The Housing Bubble

Anybody want to bet on whether that Santa Barbara plateau is permanently high or not?

Thanks to the reader who sent in this link.

“…have reached what looks like a permanently high plateau.”

Irving Fisher, Professor of Economics, Yale University, October 16, 1929.

Just wanted to add this note from my previous comment on those who keep preaching apocalypse over house prices. Also hope most of you read the NY Times this Sunday as a great bunch of articles on real estate market and trends as well as an article tracking prices in Amsterdam for 350 years to give perspective on the so called bubble. I hope that means people can start thinking critically and actually bring positive and constructive ideas to the table on price, value, trends, and where we are headed economically. None of us are prophets and none of us can time any market, stocks, real estate, gold, etc. We can only anticipate those trends.

Thanks Joe for your positive comment to the preceeding comment attacked by ANONYMOUS, a guy who always seems to take a hostile position to anything I say or accuse me of being a Realtor, a profession my values would never allow me to be, nothing against realtors, but I couldn’t take 3-6% of a persons value for listing their house. I think Anonymous is a bitter, cynical loser from all his comments on this site. I read this blog hoping to get the pulse in markets OTHER than Phoenix or Miami or SD! I have always bought a home with VALUE in mind and never for speculation or really for investment though if I make money GREAT. I buy for neighborhood, location, I hate to commute so won’t live out in never never land just to afforda a house. Oh, and that idea is an illusion. I’d rather pay $100,000 more and live near my job instead of commute two hours a day, pay for a new car every five years, gas etc., there is more to price than the minimum payment.

Historically house prices are flat adjusted for inflation with moments of price spikes based on supply and demand and SPECULATION. I try to always base my purchase on VALUE and inflation adjusted costs plus the value added for location. If those losers out there want to buy affordable houses there are many homes for them say in South Dakota, Detroit, inner city Philidelphia or Pittsburgh where they can buy a house for less than that house can be built today.

We all have choices. I left California to go to College in 1974 and never went back, too pricey for me then and even more so now. I’ve owned homes in Tampa and Phoenix and now Austin. I’ve never paid over $100 a sq foot for a fully decked out house with all the ammenities and I”ve paid as low as $6.16 per sq ft for a 3300 sq ft fixer in Tampa build in 1905. Also just because I personally feel that many homes are over valued and choose not to buy them doesn’t mean I believe in the impending doom and gloom many speak of here because I know that most homes were not purchased at the TOP of any bubble and believe only a small percentaage of home owners are at risk if prices decline as long as they have fixed mortgages, didn’t buy at the top of their market, have a payment that doesn’t exceed 30% of their income. Most the people I know fall into that category. Remember not all of us home owners are over extended Californians or low income workers.

I chose to sell my home last March in Phoenix because I belived a $100,000 increase in my home in two years was excessive (and it went up another $150,000 after I sold). I’ve always set a goal of owning for five years with a 5% appreciation (minimum for a great location) and then sell when my five year goal is met, even if that occurs in two. Then I look for another home in a growing market with good job growth and climate and buy a home that meets my value test for affordability and cost per sq ft. It took me six months to find a house in Austin that met those goals since even there a lot of the areas I would live have homes that cost more than $100 a sq ft as a fixer, which doesn’t fit my mind set no matter how much I love the area of the house.

I built a semi-custom on a 1/2 acre, 3300 sq ft, imported stone and brick on all four sides, 13ft ceilings, 11 ft windows, granite, cherry cupboards tile, and every upgrade you can put in building a quality home in a small neighorhood 9 miles from downtown Austin but in the hill country and all for $101 a sq ft.

Bottom line is you have to choose what you want, what you will pay and stick with it until you find it. If you have to move then you move if you won’t or can’t pay the price. Fourteen years in Phoenix were enough for me and the charm has gone with the populaton explosion and high cost to live here.

Do I think certain areas are prone to price declines? Yes. Will Phoenix be near the top of the list? I think so but I’m no prophet and prices may just stay flat (which is a price decline in disquise) like Austin did from 2000 to 2005. Are some markets over built? Yes, Miami for one and San Diego.

I think the biggest problem for America isn’t house prices but our trade deficeit and our national debt. But then look at Japan and their national debt and it hasn’t hurt their currency or GDP. If we experience a deflationary cycle then it won’t matter if you bought your house five years ago for 1/2 of todays prices it will cost more however if we go into an inflationary cycle like we had in the early 70s then that $300,000 mortgage fixed at 5 1/2 percent will look like an great investment.

I hope that most the people reading this site will not sit back passively and gleefully wishing for a melt down since that isn’t in anyones best interests. What I would like is honest questions to value and home price trends and quality of life issues related to home owning instead of just attacking the market or other bloggers who want a rational discussion.

Tell me you situation. Do you own? Did you buy in the past two or three years? Can you weather the prices come back to a normal, inflation adjusted cost for you location? Do you know good places to live and have a good job and where homes are in line with the local economy?

Too many bloggers have no clue on what it is like to live in other countries or how their house markets work or the cost to live in other countries and so not only do they not compare apples with apples here they try to compare the US with other countries as well. I’m sorry but an $80,000 house in Ecuador isn’t a bargain up against a $300,000 house in the USA. Again, local incomes, jobs, currency stability, the ability to even get a mortgage are just some of the issues.

Yes prices go up and prices go down. Losers and winners. I’d hope this site would help people understand how to balance their investment in a home and not to be scarred into apocalyptic thinking. The Dot com melt down was’t the end of the world and neither will price moderation or decline in home costs end the world. Look at Iraq for one and people continue to exist, live, eat, die. and homes in Bagdad are expensive!

I lived in Santa Barbara for 15 yrs and i beleive that the real estate will not go up like it has in the past 5 yrs but i do think it will stay very high and be one of the few places that do not crash.I myself do not like the Santa Barbara weather during the summer its cold at night and in the 60s in the day the winters were perfect to me though.But one of the prettiest places in the USA.

Once the middle class moves out of California, expect to see some modifications to the tax code. For example, raising the already high marginal tax rate on high incomes, or eliminating Prop 13 for non-residents. Thus the wealthy will have a choice. Either declare California residency, and get hit by the income tax, or declare residency in some other state, and get hit by property taxes.

Think I’m gonna have to marry that Maria Vate.

Oh wait…I already have a wife.

Utah?

Shucks.

I bet she’s cute, too.

ZATE!

Ic ant eveen speel.

I’ve lived here since the early 90s, but the thing that I don’t understand about Santa Barbara is that, outside ofthe fancy areas like Montecito, it’s really nothing special as California goes. The pluses are the pleasant weather, and mostly scenic mountains (scrub covered, and not high enough for skiiing) and beach (water’s too cold). Minuses are the tons of homeless, and crappy housing stock (for purchase and rental).

My rental home is okay, but I can’t imagine who would possibly buy this place for $1M… it’s just a frumpy, turquoise 60s track home for goodness sakes. There’s barely enough industry for me to even rent this place for a 1/3 the cost of buying it…

“‘Ironically, more of the higher-priced homes are selling because that’s what people can afford. The affluent buyers have been buying more homes in the area in the last two years,’ said Mark Schniepp. Excluding Hope Ranch and Montecito homes, sales and prices didn’t budge much for the rest of the South Coast. Without these neighborhoods, the median would hover in the $1 million to $1.1 million range, Mr. Schniepp said.”

I THINK:

Maria Zate (newspaper writer) continues to go head to head with the SB Realtor Association by insinuating that they are cooking the median price figures.

I believe that this article rats out a peculiar practice of the realtor association including highend estate homes with the “median” of the standard housing stock. By doing so… Maria points out that median price for south coast would be ¼ million LESS $$ (if they didn’t lump sum all the mansions… )

By doing this- they the association also touts 24% gains over the previous year, but as the newspaper points out- most of the standard housing neighborhoods saw VERY LITTLE increases in median price from the following year.

MY POINT IS: I believe that the realtor association is basically playing by rules they choose for themselves (i.e. “Hey!, if we lump these $25mil, $30mil, $8mil, $12mil estate home sales with the local, basic housing stock sales… we can show that the region established 24% increases in the median home price!”) and MARIA ZATE IS CALLING THEM OUT ON IT!!!!

In reality, if you lump the dozens of homes that sold in the $800k - $1.5mil range… you come up with a median home price of about $1mil. which the newspaper pointed out last article that median price for January ‘06 is only 2% higher than Jan. ‘05.

MY LAST POINT in this post uses this quote in the article:

“Despite all the talk of a housing shortage on the South Coast and in California, there’s no lack of homes for sale priced more than $1 million. A recent search on Realtor.com yielded about 500 properties on the South Coast alone.”

IF you read the article closely, it talks about the fact that the average person making the MEDIAN INCOME for the region CANNOT afford the Median Home price of a Million dollars….

At the same time- the “AFFLUENT” that are still snapping up the highend multi-million $$ estate properties would never want or have anything to do with these standard homes.

In other words, the RICH don’t want to buy the $million dollar homes, AND the local professionals can’t afford to buy the $million dollar homes. Hmmmm looks like a conundrum to me!

Shanghai’s housing bubble bursts, causing some panic

Bust follows a doubling of prices in past three years; recent buyers sue to get money back

By DON LEE
Los Angeles Times

RESOURCES
BOOM AND BUST
Shanghai’s red-hot housing boom has hit the skids, as an oversupply of homes fueled by speculators has chilled the market.
SHANGHAI, CHINA - American homeowners wondering what follows a housing bubble can look to China’s largest city.

Once one of the hottest markets in the world, sales of homes have virtually halted in some areas of Shanghai, prompting developers to slash prices and real estate brokerages to shutter thousands of offices.

For the first time, homeowners here are learning what it means to have an upside-down mortgage — when the value of a home falls below the amount of debt on the property. Recent home buyers are suing to get their money back. Banks are fretting about a wave of defaults on loans.

“The entire industry is scaling back,” said Mu Wijie, a regional manager at Century 21 China, who estimated that 3,000 brokerage offices had closed since spring. Real estate agents, whose phones wouldn’t stop ringing a year ago, say their incomes have plunged by two-thirds.

Shanghai’s housing slump is only going to worsen and imperil a significant part of the Chinese economy, says Andy Xie, Morgan Stanley’s chief Asia economist in Hong Kong.

Although the city’s 20 million residents represent less than 2 percent of China’s population of 1.3 billion, Xie says, Shanghai accounts for an astounding 20 percent of the country’s property value. About 1 million homes in Shanghai alone — about half the number of housing starts for the entire United States in 2004 — are under construction.

“They’ll remain empty for years,” Xie said, adding that a jolting comedown also was in store for other Chinese cities with building booms — including Beijing, Chongqing and Chengdu — though other analysts say the problem is largely confined to Shanghai.

Shanghai’s housing bust comes after a doubling of prices in the previous three years, a run-up fueled by massive speculation.

With China’s economy booming and Shanghai at the center of worldwide attention, investors from Hong Kong, Taiwan and elsewhere were buying as fast as buildings were going up. At least 30 percent to 40 percent of homes sold were bought by speculators, says Zhang Zhijie, a real estate analyst at Soufun.com Academy, a research group in Shanghai.

“Ordinary people had no option but to follow the trend,” Zhang said. “Worrying that prices would be even more unaffordable tomorrow, many of them borrowed from relatives and banks to buy as soon as possible.”

The Shanghai government only pushed the market higher, he added. “Many of the officials said Shanghai’s property market was healthy and wouldn’t drop before the World Expo” in 2010.

For Wang Suxian, 35, the tale of two lines illustrates how the bubble has burst.

When home prices were at the tail end of the boom in March 2005, Wang hired two migrant workers to stand in line for a chance to buy units in what the developer said was modeled after an apartment community on New York’s Park Avenue.

The workers waited 72 hours but Wang was thrilled to come away with two apartments, one for $110,000, about the average price for a new home in Shanghai, and another for $170,000. They were among Wang’s four investment properties.

And for a short period, Wang believed she was raking in hundreds of dollars a day for doing nothing, as property prices in the city kept soaring.

But today, prices at the apartment complex have fallen by one-third, and the lines of frenzied buyers are gone. Wang is among dozens who are fighting the developer to take the apartments back.

On a recent morning, she stood in a line herself with about 40 other buyers outside the builder’s headquarters, demanding that it negotiate a deal to return their money. The company, Da Hua Group, invited Wang and other homeowners inside, served them hot tea, then told them to forget it.

“I think it’ll take at least three years before the property market becomes healthy again,” Zhu Delin, a professor of finance at Shanghai University and former head of the Shanghai Banking Association, predicted.

The typical home being built is in a high-rise complex, with two bedrooms and about 850 square feet of living space.

Santa Barbara’s bubble probably popped when Meredith Brace threw in the bandana.

Don writes:
“Just wanted to add this note from my previous comment on those who keep preaching apocalypse over house prices.”

Were prices way out of whack in 2001? If not, why would house prices not be just as likely to return to 2001 levels as stay flat?

A reduction in ZIP 22151- only 2 lights from the pentagon -the only people hiring anyomore- unemployment 2%

This is OT.

A friend of mine is moving to Phoenix, AZ and wants to know if this area in Mesa is ok?

S. Country Club Drive

Thanks!

Where is everyone tonight, WATCHING the OSCAR’S? Taking a break from watching the BUBBLE BURST??

The long curve downward is just starting. Many people still believe real estate won’t go down. I’m waiting for the shift in emotion from panic buying to panic selling.

We’re in the cold stage in between.

I prices fall down 50%+ there will definitely be winners and losers.

Winners will be service providers like nurses that will still be paid and be able to afford quality houses. The winners will also be innovators such as engineers that create technologies that make our lives easier. The losers on the other hand will be realtors, appraisers, mortgage holders that made housing/living incredibly unaffordable.

I hope the republicans in congress stand to the one principle most Americans admire. The principle that people need to take responsibility for their decisions.

I’m reading one of the old shiller articles, robert toll is such a dolt.

“Shiller is predicting the mountain goes into the sea,” Robert I. Toll, the chief executive of Toll Brothers, a home builder, said in a recent interview, without having been asked about the economist. “He’s selling himself.”

The affluent buyers have been buying more homes in the area in the last two years

interesting quote because I see similar activity in many other markets. You get the impression that expensive homes are being passed around between wealthy citizens (or people who think they are wealthy because of their equity from other properties, or maybe straw men working for RE companies). This drives up prices for expensive homes and of course it drives up the averages especially if these high-end properties are flipped often enough.

I remember reading a fascinating article last year about the speculative RE market in Auckland, New Zealand. One of the brokers working in the high end (over +/- 500.000 US$) reported that something like 85% of the customers who purchased a home through their agency in the last year already had one or more homes, and something like 25% already had more than five homes (and most of them were planning to buy more next year). Just look at the ads on the brokers sites, a large % of the high end properties for sales are brand new or just 1-2 years old.

Are these all very wealthy citizens (there can’t be that many of them around?) that are snapping up all the expensive homes, or are these just median citizens that are using bubble leverage to the max?

Properties in the Goleta area, where most of the homes for sale hover around $850,000 to $1 million, had the lowest appreciation last year. The median rose only about 10 percent compared with 2005.

This is from the original article in the SB News Press. Notice that properties in Goleta went up “only 10%”. This is subtle evidence that folks expectations are completely out of line with historical data. From 1970-1995 Montecito properties rose at an annual rate of 7.5%. About as good as it gets anywhere. This includes two 30% drops. Montecito is solid gold real estate. But it, too, will likely drop 30% soon and return to its gold-standard 7.5% appreciation. So when folks in Goleta think that 10% per annum is paltry, we’re seeing more evidence of how irrational people are these days with real estate.