patrick.net

hanera says

JH says

I do not accept your assumption that the top quintile are the main drivers of home purchasing. The home ownership rate is over 60% and has been long before 1980s.

Previous ownership is not relevant for recent buying just like inventory available for sale is not the same as the entire housing stocks. In BA, inventory for a year is about 1-3% of total housing stocks. In other words, need only less than 1% of the population to push prices up.

I will only buy this theory if you can prove to me that the median buyer in the city of San Jose is in the top 1% of earners.

I thought this post was about SoCal.

In many areas it is better to rent. But there are pockets where it is better to buy. It depends on many factors. Real estate is again LOCAL.

JH says

I will only buy this theory if you can prove to me that the median buyer in the city of San Jose is in the top 1% of earners.

Not sure how relevant is the median buyer. What i meant is if the inventory of a city is, for example, 30 per month only need 3 buyers to 'overpay'/pay high (whatever words you like) to push the price up. If the housing stocks is 20,000. It represents 0.015% of the housing stocks. I don't know why income of the city matters as the buyers can be from anywhere, some from overseas too. Is even more true for desirable neighborhood.

hanera says

I don't know why income of the city matters as the buyers can be from anywhere,

I'm not sure your post makes much sense as I think the numbers make your exceptions less relevant. Even if your post does represent the house buying market dynamic accurately, it is still every buyer's choice to bury themselves in debt.

What you're suggesting might mean that a small percentage of people, like 20%, buying houses in San Francisco live in San Francisco. I'm almost sure that isn't the case.

hanera says

Previous ownership is not relevant for recent buying just like inventory available for sale is not the same as the entire housing stocks. In BA, inventory for a year is about 1-3% of total housing stocks. In other words, need only less than 1% of the population to push prices up.

I believe that there is some confusion regarding hanera's comment above. What hanera is saying is that only about 1-3% of houses are on the market in any given year (not sure if that figure is accurate, but let's assume it is). Those 1-3% of houses set the market for everyone else because those are the only market-clearing transactions.

It's just like stock prices. If you are holding onto stock, you are not setting the price. If you are buying or selling, you are helping set the price.

corntrollio says

It's just like stock prices. If you are holding onto stock, you are not setting the price. If you are buying or selling, you are helping set the price.

I disagree because holding also affects the supply. You have some kind of circular reference of reason going on.

My point is that even with 1-3% of houses on the market, 90
% of the people wanting to buy them are also wanting to live there. I don't know the percentage, I'm just picking a high percentage for illustration.

fedwatcher says

I thought this post was about SoCal.

Only way to discuss on this site is to include BA conversation, unfortunately.

hanera says

JH says

I will only buy this theory if you can prove to me that the median buyer in the city of San Jose is in the top 1% of earners.

Not sure how relevant is the median buyer. What i meant is if the inventory of a city is, for example, 30 per month only need 3 buyers to 'overpay'/pay high (whatever words you like) to push the price up. If the housing stocks is 20,000. It represents 0.015% of the housing stocks. I don't know why income of the city matters as the buyers can be from anywhere, some from overseas too. Is even more true for desirable neighborhood.

Sure, over market purchases put upward pressure on sale prices. And under market purchases (eg, distressed sales) put downward pressure on sale prices. So sure, right now banks are holding distressed sales off the market, so we are in a small bubble based on restricted inventory. But that is just a blip.

Therefore, I do not buy the theory that the 1% is driving high housing prices in California. Median prices matter because, statistically, that is where the bulk of buyers are paying, and median incomes matter because, statistically, that is where the bulk of buyers are sourcing the money from.

FunTime says

I disagree because holding also affects the supply. You have some kind of circular reference of reason going on.

Holding does affect supply. But that's an *indirect* cause. What I'm saying is that the actual price-setting is all done by actual transactions within the marketplace. That is not controversial, unless you don't understand how markets work. Holding a house does not produce a "comp" -- that's why so many people have net worth "on paper."

It is true that if in one year, 7% of households decided to sell, supply would go way up and prices would go way down. However, the prices would still be set by those 7%.

JH says

Therefore, I do not buy the theory that the 1% is driving high housing prices in California.

You're misunderstanding hanera's comment. This has nothing to do with the top 1% of household income. This has to do with 1% of houses being sold in a given year, and those 1% determining the asset value for the other 99%.

JH says

Median prices matter because, statistically, that is where the bulk of buyers are paying, and median incomes matter because, statistically, that is where the bulk of buyers are sourcing the money from.

Not true. Median prices are subject to mix. For example, if the market is disproportionately foreclosures and short sales, median will necessarily go down. If only the upper end of the market is selling, median will necessarily go up.

corntrollio says

JH says

Therefore, I do not buy the theory that the 1% is driving high housing prices in California.

You're misunderstanding hanera's comment. This has nothing to do with the top 1% of household income.

This is what we were discussing on this thread over the past 2 days, and he responded to that discussion not this one:

This has to do with 1% of houses being sold in a given year, and those 1% determining the asset value for the other 99%.

Maybe he started his own discussion, which would explain why it doesn't fit.

corntrollio says

Median prices are subject to mix. For example, if the market is disproportionately foreclosures and short sales, median will necessarily go down. If only the upper end of the market is selling, median will necessarily go up.

And that is exactly why medians work. Because both happen, highs and lows, and in the long term the median accounts for both.

corntrollio says

What I'm saying is that the actual price-setting is all done by actual transactions within the marketplace. That is not controversial, unless you don't understand how markets work. Holding a house does not produce a "comp" -- that's why so many people have net worth "on paper."

Ahh, I get ya. You're right, I don't understand markets. It's not a subject I've studied with any rigor.

The thinking you've communicated is the same I use to think that once a lot of people have hunkered down in their houses, prices can still go way below what most people paid because those of us left are not willing to spend 50% of our income buying a house that will return only a major hobby and living in a house and the conforming behavior of saying, "I own a house."

Of course, there are probably people left, as you say, who are willing to pay whatever the market prices are because they still represent barely a pittance compared to their net worth. Another group of people left are those still or remaining unqualified to be trusted with paying the bank interest.

FunTime says

The thinking you've communicated is the same I use to think that once a lot of people have hunkered down in their houses, prices can still go way below what most people paid because those of us left are not willing to spend 50% of our income buying a house that will return only a major hobby and living in a house and the conforming behavior of saying, "I own a house."

Right, prices are set by actual transactions happening.

JH says

And that is exactly why medians work. Because both happen, highs and lows, and in the long term the median accounts for both.

That's not quite true. Let's use an extreme example on both sides to show how medians can create distortions in the data. In Zip Code #1, 6 houses sell for $100K and 4 houses sells for $1 million. Median house price is $100K. In Zip Code #2, 4 houses sell for $100K and 6 houses sell for $1 million. Median price is $1 million.

Are those zip codes that fundamentally different?

Zip Code #3 has 99 houses sell for $100K and 1 house sell for $1 million. Median is $100K. Is that zip code exactly the same as Zip Code #1 because the median is the same?

Does this mean medians are completely useless? Absolutely not. But you have to consider it as part of the overall data. Analysis of data has to be more holistic than just looking at one number.

Mean is similar. It matters whether the mean is $400K with a standard deviation of $20K vs. a standard deviation of $100K.

This is why I like looking at raw data too. You can see if there are two peaks or if there are other anomalies in the data. You can see if people who buy cheap houses are not in the marketplace vs. people who buy expensive houses.

All I can say is that at least around here in the bay area real estate AND rents are insanely high and in my opinion, neither option makes any sense at all. This all changed dramatically. We bought 2 years ago and as of now if we were to for some reason sell, renting anything around here would be a lot more than the current mortgage. Buying would set us back an additional 30%+ for the same house.

edvard2 says

We bought 2 years ago and as of now if we were to for some reason sell, renting anything around here would be a lot more than the current mortgage. Buying would set us back an additional 30%+ for the same house.

Yeah, the area went totally insane, again, in that time. It is insanity, though. No data suggests to me that people can really afford it. They're just going all-in. Good luck, player!(not meant for you edvard2)

corntrollio says

In Zip Code #1, 6 houses sell for $100K and 4 houses sells for $1 million. Median house price is $100K. In Zip Code #2, 4 houses sell for $100K and 6 houses sell for $1 million. Median price is $1 million.

Are those zip codes that fundamentally different?

I don't see this happening in the middle to upper middle class neighborhoods I was arguing initially with tatapupu about earlier on this thread. 100k vs 1 M is an extreme example, and I get your point, but more likely we are talking about 500k v 700k or 400k v 600k, along with a better distribution of data points, making medians more realistic, and your scenario less realistic.

Therefore, in the case of low inventory in very expensive areas I completely agree that raw data is best. Median v. mean doesn't tell the story...at all. But I am talking about larger trends in metro areas like San Jose, Orange County (not coastal), etc. The fact that the incomes of the top 1% of earners has increased disproportionately has very little bearing on these markets. These markets are driven by financing and therefore affordability with respect to median income...or 60-80% quintile income. NOT top 1% income.

FunTime says

No data suggests to me that people can really afford it.

People can't afford it. No analysis needed. The incomes are not even close.

JH says

100k vs 1 M is an extreme example, and I get your point, but more likely we are talking about 500k v 700k or 400k v 600k, along with a better distribution of data points, making medians more realistic, and your scenario less realistic.

Medians still aren't any better. Price point matters a whole lot and sometimes lower priced houses are leading the charge (recent housing boom) and sometimes higher priced houses are leading it a bit more (current boom seems more lead by higher priced).

Case-Shiller publishes three tiers of sales, and they all act slightly differently. Here is an example for San Francisco:

http://www.socketsite.com/archives/2014/02/san_francisco_home_appreciation_slows_condo_values_stal.html

As you can see, Case-Shiller low tier went the highest and tanked the most in the big boom and bust, and the other two tiers acted slightly differently. To argue that this doesn't change median doesn't make sense.

In some cities of the Bay Area, you can see certain price thresholds under or over which houses are or aren't selling at various points. There have been certain points where the higher priced ones have been selling more (increasing median) and other times where lower priced ones have been selling more (lowering median). Median ignores all this and assumes that everything is comparable across all time periods.

That's why Case-Shiller's methodology is generally better than pure median.

Renters are losers

Bm05211983 says

Renters are losers

.... and your mom is a whore. What your point?

corntrollio says

That's why Case-Shiller's methodology is generally better than pure median.

I have to say, though, that the middle third tracks pretty damn well in this chart. Separating into thirds helps understand the boom/bust of the mid 2000s for sure. That is where a more refined analysis that includes raw data where practical is definitely useful. However, the previous discussion which now appears to be gone is looking long-term...30 years. From your graph I can see that all thirds tracked tightly from 87 to 01. And now they are returning back to that tight tracking now in 14. Seems like the medians are returning. Hmmmm....

Oh, and that the middle third held the average/median pretty well.

Oops I liked my own comment, when I meant to click edit. haha

evilmonkeyboy says

Bm05211983 says

Renters are losers

.... and your mom is a whore. What your point?

Nice. I was hoping Patrick had dumped this BM troll.

JH says

However, the previous discussion which now appears to be gone is looking long-term...30 years. From your graph I can see that all thirds tracked tightly from 87 to 01. And now they are returning back to that tight tracking now in 14. Seems like the medians are returning. Hmmmm....

Oh, and that the middle third held the average/median pretty well.

Over the long term, some of this averages out, sure. In the short-term, different things can happen. If you zoom in on the 1989-1990 peak and the subsequent bust, you can see that it wasn't exactly all together, but it looks like it now when you zoom out to the larger picture. The lines may converge a bit going forward, they may not. We'll see.

Part of what has changed medians dramatically now vs. 2008-2011 or so, is that a lot of the foreclosures and short sales that composed more of the sales are now gone, but they had made Case-Shiller tank like crazy then. A lot more of the high-priced stuff is selling overall vs. the last few years right now.

In addition, the high flying equity market is making ultra-high-end places trade at crazy valuations right now, which is bringing everything up as people fill in the gap. The mix of housing always matters for median in the short-term, and it makes it hard to compare things across different periods sometimes too.

Note also that Case-Shiller tiers are determined by the first purchase price in the pair, not the second.