I've been following a lot of very knowledgeable people on Patrick.net for a long time. Patrick.net saved my family from buying during the bubble, so I tend to trust the info he posts. What do the experts on his forum truly believe? When will the next downturn hit? Will it just flat-line, or dive? Why? We live in the Bay Area and the prices still seem suspicious. Do any of you know why? Would you buy here? Thank you.
When do you think the next real estate downturn will occur? Why?
By hrhjuliet Follow Sat, 28 Jul 2012, 7:06pm 10,913 views 165 comments
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Bellingham, WA
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bg says
I think the nice places will be fine in the BA. This place is a money pump, and that flow will continue to trickle out to the wider area.
They stopped making new subdivisions here in the 1970s AFAIK. As long as Apple, Google, etc are flying high there will be demand pressure against a very limited supply. We still have the 1990s dotcom winners taking up supply space!
And housing isn't THAT expensive vs. the value-add workers do for world-class IT companies.
San Francisco can be a retiree and tourist town.
My pessimism is an over-arching pessimism, not specific to the fortress areas, which have their own economic dynamics.
Rents for the apartment I was at have gone up from $1320 in 2006 to over $2000 now. Man.
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Delurking says
Can you explain what this means? First of all, you don't know my situation or anyone else, so you made a huge assumption, which slightly discredits all of your other potentially valuable information. I don't tend to trust people who make huge uneducated and emotional assumptions.
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Corning, NY
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To the OP:
Nationally, house prices are approaching their long-term (post WW2) averages. The bubble is mostly deflated now.
http://www.multpl.com/case-shiller-home-price-index-inflation-adjusted/
Could there be down-side "overshoot"? Anything is possible, but historically that hasn't happened.
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freak80 says
Do you really think the bubble is deflated now?? But, historically, we haven't had the amount of unemployment/underemployment post WW2 that we have now.
Add in the number of people on EBT cards, Section 8, extended UE and other Gov't. programs (that we didn't have post WW2), and I don't think the "upside" will be seen for a long time.
How will all these above people help pull us out of this hole?? I don't think they are buying houses anytime soon....
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Call it Crazy says
I'm not suggesting we'll see another "upside" nationally. I think RE will continue to track inflation as it has done so, on average, for hundreds of years. Any speculation of another bubble forming is just...well...speculation.
Locally, of course, anything can happen. North Dakota RE is booming right now because of oil and gas. Once the oil is depleted, their RE market will go bust. If I remember right, you live in northern NJ. You've got the added risk of having much of your local economy tied to the Wall Street Casino.
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freak80 says
Good point, but....historically the bubble we saw has never happened, and historically housing was NEVER over twice the annual median income until the 90's when it went to 14 times the annual median income in many places. So, it doesn't seem to be following anything historical to begin with.
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Corning, NY
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hrhjuliet says
True. I was simply going by "past performance" which is no gaurantee of future performance. It's only an educated guess.
Rather than trying to predict price movements, look at things like price-to-rent ratios, job security, etc when considering a house purchase. Make sure you have a "factor of safety" if the market does happen to go down by 10 or 20%.
If you don't mind me asking, where are you looking to buy? Are you in an "expensive" market like SF, NYC, DC?
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freak80 says
The Bay Area of course, but I'm here for my ageing family, not for economic reasons. All of my family lives here and I have parents who will need long-term care soon enough and a brother who is legally blind I also check in on. Not to mention I grew up here, so all my friends and family live around here and I built a very good reputation over the last 15 years as a teacher, so I am in very high demand, which is also hard to give up. I only say all of this, because you seem like a very logical person and must wonder why I don't move. I hate the Bay Area, it's getting worse and worse; more crime, more superficial idiots, more ugly architecture and more box stores /strip malls, and you get all of this and a higher cost of living, yet I'm sort of stuck. ):
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Corning, NY
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hrhjuliet says
Yeah you're in a bit of a pickle. And if you've got long-term care to pay for, you're *really* screwed.
My main advice: try to keep your emotions at bay. Don't fall for the whole "it's not your home unless you own it" meme. After all, do you really "own" your house anyway? Try missing a property tax payment!
Turn off HGTV and other "house porn!"
If you can rent for cheaper than you can buy, then just rent. Unless you absolutely need a place bigger than a 2 or 3 bedroom apartment. Use Patrick's rent vs. buy calculator, and enter in the assumptions that reflect your personal situation.
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Skokie, IL
The government is the housing market.
And trying to predict what the next crazy thing the government will do is not so easy.
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StillLooking says
I've heard that one too, but how true is it?
I suppose ZIRP could artificially inflate RE as people go "yield chasing." Is that what you mean?
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Laguna Beach, CA
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Prime areas of California: Probably a 20% drop to come.
Fly over states: Most of them have already hit bottom. If they drop anymore, they would be going towards 1970s prices, adjusted.
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Madison, WI
What downturn?, it's all over the news, housing recovery in progress. I don't live in the bay area, but I live in a larger metro area where prices and taxes are always higher than rural areas. We may see a slight downturn in prices if interest rates ever go up again, but I don't see that happening, the governmental goal is to inflate, force people to borrow more, and feed the banks, that's what your up against. Still, with how low they've had to drop rates to battle deflationary pressure, cheap borrowing makes a person wonder what lies ahead.
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freak80 says
We used that calculator before. A fantastic tool, but I forget where "it lives" on this site. Do you have a link? Thanks. (:
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freak80 says
I'm a little south of there, in central NJ, but we still get the influence of the Wall Street rape and pillage...
What's going to make the roller coaster pick up downward speed here is the ramping up of the foreclosures. There is a big chunk that NJ is finally getting around to finish up. As they hit the local market, prices will accelerate downward....
I've been actually nosing around looking at some of the foreclosure to see if I can find a deal. I must be totally CRAZY (like my screen name)!!! I didn't plan on jumping back in this quick.
I think the economy will taking a good spanking in the near future so I'm trying to decide where will it be a better place to "weather the storm". Do I continue to rent and be held at the mercy of a landlord or do I buy and find a good deal that will keep my mortgage in line with rent but still have a 20% buffer for house prices to continue to fall.
If I own, I have to deal with the other landlords (the bank and city taxes), so where is the better place to be???
Decisions......
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Call it Crazy says
Freak80 had a great suggestion: freak80 says
Hope this helps you too. Your questions are as tough as mine. Good luck. (:
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hrhjuliet says
Thanks... I've ran the numbers (and have been a home owner for many years until recently), so I know the costs.
My first decision is around which one will provide financial and overall security when things crash and burn in the economy. Do I want the flexibility of renting, where I can move quickly or own so I can't be kicked out.
Do I want to tie up money in a depreciating asset or keep my money in my pocket and hope my landlord doesn't do something stupid.
Do I steal a foreclosure at a good price below market and have to do renovations but then know I'm set in place as long as I pay the mortgage.
Now, only if I could find my crystal ball.... I know it's around here someplace....
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I doubt the next real estate downturn will occur any time soon.
For one - this current downturn will not be over for another 10 years - and I am being optimistic here.
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AlexS says
Ha Ha Ha..... That's funny!!!
But unfortunately true.........
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Victorville, CA
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hrhjuliet says
They're goosing all asset prices in order to create wealth effect, which, in a FIRE economy, is the only medicine available. Once this gambit peters out some, and it will, (they say ZIRP til 2014, but after that, it will be NIRP), you will see a lot of the froth boil away.
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Emeryville, CA
As an aside, my compliments to all involved on this thread. It's all so insightful and reasonable, I almost forgot where I was.
Nice work.
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Call it Crazy says
Such good and valid questions. I think this is what we are all wondering. The economic crash is going to happen and the president can't fix it, like some people on this forum seem to think, whoever he or she may be. The president doesn't have the power and it's too big of a mess for any one group or person to fix. Yes, your questions are the hard ones, and I wish I had an answer too.
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everything says
Another concern of mine.
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I live in South Florida and prices are back down to about 2003 levels. Meaning they are still 100% higher than they were in the late 1990's, even after falling 50%. Meanwhile property taxes are triple what they were back in 2003. Insurance as well. In fact, the majority of daily basics like food, gas, etc have tripled. Yet our incomes are stagnant. Prices are not cheap by any measure.
Something I don't see mentioned much is the Federal Reserve promising to keep interest rates near zero through 2015. They claim to be fearful of deflation. Real estate is supposed to go down with deflation. When I see prices that have gone up 50% in places like Phoenix and Miami in just the last six months, I question if it is not proof of speculation. It sure isn't rising on fundamentals. If fundamentals supported the increases the Fed would be jacking rates, not printing money....
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Corning, NY
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Goran_K says
Are you referring to those states with non-parasitic economies? You know, states that actually produce goods of tangible value instead of just RE speculation and banking?
Just checking. ;-)
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Corning, NY
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Goran_K says
Are you sure about that? The top 0.1% are doing very well, as we all know.
You could be right, but waterfront and downtown locations are always desirable. There is plenty of money out there (among the wealthy) that is looking to find a "home," no pun intended.
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Full disclosure: We bought 2 months ago so even though I am trying to not be biased, that might ultimately have an effect on my opinion.
We waited out the bubble and saved for almost 12 years. So yes- I fully know the frustration and annoyance of the OP. We make pretty good money- as in we're probably within the upper 10% of the median income bracket. But even still, it took us a long time to save up because we're frugal and wanted to make sure what we bought was well within easy affordability and something that wouldn't become a liability.
As far as what I think- and again- this is my opinion- is that at least for immediate Bay Area the bust is probably over. We live in a fairly desirable East Bay city and between winter and spring it was like the faucets were turned on full-blast. It went from houses sitting and sitting forever to suddenly selling almost as soon as they hit the market. All of the inventory quickly dried up. We simply got lucky on ours. I spoke with our Realtor lately and she said its gotten worse since we bought. I can't speak for the rest of the Bay Area but I suspect its probably similar.
We're in this weird gray area right now. The limited supply has put a higher demand on real estate. Now what will happen if suddenly everyone puts their home on the market is another question. But if the supply stays limited then prices will likely go up. Its simple mathematics.
But even so, I seriously doubt there is going to be any sort of substantial downturn in prices. Even if there were the outcome would probably be the same as the first downturn: Any homes that were at all reasonably priced would get bought by investors and thus keep those out of the hands of "ordinary" buyers.
Note that I have no interest on what home values do. We bought a house to live in and hopefully do so until we're old. I could care less what its worth. I also would actually welcome a more normal housing market because that's better for everyone-including me.
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edvard2 says
Seems that's the right attitude to me. That's our problem, we want a home, not an investment, but that's so incredibly hard when you are not in the 10% and have a child. I'm still not sure it will keep going up. Something seems odd about the way it suddenly jumped, we've been looking for a long time and I've never seen it shift that fast in any direction, which makes me nervous and highly suspicious. It seemed an unnatural jump.
I'm happy for you. Sounds like you got what you wanted. (:
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"....Something seems odd about the way it suddenly jumped, we've been looking for a long time and I've never seen it shift that fast in any direction, which makes me nervous and highly suspicious....."
Bear market rallies are usually fast and furious. In my neck of the woods I am seeing properties on the low end selling for 100% more than they did six months ago. That to me smacks of a bear market rally. Real estate traditonally hits bottom and flattens out for years before the next rally. Maybe this time is different because the inventory has been kept from the market for 2.5 years. Interest rates are being kept low while the real inflation rate is being hidden. Government is backing 90% of all new mortgages. Subprime is back with fhfa 3.5% down and easy credit. We will see.... History and fundamentals don't support this spike. Only extreme speculation does.
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Corning, NY
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hrhjuliet says
It's at the very bottom of Patnet. Click the "House Value Calculator" link. Be sure to "change assumtions" to adjust for your personal situation, but make *conservative* assumptions. Also do a "worst case" analysis.
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Lafayette, CA
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Cheeseus Sonofdog says
WTF does this even mean? I've done a lot of research on bubbles and a bear market rally NEVER lasts longer than 6 months.
The crash in real estate stopped in 2009 and since then the market has been effectively flat. Suddenly in 2012 we get a nice bounce. Do you know what we call this pattern?
The bottom.
Here's what it looked like after the nasdaq bubble. Peak, bull trap, bear market rallies, and flat when we reached bottom and doldrums took over followed by a new bull market.
Now lets look specifically at housing. Homes cannot be traded like stocks can. It takes a month or more from the decision to sell to the point where the home is actually sold. There are no house options, you cannot sell a house short, and homes are not generic commodities like stocks are.
Therefore you'd expect everything on a housing graph to be drawn out. Bear market rallies disappear because they are smoothed. Here's the housing market:
What I see is the Nasdaq bubble with all the sharp edges smoothed out and a bottom in 2009. A new bull market in 2012 is just about right. Calling this a bear market rally when we've had three years of plateau is simply wrong.
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There have been spikes. Late 2006 to mid-2007. 2008.2009. The first time buyers tax credit. Almost every spring. So far they have all been follwed by declines. Can we really even debate statistics when foreclosures have basically been frozen for over two years?
Yes, this will be a bottom in some areas. In others it will be another bear market rally.
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47 male
Lafayette, CA
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Cheeseus Sonofdog says
That's exactly what it did. See the above graph.
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Lafayette, CA
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Cheeseus Sonofdog says
There have been tiny spikes of 5% or so EXACTLY conforming to a classical spring selling season and winter slow season. The overall trend has been three years of a flat market. Again......see the above graph.
Cheeseus Sonofdog says
This statement is totally incorrect. Foreclosures were never halted in California and elsewhere in non-judicial foreclosure states.
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Calling this a bottom when we are still 100% higher than the start of the bubble is simply wrong too. Crashes usually dip lower than the prices the bubble started at. With government manipulation, perhaps we avoid that fate. Fundamentals say we go back to the mid-90's prices. Factor in property taxes, insurance, upkeep, etc are triple from that time and we could overshoot it even more just to get back to affordable levels...
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Lafayette, CA
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Cheeseus Sonofdog says
False premise. There is no objective way to determine the start of the bubble. If you're claiming we're 100% higher than the bottom, then you're also claiming housing has to lose another 50%. This is impossible and will not happen. A 50% discount in homes would mean most homes would rent at a 10%-30% return on capital and a trillion dollars would flood into the market instantly.
Cheeseus Sonofdog says
No they don't. Fundamentals say the cost of housing is RIGHT NOW far below the mid 1990s. Interest rates are a fraction of what they were in the mid 1990s. Fundamentals say housing is very cheap.
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Ive lived in the Bay Area long enough to know that trying to apply any sort of mathematical, sensible logic to the way the housing market behaves here is a lost cause. It simply doesn't act as "It should".
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edvard2 says
Absolutely agreed. Home is not an investment - it's a consumable good. You need to eat. You need to drive places. You need to live somewhere. Roof will deteriorate, basement will crack, new building technology will obsolete your home, etc.
When times were normal people would work and save to buy a house. Then things went nuts and people would buy a house to use it to get money.
What can't continue has a tendency to stop...
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Banks have been stalling for years, even in California. That state has had local politicians creating laws to stall the process too. California is still in the top ten for deliquent mortgages. There is shadow inventory. However, with the current spikes, many of these owners now have equity. Whether they can refi or sell for a profit is unknown. If not, the banks may stop stalling and foreclose on these....
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San Jose, CA
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iwog says
If you take the average of those cities, it's pretty flat around 135 to 140 since early 2009. That's over 3 years of a flat market. If history is any indications, we will either see an average flat market to 2-3% annual appreciation for the next 3 to 4 years before the market would start to heat up again, and we would go for another nice run up.