interest deduction) that takes money from the government which might do some good with it, like fund schools or highways, and give the money to bankers instead. Yes, bankers are my favorite charity! What is screwed up is the expectation that everyone must spend most of the money they have ever made and likely ever will make on housing. What is screwed up is that most American’s wealth is tied up in housing, which has an annualized return on investment that barely keeps up with inflation, for which they must pay taxes, insurance, maintain, etc. It is a terrible idea!
What ever happened to living according to your means?
Living within one’s means went out with easy money. Thanks to a culture of instant gratification fed by the likes of Greenspan, Bernanke, and some of the Monetarist ideas of Milton Friedman. Give the banks a lower reserve and expand the supply forever and the market will take care of the rest. But wait – low interest rates, low inflation, and no foreseable chance for appreciation in housing.
http://www.bls.gov/news.release/pdf/cpi.pdf
Sacrificing 30 years of income into a home with 20% down, still looks ugly to me. Surely there are small regional markets in the U.S. where it makes sound economic sense, but I don’t see it in SoCal. Maybe in WA, WV, etc. if you have a stable job not dependent on cyclical natural resource dependent industries, the house is price around 3x annual income or payments are 30% of monthly income max, and you want to stay a decade or more. Then maybe. Housing seems like a piss poor proposition in the Southland for those of us in the downward shuffling middling class.
If your friend wanted the house, couldn’t he or she just outbid the all-cash buyers? That’s how an auction works, right?
Doc been following your stuff since the blog spot days. As an active investors who buys fixs and flips properties the “hook line and sinker” is the low rates… meaning. The banks aren’t stupid… they know what they are doing…. and in my opinion. They have lied, cheated, and stolen from the American people to cover up the trials of their balance sheets. (of course with the help of the Feds and folks in capital hill).
As both Madasheck and RUKrazy said… the interest rate is the bait… to get new buyers into the market… AND new investors… meaning… I’m considered a professional house flipper… i flip to eat (doing 5 to 11 houses a month)… the “new investors” are what I like to call the “nest egg house flippers”. Meaning some are using ALL cash to buy and buying at prices I would NEVER buy but for them a 5 to 10% return is good… AND even some are buying with FHA (illegal) and/or conventional loans. Either way…. a house is NOT an investment and that’s the paradigm shift that is occurring (MHO).
Keep’em coming Doc!
Here’s a link that I talk about the “nest egg house flippers” vs “professional house flippers”
http://www.youtube.com/watch?v=SzcZyi9lR1I
Nothing to see here, just pay atention to Facebook’s IPO. OH, wait, it’s down 17% since Friday. You know the old saying regarding suckers.
The insanity is rearing its ugly head in the Bay Area again…”taking offers” days, escalation clauses, multiple offers…basically, this kind of mania signals “overshooting” once again…all in the name of “low rates.” Manipulated low inventories (banks not dealing with shadow inventory much), and lots of potential sellers not wanting to sell at these “low” (putting them underwater or close to it) prices. It’s a mini bubble that may fizzle in days or weeks, but it’s happening. I guess I’ll have to wait another few months and se if the madness has calmed down. Until then, I wait.
There is truth to your statement, but there is truth the other way as well. 3500 new millionaires running around will have an effect for a year or so…
RUKrazy
A Realturd = A Liar
Even our buyer broker lies to us, and he’s “working” for us. IMHO, they lie for word of mouth effect. BTW, I’m licensed in Ca .I’ve sat in on the “what to tell people” meetings. My REIC career is higher level than a Realturd. The group drives me batty.
If 673,000 people dropped OFF the unemployment rolls but the total only went down by 108,000 isn’t that 565,000 NEWLY unemployed people? So slightly more than the entire population of Sacramento just got sacked? Welcome to the recovery.
Are the people dropping off because they are now employed, or because they’ve stopped looking?
People have left the workforce to pursue other interests. Their interests no longer include food, clothing and shelter.
A little bit off both. But mostly they stopped looking as they couldn’t find anything. if they haven’t payed mortgage in years, then they stay. Else move into family basement/garage , frinds, shelter whatever and drain even more resources from the state.
Solution of course is to lower taxes some more and ship a few million more jobs to China!!
That’s actually a good question. There are three reasons people drop off the unemployment rolls:
* They find a job
* They qualify for retirement or disability benefits, or enroll in school
* They run out of benefits (up to 99 weeks)
Unemployment and workforce statistics are much more complicated than most folks who discuss them understand. They have high uncertainty, the data tend to be very noisy which they attempt to filter using “seasonal adjustment”, and the definition of the overall workforce is not intuitive. For example I’m a graduate student so the BLS defines me as “out of the workforce” even though I work full time. A person who receives retirement or disability benefits is defined as being out of the workforce as well even if he or she has a part time job or operates a profitable business.
As long as the data are defined consistently, all of this can be adjusted for. It’s important to watch for changes in the definitions. For example, the Federal government reported in 2003 that the number of small businesses had nearly doubled, but it was because anybody who had a sellers account on eBay was being defined as operating a business in the US even if the person had only a couple sales and didn’t even live in the US. You also had GSE’s in the early and mid 2000s (Fannie and Freddie) allowing day-laborers to be defined as entrepreneurs and accepting CPA letters from non-CPA’s to stand as proof of a $10,000+ monthly income from landscaping, painting, or construction cleanup.
I want to congratulate you for asking the right kind of questions. If you look deeper, I think you’ll find the answers more interesting than you expected. Best wishes!
Those familys are paying nearly as much as a move in ready home price. And end up spending more after renovaions……..
But they finally get to live in OC! they have always dreamed of it…..
Now there is some compelling reason to jump
Your trepidation about mortgages and foreclosures are spot on, but your evaluation of particularly the level of Federal “debt” is misguided. There is no “debt” for the Feds in any conventional sense of that word. Please, introduce me to a single family who can (legally) mint the medium by which they’ll repay their debt, or pay their taxes. They don’t exist.
The Federal Government is the monopoly issuer of currency, and concern that they might run out is roughly like worrying a scorekeeper at a sporting event will run out of points. Watch Warren Mosler’s video here for more: http://www.youtube.com/embed/AfnwFZfdDvw
This means the *entire* “deficit crisis” is ginned up in the service of creditors to make policy changes that are otherwise too unpalatable, politically. Social safety net programs and revenue sharing for the states need not suffer because of any artificial shortage.
The people who favor this phantom shortage, BTW, are exactly the ones foreclosing on all those properties. The misery inures to their profit, just as stirring up trouble in the Middle East makes domestic oil prices skyrocket.
Gosh! I wonder whether they’re doing that on purpose?!!!
Right on!!
The low down payment and low interest rate hook is like leasing a car for $99 down and offering 0.9% financing. Anything to get you to sign, so they can make a sale. The devil is in the details. And, guess who really ends up on the hook after the person who can’t really afford it defaults? That’s right.
http://www.westsideremeltdown.blogspot.com
So what’s a potential buyer to do? I see homes that I can buy with a mortgage payment less than what it would be to rent. Although I have negative sentiment for housing, it seemingly looks cheaper to buy.
It is cheaper to buy a home then rent in most markets… Dr. HB is cherry picking the los angeles markets where it’s more expensive to own then rent.
The only risk you have of buying now.. is if we have a total economic collapse in CA and don’t get bailed out by the FED. Barring a total economic collapse… (the 2nd in 6 years… ) Home prices will stabilize 10% above or below current rental parity.
The banks and government know for a fact that if they allow home prices to slide dramatically again, EVERY SINGLE 2004-2008 home buyer will DEFAULT and they will be left with another round of trashed foreclosures to unload. They will extend and pretend until we are all dead… and they can do it too!
If you are financing, I would buy! If you can finance for 3.5% down, you are almost insane for not buying.
What is the risk? It is a WIN WIN to buy right now. If it goes down, you stop paying, you get much more than your down payment back via free rent while the bank tries to sweep you, its latest foreclosure, under the rug. If it goes up, well, you win even more!. If you end up in foreclosure, you just try again 2 years later.
The only downside is your credit, but how much is your credit history really worth when it can be repaired enough to get another mortgage after only 2 years? I would easily sell my 800 FICO score for what would otherwise be a no risk gamble in the housing market.
And please, no morality arguments from anyone! This is not a moral decision. When money is created out of thin air, trillions, and used to bail out the biggest offenders in the nation, how can a person trying to get a piece of the action be considered immoral?
We all need to grow up and realize, the smart ones are those who take advantage of risk free risk and buying a house with 3.5% down is a risk free risk.
I must say you make a good case. I kinda agree!
It isn’t immoral if your morality is based on the current paradigm set by amoral corporations and immoral greed.
That’s like saying, “my neighbor is a thief, so I must become one to get a piece of the action.”
Sorry, but 2 wrongs don’t make a right.
Janum,
Really? I would never steal anything, nor would I suggest anyone steal. If you think what I proposed is stealing, well, you have not been paying attention.
Defaulting is as American as apple pie. What is unusual is for the defaulter to be rewarded. Reward the defaulter and punish the Prudent, that is the current game and it will continue until too many take advantage of this warped system. I as a Prudent person am being punished and I want it to come to an end. The only thing that will expedite the end of rewarding the irresponsible is if too many go after the reward for being irresponsible.
So yes, I advocate people take advantage of the moral hazard that our federal Government is selling via FHA, Freddie and Fannie.
Sorry, if you think it is stealing but I am tired of it and I want it to come to an end and maybe it will once the FHA default rates surpass 20%
Good question.
It really depends on personal situation.
If you do buy, put 10% down and plan on staying put about 10 years if possible.
Rent at $2000/month for 10 years = $240,000
BUYING IS MORE Complex:
PITI on a $365,000 home (10% down, 328,500 mortgage (3.875%) runs about 2100/month. But over that 10 years, you will average $950/month in interest and $380/month in property taxes. At a tax bracket of 25% you lower the cost by $332 /month.
The basic monthly cost is then 1200/month ($950 (interest)+$380 (property tax)+$70 (Hazard Insurance) + $120 (PMI) – $332 (Tax Savings))
In 10 years this come to 144,000
You bank ~ $595/month in “equity” or better called self financed principle reduction.
You’ll owe ~ $257,000. If the house drops in value by 100,000 in 10 years, you sell at 265,000 and pay 10% to sell (Realtor Fees, Closing, credits ect…) so you spend:
26,500 + 144,000 =146,260 over 10 years
Rent ($240,000) vs. Buy ($170,500).
Sounds like a good deal. Of course you still have to factor in maintenance and extra utilities, which can be priced, and intangibles like not having shared walls, which are harder to numerically value.
Please note that most of these numbers reflect a house that we are currently under contract for and are fairly accurate.
Over a ten year period, rental rates will double just due to inflation. Your mortgage payment will remain the same. So a mortgage offers inflation protection.
In addition, the value of the home should rise and track the inflation rate.
RentaLurker -Well said. KUDOS.
You forgot to include remodeling (not just maintenance). A kitchen is typically redone every 10-15 years. Don’t forget Bathrooms, carpets, etc. Also, many choose to extend their home as their needs/families grow. Speaking as a former home owner, you are significantly under estimating the true cost of owning a house. Also, what if crappy neighbors move in next door, or crime goes up in your area or you have to move for work/health?
Don’t get me wrong, I loved owning my home but the housing market still has horrible fundamentals at the moment.
If you are confident in your job/income security, then clearly it is time to buy.
Sometimes it’s not just about the price of the house, it’s about future planning. As in, getting those mortgage payments out of the way so you can retire easier.
I have an issue with the people concerned about 100% cash buyers, and potential overpayment. And that’s that I don’t think they care about the price. They have bought their house, it’s theres mortgage free, and now they don’t have to worry about it. It’s not always about equity or tax breaks, sometimes it’s about peace of mind.
You forgot about payment for water utilities which are going up and you forgot to figure for repairs.
Yes your mortgage is a large part of what constitutes the price of a home, but its just the start.
And yet, if no one bought, the current state of affairs of massive shadow inventory would continue forever. Boomers would not be able to finance retirement / downsize because of their home-albatross. Young people would be doomed to be renters forever. This is a classic example of Keynes paradox of thrift.
Despite the obvious red flags, buying houses is how we get out of this mess, and we won’t get out until we do.
he MSM and all the talking heads keep saying 2012 will see the bottom of the housing market. But if this were true, why aren’t the banks transparent about all the shadow inventory. I appreciate all the data that we get from DHB becuse it is one of a few credible resources. But why can’t the banks come clean about their strategic plan. To me this lack of bank transparency seems more like deception. Why should be trust the banks of the MSM or talking heads. It;s all lies!
Thanks DHB. You are a great read and your blog should be what should be discussed by the MSM.
Love all your posts. Great group of contributors.
We looked at a fixer short sale yesterday. On the market since Nov 2011. 3-4 buyers have bailed. I assume length and inspection. Get this, $420K-$440K plus you have to pay $11K on the 2nd. Screw that noise. The house needs work, and you have to pay the former owner’s bills. Great neighborhood, loved the floorplan, pool/spa equipment seemed shot. The deal sucked. (Property was worth $380K)
The search goes on….
Some kind soul posted this link on Calculated Risk…incredible photos of “feral houses”. Some perspective…a house is merely an elaborate tent, nothing lasts forever. Enjoy this beautiful day…
http://www.sweet-juniper.com/2009/07/feral-houses.html
Curious-Cat
You said:
This realtor must be lying through his/her teeth. Who has $600K+ cash to buy a house
these days. She must me citing 1 such sale in 1000 as a marketing campaign. I simply
do not believe that 80,000 homes or even 10% of them can be bought by all cash
buyers. Americans have debt coming out of their ears. This is realtor BS and it
should be called. Heard this only from realtors. Yet, to meet 1 single cash buyer and
I meet with some pretty wealthy folks.
Actually this realtor friend of mine is honestly a friend who happens to work as a realtor so she tells me things as a friend, she is not working for me. She has been trying to help her sister and brother-in-law find a home for the past year. She thinks they should continue to rent but her sister wants “the dream”. The home with a yard, her own garage, blah blah blah. My realtor friend has helped them put bids, solid bids, on no less than 5 homes. Her sister and brother-in-law are qualified, have the 20% downpayment, stable employment, excellent credit, etc.. Each time they have been outbid by an all cash buyer. And in each case, the cash buyer actually moved in to the home. My realtor friend said that when she talked to the selling agent (as they always talk to each other), the selling agent told her that the cash buyers were afraid the houses wouldn’t appraise and so they were making sure the home sellers would take their offer over all others.
RUKrazy, can ask your realtor friend where all these cash buyers are coming from. Curious minds want to know. Are they wealthy Asians, new Facebook millionaires, people who cashed out at the top of the bubble, gold or Apple stock investors, kids with rich parents?
Your average family in OC is struggling. Even two 100K per year incomes is tough. Add kids in the mix, two nice leased luxury cars, food, gasoline, healthcare, saving for retirement…there isn’t much left to pay the monthly housing nut.
RUKrazy,
Beats me! If she is your friend you have to believe her. However, the numbers on debt
that the Fed puts out does not gel with your friend-realtor’s anecdotal references.
Some simple math here on American debt, courtesy the Fed:
$850B+ of student debt
$850B+ of car debt
$850B+ of credit card debt
= $2.5T+ of total American debt. I am not including house debt since people with mortgages are assumed to be not the cash buyers.
About 110M households. Do the division $2.5T/110M = $23K+ of debt per household.
Granted some households have $0 debt and some have $100K+ so the $0K debt
households are the cash buyers. Still they cannot be more than a few %. Again
this statement of “plenty of houses being sold to cash buyers” makes no sense.
Codes to decipher: “+” = more than or over, B = billion, T = trillion, M = million.
All numbers approximate but the point stays the same even if we get exact numbers.
A good article from alternet…
http://www.alternet.org/visions/155525/how_homeownership_has_changed_in_america_and_why_you_shouldn%27t_give_up_on_buying/
Lord Blankfein,
I asked my friend that question almost every time her sister and brother-in-law lost out on the bidding. She said that one of the properties was being purchased by a family that lived next door to the house that was for sale. The kids bought the house for their parents so that they could live next door to each other. Another property was purchased by two brothers who planned to move in with their aging parents. And the other one that I can remember was an out of state family being relocated to south OC.
My friend said that in some cases the cash offers were not necessarily the top offers. The home sellers explained that they took the cash because they wanted out and they were afraid the houses would not appraise and the deals would fall apart.
Yippee!!! Time to buy is 2009!!! Thank God this nightmare is over!!! We are back baby!!!
U.S. Housing Market May Bottom in 2009, Zandi Says
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aNI.HNulFDw0
Oh… well that’s ok, Time to buy is 2010!! Thank God this nightmare is over!! We are back baby!!
Case Shiller Futures Suggest 2010 US Housing Market Bottom
http://www.marketoracle.co.uk/Article5212.html
But you said… oh never mind… Time to buy is 2011! Thank God this nightmare is over! We are back baby!
U.S. housing bottom seen in mid-2011
http://www.reuters.com/article/2011/01/28/us-property-us-poll-idUSTRE70R41H20110128
Hey!!! You don’t even sound that convinced… ok… Time to buy is 2012??? Thank God this nightmare is over??? We are back baby???
Barron’s Calls For A Bottom In Housing…AGAIN
http://articles.businessinsider.com/2012-03-18/markets/31206312_1_home-prices-housing-market-barron
Oh… we forgot to say “Simon Saysâ€!!! Time to buy will be in 2013. Thank God this nightmare will soon be over. We will be back soon baby…
Pimco’s Simon Sees Housing Bottom in 2013
http://www.businessweek.com/videos/2012-04-24/housing-to-fall-3-percent-4-percent-bottom-in-2013-simon-says
What??? But Simon said!!! Didn’t you get the memo???
Housing Market to Bottom in 2014
http://www.housingpredictor.com/2012/housing-market-bottom.html
Housing bottom 2015, do I hear 2016, 2016 to the man in the back with the red baseball cap, do I hear 2017?
RealtyTrac’s Sharga sees no housing recovery before 2015
http://reibulletin.com/realtytracs-sharga-sees-no-housing-recovery-before-2015/
That is funny!!!! Great post!
The best post by far. Oh the irony…
Great post, What?! You do a remarkable job of tracking data.
The 1% has been doing very, very well and continues to prosper dramatically. It’s not a big percentage, but it is still a lot of people, given the size of our USA / CA population (say ~400,000 people in California). There is no shortage of cash buyers. Many very wealthy people who recently have taken money from hedge funds, stock in their own companies, or the sale of business are now looking at real estate as a place to put money that they have not put it before (“it’s fallen so much”).
I don’t believe that it is enough to support the market long-term, but it is a key factor. I don’t just mean people making well over $200k (http://mdsalaries.blogspot.com/#Physician_Salary_Broad_Category_and_Specialties for one example of many such professions) but much wealthier people with dividend income and capital gains from their businesses. The truly wealthy don’t have income from wages, of course – it is dividend and capital gains (e.g. Mitt Romney).
This is from personal experience, where clients have said, “I want to buy 50 houses.” Even when it’s all cash, it is easy to be outbid, and my advice has often been to stay on the sidelines to avoid losing money, but that is the hardest advice of all to swallow, with cash yielding nearly nothing. They typically don’t take my advice and go find someone else who is happy to facilitate bidding wars.
One client who bought a very, very nice SoCal home for cash said, “Tomorrow that money might buy me a loaf of bread – who knows what will happen with the value of money? At least I’ll have a house to show for it.” There are many wealthy people with this kind of attitude and even more pessimistic – the prices for productive farmland are out of this world.
interesting anecdote…there are many sources out there that suggest the hyperinflation that these wealthy all cash buyers fear, but I just don’t see the money getting into the hands of the masses to cause such inflation…yes the big banks seem to have access to an endless supply (which is why I don’t trust the stock market at all…) but I can’t imagine a devaluation of the dollar to a point where holding any hard asset is the only safe place… Keep the anecdotes coming though, I really miss that old blog Another F’d Homebuyer, the stories he had of the loans he saw passing though his hands were invaluable to understanding what was going on in 2005
Yeah, not that I think of it, the “cash buyers” meme is the new “buy now or be priced out forever.” Anything to try to create buzz and churning.
Texas is the second largest state in the United States in terms of population (approximately 24 million people); only California is larger. And while it still retains its traditional image of wide-open spaces, oil fields, and cowboys and ranching, it has since World War II become an urban, industrial state. Indeed, it has three of the ten largest cities in the country (Houston, 4th; San Antonio, 8th; Dallas, 9th; US Census). As Professor Laura Lein of The University of Texas at Austin discusses in the video in the box to the right, poverty in Texas is multifaceted.
Despite its growth and diversified economy, Texas also has had the less fortunate history since 1980 of having a larger percent of its population living in poverty than the overall US average. Briefly stated, Texas uses a measure of poverty employed by the federal government that calculates a yearly dollar figure; if an individual or a family has an income that is less than this figure, then that individual or family is by definition poor. For example, in 2006, a family of three individuals, two of which were under 18 years of age, was considered to be “in poverty” if the family’s total income (wages, salaries, etc.) was less than $16, 242. For a family of four with two under age eighteen, the “poverty line” or “poverty threshold” was $20,444. As Francis Deviney of the Center for Public Policy Priorities discusses in the video clip found in the box on the right side of this page, the definition of the poverty line, however, fails to reflect the modern expenditures of most contemporary households.
A graph of poverty rates in the US and Texas shows that every year since 1980 Texas has had a higher poverty rate than the US. One might well ask why this is the case, and we shall address this question and others as we go along.
What else is distinctive or notable about poverty in Texas? One way to answer this question is to ask how Texas ranks with the other fifty states on a variety of indicators. For example, in 2007 Texas ranked second among all the states in the percent of its populace that was poor (that is, only four states had higher rates). The poverty rate for Texas in that year was 16.5%. The only other state that had higher poverty rates was Mississippi (20.1%). It should be pointed out that the four other states in the top five all have much smaller populations than Texas, and all are predominantly rural, as this table illustrates. This fact alone makes Texas distinct; it clearly has the highest poverty rate of any large industrial state.
But Texas also has far greater numbers of poor people than these four other states. Its poor population in absolute numbers (3.934 million people) is larger by far than the combined poor populations of the other four states (3.9 million for Texas compared to 2.13 million for the other four together (US Census Bureau “Income, Earning, and Poverty Data from the 2007 American Community Survey”, p. 15). Indeed, California (total population 36.8 million) is the only state with a larger number of poor people (4.67 million) than Texas. The third and fourth largest poverty populations are in New York (2.8 million) and Florida (2.3 million), but all of these states have significantly lower poverty rates (California 12.7%, New York 14.3%, and Florida 12.5%) than Texas. Texas therefore has both a large number of poor people and a high percentage of its population living in poverty. In 2007, Texas ranked ninth in its poverty rate for the elderly; it ranked forty-ninth in the percentage of its adult population with a high school diploma; and it ranked first, at 24.4 %, in the percent of its populace with no health insurance.
However, some of Texas’ poverty characteristics are similar to the United States overall. For instance, poverty in Texas is not evenly distributed by race, nor is this the case in any state, as the figures in these charts and graphs illustrate. Texas is now close to being what is referred to as a majority-minority state, which means that the two largest racial minority groups in the state (African-Americans and Hispanics) (are these the proper labels?) will within the next few years together constitute a majority of the of the state’s population. According to 2007 US census data from the American Community Survey, 46.5% of Texas’ population is white/Anglo, 11% is African-American, and 35.2% is Hispanic. Yet the distribution of poverty by race is no way resembles this distribution. Of the Anglo population, 8.4% is poor, while 23.8% of the African-American and 24.8% of the Hispanic populations are poor. In other words, the rate of poverty among the two minority groups is three times greater than among the Anglo population .
But the distribution of poverty by race in Texas can be looked at in another way. If we take the entire poor population of Texas (some 3.9 million people), how are they divided up by race? 23.8% of all poor Texans are Anglo, and 15.8% are African-American, but well over half (53%) are Hispanic.
How else are poor Texans distributed within the state? As noted above, Texas is now an urban state; as of 2007, 86% of the population lives within a metropolitan statistical area (MSA). An MSA must have a at least one urbanized area of 50,000 or more inhabitants. Texas, in other words, has a higher rate of poverty for its population as a whole than has the US, which is a distinctive characteristic. It is also a large, urban, industrial state, but it has had poverty rates over the years similar to much smaller rural states, another unique characteristic. But that fact that poverty is unevenly distributed across its major racial groupings is not unusual.
There is another aspect of poverty in Texas that is distinctive, and that concerns the very poorest Texans. In 2005, of the thousands of counties in the entire United States, the two absolutely poorest (with populations in excess of 250,000) in terms of median household income (the median income is defined as the half-way point in a distribution – that is, half the households were higher and half were lower) and percentage of population counted as poor were both along the Texas-Mexico border – Cameron County and Hidalgo County. Cameron County, whose county seat is Brownsville, had in 2005 a median household income of $24,501; Cameron Country (county seat McAllen) was virtually the same ($24.684) .
In order to grasp how poorly off these counties are, the median household income in 2005 for Texas was $42,139 and for the United States overall $46,242. Or another comparison: Cameron and Hidalgo were the only two counties in the United States with median household incomes under $25,000; one other nationally (Bronx NY) was under $30,000 ($29, 228), meaning that these two poorest counties were indeed poor. Cameron and Hidalgo counties also had the highest poverty rates of any counties in the United States; each had a rate of about 41%. Again, for comparison’s sake, El Paso had a poverty rate of 29%. Finally, of the ten poorest counties in the United States, Texas had El Paso (sixth) and Lubbock (tenth) in addition to Cameron and Hidalgo. Texas was thus the only state to have more than one of the poorest ten counties nation-wide, and it had four. This table illustrates Texas’s predominance among the ten poorest counties in the United States.
It may also be of interest to know that by one widely-used standard Texas has the poorest place in the United States. Cameron Park (in Cameron County) is a colonia (see discussion below) that dates back to 1968. Naming the poorest place in the United States depends heavily on population; after all, there are some very small towns scattered across the country of a dozen or so inhabitants that are extremely poor. But if we take as a definition of a “place” any settlement that has at least a thousand households, then Cameron Park was in 2005 the poorest place in the United States. Its 5900 or so inhabitants had a median individual income of $4100; the median household income was $17,000. As noted earlier, Cameron County, the poorest county in the United States, had a median household income of $24,500, meaning that Cameron Park’s median income was only two thirds that of the county – and Cameron County is the poorest county in the country. In Texas in 2005, median household income was $42,000. 60% of Cameron Park lived below the poverty line; 20% of its adult population had a high school degree (compared to Texas average of 72%).
There are dozens of additional ways to think about poverty in Texas and to compare Texas with the United States as a whole – education, child care, health insurance, health care and health disparities, housing, access to state services, ad so forth and so on. Rather than examine each of these facets of poverty here, we shall wait until Section 5, which discusses poverty policies in Texas.
Texas Politics: 26 May 2012
© 2009, Liberal Arts Instructional Technology Services
University of Texas at Austin
2nd Edition – Revision 99
However, another study that adjusted for rential income had California at 20 percent poverty and Texas near 18 percent. However, Texas still even in this study did worst than Iowa which would be only 8 precent poverty rate if adjusted for rential income.
Long time reader of posts, first time commenting. After year of saving for a down payment for a house either in Santa Monica or the Palisades, I’ve finally got my 20 percent and now I find myself waiting at least until the elections this November. My worry is, as I’m one of the lucky ones who make $250,000 plus a year, I see the potential for my taxes to go up 6 percent next year if both Governor Brown’s tax increase goes thru and if the Bush tax tax credits expire. If both happen, then I (and most anyone else buying on the Westside) will be able to afford a lot less house which means if this happens, prices in these affluent areas has to go down. Anyone see a flaw in my logic.
My advice to anyone considering selling your house this year. Do so before everyone in CA realizes how bad their tax increases will be next year.
If you don’t own a house it is better to wait and buy later. Paper money will self destruct in the near future. If you buy today, the purchasing power of the dollars you put into the house will continue to decline because of hyper-inflation. The house investment may hold it own in price, but will continue to under perform in terms of purchasing power and you will likely end up a big looser or possibly even impoverished if the economy collapses. If you have enough determination to be able to sacrifice today for a more secure future, a more sensible plan it to rent and save as much money as possible to regularly invest in gold and silver, which are assets that will appreciate handsomely while the dollar declines. That way the money you saved will be enhanced year by year. Not so the house. After several years you may be very surprised to discover that you are in the cat birds seat as you will have a good chance of acquiring the wherewithal to pay, for instance, cash for a $400,000 house that cost you only $100,000 in earnings. But, no matter the scenario with the actual numbers, you will be better off economically.
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