Home Price Corrections: Is Worse Yet To Come?
- Thread starter crgarcia
- Start date
I think your expectations are probably on cue.
It's hard to say what's a "bubble" and what isn't. IMO SoCal has a bid of roughly one billion people underneath the market whereas Buffalo is a net loser in population. (ironically the Bill's could be in L.A. a year or two down the line)
Same thing with SoFla. I live there and Chicago. Believe it or not Chicago is still pricier. By far. Miami seems pumped because it was dirt cheap. Trends change though and I think it's sure money that someday Miami will be 2x Chicago. Much the same way that 80 years ago a flat in what's now an eastern urban ghetto would have cost more than a homesite back then in Beverly Hills......
It's hard to say what's a "bubble" and what isn't. IMO SoCal has a bid of roughly one billion people underneath the market whereas Buffalo is a net loser in population. (ironically the Bill's could be in L.A. a year or two down the line)
Same thing with SoFla. I live there and Chicago. Believe it or not Chicago is still pricier. By far. Miami seems pumped because it was dirt cheap. Trends change though and I think it's sure money that someday Miami will be 2x Chicago. Much the same way that 80 years ago a flat in what's now an eastern urban ghetto would have cost more than a homesite back then in Beverly Hills......
Quote from crgarcia:
Home Price Corrections: Is Worse Yet To Come?
Posted Byiana Olick
Topics:Real Estate | Housing
Sectors:Construction and Materials
Ok, so we all know that home prices are in the midst of a correction. After a 49% increase in the median price of a home from 2000 to 2005, well, something had to happen, right? But that doesnât tell the whole story, because, yet again, thatâs one of those big national numbers that really doesnât mean anything to you and me and the price of our homes.
This is why Iâm loving John Burns Real Estate Consulting, which took the numbers local and found just how much prices would have to fall for housing costs (this is including mortgage payments, property taxes and down payments) to return to each marketâs typical ratio of housing costs/income, i.e. how far to make homes affordable. Check out their findings:
Necessary Price Drops to Reach Historic Affordability:
Miami, FL: -41.4%
Riverside, CA: -41%
Los Angeles, CA: -39.5%
Baltimore, MD: -37.2%
Washington, DC: -33.3%
Las Vegas, NV: -33%
Seattle, WA: -31.9%
San Diego, CA: -29.2%
Orlando, FL: -28.6%
Phoenix, AZ: -24%
Myrtle Beach, SC: -20.6%
Source: John Burns Real Estate Consulting
Now none of these markets is going to correct that much, says John Burns himself, they simply canât. Homeowners arenât desperate enough, and the economy isnât bad. If sellers canât get the price they want, theyâll just wait until things settle down a bit.
Okay, but this still presents a conundrum. We all know why the prices went up so much: free money. Adjustable rate mortgages fell from 7% to 3.5% during the boom, so buyers had no trouble at all taking on homes they truly couldnât afford. Now that mortgage brokers/bankers have returned from la la land, I wonder how prices canât go down this much. I mean, if you donât have to sell your house, then fine, you donât. But there are plenty of people out there who do have to sell, especially those whose mortgages will reset.
Foreclosures are on the rise, but most people donât go into foreclosure, they simply sell, and take the loss. Unless Iâm missing some major national salary boost that everyone but me got, then I think home price corrections--and Iâm talking in the boom markets only--are going to be a lot more painful than anyone expects
http://www.cnbc.com/id/19678159/site/14081545
Thats a simplistic way to look at it. You shouldn't compare housing cost to income if you are looking at the purchase price. Instead, you should look at housing payments (not price), vs. income.
The average consumer saw the dip in the interest rates and refinanced. Unless they did a "ridiculous" cash-out and just blew the money or ignored the fact that we were at historically low rates and got an ARM, their payment actually went down and likely stayed down while their paychecks rose with inflation.
Even if they didn't do that, or they are relocating or new entrants to the housing market, you can still borrow $100,000 much cheaper today, payment-wise, than you could 5 years ago. The cheaper borrowing costs significantly nullifies the higher housing prices and has to be factored in.
And lastly, who says that housing has to fall to get to the historical norm? Our dollars are worth less, and housing prices are a reflection of build costs in todays dollars. It would be unusual for houses to sell for much below build costs, but it would not be unusual for wages to rise significantly in the face of an eroded dollar. I don't follow wages that closely, but I believe they've been relatively stagnant compaed to their decreased purchasing power.
***Oh, and for those of you slamming the real estate bulls, I own multiple houses that are *STILL* worth at least 50% more than I purchased them for 2 to 5 years ago, and our housing market is getting tighter. If you had listened to those bulls when they were outlining the benefits of purchasing investment property and actually went out and purchased some, your net worth would be higher now. A small backslide after a huge run up on a leveraged investment is a great, great, thing.
SM
http://investmenttools.com/median_and_average_sales_prices_of_houses_sold_in_the_us.htm
Hope this link isn't too long, but its so cool. Among other things, it compares the median price of homes to the number of ounces of gold, or amount of stock you'd have to sell to buy it over time. We're at a real low point. Factor in the lower interest rates, and payments are even below that. Indicates that folks are working less hard to make their house payments.
I'm still trying to figure out how big the median house is, so I can figure out cost per square foot based on a $308,000 purchase price.
SM
Hope this link isn't too long, but its so cool. Among other things, it compares the median price of homes to the number of ounces of gold, or amount of stock you'd have to sell to buy it over time. We're at a real low point. Factor in the lower interest rates, and payments are even below that. Indicates that folks are working less hard to make their house payments.
I'm still trying to figure out how big the median house is, so I can figure out cost per square foot based on a $308,000 purchase price.
SM
"whereas Buffalo is a net loser in population"
San Diego has lost population for several years in a row now. People keep moving away from the high cost of living.
As population decreased every year, prices sky rocketed. All the effect of the low interest rates + free money. But what can sustain it?
A slow multi-year grind lower seems probable. Only the richest 5% could afford the median home 2 years ago, that number must be even worse now. Who's left to prop these prices up without crazy loans?
San Diego has lost population for several years in a row now. People keep moving away from the high cost of living.
As population decreased every year, prices sky rocketed. All the effect of the low interest rates + free money. But what can sustain it?
A slow multi-year grind lower seems probable. Only the richest 5% could afford the median home 2 years ago, that number must be even worse now. Who's left to prop these prices up without crazy loans?
I think SM has it right. I've been appraising RE for over 17 years and there is a definite disconnect with todays buyers when it comes to "price". It's all about terms....how much down and how much a month. Is that house down the street really worth $xxx,xxx? Or is it just that dollar demoninated assets reflect the declining value of the dollar? I think prices will react more to interest rates than any supply/demand scenario due to the leverage.
I agree, its about monthly payment.
Now please explain to me how joe average in san diego can afford a detached 800K home when his monthly payment, including taxes is going to be $5400/month and his combined salary with his wife is 100-120K. There is a reason people are moving away. Affordability is gone.
With 3.5% interest only ARM, yeah, they could do it, but now? No way.
Now please explain to me how joe average in san diego can afford a detached 800K home when his monthly payment, including taxes is going to be $5400/month and his combined salary with his wife is 100-120K. There is a reason people are moving away. Affordability is gone.
With 3.5% interest only ARM, yeah, they could do it, but now? No way.
Yes agreed, it's happening on my street right now. I live in upper middle class part of Denver Metro, but we have 3.5% vacancy right now. Overall, the housing market has been bad here since the dot com burst. I bought at a discount, I was thinking of selling for fmv, really, about 350k for 2600sft, but the guy up the street with the same model is deseperate and is selling for 340k. The house up the street from his, almost identical model is selling for 335, so I don't think I will get my 350k. I am pondering do I stay, because I got a great rate 4.5% on a conventional loan A credit, 3 years ago, or just take a small hit and bail before the ARM's reset later this year gamble. I fell like I am trading the housing market sometimes.
There's always someone asking the same question you asked of expensive real estate markets.
Ultimately the free market decides affordability, and by that measure, homes are always "affordable", even if you don't understand how someone can afford it.