Median Incomes vs. Price of Housing

[Pabst]

Quote from riskarb:

Rents to value and rents to carry. Never seen such a disparity. A $600,000 home in Reno rents for $1,800. Never had so many spec buyers been this far underwater.

At least you didn't remind me that New Trier wasn't good enough for you!

Your mention of the tremendous P/E's in a place like Reno is why I see Nevada/Arizona as the most vulnerable regions. In Florida P/E's are stretched but not as dramatically. A decent pool home in a good neighborhood (SoFla is FILLED with scary/shitty areas) is at least 3k. That would be a 700-800k home. Plus property taxes can be 8-10k. (one loses their homestead exemption in FL on rentals). But in reality Beck, if a guy can borrow in the low 6's and can take full advantage of the mortgage interest deduction, in the scenario I mentioned he's not under a hell of a lot of a water. And of course MOST of these homes weren't purchased last year on the highs. So the guys who got long in the sweet spot of 1996-2001 have seen a. rents rise b. rates move lower c. 100-200% appreciation on their properties.

Just because the equation looks less advantageous at these levels doesn't mean landlords in mass will be sellers. Certainly however the "flipper" type who's stuck long will succumb to a year or two of negative carry. I guess it's sort of like being stuck long on a futures trade that started as a scalp and then trying to sell calls against it. No matter how ya slice it you're still long delta's in a breaking market........

 

[jficquette]

Quote from Pabst:

I believe RE is over valued and that prices will contract. Perhaps even 30-40% in the deserts of the SW and 25% in Florida. Bubble? As in JNPR March of 2000? Nah. Where? I was looking at San Diego listings the other day. Expensive. No doubt. However given that it's a scenic jewel with the best climate in the wealthiest nation on earth, I don't find the prices stratospheric. In fact compared to L.A. it's actually reasonable. Am I surprised that several thousand people in the free world can afford homes 2mil and up from LaJolla on north? Hardly.

Two anecdotes. I lost quite a bit of money in 1993 shorting S&P's in the 400's. All time high prices. To this day we've never seen those levels again. So while homes may fill in the "bubble" part of this run-up, i.e. 2003 on, I doubt we'll EVER see 1996 prices again. Secondly being that I've always been in the trading business I've never known what "professionals" in my age bracket make. I got my first inkling about ten years ago when I was dating a 30yo woman who had a job at an ad agency. Her salary? A buck and a half per year. Her savings? 300k. In 1996 dollars to boot. So am I surprised that her and her equally well paid husband are now living in a million dollar home? Shit they're not breaking a sweat in paying it off. For all I know she's got a million salted away by now. There's more folks out there in those situations that we'd like to admit.

One last thing. In the City of Chicago the public schools suck. Much the same in most big cities. In the suburbs certain school districts are prime. So if it costs 15k a year in tuition for city dwellers then suburbanites get off the hook for just property taxes. 3 kids at New Trier. $45,000 worth of free education in exchange for 10k or so in property tax. A good deal. A GREAT deal. So if I throw that caveat in then the 800k for an old farm house in East Wilmette looks pretty cheap.

San Diego's climate was just as good 5 years ago as it is now. 5 years ago houses cost half as much.

International money bought land more then houses. The lot cost on the house I bought in Olivahain was $330k. This was in 1998. In 2004 a similar lot sold for $1.1 million in the same subdivision.

I don't know what's going to happen but when only 10% can afford the median priced house in San Diego then something has to give.

If houses ever get back to what they were in 1998 then I am buying one.

John

 

[ElCubano]

Quote from Pabst:

So the guys who got long in the sweet spot of 1996-2001 have seen a. rents rise b. rates move lower c. 100-200% appreciation on their properties.

OCT 2000 right before the breakout...

 

[Pabst]

Oh, who'd pay up to live in chi-chi Coconut Grove.

That half a rock profit's burning a hole in your pocket.....

BTW: Did you ever sell your investment property up near Ocala?

Viva Sanchez!!

And GO DOLPHINS!!!!

 

[riskarb]

Quote from Pabst:

At least you didn't remind me that New Trier wasn't good enough for you!

Your mention of the tremendous P/E's in a place like Reno is why I see Nevada/Arizona as the most vulnerable regions. In Florida P/E's are stretched but not as dramatically. A decent pool home in a good neighborhood (SoFla is FILLED with scary/shitty areas) is at least 3k. That would be a 700-800k home. Plus property taxes can be 8-10k. (one loses their homestead exemption in FL on rentals). But in reality Beck, if a guy can borrow in the low 6's and can take full advantage of the mortgage interest deduction, in the scenario I mentioned he's not under a hell of a lot of a water. And of course MOST of these homes weren't purchased last year on the highs. So the guys who got long in the sweet spot of 1996-2001 have seen a. rents rise b. rates move lower c. 100-200% appreciation on their properties.

Just because the equation looks less advantageous at these levels doesn't mean landlords in mass will be sellers. Certainly however the "flipper" type who's stuck long will succumb to a year or two of negative carry. I guess it's sort of like being stuck long on a futures trade that started as a scalp and then trying to sell calls against it. No matter how ya slice it you're still long delta's in a breaking market........

The supply of new homes is increasing, look at the permits. IOs are as common as a Paris Hilton STD. Rates are pushing on a string. One good labor puke and there go the foreclosures.

ALL homestead buyers ARE spec buyers in this market. They buy a $1mm home on an IO when they couldn't qualify for $500k on a conventional note. Why? Appreesh! They assume they will bank $300k before the loan needs to be rolled in 5 years. The entire Country has been trading up. IOs are not a recent invention -- do some research and you'll find out how the last IO boom ended. [spoiler: it wasn't good]

Those that bought in 1996-2001 haven't stopped buying. There is a townhouse development at route 395 and 431 in Reno... my RE agent told me that 65% of the purchasers were spec buyers. The dev is only 40% occupied. They're offering $15,000 coupons on a $300k unit. The recorded closing prices are bullsh*t as people are throwing Hummers and BMWs into the deals to inflate closings.

Wages didn't suddenly double in the past 5 years. Yes, it can continue as long as MBS buyers are willing. Watch the mortgages. We will see record foreclosures if we drop into recession.

 

[ElCubano]

Quote from Pabst:

Oh, who'd pay up to live in chi-chi Coconut Grove.

That half a rock profit's burning a hole in your pocket.....

BTW: Did you ever sell your investment property up near Ocala?

Viva Sanchez!!

And GO DOLPHINS!!!!

im in the roads.....near the brickell area...but im a grove hood rat from the days of virick gym, lived there many years and also in the gables near miracle mile

not yet still own land not an actual house....

And me dolphins are looking good.... Mike and mike in the morning have them at 9/7 but most have them at 10/6..coach Saban is doing a very good job as per cote and le batard..we shall soon see....

and any mo-fuck that starves himself for his peeps and isnt just another let me screw them good jesse jackson wanna be...is good by me...Viva Sanchez...

 

[pepper_john]

Quote from jsv416:

I have lived in Western Montana all of my life and I can not believe the current economic situation and am wondering what is happening in other parts of the country. Housing prices have gone through the roof in the last 5 years not unlike many other parts of the country. The average price of a home in Missoula MT is 220k while in Bozeman it is 280k which to some of you may seem paltry, but these are amazing prices being driven by out of state investment and retirement. The crazy thing is that median income in both of these Western Montana towns in less than 30k/yr. To me this is completely out of whack. Isnt a huge correction in the western Montana housing market coming? If the out of state money stops coming because of faultering real estate markets in other parts of the country who will be left to buy up our overpriced crap? Certainly not any working stiff making less than 30k a year. There are no decent paying jobs to speak of unless you are a real estate agent or in construction. I have talked to many real estate brokers and developers who say that Western Montana is insulated from National Trends and that the housing market will hold steady. I say bullshit and it pulls back hard. Anybody care to shed some light? Thanks....

Housing has been part of the income (think of a ATM machine) until recently, so the out of balance is not too strange.

 

[Cutten]

Quote from seneca_roman:

With so much talk about the housing bubble and so many shorts on the housing stocks; maybe it is time to start looking to go long the builders as many of them are down 40-50% or more from their highs.


Seneca

For a trade maybe. Just remember that people said the same after the nasdaq had dropped 50% from the highs in the tech bubble. There were one or two pretty sweet rallies, but ultimately the market collapsed to multi-year lows. Homebuilders have just given back the advances over the last year or two, so I'd expect there is further downside in the long-term.

 

[Cutten]

Quote from Pabst:

If I could live in a bullion cube I'd make that swap.

I agree, somewhat. I'm certainly more bullish on gold than RE but at the end of the day they should move together. That's not to say one can't clearly out perform the other.

There's no correlation if you look at prices over the last 50 years or so, nor should there be, as supply/demand factors for both are based on quite different things.

 

[Zhang Fei]

Quote from seneca_roman:

This thread reminds me of the purchase of my second house in New Jersey. My Dad warned me I was overpaying and that basically the sky was going to fall due to the crises of that time
(Early 70s) being runaway inflation and the recent resignation of Nixon and oil prices rising out of control, etc, etc, etc.

I paid about 50K for it, sold it a two years later for 85+, and it currently sold for over 400K.

So, maybe it will be different this time, but history taught me that what appears overpriced may not be to others and as long as someone steps up to the plate and pays a higher price, the fear of bubbles bursting remain just that - fear.

Sure, they'll be local markets, like S. Florida, that are slumping. I own a condo there, and its market price fell a shocking 10% from the highest price ever paid for a unit in the complex. But even that horrific fall in price leaves me with more than a double in just over 4 years of owning it.

Seneca

Median Household income in 1975 was $11,787. The $50,000 price you quoted was just over 4x median household income in 1975. The price it sold for, $400,000, is over 9x the current $43,000 median household income. And this is for a used home (saying "existing" home is like saying "pre-owned" car - it's just awkward). My feeling is that property prices could collapse by 50% and still not hit bottom.

Japan's property market went down every year for 14 years. I remember reading last year about how Japan's property market had registered its smallest drop in 14 years - a mere 5% decline. I don't know how severe the stateside decline will be, but I expect a lot of buyers in the 2002-2005 time frame to be upside down to the tune of hundreds of thousands of dollars each by the time this is over.