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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
About Me
Name:Ben Jones
Location:Northern Arizona, United States
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Is the current housing market another bubble or a long term trend? See the posts below from Wednesday……..
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Comment by Ben Jones
2014-04-30 06:58:17
How long has this bubble been building?
‘One man told Mr. Livingston he left Kentfield in 1946 because it was changing too much. Although for many years a mix of working-class residents and well-to-do professionals lived there, starting in the 1960s, a number of families moved to Novato and Petaluma because of rising property values.’
Comment by Rental Watch
2014-04-30 10:08:36
My grandparents grew up in SF in the early 1900’s (my grandmother used to tell stories of riding in vehicle that would deliver beer–my family apparently was involved in some bar ownership). They later moved to the Peninsula. After raising their kids on the Peninsula, ultimately, they moved to Sonoma County (north of SF).
My parents left the SF peninsula in the late 60’s because it was getting too crowded…they moved to Petaluma.
My great aunt moved to Palo Alto from SF in 1946, at which time the cost of the home she bought was considered pretty high (something like $26k).
So yes, if you define the “bubble” as high cost of housing in the Bay Area, it’s been building since at least the late 40’s.
Comment by Bluto
2014-04-30 12:25:37
Not quite that long (1946), I’m a native San Franciscan and even S.F. was affordable for many until the mid ’70s, large areas of the city were blue collar when I was growing up and many people in them owned their homes…a good steady middle class job was enough. That said by the time I was an adult and returned home from the military in 1978 buying in S.F. was out of the question for me…19 years later I moved 100 miles north to Mendocino Co. and it was no problem.
Comment by Jingle Male
2014-05-01 02:08:00
Is it a “bubble” if the market trend is ongoing for almost 70 years?
My Uncle was an engineer in “Silicon Valley” before there was any silicon in the valley (Varion, Lenkart, Sylvania, etc). When he died in 1986, his house sold in 1 week for $375,000. I remember everyone in my family saying the price was insanity. 1,780 SF. $210/SF.
Here is the house today:
http://www.zillow.com/homedetails/120-Gabarda-Way-Menlo-Park-CA-94028/15601528_zpid/
Everyone is still saying the same thing today: Insanity at $2,000,000. $1,123/SF.
Here is reality: The rate of appreciation over the last 30 years has been about 6%. This SF peninsula market may be in a bubble today, but it is more likely just a long term trend. Wages in Silicon Valley for engineers of his caliber have easily grown faster than 6%/year.
Clearly it’s another temporary support of a moribund market sector. Keep in mind housing demand has fallen to 19 year lows and current asking prices of resale housing are 300% higher than long term trend.
I generally agree…that the Bay Area is a pretty desirable place to live, and there is a relatively unique confluence of $, educated population and willingness to take risk, etc. that will likely keep it as a place new ideas are tried, sometimes with the success that creates new businesses and wealth.
HOWEVER,
The Bay Area is not immune to cycles.
One commercial trend that is causing problems right now is lease renewals. Any commercial lease that was signed 5 years ago (in 2009) is now up for renewal…and lease rates have about doubled (if not more).
Will people move their businesses? Perhaps some.
Will people bite the bullet and stay? Perhaps quite a few, however will they expand in the Bay Area? Or go elsewhere? I’m willing to bet that significant expansion plans will be elsewhere.
During the 2005-2007 bubble, the math looked similar (long-term appreciation rates of 5%+). That was a measure near the peak. Should appreciation like that be expected over the next 20 years?
IMHO, no.
I would be surprised if over the next 10 years, the Bay Area home prices keep up with inflation (ie. prices fall in real terms over the next 10 years). As good a climate/place to live as it is here (complete with jobs, etc.), it feels out of hand to me right now in the Bay Area.
If we are not at a cyclical peak, we are definitely above the trendline currently.
RW, interesting observations. In 2000, I worked in San Francisco and had an office at One Market on the 24th floor. Our lease rate for the whole floor plate was $24/SF, signed in 1994.
We only used about 1/2 the floor and as office space rental rates rose over the next few years we considered subleasing half the floor for $38/SF. This would cut our effective lease rate to $10/SF. (It turns our lease called for the landlord to receive 90% of any sublease spread above our rate, so we never did it).
In 2000, Shorenstein signed a lease deal at $100/SF. It was astounding. Of course the dot com bubble burst within the year and lease rates dropped and vacancies started to climb.
I am unfamiliar with lease metrics today. What are the current metrics?
BTW, your situation is exactly why we don’t push for a high percentage of rent profits in leases…it’s a disincentive for tenants to sublease at higher rents. Of course, if the landlord’s objective is to require the potentially subleasing tenants to take other space in the building, that might be a reason to push for 90% profit rents (as that disincentive)…we commonly agree to 50%…give the tenant a reason to go through the hassle.
I recently heard of an R&D building in the mid-peninsula (essentially office near Mountain View) sign for $6NNN per month (probably $85 +/- annual gross equivalent). I don’t know about SF, but I’m guessing the rents there are $70+ minimum.
In speaking with a commercial broker I know, many of the renewals are double the prior rent, if not more.
On the other hand, apparently Google continues to be a monster, buying any building they can.
One thing to note though (which might the counter-argument to my concern) is that the differential between rents in Sunnyvale as compared to Mountain View is about as high as I’ve ever seen…what might be $6 in PA/MV, might only be $2-$3 in Sunnyvale. Many of those whose rents are getting jacked up might just move a bit south and stay in the area.
PARABOLIC is the only thing you need to know.
Ignore San Francisco area unless you live there because I think it really is different to some extent as Silicon Valley is the heart of a whole new real economic sector (that itself is in a bubble).
San Diego used to be affordable. Look back 10-12 years at the price of houses then v. Now. That’s much more representative.
“San Diego used to be affordable.”
Exactly. Although not for well over a decade at this point.
I do know a gentleman about my dad’s age (mid-80s) who told me the late 1950s were a good time to buy. That’s when he and his wife bought their first house here.
P.S. The SD bubble started well over 12 years ago. A colleague at work showed up in town around the year 2000; his dad, a Realtor® in another state, advised him not to buy, as prices were overvalued and bound to drop soon.
In another six years, price had doubled from their supposedly-high Y2K levels.
Corollary: When this ultimately reverses, the ensuing bust will also last for well over a decade.
So Whac, you and I like to run numbers. Let’s say the son ignored dad and bought a $400,000 house in the year 2000. What would the value of that house be today?
Assume he put 20% down ($80,000) and had a fixed rate 30-year loan ($320,000) at 6.0% interest, so his P&I is $1,919/mon. Taxes & Ins = $400/mon, so PITI = $2319/mon. Ignore the ability to refinance at a lower interest rate later. His loan balance today would be $240,000.
What is an equivalent rent over the 14 years for a similar house?
What could he have earned in the stock market on $80,000, plus the rent differential (if any), over the ensuing 14 years.
Give me some metrics, let’s work this through.
“Let’s say the son ignored dad and bought a $400,000 house in the year 2000. What would the value of that house be today?”
Nobody could have seen the historically unprecedented mania coming.
So I am missing the point of your line of inquiry.
“Historically unprecedented mania”
That is what many said about the 1990 bubble. Then it happened in 2005. Many think it is happening again in 2014. There was nothing “unprecedented” about it.
“So I am missing the point of your line of inquiry”
Hindsight is always 20-20. I am just curious about what would have happened had he purchased a home in 2000 and still owned it today. Then compare that economic event of purchasing to the scenario of renting, while investing the down payment and adding in the rent differential (if any).
Simple opportunity to run the numbers and see how it plays.
And the 1990 peak price collapsed entirely and a bottom was formed by 1996.
2005 prices were never allowed to bottom. Here we are 9 year later and sales collapsed with nothing but your hot air and bs under then.
You catching on yet J._Fraud?
“Is the current housing market another bubble or a long term trend?”
Same bubble, wrong question.
JingleMale: Is the current housing market another bubble or a long term trend? See the posts below from Wednesday……
Neuromance: I see what the government and central bank are up to. They are trying to encourage low down payment and allow heavy debt loads on buyers with relatively good credit. It’s already been tried, but hey, if the government is still willing to insure it all, why wouldn’t the FIRE sector take that subsidy?
Many government financial agencies are under full regulatory capture (” Regulatory capture is a form of political corruption that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or special concerns of interest groups that dominate the industry or sector it is charged with regulating”).
Homebuyers: Proceed with caution
Edward J. Pinto, Stephen D. Oliner | UCLA Economic Letter
American Enterprise Institute
April 30, 2014
Contrary to the prevailing view that only borrowers with pristine credit records can get a mortgage these days, many risky loans are still being made. A new index published by the International Center on Housing Risk at the American Enterprise Institute measures this risk month by month, based on about three-quarters of all home purchase loans extended across the country. And the index clearly shows that many of today’s mortgages would not perform well under stressful conditions. This conclusion holds for the nation as a whole and for nearly every state individually, California included.
Here’s why. For the country as a whole, fully half of all the recent home purchase loans covered by the risk index had a down payment of 5% or less (see figure 1). In California, about 40% of recent purchase loans had such a small down payment ? not quite the national share but high nonetheless. With so little money down, these borrowers would be underwater with only a modest decline in housing prices. In addition, for nearly half of the recent home purchase loans nationally, borrowers’ monthly payments on their mortgage and other debt exceeded 38% of their pre-tax income, the traditional threshold for acceptable payment burdens.
The Federal Housing Administration is the prime source of this risk. It now guarantees more than a quarter of the newly originated home purchase loans and does so with little regard for risk. Under the banner of expanding homeownership, the FHA provides risky loans to households that often lack the resources to make the payments if anything goes wrong.
See linked PDF at bottom of page: http://www.aei.org/article/homebuyers-proceed-with-caution/
Thanks for the article.
Here is my one question about the data:
The data is from about 75% of the loans in the entire US (Fannie/Freddie/FHA/Rural Housing Services)…given the lower loan limits in CA, does that represent 75% of all loans in CA? Or a different number?
In other words, given the high home prices in CA, I suspect there are more non-conforming loans in CA on a percentage basis than in other states, and those loans generally require a larger down payment.
While this may not eliminate the difference between CA and other states in terms of debt burden, etc., it may make the difference less pronounced.
“Is the current housing market another bubble or a long term trend?”
The definition of insanity is repeating the same sh*t and expecting different results. Now stop beating a dead horse. If you have not been able to understand this housing bubble you never will. Get a reality check.
Jeebus you are annoying
I’ll be borrowing this brutally truthful eloquent post.
Thank you.
These types of Guys are sick. The Titanic is sinking and rather than making an effort to warn people and take proactive steps to discuss solutions they want to help sink the ship all the while taking more victims with them.
I wish the adult in me could wash this guys mouth out with soap so he won’t talk rubbish.
I can’t afford a luxury car. The question is; should I buy one or rent it?
Article for Ben Jones
http://www.marionstar.com/article/20140425/NEWS01/304250017/Marion-police-sheriff-will-receive-Mine-Resistant-Ambush-Protective-vehicles?nclick_check=1
The casino-ization of a necessity - shelter. Government and central bank policies are geared towards boosting house prices. Should the government be intervening in markets to not only encourage speculation but pick winners and losers?
Leviathan of last resort
State subsidies and guarantees are once again corroding the financial sector and creating new dangers
Apr 12th 2014
First, it is hard to see how entrenching state support will prevent excessive risk-taking. And, second, whatever was wrong with the American housing market, it was not lack of government: far from a free market, it was one of the most regulated industries in the world, funded by taxpayer subsidies and with lending decisions taken by the state.
That danger was amply illustrated in 2007-08. Having pocketed the gains from state-underwritten risk-taking during the boom years, bankers presented the bill to taxpayers when the bubble went pop.
The overall effect is not just to enrich one industry, but to mute the beneficial effects of finance. Healthy financial markets speed up an economy, channelling credit to firms that need it. They can also make an economy fairer and more competitive, providing the funds for those without them to challenge incumbents. Modern finance is a more slanted system in which savings are drawn towards subsidies and tax distortions. Debt-fuelled housing goes wild while investment in machines and patents runs dry. All this dulls growth.
http://www.economist.com/news/leaders/21600699-state-subsidies-and-guarantees-are-once-again-corroding-financial-sector-and-creating-new
Hey Neuromance, have you been able to watch Dalio’s “Economic Machine” on YouTube? I’d be interested in your thoughts on it…
Dalio conveniently ignores decades of deflation.
Not yet, but it’s in the queue.