November 2, 2014

Questions Regarding The San Diego Market

For this weekend topic, an email I received two days ago, which I asked if I could post here:

Hi Ben,

I’ve been a reader of your blog for more than a year now. Thank you for the informative content. I have several questions regarding the San Diego housing market and I’d greatly appreciate it if you can take time to help me out.

I was in the market looking for a SFH from Spring 2012 to Spring 2013. The pricing then was still reasonable and I got my offer accepted several times. Unfortunately, there were always some issues with inspections so I ended up closing none. Then the market got out of control so I decided to wait it out. However, renting is really getting to me now. People are asking outrageous amount of rent for really crappy places. Tiny run-down studios are asking for $1000 or more! I am now kicking myself for not buying back in 2012. I wonder if price will ever go back to 2012 levels. Many readers of your blogs believe that price will tank hard. I’d love to think that it is true but I also hear that this time around, credit is very tight so most of the purchases were made by people with solid credit or with deep pockets. Therefore, they will not be forced to sell en mass if something goes wrong and hence, no bubble. What are your thoughts on this?

Second, many of your readers believe that current pricing is too high relative to income so pricing will need to come down to meet demand. However, in many European and Asian markets, prices are much higher relative to income. So in places like San Diego, where the weather is good and the scenery is beautiful, the housing price may not be too crazy, comparatively speaking. What do you think about this?

I really don’t want to jump into the market right now, because I do believe that the current price is too high. I’d try to wait but rent is wearing me out. If you think pricing will come down, when do you this will happen?




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156 Comments »

Comment by Housing Analyst
2014-11-01 03:29:06

It’s already happening.

San Diego, CA Sale Prices Down 5% YoY; Declines Accelerate As Prices Fall MoM and QoQ

http://www.zillow.com/san-diego-ca-92130/home-values/

Comment by Whac-A-Bubble™
2014-11-01 07:32:24

Go HA!

 
Comment by Shillow
2014-11-01 07:44:35

Whoop, there it is. Median SALE price down 4% MoM, 9% QoQ, and 5% Year over Year. So what percentage decline from the earlier in 2014 peak do you need to see, because this stat right here means by next time this year it will be double digit YOY decline. 10 percent decline is certainly well worth waiting for in SD. Many tens of thousands of dollars. Makes any comparison to a few hundred dollars in rent a month look ridiculous.

 
Comment by Whac-A-Bubble™
2014-11-01 20:28:10

Pop quiz:

Which 3 U.S. cities saw month-on-month home price declines in the latest S&P/Case-Shiller index release?

Comment by Whac-A-Bubble™
2014-11-01 20:29:48

Of course, you can’t predict when prices come back down–but you can predict that they WILL come back down.


I predict San Diego home prices are already coming back down.

Home Prices Decline in Just 3 Cities
By Paul Ausick
October 28, 2014 10:15 am EDT

Only three of 20 U.S. cities included in the S&P/Case-Shiller home price index posted month-over-month declines in home prices — Charlotte, San Diego and San Francisco. The top monthly gain in August was posted by Detroit, up 0.8% from July.

The S&P/Case-Shiller home price index for August increased by 5.5% for the 10-city composite index and by 5.6% for the 20-city composite index. The national index rose 5.1% year-over-year, compared to a 5.6% gain in July. The consensus estimate for month-over-month seasonally adjusted growth was 0.1%, and the year-over-year estimate called for growth of 5.8% in the 20-city index.

The index tracks prices on a three-month rolling average. August represents the three-month average of June, July and August prices.

Average home prices for August are back at their levels in the spring of 2005.

Compared with their peak in the summer of 2006, home prices on both indexes remain down about 16% to 17%. Since the low of March 2012, home prices are up 28.8% and 29.5% on the 10- and 20-city indexes, respectively.

 
 
 
Comment by Rental Watch
2014-11-01 04:10:20

Take a look at Professor Shiller’s housing data on his Yale website. He shows inflation-adjusted home prices going back about a hundred years.

What you’ll see is that home prices go up and down in cycles…these cycles take time. During the housing bubble, the cycle went up a lot more than typical, and despite prices being obviously too high, the cycle lasted a lot longer than many of us thought. Many of us were wrong for years calling a market top. Eventually, we were right.

Right now, home prices are consistent with a market top. Of course, you can’t predict when prices come back down–but you can predict that they WILL come back down.

While the circumstances of home prices coming down are slightly different each time, prices coming down usually correspond with periods of economic stress (high unemployment, credit crisis, recession, excess supply of new housing–remember the condo glut in SD created in the last boom?, etc.).

If I were forced to guess when prices were going to come back down, I would say it’s going to be a few years–new home starts haven’t ramped back up yet broadly, but they will, and that ramp-up will add to economic activity generally. Only once that improvement to the economy has occurred, and there is generally more supply of new homes, do I think the conditions will be right for another housing correction.

My wife and I rented through the housing bubble in the Bay Area, we saw home prices go up and up and up, and wondered if they were ever going to come down–we waited a long time–years. There was lots of rationale as to why they were never going to come down (technology jobs, lack of supply, foreign buyers, great climate, etc.), but despite all those things, prices DID come down.

And when they came down, we had a large down payment ready. Instead of buying a “starter home”, and a larger home later, we were able to buy a long-term home at the start.

My best advice is to be prepared to wait–don’t get worn out waiting. Take it as a personal challenge–be stubborn.

And live below your means–save the down payment, and be ready–but be prepared to wait a while. If it means renting a slightly better place to make it easier to wait, do that.

Sorry the answer isn’t easier (like “prices are coming down next spring!”, or “they’re already falling!”), but in my opinion, despite prices being relatively high right now, it could be a few years before they come down in a meaningful way.

Comment by Whac-A-Bubble™
2014-11-01 07:41:10

Save a down payment,
Buy a home,
Go underwater,
Lose a down payment.

Great financial plan there!

 
Comment by Housing Analyst
2014-11-01 07:43:09

And you still paid a 225% because you didn’t wait for the bottom.

Remember, housing prices are falling again and the declines are accelerating.

 
Comment by Whac-A-Bubble™
2014-11-01 08:06:53

“Of course, you can’t predict when prices come back down–but you can predict that they WILL come back down.”

Did you miss the lead post? SD prices are already falling. Never been a better time to watch and wait!

Comment by Rental Watch
2014-11-03 18:37:28

You know as well as I that zip code 92130 is only part of San Diego. The year-on-year median sale price is still up for San Diego as a whole.

 
 
 
Comment by Whac-A-Bubble™
2014-11-01 04:11:12

San Diego home prices appear to have achieved a permanently high plateau. The writer may want to consider moving elsewhere if the rent seems too high, as many households we know finally did over the past decade.

Comment by Housing Analyst
2014-11-01 04:25:39

Even so, the rental rates in SD are a fraction of the cost of buying at current grossly inflated asking prices of resale housing.

 
Comment by Jingle Male
2014-11-01 06:37:42

The population of San Diego will grow 1.0 to 1.5% a year over the next decade (possibly more). If you read your own post, you have answered many of your own questions. It is unlikely there will be a significant drop in home prices in the San Diego market. The formula of 2008-2010 is not there (multiple bank owned foreclosures).

If you want to own your home, get yourself the best deal you can find and buy it. Your paralysis of analysis has already cost you an ownership opportunity in 2012. There are no perfect deals.

Do NOT reach for more than you can comfortably afford. Get something that represents 30% or less of your income and have 6 months of payment reserves in the bank.

It is very likely you will look back in 10-years be very satisfied you purchased your own place.

Comment by Whac-A-Bubble™
2014-11-01 07:36:20

Was that a quotation from the Used Home Seller’s Bible or something?

Comment by Prime_Is_Contained
2014-11-01 07:41:20

Couldn’t be—the advice is way too fiscally conservative for that; now if it said “60% or less of your income”, and didn’t mention anything about reserves, then maybe it could be.

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Comment by Whac-A-Bubble™
2014-11-01 07:51:56

Why would anyone but a UHS suggest buying and living in a dump at 30 pct of income when you could rent a much nicer place for the same money plus avoid a large capital loss in the next crash?

 
Comment by Blue Skye
2014-11-01 09:41:42

Because his own money is on the line. If the market declines at all he is seriously screwed. So, lest his head were to blow up, declines must be unpossible.

 
Comment by Whac-A-Bubble™
2014-11-01 09:43:43

“Because his own money is on the line.”

‘Nuff said. When the shills become ever more shrill, you know the market is soon going to tank.

 
Comment by Housing Analyst
2014-11-01 16:31:17

^that

 
 
 
Comment by Housing Analyst
2014-11-01 07:49:10

Population growth? That’s absurd. Population growth is the lowest the lowest level in US history per the most recent census.

With 25 million excess empty and defaulted houses, 4 million of which are in California and another 35 million just beginning to empty as boomers pass on, paying current grossly inflated asking prices for an asset that depreciates rapidly like a house is financial suicide.

Comment by Jingle Male
2014-11-01 08:44:29

Just because no one wants to live where you are does not mean San Diego will decline in population.

US Census Count:

San Diego: 2010 = 3,095,000 2013 = 3,211,000

116,000 added people in 3-years. Can you ANALYZE that Housing Analyst?

Here, let me help you: 3.7% growth over three years. Hmmn, that would be somewhere between 1% & 1.5% / year. Refer to the original quote above……”The population of San Diego will grow 1.0 to 1.5% a year over the next decade….”

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Comment by Housing Analyst
2014-11-01 08:49:55

And the lowest in history.

 
Comment by Whac-A-Bubble™
2014-11-01 09:38:41

Moving out? Migration reflects soft Southern California housing market
March 27, 2014|By Tim Logan
More people moved out than in in five of the Southland’s six counties last year, according to census figures released Thursday.

More people moved out than in in five of the Southland’s six counties… (Lori Shepler / Los Angeles…)

Population growth in Southern California continued to slow last year, another factor in soft demand for housing.

The populations of the Los Angeles, Riverside and San Diego metro areas were still growing in 2013, according to new figures released by the Census Bureau on Thursday, but less quickly than they did in either of the two years prior. Of the six counties in Southern California, only two — Riverside and San Diego — grew faster than the state as a whole.

Housing economists and demographics experts note that fewer people moving and fewer people forming new households have dampened demand for housing since the end of the recession. Thursday’s numbers bear that out locally. While births continue to outpace deaths, net migration was negative, meaning more people moved out than moved in, in five of the region’s six counties last year, according to the census. And while that’s long been the case in Los Angeles County, it’s a newer phenomenon in places like the Inland Empire and Orange County.

 
 
 
Comment by Jingle Male
2014-11-01 08:17:09

No Whac, it is not from the UHSP guide. I actually like Rental Watch’s answer too. However, I think the market in San Diego today is much different from the bay are in 2002 or 2003 when RW probably started his hold out as a renter.

I bought a house in 1990 and six months later the market tanked. I had to do a cash-in refi in 1994 just to get a lower interest rate. However, that house has served me well and 10-years after I purchased it, I was very happy with the result. My PITI was $680 and the rental value was $1200.

I think San Diego Renter could probably find a deal that could fit his needs today. HA shows us the market is decelerating, perhaps even declining for a while. If SDR can find the right house in the “off season” (Nov, Dec, Jan) he might make a pretty good deal.

He can also keep renting and banking. That is viable, just so much less satisfactory to my way of thinking.

Comment by Housing Analyst
2014-11-01 08:34:16

Of course you agree with him. you are two fraudsters who fraud great together.

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Comment by Prime_Is_Contained
2014-11-01 08:36:12

My PITI was

The P is irrelevant; the M is very relevant. (hat-tip to RW…)

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Comment by Whac-A-Bubble™
2014-11-01 09:42:08

“I think San Diego Renter could probably find a deal that could fit his needs today. ”

She’s been a happy home owner for a while, so there is no need for her to worry about whether to follow your bad advice and buy at a market top.

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Comment by Ben Jones
2014-11-01 09:05:25

‘Your paralysis of analysis has already cost you an ownership opportunity in 2012.’

How could you not work the word “bitter” into that sentence?

This is really sad to me. Here we are on a Saturday morning, going over a decision that used to not be that big a deal. Are you proud of yourself Janet Yellen?

Still, I have to ask a few questions. With this inevitable, never-ending house price increase, why is it that the government has to guarantee so many mortgages? And now make down payments lower? With all the money sloshing around, and returns so low, why are banks using their bought politicians and bureaucrats to get them off the hook for loans on these gold mines on a slab? It’s a no-brainer, right? Make the loan, and collect the interest. If the borrower defaults, you’ll have a house worth much more than what’s owed, right?

Comment by Whac-A-Bubble™
2014-11-01 09:54:15

“Still, I have to ask a few questions. With this inevitable, never-ending house price increase, why is it that the government has to guarantee so many mortgages? And now make down payments lower?”

Isn’t so many easy-term, federally-guaranteed, Fed-bought mortgages a key reason for the persistently high home prices we see today? In particular, QE3 seemed deliberately targeted at home price reflation.

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Comment by Blue Skye
2014-11-01 10:00:20

“right?”

Except for the reality of the situation. There are only so many fools and idiots, and they are likely to fail or quit as soon as their little “gold mine on a slab” starts to wobble.

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Comment by Ben Jones
2014-11-01 10:14:41

Let’s get down to brass tacks. Some are saying prices will go up. Why should that even matter? Because it starts to look more like speculation to even take that into account. Besides, if it doesn’t work out, you can just walk away. It’s a one sided bet. (Well we have recently heard of the GSE’s coming after FB’s years later, but that wouldn’t happen to me or you).

‘NEW YORK CITY — Owning a home has long been the American dream. But a report this week from the Census Bureau says home ownership has fallen to a near 20-year low of just over 64 percent. For many Americans, owning a home has become a dream deferred.’

‘Forty-five-year-old Matt Purdue has a 10-year-old daughter and a good job in public relations. What he doesn’t have is a house, which is just how he likes it. “I never have to deal with maintenance, broken pipes, cleaning the gutters, mowing the lawn,” said Purdue. “I have so many friends who own homes that are still underwater since the financial crisis,” said Purdue. They “can’t sell their home, can’t move, don’t want to rent it out, and they’re just miserable.”

‘Home ownership is down across the board, but it’s fallen most among Gen X-ers — those between 35 and 44 — dropping from nearly 67 percent before the recession to 59 percent today. Ownership among millennials — those under 35 — fell as well, from 41 to 36 percent.’

“To me, the American Dream is freedom and having flexibility to go when your lease is up,” said Purdue. “Maybe upgrade to a better place, and not be stuck in debt to a bank.”

Sure, when a thing you bought goes way up, you’re a genius. You feel good, maybe even regret not buying more. When it goes down, you might feel stuck, miserable even.

My point is, why in the heck are we even having this conversation about houses? Renting or buying should just be a decision of preference, outlook or circumstance. Isn’t it obvious these shacks have turned into some government financed casino? That is screwed up on the face of it.

 
Comment by Whac-A-Bubble™
2014-11-01 10:20:07

“I have so many friends who own homes that are still underwater since the financial crisis,” said Purdue. They “can’t sell their home, can’t move, don’t want to rent it out, and they’re just miserable.”

Given that home ownership is a certain path to riches, it seems beyond amazing that so many of Matt Purdue’s friends could be so unlucky. Does Matt have a black cloud hanging over his head that rains on all his friends’ home ownership experiences?

 
Comment by Blue Skye
2014-11-01 10:50:06

“casino?”

You know that it is.

Neither side to this will give up until the point of exhaustion.

 
 
 
Comment by Puggs
2014-11-01 14:24:52

if I looked back 10-years from today with 20% down I’d still be pissed that I bought (got screwed).

Comment by Whac-A-Bubble™
2014-11-01 17:33:37

Just imagine if you put down 20% then lost it all to underwaterness, only to learn that an army of subprime borrowers had bid up home prices with loans they couldn’t afford, enabled by 3% or less downpayments, no documentation of incomes, negative amortization, and every other trick in the book to get un-creditworthy borrowers into home ownership.

Anyone who thinks this sounds like a good deal is certainly welcome to save up a 20% downpayment and compete for overpriced housing with the next wave of unqualified borrowers, enabled by the newfangled Fannie Mae and Freddie Mac affordability loans.

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Comment by Jingle Male
2014-11-02 04:32:22

If you bought a great deal in 2004 and enjoyed living there and owning your own place and had reduced principal substantially, you might actually be pleased. It happened to me in 1990 to 2000. PITI + M = $800. Now a rental. Rent = $1600. 10 more years and it’s free & clear.

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Comment by Housing Analyst
2014-11-02 08:00:23

J._Fraud,

If you bought a depreciating house in 2004, you’re doomed.

 
Comment by Captain Credit Crunch
2014-11-02 08:51:11

The antecedent is impossible. There were no great deals in 2004.

 
Comment by Jingle Male
2014-11-03 03:39:36

Yes, that is true. You are correct and thinking back that is why I did not buy then either.

 
 
 
 
Comment by scdave
2014-11-01 07:52:40

However, renting is really getting to me now. People are asking outrageous amount of rent for really crappy places ??

Yep….One of the perils of renting particularly in a environment where there is limited supply & high demand….May I suggest a roommate or two ?? You may then be able to get into a house in a nice neighborhood…

I’d try to wait but rent is wearing me out ??

Here is an idea/thought….I have seen this done many, many times in my market and mine is more expensive than yours…

Do you have family or friends that are dependable, have some resources, steady job maybe relatively the same age and stage in their lives ?? If so, look into the alternative of buying a duplex, triplex or fourplex…The cost per unit I suspect is less than 1/2 of buying a condo or small house…You can buy it together as a TIC (tenants in common)..The key component here is a strong working agreement likely within a LLC…The best person IMO to prepare this for you would be an attorney who’s focus is preparing HOA documents…

The biggest single issue you will face as a group is the exit strategy…How & when do you exit the partnership…And, if you want to exit early what are the mechanics of that…

I know it may sound a little overwhelming but it works….I have seen it work quite successfully many times…Pick your partners carefully…Hope in some way I have helped with the daunting cost of housing in the area you would like to remain…scdave

Comment by Housing Analyst
2014-11-01 08:06:38

” look into the alternative of buying a duplex, triplex or fourplex…”

… and triple down on already massive losses?

●THINK● Dave.

Comment by Whac-A-Bubble™
2014-11-01 09:55:46

Why not just move four families into a largish McMansion? Why screw around with crummy fourplexes when McMansion prices are guaranteed to go up?

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Comment by Ella58
2014-11-01 15:50:02

Funny you should mention that. I’ve been looking into some bubble-era loans/foreclosures for a friend, and the county recorder’s files circa 05/06 are FULL of transactions with four and five names on the deed for one small house, selling to another group with four or five names on the mortgage.

Obviously it ended well for everyone involved. ;)

 
 
 
Comment by Neuromance
2014-11-01 22:08:23

scdave:Do you have family or friends that are dependable, have some resources, steady job maybe relatively the same age and stage in their lives ?? If so, look into the alternative of buying a duplex, triplex or fourplex…

I’ve seen this firsthand with just two people. One person’s life circumstances change and they want to move out. This forces a sale of the house. Unless you want to become an impromptu landlord.

 
 
 
Comment by Whac-A-Bubble™
2014-11-01 04:15:06

“I also hear that this time around, credit is very tight so most of the purchases were made by people with solid credit or with deep pockets. Therefore, they will not be forced to sell en mass if something goes wrong and hence, no bubble. What are your thoughts on this?”

I similarly heard that Enron was run by the smartest guys in the room.
But truth will out in due time.

Comment by Prime_Is_Contained
2014-11-01 07:42:38

so most of the purchases were made by people with solid credit or with deep pockets.

And don’t forget, that was the segment that walked away the most quickly the last time around…

Comment by Whac-A-Bubble™
2014-11-01 08:10:52

That bit led me to suspect Ben’s ghost writer is a troll in the guise of a priced out renter.

Comment by Housing Analyst
2014-11-01 08:35:33

Gee wiz. You think?

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Comment by Prime_Is_Contained
2014-11-01 08:37:52

I wondered that briefly from some of the word-choices as well…

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Comment by Whac-A-Bubble™
2014-11-01 09:57:24

The “deer in the headlights” tone of the screed is also a good tip off.

 
 
 
 
 
Comment by Shillow
2014-11-01 06:31:31

While I don’t agree with the permanently high plateau, I don’t think you are going to be getting a bargain there even if prices do drop, which they already are.

“But I also hear that this time around…” Sigh. Don’t beleive everything you hear. What is the most current data for the area you want showing? The market has turned and is headed down in many, many areas. If you have been reading this blog for more than a year now, you should know this.

It is California. California is full of flippers. They do not have deep pockets.

But really, I think the best advice is to get out and go to somewhere that isn’t crazy.

Comment by Housing Analyst
2014-11-01 07:03:40

Given the fact that buying will double or triple your cost over rent what is the issue here?

 
Comment by Whac-A-Bubble™
2014-11-01 10:06:55

“While I don’t agree with the permanently high plateau,…”

That’s a joke, son.

 
 
Comment by Guillotine Renovator
2014-11-01 06:44:21

Coastal CA is always going to be expensive. The Chinese funny money floating around doesn’t help things in the least.

Comment by Whac-A-Bubble™
2014-11-01 07:46:36

Is the Chinese funny money a permanent or a transient feature of CA housing demand?

Comment by scdave
2014-11-01 08:15:28

permanent or a transient feature of CA housing demand ??

Permanent….Kids are raised here….Kids become adults here…Adults become assimilated here….Other than a 10 day trip to visit ancestors homeland, they are never leaving…

Comment by Housing Analyst
2014-11-01 08:22:26

And California has become the most impoverished state in th US because of it.

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Comment by Blue Skye
2014-11-01 10:10:45

“they are never leaving…”

That may be a grain of truth in an overall lie. Once the mythical box of money they brought with them is gone, they have the same reality as any other American.

 
 
Comment by Whac-A-Bubble™
2014-11-01 10:11:03

“Permanent….”

Wrong answer. Herbert Stein provided the right answer long ago, albeit to a different question:

If something cannot go on forever, it will stop.

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Comment by Avocado
2014-11-01 11:01:59

Sounds like Irvine.

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Comment by Guillotine Renovator
2014-11-01 10:08:03

It’s going to be around long enough to create a generation of renters, unless they want to sign up for a millstone mortgage.

 
 
 
Comment by Shillow
2014-11-01 07:49:53

Self Identified Shills and debt donkeys rush to defend high prices with the same old twisted logic, ignoring the evidence from the last 10 years. Cognitive bias is a hell of a drug.

The great thing about leverage coupled with owning multiple homes is that your losses can skyrocket very quickly. Like a man with a knife stuck in his head who is still conscious and lucid, but only until they pull out the knife. Already dead.

Comment by Whac-A-Bubble™
2014-11-01 07:56:15

It brings to mind the recent National Geographic article about real zombies. There are many varieties of zombie in the California real estate market.

Comment by Whac-A-Bubble™
2014-11-01 10:12:49

Don’t let the California real estate market turn you into a real-life zombie.

 
 
Comment by scdave
2014-11-01 08:21:18

My brother is a retired plumber…A master plumber I might add…Has many certifications and worked on new housing to Nuclear power plants and everything in-between…

He has a friend that he does plumbing work for..Last count from my brother is the guy has 53 houses…Has accumulated them over a 30 year period…

with owning multiple homes is that your losses can skyrocket very quickly ??

Tell that to my brothers friend…

Comment by Housing Analyst
2014-11-01 08:39:25

And I knew a guy who could turn lead into gold.

Comment by rms
2014-11-01 09:14:12

“And I knew a guy who could turn lead into gold.”

+1 Seems like our bankers are great pipe-fitters too.

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Comment by Shillow
2014-11-01 10:07:26

If I were able to buy houses 30 years ago now I would do so. Unfortunately I have to live in the present and in reality, not on planet Mongo.

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Comment by Whac-A-Bubble™
2014-11-01 10:15:54

If I were able to buy houses 30 years ago now I would do so.

You mean before the onset of the most spectacular housing bubble in the history of western civilization?

 
 
Comment by Jingle Male
2014-11-02 04:44:01

I know a guy who won’t use the lead in his pencil to hep him analyse anything. HA!

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Comment by In Colorado
2014-11-01 08:44:36

I’m guessing that bought most of those houses when prices were much, much lower than today.

Comment by scdave
2014-11-01 08:58:20

Probably so although my brother tells me that he has bought some fixers recently….By the way, in his lifetime, he has never sold one house…He keeps them…

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Comment by Whac-A-Bubble™
2014-11-01 10:16:54

…he has never sold one house…He keeps them…

So far, so good on never-ending price appreciation…

 
Comment by In Colorado
2014-11-01 14:49:26

The early purchases are probably paid for and if not quite yet I’ll bet the monthly nut is small. Those ones probably cash flow nicely and did appreciate. The newer ones … not so much.

 
 
 
Comment by shendi
2014-11-01 11:29:36

I never knew they had plumbers doing Nuclear power plants.

Anyone can work the plumbing in an office building for Nuclear plant and the like - certainly not the piping. I doubt that they NPT connections are allowed in Nuclear piping.

 
Comment by Ella58
2014-11-01 16:13:16

“He accumulated them over a 30 year period.”

Mortgage rates since 1971 - note the general downward trend, which may have somewhat aided his financial genius:

http://www.mortgagenewsdaily.com/mortgage_rates/charts.asp

Comment by Whac-A-Bubble™
2014-11-01 17:35:56

Wonkblog
Mortgage rates are headed to 5 percent. But don’t blame the Fed.
By Dina El Boghdady
October 29, 2014

More than a year ago, mortgage interest rates shot up when the Federal Reserve signaled it might scale back a program designed to pump money into the ailing economy.

On Wednesday, the Fed said that program will end this month.

But nobody expects much to happen right away to mortgage rates, which are currently near historic lows. The market saw the end coming, and planned accordingly, many housing experts said. If there are wild fluctuations in mortgage interest rates any time soon, it’s not likely to be tied to the Fed’s announcement today.

The Mortgage Bankers Association expects the average rate on a 30-year, fixed rate mortgage to rise slowly to 5.1 percent by the end of 2015 — a full percentage point higher than where it was last week – as the U.S. economy grows and the job market improves. (Generally, strong economic performance pushes mortgage rates up.) If not for the economic and political turmoil that’s erupted in other parts of the world, the forecasts for mortgage rates would probably be even higher.

“In our forecast, we’re assuming that the global issues remain at a simmer,” said Michael Fratantoni, the MBA’s chief economist. “If they were to come to a full boil, rates would stay lower for longer.”

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Comment by Whac-A-Bubble™
2014-11-02 00:22:11

If it is any comfort, 100% of MSM-polled economists predicted higher long-term interest rates this year, and 100% of them were spectacularly wrong.

 
Comment by Jingle Male
2014-11-02 04:50:07

I’ve been expecting interest rates to rise rise since 2009…and have been wrong (don’t tell HA)

 
Comment by Housing Analyst
2014-11-02 08:01:36

Your losses only increase irrespective of rates J._Fraud.

 
Comment by Whac-A-Bubble™
2014-11-02 08:29:26

There was a fellow who used to post here under the name of Hoz several years back. I believe he may have passed away. Anyway, he seemed quite knowledgeable — I believe was a retired futures trader — and generous with sharing his insights. Among other contributions here, he provided a series of running anecdotes on layoffs leading into the Great Recession back when the MSM and politicians were hiding or ignoring the facts.

Hoz recommended on numerous occasions buying a contrarian fund whose value would rise in synch with Treasury yields rather than fall with Treasury prices. Hoz was sure that higher rates were right around the corner half a decade ago, before the Fall 2008 financial meltdown sent yields to unprecedented depths.

Regardless of what the pundits or MSM-polled economists predict on the timing of long-term interest rate increases, I wouldn’t hold my breath.

 
Comment by Housing Analyst
2014-11-02 09:05:06

Housing prices are falling. Who cares about interest rates.

 
Comment by Whac-A-Bubble™
2014-11-02 10:50:34

“Who cares about interest rates.”

I think the relevant point is that they are already falling w/o any rate increase, and destined to fall harder when rates return to normalcy.

Prospective buyers have been duly and often warned here about this eventuality.

 
 
 
Comment by SV guy
2014-11-01 16:15:56

“My brother is a retired plumber”

393?

 
 
 
Comment by Housing Analyst
2014-11-01 08:24:11

Who will announce the first wave of layoffs first; Apple or Facebook.com?

 
Comment by Ben Jones
2014-11-01 09:11:38

http://www.nytimes.com/2014/05/22/upshot/rent-or-buy-the-math-is-changing.html?abt=0002&abg=0

MAY 21, 2014

‘Billy Gasparino and Jenna Dillon-Gasparino were savvy enough to wait out the housing boom of a decade ago as renters. Not until 2010, well into the bust, did they buy a house in the Venice neighborhood of Los Angeles, less than a mile from the beach, for $810,000.’

‘Only four years later, the couple see new signs of excess in the housing market and have decided to go back to renting. They are close to a deal to sell their house – for $1.35 million, a cool 67 percent gain.’

“It just seems like the housing market came back so strongly, so fast, that maybe there’s a little bit of a bubble there,” said Mr. Gasparino, 37, an executive with the San Diego Padres.’

“If you thought home values in the Bay Area or Southern California were such that we might see another housing correction, that radically starts to advantage rental housing,” said Stan Humphries, Zillow’s chief economist, who argues that current prices are reasonably well justified, while acknowledging that prices are high enough to leave buyers exposed.’

Comment by Shillow
2014-11-01 10:16:35

An executive with a San Diego team living in Venice not SD? Sounds like a speculator. I’ll have to read the article to see why the New York Times would print this.

 
Comment by Whac-A-Bubble™
2014-11-01 10:27:07

If you were in a position to buy in SoCal over the past decade, then 2010 was the year. I have several colleagues at work who did so.

Of course, prices would likely have continued correcting were it not for the onset of the Fed’s QE3 housing price reflation program in early 2012.

 
Comment by Guillotine Renovator
2014-11-01 10:27:19

How can this be? Housing Analyst says prices have CRATERed.

Comment by Housing Analyst
2014-11-01 16:35:45

No my friend. Not past tense. Prices reversed course and are cratering.

Comment by Guillotine Renovator
2014-11-02 12:31:45

Nice try. You’ve been denying the price increases over the past two years.

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Comment by Housing Analyst
2014-11-02 12:40:24

Prices are falling my friend. Get over it and get on with your life.

 
 
 
 
Comment by EastCoastLurker
2014-11-01 10:31:42

If he is an exec with the Padres, why does he live in LA? Assuming that he was leveraged, that 67 percent gain was a phenomenal investment. These prices are beyond my comprehension. “High enough to leave buyers exposed” is the ultimate understatement. But if there is no recourse, who cares? Do mortgage rates in recourse vs non-recourse states reflect that risk?

Comment by Whac-A-Bubble™
2014-11-01 10:37:12

“But if there is no recourse, who cares?”

That rumor is out there, but I have my doubts. For instance, there is my former colleague, now living in Costa Rica, happily married to a former Countrywide executive who walked away from his San Diego investment condo. I wish I knew the answer to whether his relocation decision was driven in part by a desire to avoid creditors.

Comment by Guillotine Renovator
2014-11-01 13:37:14

What’s this Costa Rica thing I keep hearing about?

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Comment by Whac-A-Bubble™
2014-11-01 10:38:34

“Do mortgage rates in recourse vs non-recourse states reflect that risk?”

Not in a world of flat, federally-funded-and-guaranteed mortgage financing…

 
Comment by aNYCdj
2014-11-02 19:01:16

plus they get a $500k married couple tax free gain…….damn

 
 
Comment by Jingle Male
2014-11-02 04:54:47

I remember thinking the same exact thought in 2002! Billy and Jenna, market timing is a difficult game.

 
 
Comment by Blue Skye
2014-11-01 10:29:39

There is a reason that the desire to buy a house is called lust. Some will give all that they have, plus all that they expect to have in the future, in exchange for the promise of satisfaction.

Others, perhaps with some experience or insight, will make more temporary arrangements when the price is too high.

Comment by Whac-A-Bubble™
2014-11-01 10:35:18

“…house lust…”

You brought to mind an infamous commercial!

 
Comment by Shillow
2014-11-01 11:41:52

Hopefully there is plenty of lust for the company of the Venice Shoreline Crips, heroin addict transients and exorbitant private school tuition also.

 
 
Comment by Avocado
2014-11-01 10:59:51

My advice: SD is has too much traffic and illegals. Too close to the border, not a good enough quality of life to stay (unless you have a $150k job).

Did I mention water? I would rather live in acheap town like ABQ and have time to do stuff I love and travel, vs sitting in traffic.

Comment by Whac-A-Bubble™
2014-11-01 11:27:46

“…a cheap town like ABQ…”

How is the crime rate in ABQ? You are tempting me…

Comment by Guillotine Renovator
2014-11-01 13:39:47

I don’t know about the crime rate, but look at the unemployment rate. New Mexico is one of the, if not the, poorest states in the nation. That’s the kind of place where all your chit gets stolen repeatedly.

Comment by Whac-A-Bubble™
2014-11-01 13:49:50

If poverty is something you want to avoid, then I don’t recommend California as a destination.

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Comment by Whac-A-Bubble™
2014-11-01 13:50:50

Opinion
Editorial: California has highest U.S. poverty rate
ORANGE COUNTY REGISTER
Published: Oct. 20, 2014 Updated: 3:45 p.m.

That there are more poor folks living in California than any other state is unsurprising, inasmuch as California boasts at least 12 million more residents than any other state.

What surprised us was the report last week by the Census Bureau indicating that the Golden State not only has the nation’s largest poor population – a three-year average of 6.1 million from 2011-13 – but also the nation’s largest percentage of poor – some 23.4 percent over that three-year span.

The reason we were so taken aback was that the Census Bureau reported in September that California’s official poverty rate was more like 14.9 percent. Then, a mere month later, the bureau reported that the rate actually is much higher.

As it turns out, the discrepancy in California’s differing poverty numbers make perfect sense.

The official rate is based on a household’s money income before taxes and does not include noncash benefits.

The nonofficial “supplemental poverty measure” takes into account a household’s money income as well as such in-kind benefits as nutritional assistance and subsidized housing. The SPM, as it’s called, also takes into account the cost of living in the locale in which a household resides.

Because California is one of the most expensive states in which to live, there are nearly 2 million households with annual incomes that rise above the government’s official poverty threshold, but nonetheless are poor, in real terms, after factoring in their housing, transportation, food and other living expenses.

 
Comment by rms
2014-11-01 14:22:37

“California poverty advocates suggest that the best way to reduce the ranks of the state’s poor (official and nonofficial alike) is to increase their household incomes by raising the government-mandated minimum wage.”

Being poor isn’t about the lack of money.

 
 
 
 
Comment by In Colorado
2014-11-01 14:44:59

Did I mention water?

It isn’t just Cali. Most of the Southwest is boned when it comes to water.

Comment by Whac-A-Bubble™
2014-11-01 17:38:53

Most bad things eventually come to an end.

Even in dirt poor California.

Rainfall moves into San Diego County
County offering free sand and bags in unincorporated areas
By Susan Shroder & Robert Krier
10:04 p.m. Oct. 31, 2014
Updated 11:03 p.m.

It’s here.

Rain began falling Friday night in San Diego County, with the California Highway Patrol reporting state Route 78 in San Marcos getting dampened about 8:40 p.m.

The rain worked its way south, with light showers reported throughout the county about 11 p.m, the National Weather Service said.

Most of the rain is expected between midnight and 11 a.m. Saturday, with a heavy band forecast between 2 and 3 a.m. Showers are possible through about 10 a.m. Sunday.

Rainfall projections from the weather service through Sunday morning include a quarter-inch in San Diego; 0.42 in Rancho Bernardo; 0.38 in El Cajon; and 0.76 on Palomar Mountain.

The last significant rain in San Diego was April 26, when 0.16 of an inch fell, the weather service said. Motorists are advised that roads will be slick due to the buildup of oil, and drivers are urged to be cautious.

 
 
 
Comment by Ella58
2014-11-01 15:41:52

You might want to check out Mark Hanson’s latest blog post - the graphs were so informative I printed them out to keep:

http://mhanson.com/archives/1674

The end-user housing demand graphs overlayed with the timeline of gov’t stimulus programs and QEs are particularly illuminating. You may draw your own conclusions, but it sure looks like demand begins and ends with government stimulus.

And that is the wild card. It’s easy for us to say demand is cratering, incomes don’t support prices, etc., but the real question is how far gov’t/central banks will go to support asset prices. Not that central banks are omnipotent - we can already see the whole system starting to spring leaks - but the last five years have shown that they are fearless.

I see three scenarios where prices rise from here: 1) more hyperinflation due to global QE, 2) helicopter money drop or mass debt-forgiveness 3) significant student debt reform (especially if contingent on house buying). To guess whether these will come true, you might as well flip a coin. I know I’m not buying now, but can I say for sure that you shouldn’t? No, because, thanks to monetary policy, a question as simple as whether you should buy a house you can afford or rent might as well be financial Russian roulette.

Comment by Housing Analyst
2014-11-01 16:39:10

What’s the point considering prices have already reversed course and are falling?

 
Comment by Blue Skye
2014-11-01 17:22:03

“financial Russian roulette…”

Not based on the interesting article you linked to.

The author seems to indicate that we are in the bottom of the third inning. Having built three million more excess housing units since the 2007 crash, and with worse end-user fundamentals, you have three scenarios whereby house prices are headed up through the roof?

1) We have not had any “hyperinflation”, so how could we have “more”? We’ve had relentless credit expansion for the last 40 years. It’s been quite the party but it is not hyperinflation. There is the debt to pay.

2) “money drop”. Well, the bankers are only dropping money on themselves. Having captured the system in this way, what would motivate them to drop money on their prey, to repay the loans with worth-less dollars? “Debt forgiveness”. You may hear rumors of a debt jubilee, but this is not the way lenders handle things, and they are at the helm. To have debt forgiveness there would have to be a Cuba style revolution, and it would be debt repudiation. Game over for a few generations. The bankers would not initiate this, it would be their death, literally.

3) see #2.

To get the next bounce something really interesting needs to be invented.

Comment by Housing Analyst
2014-11-01 18:17:08

Bingo.

For everyone else,

Read 1).

Then read 1) again.

Then keep reading 1) until it’s memorize it.

 
Comment by Whac-A-Bubble™
2014-11-01 18:29:37

“The author seems to indicate that we are in the bottom of the third inning.”

Seems about right.

“Having built three million more excess housing units since the 2007 crash, and with worse end-user fundamentals, you have three scenarios whereby house prices are headed up through the roof?”

Government-sponsored price manipulation can handle it, right up until the replay of the abandonment-of-all-hope stage (aka “This sucker could go down“).

Next up: More bailouts until kingdom come.

 
 
Comment by Whac-A-Bubble™
2014-11-01 17:41:33

“…it sure looks like demand begins and ends with government stimulus.”

Kind of a no-brainer, but good of you to put it into print.

“…the real question is how far gov’t/central banks will go to support asset prices.”

That’s spot on. It’s a bit surprising the uncertainty over future central bank policy alone doesn’t completely destroy real economic activity.

Oh wait…

 
Comment by Whac-A-Bubble™
2014-11-01 17:44:07

“3) significant student debt reform (especially if contingent on house buying).”

I’m going to encourage all my kids (in college or soon to be) to wrack up as much student debt as possible, in order to maximize their payoff when the student debt jubilee plays out on Hillary’s watch.

Comment by rms
2014-11-01 18:58:54

“I’m going to encourage all my kids (in college or soon to be) to wrack up as much student debt as possible, in order to maximize their payoff when the student debt jubilee plays out on Hillary’s watch.”

That’s a huge gamble unless you’re planning on leaving the country if it doesn’t work out.

Comment by Whac-A-Bubble™
2014-11-01 20:02:41

Pessimist.

Hillary Complains About Student Debt While Speaking For $225,000 At University – OpEd

Author: Albany Tribune
October 16, 2014

(MINA) — Despite objections from a student body which faces the burden of 17% tuition hikes during the next four years, probable Democratic Party presidential nominee Hillary Clinton spoke to the UNLV foundation Monday night, drawing a speaking fee of $225,000. Ironically, in her speech, she opined that more needs to be done to assure young people can achieve their dreams and free students from debt.

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Comment by rms
2014-11-02 01:01:37

How about a four-year military enlistment to reduce that student loan debt by 50%, and help serve the crusades?

 
 
 
 
Comment by Jingle Male
2014-11-02 05:11:44

I remember learning in high school the same correlation for the stock market!

 
 
Comment by Weary SD Renter
2014-11-01 21:04:52

Thank you all, especially RentalWatch and Ella58, for all of the comments, info, and advices. And no, I’m not a ghost writer. I’m a millennial living in SD with a decent job earning a bit more than $110K a year. I’ve been living with roomate since moving to San Diego so I think I have been living way below my means. Recently, I have had a roomate from hell and decided that my time with roomate is over. Then I started apartment hunting and got really shocked with rental price vs. condition. I do regret not buying in 2012 but I’m not regretting being cautious in my house buying process. A guy told me that in life, there are two things that worth taking time to do them right: buying a house and choosing a partner. And I’ll try my best to get it right.

I do really feel Ben’s frustration with government intervention/manipulation of the market. While hunting for apartments, I saw some brand new complexes with really great pricing. However, those come with income restrictions. I cannot help but feel bitter about this. As a single guy, I pay an arm and a leg in tax, and part of my tax money is used to subsidize other people rents while I’m left dealing with crappy housing. In my opinion, housing in San Diego is not a right. You have to earn it. And while I feel for people who work full time and have a hard time affording rent, I think that if that is the case, they should just move to other areas with lower housing costs. The government shouldn’t have any part in subsidizing them. Doing that just allow companies like Walmart to keep their pay below living standard and renters to charge whatever they want because demands are so high.
As for student debt forgiveness, I think it will happen. A lot of millennials are very vocal about this. When I listen to their demand that the government should write off their debt, I wonder if they don’t have any shame. No one forces them to borrow those loans. No one forces them to choose the majors with very low pay or marketability. They chose it and when things don’t work out, the government must do something about it. How funny.

I digress, I guess. Let me just thank you all for your comments and for letting me rant a bit. I will follow RentalWatch advice, get decent place to rent, and prepare myself for the next buying opportunity, if it does come by.

Comment by Whac-A-Bubble™
2014-11-01 21:18:44

“A guy told me that in life, there are two things that worth taking time to do them right: buying a house and choosing a partner.”

There are at least three, including a good choice of career. But it sounds like you may already have that one covered.

Don’t miss my very recent post documenting month-over-month San Diego home price declines in the latest S&P/Case-Shiller index data release.

Comment by Prime_Is_Contained
2014-11-02 18:52:27

There are at least three, including a good choice of career. But it sounds like you may already have that one covered.

The house you picked ranks WAY WAY below the choice of spouse/partner and choice of career, in terms of impact on life satisfaction.

 
 
Comment by Jingle Male
2014-11-02 05:17:11

Excellent synthesis and conclusion. Thanks for the stimulating topic!

 
 
Comment by Derek
2014-11-01 22:31:56

Weary SD Renter
1. Consider lower cost areas in SD, East Escondido is nice
2. Perhaps a condo in San Marcos, some around Cal State in the $400K range
3. Find a good Realtor who knows short sales, they do still happen in SD but yes there are fewer

Rents will likely rise by 2.5-3%/year for foreseeable future. We have four rentals in SD all SFH. Bought in 2000 (regular) or in 2013 as short sales.

We locked in fixed 4% financing with 25% down payments. 42% debt financed. Two are paid off. We stay competitive on rents, but in past year, market has shifted and rents are going higher, doesn’t mean we go nuts. If my tenants bought, they would pay 30% more in payments, so not sure it makes sense for them to buy even if a “deal” comes on the market.

There may be some fool landlords out there but I think the market is pretty solid. Wishing for a collapse is not a strategy, get out do research and find the “deal’ be ready with 20% though and try to limit financing to 417K. Finally if it doesn’t feel right, don’t do it. Renting is not end of th world.

Comment by Whac-A-Bubble™
2014-11-02 08:41:53

The advice to blow a 20% down payment (> $100K in San Diego’s market) at a market peak keeps on cropping up. How many times do I have to repeat this: Your competition is marginally qualified government-financed buyers using 3% or less down payments. They have far lower household incomes than you have, and hence much less to lose, yet subprime loans will enable them to purchase the same priced house you will be shopping for with your 20% downpayment. These marginally qualified buyers will walk away in the next recession, same as they did in the last one, leaving you underwater on the purchase price and erasing your down payment equity.

If you can hold off using that 20% down payment until the aftermath of the next recession, and are lucky enough to find yourself still employed after others have lost their jobs, then perhaps that isn’t such a bad strategy.

 
 
Comment by Neuromance
2014-11-01 22:51:07

A few in-the-background issues:

1) The mortgage finance market is broken. It’s almost totally government-supported at this time. Meaning that government, via the GSE’s are buying virtually all mortgages in the US. This is my take on it at least:

Links:
1) Page 10: http://www.freddiemac.com/investors/pdffiles/investor-presentation.pdf
2) Wall Street Journal: Is the private mortgage-bond market dead or dormant
3) http://www.washingtonexaminer.com/federal-government-controlled-99.3-percent-of-mortgage-market-in-2012/article/2522042

So what? After the Great Depression, the US went to a hybrid public-private mortgage finance market. After the financial crisis, it went to a full government mortgage finance market. Is it sustainable? I dunno.

2) The country is already at peak debt. See page 17 of the Freddie Mac PDF above. Debt is deflationary as it has to be paid back, which restrains spending. But the central bank is doing all it can to stoke inflation.

3) On the other hand - the government and central bank have done a tremendous amount to support house prices. I don’t think these efforts will stop. Mortgages rates are at 4%. Fed printing money to buy mortgage backed securities. Are they going to stop coming up with novel interventions to support the house prices. Probably not. Unless circumstances force them to. Which is what?

4) Japan has been in a zero interest rate environment for a long time - 2 decades almost, if I recall correctly. But they’ve had deflation for that time. Which doesn’t bite into their standard of living. We’ve had inflation in a ZIRP environment. This puts the screws to at least a certain segment of the population. Enough registered voters to matter? Enough big donors to matter? I dunno.

5) People point to population growth as a driver. Of course, it’s a factor. But in the mid-2000s, I noticed that Baltimore City prices were going nuclear. Yet it had been losing population for decades. That was due to the tremendous amount of bad debt being generated. And speculators who got caught when the music stopped. But increasing population does put an upward pressure on prices.

6) Incomes have actually been dropping for 80% (at least) of the population: https://www.census.gov/hhes/www/income/data/historical/household/ - first bullet under heading H-1, first bullet under heading H-2.

7) From personal observation, there are places around DC where, even if you bought at the peak of the bubble in 2005-2006, your house has significantly appreciated. But, I also know people who were forced give up houses (sell / walk away) in less august locations around Baltimore and in DC Metro.

Ultimately, I think this support of house prices is political. I think the winds will change, as evidenced by the linked poll from Britain. What does that mean for you now? I don’t have a crystal ball. I didn’t foresee the tremendous central bank and government interventions. I dunno what they’re going to do in the future.

But they might actually be out of bullets. They’re very smart people though, and the FIRE sector does own the central bank and politicians. But they’re picking winners and losers. They’re explicitly centrally planning. It’s something leaders can’t help but do. And historically it blows up.

Just some data points to add to the analysis.

Personally: I think there’s a Sword of Damocles hanging over the market and it is only massive government and central bank intervention which have supported house prices.

The question is - can it continue indefinitely? I dunno. Maybe. Will the government / central bank try to engineer a soft landing where inflation slowly eats away the value of the currency and makes the prices seem more affordable? Or is it just too lucrative to keep the old system going? Do they have the discipline and skill and motivation and knowledge to do a soft landing? Or can they not help themselves and will try to continue the current system where key players keep making massive profits?

Dunno. But perhaps some items to consider.

Comment by Whac-A-Bubble™
2014-11-02 12:00:41

Fed printing money to buy mortgage backed securities. Are they going to stop coming up with novel interventions to support the house prices. Probably not. Unless circumstances force them to. Which is what?

Business
Farewell, Quantitative Easing — and good riddance

By John Crudele
October 30, 2014 | 3:50am
U.S. Federal Reserve Vice Chair Janet Yellen Photo: Reuters

Quantitative easing is dead — and good riddance to it.

The Federal Reserve on Wednesday announced that it was finished with quantitative easing, a dangerous and experimental money-printing operation started in November 2008 when Washington was convincing itself and the nation that the banking system was on the verge of collapse.

During the past six years the Fed “printed” more than $4 trillion in extra money and used that digital dough to purchase Treasury bonds and mortgage-backed securities. The result has been artificially low interest rates which helped create an ebullient stock market that has blown itself into another bubble.

QE also has created conditions for a lot of possible unintended and unforeseen consequences.

For example, the low interest rates acted like a hidden tax on the middle class, siphoning trillions out of the pockets of conscientious savers. And even though QE’s bond purchases are ending, that secret tax will continue until interest rates become more normal.

While the middle class was bludgeoned, banks benefited with paying savings account holders just a pittance for their business.
Uncle Sam wasn’t complaining either, of course, because public debt could be refinanced at dirt-cheap terms.

That hardly amounted to enough business activity to get the US economy beyond moderate growth, meaning QE was a boon for some but a disaster for many.

None of this gets any kind of airing on high, with the Fed keeping a stiff upper lip on Wednesday even as it ditched the one-time sacrosanct program.

 
Comment by Whac-A-Bubble™
2014-11-02 12:09:36

Opinion
The Fed’s Mortgage Favoritism
When the central bank buys private assets, it distorts markets and undermines its claim to independence.
By Jeffrey M. Lacker And John A. Weinberg
Updated Oct. 7, 2014 7:30 p.m. ET

Modern central banks enjoy extraordinary independence, typically operating free from political interference. That has proved critical for price stability in recent decades, but it puts central banks in a perpetually precarious position. Central-bank legitimacy will wane without boundaries on tools used for credit-market intervention.

Since 2009 the Fed has acquired $1.7 trillion in mortgage-backed securities underwritten by Fannie Mae and Freddie Mac, the mortgage companies now under government conservatorship. Housing finance was at the heart of the financial crisis, and these purchases began in early 2009 out of concern for the stability of the housing-finance system. Mortgage markets have since stabilized, but the purchases have resumed, with more than $800 billion accumulated since September 2012.

We were skeptical of the need for the purchase of mortgage assets, even in 2009, believing that the Fed could achieve its goals through the purchase of Treasury securities alone. Now, as the Fed looks to raise the federal-funds rate and other short-term interest rates to more normal levels, that normalization should include a plan to sell these assets at a predictable pace, so that we can minimize our distortion of credit markets. The Federal Open Market Committee’s recent statement of normalization principles did not include such a plan. For this reason, the first author, an FOMC participant, was unwilling to support the principles.

The Fed’s MBS holdings go well beyond what is required to conduct monetary policy, even with interest rates near zero.

A balance sheet has two sides, though, and it is the asset side that can be problematic. When the Fed buys Treasury securities, any interest-rate effects will flow evenly to all private borrowers, since all credit markets are ultimately linked to the risk-free yields on Treasurys. But when the central bank buys private assets, it can tilt the playing field toward some borrowers at the expense of others, affecting the allocation of credit.

If the Fed’s MBS holdings are of any direct consequence, they favor home-mortgage borrowers by putting downward pressure on mortgage rates. This increases the interest rates faced by other borrowers, compared with holding an equivalent amount of Treasurys. It is as if the Fed has provided off-budget funding for home-mortgage borrowers, financed by selling U.S. Treasury debt to the public.

Such interference in the allocation of credit is an inappropriate use of the central bank’s asset portfolio. It is not necessary for conducting monetary policy, and it involves distributional choices that should be made through the democratic process and carried out by fiscal authorities, not at the discretion of an independent central bank.

Some will say that central bank credit-market interventions reflect an age-old role as “lender of last resort.” But this expression historically referred to policies aimed at increasing the supply of paper notes when the demand for notes surged during episodes of financial turmoil. Today, fluctuations in the demand for central bank money can easily be accommodated through open-market purchases of Treasury securities. Expansive lending powers raise credit-allocation concerns similar to those raised by the purchase of private assets.

Moreover, Federal Reserve actions in the recent crisis bore little resemblance to the historical concept of a lender of last resort. While these actions were intended to preserve the stability of the financial system, they may have actually promoted greater fragility. Ambiguous boundaries around Fed credit-market intervention create expectations of intervention in future crises, dampening incentives for the private sector to monitor risk-taking and seek out stable funding arrangements.

Central bank operational independence is a unique institutional privilege. While such independence is vitally important to preserving monetary stability, it is likely to prove unstable—both politically and economically—without clear boundaries. Central bank actions that alter the allocation of credit blur those boundaries and endanger the stability the Fed was designed to ensure.

Mr. Lacker is the president of the Federal Reserve bank of Richmond, where Mr. Weinberg is the director of research.

 
 
Comment by clark
2014-11-01 23:12:06

“Recently, I have had a roomate from hell and decided that my time with roommate is over.”

I think, maybe, Everyone must learn this almost absolute truism: Having a Roommate Never works out! Not for long, anyway.

I remember in the early 1990’s when I was in S.D. (It Sure Is a pretty place) I started apartment hunting and got really shocked with rental price vs. condition.

Funny how things haven’t changed.

[Fed bastards -cough-]

S.D. in the early 1990’s is where I first learned of housing booms and busts. Er’ that they were more widespread than my humble Midwestern town and the effects I saw in the 1980’s. One step Up, two steps Down.

RE: “those [apartments] come with income restrictions”

Ya! They have that here in the Midwest, too. They suck!
Imho, Fed funny money is the only thing that keeps that game going.

This stood out to me: “I feel for people who work full time and have a hard time affording rent, I think that if that is the case, they should just move to other areas with lower housing costs.”

Ah-hem.

Anyway, I’m not sure what the following means to you, other than you might be a bit confused about economics and need to spend some time at Mises.org in order to overcome your economic blind spot?:

“The government shouldn’t have any part in subsidizing them. Doing that just allow companies like Walmart to keep their pay below living standard and renters to charge whatever they want because demands are so high.”

Mises.org - phalease check it out.

Comment by Whac-A-Bubble™
2014-11-02 08:43:45

S.D. in the early 1990’s is where I first learned of housing booms and busts. Er’ that they were more widespread than my humble Midwestern town and the effects I saw in the 1980’s. One step Up, two steps Down.

Yes it’s always been this way in SD, except the most recent boom and bust was orders of magnitude larger.

Comment by Mike in Carlsbad
2014-11-02 18:32:25

Thank Prop 13 for this. Look at all the housing built in the 70s around San Diego, like Pacific Beach, looks exacly like it did then, and will always, there is no incentive to improve slumlord properties that are locked in to 1979 tax rates or sell them for that matter for a better private owner use.

 
 
 
Comment by clark
2014-11-01 23:14:37

“Recently, I have had a roomate from hell and decided that my time with roomate is over.”

I think, maybe, Everyone must learn this almost absolute truism: Having a Roommate Never works out! Not for long, anyway.

I remember in the early 1990’s when I was in S.D. (It Sure Is a pretty place) I started apartment hunting and got really shocked with rental price vs. condition.

Funny how things haven’t changed.

[Fed bast... -cough-]

S.D. in the early 1990’s is where I first learned of housing booms and busts. Er’ that they were more widespread than my humble Midwestern town and the effects I saw in the 1980’s. One step Up, two steps Down.

RE: “those [apartments] come with income restrictions”

Ya! They have that here in the Midwest, too. They suck!
Imho, Fed funny money is the only thing that keeps that game going.

This stood out to me: “I feel for people who work full time and have a hard time affording rent, I think that if that is the case, they should just move to other areas with lower housing costs.”

Ah-hem.

Anyway, I’m not sure what the following means to you, other than you might be a bit confused about economics and need to spend some time at Mises.org in order to overcome your economic blind spot?:

“The government shouldn’t have any part in subsidizing them. Doing that just allow companies like Walmart to keep their pay below living standard and renters to charge whatever they want because demands are so high.”

Mises.org - phalease check it out.

 
Comment by clark
2014-11-01 23:25:48

“Recently, I have had a roomate from hell and decided that my time with roomate is over.”

I think, maybe, Everyone must learn this almost absolute truism: Having a Roommate Never works out! Not for long, anyway.

I remember in the early 1990’s when I was in S.D. (It Sure Is a pretty place) I started apartment hunting and got really shocked with rental price vs. condition as well.

Funny how things haven’t changed.

[Fed bast#$%$ -cough-]

S.D. in the early 1990’s is where I first learned of housing booms and busts. Er’ that they were more widespread than my humble Midwestern town and the effects I saw in the 1980’s. One step Up, two steps Down.

RE: “those [apartments] come with income restrictions”

Ya! They have that here in the Midwest, too. They Bite!
Imho, Fed funny money is the only thing that keeps that game going.

This stood out to me: “I feel for people who work full time and have a hard time affording rent, I think that if that is the case, they should just move to other areas with lower housing costs.”

Ah-hem.

Anyway, I’m not sure what the following means to you, other than you might be a bit confused about economics and need to spend some time at Mises.org in order to overcome your economic blind spot?:

“The government shouldn’t have any part in subsidizing them. Doing that just allow companies like Walmart to keep their pay below living standard and renters to charge whatever they want because demands are so high.”

Mises.org - phalease check it out.

 
Comment by Ben Jones
2014-11-02 06:56:37

‘Would you Rather Get a Root Canal or Get a Mortgage? That was one of the questions posed to recent homebuyers in an annual poll conducted by the California Association of Realtors®’

‘it shows that investors have been leaving the market in droves as higher home prices squeeze the profits. It shows that Millenials are also staying out of the market in droves, and household formation has faltered. It also shows that 7% of recent Buyers would rather undergo a root canal than go through the mortgage process again. Another 7% would rather spend a night in jail while 23% would prefer to gain 10 pounds rather than try to get a home loan!’

‘As we’re seeing in our local market, housing sales have plateau’d amid rising prices, rising inventory and dropping consumer confidence. It’s the same for the state and for much of the nation as well. In fact for our region unless things pick up remarkably against all historic trends, 2014 will be the lowest home sales since 2007.’

‘Across Southwest California, we’re running 8% off last year’s pace for single family home sales. (5,732 / 5,301). September sales were up 5% over last September but what should be remembered is that last September it was a trough, this year it’s a peak. Sales are off 26% from their peak year in 2009.’

‘On the plus side of the equation, prices continue to rise but ever so feebly. Regional median price was down 2% from last month but still 5% ahead of last year. And while we’re at 5% now, we started the year 21% ahead of the game. It’s slowing. While forecasting that prices would rise statewide about 5% in 2015, our state Chief Economist, Leslie Appleton-Young said she wouldn’t be surprised if we saw some more softening in some markets and even post a few declining price months before long. September was a ‘declining price’ month for us.’

‘Most economists still believe there’s a sizeable pent-up demand that’s waiting for some stability in the housing market and a return to ‘normal’ lending standards. Since 2009 the rate of household formation in California has lagged its historic pace by nearly 1 million households (page 27). Sooner or later even those Millenials will get tired of living with Mom & Dad, won’t they?’

http://www.valleybusinessjournal.com/index.php/real-estate/item/3340-would-you-rather-get-a-root-canal-or-get-a-mortgage

Comment by Whac-A-Bubble™
2014-11-02 08:46:01

It also shows that 7% of recent Buyers would rather undergo a root canal than go through the mortgage process again. Another 7% would rather spend a night in jail while 23% would prefer to gain 10 pounds rather than try to get a home loan!

These are very encouraging signs that Americans are finally coming to their senses on the folly of purchasing an overpriced debt trap!

 
Comment by Whac-A-Bubble™
2014-11-02 08:49:14

Across Southwest California, we’re running 8% off last year’s pace for single family home sales. (5,732 / 5,301). September sales were up 5% over last September but what should be remembered is that last September it was a trough, this year it’s a peak. Sales are off 26% from their peak year in 2009. On the plus side of the equation, prices continue to rise but ever so feebly.

I’m sure it’s different this time, but last time, steadily dwindling sales and prices ever more out of reach of all but the wealthiest households heralded a crash.

 
Comment by Housing Analyst
2014-11-02 09:07:20

“plateau”

That again? LOLZ

 
 
Comment by Ben Jones
2014-11-02 07:00:48

Here’s a report that addresses media and reality:

‘”Six sales in excess of a million dollars in this market is substantial,” said Chris Janes, the province’s senior market analyst for CMHC. “That has an upward impact on the average price obviously but again when you talk about that doubling or tripling, it’s really irrelevant.”

‘That seems to match what you hear on the street. The talk at the proverbial office water cooler is that the market has changed. Friends and co-workers now talk about seeing more “for sale” signs around St. Johns, hearing about houses staying on the market for longer periods of time, and questioning whether or not the breakneck construction of new homes has slowed down.’

‘That’s why many eyebrows were raised locally when the Globe and Mail picked up on the Royal LePage release and published a story with the headline, St. John’s housing market on a ‘winning streak.’ The accompanying article quoted Royal LePage CEO Phil Soper as saying the local “market continues to drive ahead at a faster pace than the rest of the country,” and that St. John’s is a “very boisterous market.”

‘Taking that opinion into account, I placed another call to CMHC’s Chris Janes, for his take on that report. “When you look at articles or headlines such as these, they may be a little bit self-fulfilling,” he told me. “They may lag the overall market in terms of what we see here on the street by a few months or even a year or two. So for me, it’s a bit surprising to see that kind of a headline … given the current market conditions,” said Janes.’

‘Glenn Larkin, a realtor with Royal LePage in St. John’s, acknowledges that the market has changed. “We have a big inventory right now and sales have declined. So when you get those two things, you’re moving into a buyers’ market. I think prices, there will be pressure on prices,” said Larkin.’

“We’re seeing a lot of contractors offering incentives — anything from electricity to be paid for a year, to appliances, to bonuses, to selling agents and bonuses, condo fees for a portion of time, and so when you see incentives moving into the marketplace, you know the market’s cooled.”

http://www.cbc.ca/news/canada/newfoundland-labrador/real-estate-reality-just-how-hot-is-the-st-john-s-market-anyway-1.2808774

 
Comment by Housing Analyst
2014-11-02 09:15:24

Flower Mound, TX Sale Prices Turn Negative For Year; Prices Crater 7% MoM As Housing Demand Plummets

http://www.zillow.com/flower-mound-tx/home-values/

 
Comment by Kristopher
2014-11-02 16:21:20

I’ll throw in my two cents as well since I was born and raised in San Diego. I find myself in a very similar situation as the OP, 27 years old with a secure $100,000+ career and $110k in savings with absolutely zero debt. I spent the last few years living blocks from the beach with a great roommate and very cheap rent. I just recently moved in my significant other, still steps from the beach and with a total rent of just under $950 with utilties/wifi etc. after splitting it with the girlfriend. Granted, it is a very small cottage that lacks some amenities like a washer/dryer, or even a garage, but how can you beat that overhead in this market?

I’ve been looking at houses for years now, and at this point have basically given up on owning a home in the next few years at least. I would really love to own a home, but can’t justify paying $500k for a starter home in a less than desirable area of SD. My plan is to continue stacking cash and maxing my 401k as I have done for the last several years, and hopefully buy if and when there is a 10-15% minimum correction.

I’m starting to have a more positive attitude on the whole thing, where previously i’ve been pretty bitter about it. I rent in a location I could never afford to own, steps from the beach, and have plenty of money leftover monthly to save and enjoy life. Who could complain about that?

Comment by Housing Analyst
2014-11-02 16:29:28

Why be bitter? Prices are falling and you’re renting for a fraction of the cost of buying at current grossly inflated asking prices.

Sit back, enjoy and bank your cash.

 
Comment by Whac-A-Bubble™
2014-11-02 17:23:28

Sounds like you are living right. My one suggestion regards this statement:

“I rent in a location I could never afford to own, steps from the beach, and have plenty of money leftover monthly to save and enjoy life.”

Stay optimistic and opportunistic, and maybe a future change of circumstances will enable you to own a home exactly where you want to live. If you can already afford to rent there, why assume that unprecedented market disequilibrium will never correct over your entire future lifetime?

 
Comment by rms
2014-11-02 20:51:54

Lets review: 1) 27 years old with a secure $100,000+ career and $110k in savings with absolutely zero debt; 2) total rent of just under $950 with utilties/wifi etc. after splitting it with the girlfriend; 3) continue stacking cash and maxing my 401k; 4) Coastal San Diego.

Trust me, it doesn’t get much better than you have it now; revel in your apparent genius. From my POV, “you be ‘da fugg’n king!”

 
 
Comment by Mike in Carlsbad
2014-11-02 17:19:14

I bought my North San Diego, Carlsbad “box of air” aka Condo in 2011 and couldn’t have timed it better. My general rule is only buy something if the rent vs buy calculator says so. Click on my name above to access this DinkyTown Calculator.

If it makes financial sense where buying is cheaper than renting, I buy, if its better to rent then I rent.

Back in 2011 my complex was a mess of for sale signs and foreclosures so I scored a bank owned place that has since gone up considerabily, I have no reason to sell as I can afford it even if I lost my job and had to be on unemployment.

If you follow this blog you will never buy anything! At least some posters. I have friends who have been trying to buy for a year in the UTC area and even though they both make 100k / yr they were constantly being outbid and everything on the market would sell in a week. They told me EVERYTHING has changed, they just place a bid on a place that has sat for 90 days on the market, since July everything in San Diego has slown considerably and prices are reducing.

There are some areas in San Diego that are old, ugly 50’s ramblers with wood roofs, in poor school districts, that ask 600-800k which I think is a joke. I would suggest Shadowridge in Vista. No HOA’s, no mello roos, and lots of house for 400-500k.

I think you shouldn’t be in any hurry I see the next year at least as a buyer’s market.

Comment by Mike in Carlsbad
2014-11-02 17:20:53

Calculator didn’t post its above, just click on my name.

My co-worker is a network engineer, his wife a pharmacist so they can clear 200k, I don’t think anyone making less than 200k / yr has any business buying a home in San Diego

Comment by Housing Analyst
2014-11-02 17:25:50

nope

 
 
Comment by Housing Analyst
2014-11-02 17:21:46

And you’re underwater and going deeper. I’m not sure what your point is.

 
Comment by rms
2014-11-02 21:01:26

“If you follow this blog you will never buy anything!”

So, once again, it’s time to question whether this market is being supported by real economic fundamentals?

The short answer? It’s not.

 
 
Comment by jt
2014-11-02 19:51:15

This current housing market rally has a long way to go. It just started about 24 months ago. Southern California housing prices will go much much higher before the next price fall. You need to buy as soon as possible.

However, it takes many months to find a property that will be a solid investment. Hopefully, you can locate one during this holiday season, which is a slower time of the year for housing sales. Spring will likely see another price jump.

Don’t be fooled by the typical holiday season slowness. It does this every year and renters always think the holiday season slowdown means prices are falling. Forget it. There is a solid 3 years left in this run. Prices will be at least 30% higher ( at least ) before this rally ends. The price increases could be much higher that 30% if the central bankers continue to print money.

Comment by Whac-A-Bubble™
2014-11-02 20:17:04

“It just started about 24 months ago.”

Coincidentally the Fed’s QE3 mortgage backed security purchase program started about 34 months ago.

Now that QE3 has ended and the S&P/Case-Shiller index indicates month-on-month price declines for San Diego, you think the ‘housing market rally’ is going to last ‘a solid 3 years’?

Please enlighten us who have our doubts on the reasons.

 
 
Comment by BottomFisher
2014-11-02 20:01:36

A lot of Asian buying here in San Diego also
http://www.cnbc.com/id/102125081

Comment by Housing Analyst
2014-11-03 05:35:48

How can that be when housing demand in SD is at 12 year lows and prices are falling?

 
 
Comment by BottomFisher
2014-11-02 20:05:41

A lot of Asian buying here In San Diego also
http://www.cnbc.com/id/102125081

 
Comment by BottomFisher
2014-11-03 19:08:57

I’ll have to admit HA…my views are a little slanted on this subject….no politically incorrect pun intended.

 
Comment by Bill
2014-11-04 23:46:17

Yes investor activity has slowed. Last year we bought three short sales which have given us 100% ROI on the down payment, this year we only bough one former short sale with a 50% ROI.
Average financing has been set at 3.9% only one of our four mortgages is variable. Every month, the tenants pay down about 3K of our mortgage balances. Not trying to be rude but some of the posts just don’t get that we are in a deflationary environment when it comes to energy costs, solar gets cheaper, EVs are becoming more common, consumers will have more money and unemployment is going down. It has been stated government policy to keep financing costs low and that will continue. The fed and treasury won’t make the same mistake again. More foreign money is coming into the US, SD is not yet a top destination for foreigners but could become one. In the mean time, we collect our rents and don’t bother our tenants. We try to make it a win-win.

 
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