patrick.net

zzyzzx says

tatupu70 says

I paid $32K for my house in Baltimore City. That was in 2003. That's less than 1X annual salary. House behind me just sold for 60K.

I'm glad you're pulling in more than $32k

zzyzzx says

dublin hillz says

Apartments are definitely becoming less affordable. My wife and I lived in a "luxury apartment" in Fremont and the unit that was going for $1575 in june of 2010 is going for a little over $2000 a month now. That's about a 28% increase roughly. We saw it coming and in part due to this bought earlier this year. What apartment complexes are doing is unconscionable - taking advantage of people who got foreclosed on and jacking up rents due to "supply and demand." 28% jack move is way bigger than "inflation."

Are you sure that food inflation hasn't been higher???

It seems that food inflation is around 15% based on my experience. Rents at many properties have exceeded that.

DaveM_Renter says

I paid $32K for my house in Baltimore City. That was in 2003. That's less than 1X annual salary. House behind me just sold for 60K.
I'm glad you're pulling in more than $32k

I thought we were talking median salary to median house....

=DaveM_Renter says

I paid $32K for my house in Baltimore City. That was in 2003. That's less than 1X annual salary. House behind me just sold for 60K.

I'm glad you're pulling in more than $32k

Housing prices are at 2x-4x for the social class that normally occupies them...at least in Ohio anyway. I could buy a 32k house, but around here that'd give me the ultimate fixer-upper and/or a neighborhood I'll probably get stabbed in.

Maybe that didn't apply for you. If so, you're one of the lucky ones.

Without arguing specifics and ranges, what will be the result of this?

1) Current homeowners will be obligated to pay the banks for homes that no longer have the marginal value for the loan. Who wins? Banks have larger loans than what would otherwise be possible.
2) New sales at lower prices. Banks still have same 2% or better margin in lending from the cost of the money to them, but don't loan as easily and have to write more loans for the same $. This also promotes higher density in the cities and later in life housing purchases and favors apartment / condo owners keeping rents higher. Alternative is to pay for more gasoline to get back and forth to property.
3) If the current late in life homeowners manage to pay off their home, then they should be able to afford a higher taxation rate. This should further discourage home sales to new owners and allow for banks to posthumously accumulate more homes as the current residents pass.

And as we have seen before .. rates fell in early 1990 so did home prices.. even today rates have fallen and so have prices.

Yep, homes are now more affordable then ever that is why homeownership rate is on the brink of collapse.

http://finance.yahoo.com/news/Home-ownership-sees-biggest-cnnm-3881936188.html?x=0&sec=topStories&pos=7&asset=&ccode=

The percentage of Americans who owned their homes has seen its biggest decline since the Great Depression, according to the U.S. Census Bureau.

In general, home prices probably are as affordable in large California cities than they were in the 1990s. The exception is the higher priced markets (upper quartile) in big cities in LA, which still have plenty of room to fall.

Why?

Banks have offloaded most of their shadow inventory of homes below $300k, but the more expensive homes of $300k have yet to be released onto the market. This has kept prices artificially high, while banks try to slow down writing off the huge loses of expensive homes. Similarly, people with greater means use various legal methods to forestall foreclosure and stay in homes for years before they are kicked out.

This is starting to change though as million dollar homes have seen the greatest increase in foreclosure filings. It makes sense that the top of the market is the last to fall. As well, FHA loans are now maxed out at $625k versus $729k just a few weeks ago, so homes priced between $625k-$900k will experience a significant price adjustment.

If you live in an area of $300,000 median priced homes, have good credit and can put 20% down, you can get a mortgage for under $1200 per month. The problem today is that nobody saves money anymore and very few are likely to have the 20% to put down. If you do and you live in an area of median priced homes, you can get a sweet deal right now.

billibong says

The exception is the higher priced markets (upper quartile) in big cities in LA, which still have plenty of room to fall.
Why?
Banks have offloaded most of their shadow inventory of homes below $300k, but the more expensive homes of $300k have yet to be released onto the market.

300K in LA is not expensive. Even some of the worst zip codes in Los Angeles like Watts 90044 and South Los Angeles, formerly known as South Central Los Angeles 90047, have average and low end homes that sell for more than that.

lurking says

300K in LA is not expensive. Even some of the worst zip codes in Los Angeles like Watts 90044 and South Los Angeles, formerly known as South Central Los Angeles 90047, have average and low end homes that sell for more than that.

That may have been true before during the boom, but look at Redfin for 90044 now and see how many houses sell for $300K and above now:

http://www.redfin.com/homes-for-sale#!market=socal&region_id=37491&region_type=2&sf=1,2&uipt=1&v=6

Then look at 90047:

http://www.redfin.com/homes-for-sale#!market=socal&region_id=37494&region_type=2&sf=1,2&uipt=1&v=6

It's less than 10 for 90044, and most of them are in the under $200K range (mean is under $200K). For 90047, there are more houses in the $300K and up range, the average is only a little more than $200K.

Los Angeles is certainly an expensive city, but what you're saying is a bit of hyperbole. As I mentioned, it may have been true during the boom, but prices came back to earth in the last few years. The prices are probably also artificially inflated still by the ridiculously low mortgage interest rates and massive government subsidies.

300k for a mediocre home is not affordable jesus christ. Given wages and debt load home should be going for close to 100k for a mediocre home.

tts says

300k for a mediocre home is not affordable jesus christ.

Amen. Even someone making 300K a year shouldn't have to pay nor should they consider to pay 300K for a home.

They are other expenses and money should always be saved in case of emergencies but also for retirement.

tts says

Given wages and debt load home should be going for close to 100k for a mediocre home.

Sounds more reasonable, I guess.

tts says

300k for a mediocre home is not affordable jesus christ. Given wages and debt load home should be going for close to 100k for a mediocre home.

In Mass that wouldn't be that bad. Hardly anything can be found for I'd say less than 190k. Technically yes there are some urban areas that would but it would be beyond mediocre to the point of a waste.

In northern NJ there are hardly any decent houses in the $300k range. And when I do see a listing for a $300k house, there are never any interior photos, which means the house is a dump. There will be 8 or 10 photos, all of the outside.

HEre's a $300k house in my area. Sure looks inviting, right?

"NEEDS A LOT OF COSMETIC UPDATING AS REFLECTED IN PRICE."

http://www.njmls.com/listings/index.cfm?action=dsp.info&mlsnum=1117848&dayssince=&countysearch=false

HousingWatcher says

In northern NJ there are hardly any decent houses in the $300k range

Depends on who is defining "northern nj". If you only mean hudson county, the smallest, most developed, and closest to NYC of the 6 or 7 counties (depends on how you count middlesex) in "norther nj", then that's probably true.

I was referring to Bergen County.

HousingWatcher says

In northern NJ there are hardly any decent houses in the $300k range. And when I do see a listing for a $300k house, there are never any interior photos, which means the house is a dump. There will be 8 or 10 photos, all of the outside.

HEre's a $300k house in my area. Sure looks inviting, right?

"NEEDS A LOT OF COSMETIC UPDATING AS REFLECTED IN PRICE."

http://www.njmls.com/listings/index.cfm?action=dsp.info&mlsnum=1117848&dayssince=&countysearch=false

" .HOUSE IS IN MOVE IN CONDITION .NEEDS A LOT OF COSMETIC UPDATING "

Anyone else find that a bit contradicting?? Photo Gallery only has one picture.

tts says

00k for a mediocre home is not affordable jesus christ. Given wages and debt load home should be going for close to 100k for a mediocre home.

I agree.

HousingWatcher says

I was referring to Bergen County.

You need to look beyond Cliffside Park. I just looked up Closter and there were 11 houses less than 300k, most of them looked pretty nice. I choose Closter because I lived there in 92, know the area, and have kept up with some people there. As far as I know that these houses are in nice area's, with very good schools, unless my friends have failed to tell me about a catastrophic decline in Closter.

Can someone please correct me if I'm wrong?

If interests rates start going UP soon, home values/prices start coming DOWN soon as well, right?

If so, who cares about our "historically-low" interests rates?

Interests rates can only go up while taking our "historically-high" home prices and little equity gains in the tank with them.

Waiting for the drop says

If interests rates start going UP soon, home values/prices start coming DOWN soon as well, right?

This is a matter of debate, to some extent.

It is true that many people use monthly payment to determine whether they can "afford" a house.

It is true that monthly payments go down when interest rates go down, so that people can afford a larger loan.

However, sometimes interest rates and home prices rise together, and sometimes they move in opposite directions, depending on how the economy is doing, because housing prices also depend on income and certain other factors like unemployment and loan availability.

I do agree that our historically low interest rates have created a lot of support for high house prices, have served as stimulus essentially for houses, and have kept prices from falling too far from the peaks too quickly (and probably have kept them from overshooting on the down side).

When wages go up accordingly rates and prices can go up at the same time. This is what happened in the 70's-80's.

If wages remain stagnant when rates rise then home prices will fall since affordability will drop. This is what will likely happen this time around.

Rates rising are a given, the timing is the problem. Officially the government believes it can keep rates suppressed until 2013 or so. No one really knows if they can however and once that time frame comes a long no one really knows how high rates will get exactly either.

Historical average is around 5%.

In the 80's however rates got to around 18% by an inflation fighting Fed.

18% is extreme and we likely won't see that, that rate is untenable given our national debt load. What I do expect is a still very high 8-10% sustained for many years.

tts says

Rates rising are a given, the timing is the problem.

Why? As Bob has pointed out, Japan has had low rates for a long, long time.

tatupu70 says

Why? As Bob has pointed out, Japan has had low rates for a long, long time.

1) Japan is fucked. Both long and short term. You do not want the US to end up like Japan unless you think the idea of a multi decade not-quite-Great-Depression is grand. If you think it is grand we've got nothing to talk about.

2) The low rates are artificially low. Through QE the xxLF's and other FOMC's the Fed/gov has been keeping rates low artificially. This hasn't blown up in our face yet because of the world's financial situation is as bad or worse as ours but at some point higher rates are _required_ in order to continue financing the government since that will not be true forever.

tts says

This hasn't blown up in our face yet because of the world's financial situation is as bad or worse as ours but at some point higher rates are _required_ in order to continue financing the government since that will not be true forever.

I'm not entirely sure about that. We're in a mexican standoff between money creation, cross-default deflation, and government deficit spending.

I don't know where this game ends, but this country can't pay 5% interest rates so we will not.

Bond holders insisting on 5% yields will get -100% instead.

tts says

Japan is fucked. Both long and short term. You do not want the US to end up like Japan unless you think the idea of a multi decade not-quite-Great-Depression is grand. If you think it is grand we've got nothing to talk about.

What I want doesn't matter. Unfortunately, I don't get to decide... I'm merely pointing out that it is quite possible that rates will stay low for a relatively long time.

tts says

The low rates are artificially low

Maybe, maybe not. As you say later in your post, there is a good reason that rates are low.

tts says

If wages remain stagnant when rates rise then home prices will fall since affordability will drop. This is what will likely happen this time around.

I agree.

tts says

1) Japan is fucked. Both long and short term. You do not want the US to end up like Japan unless you think the idea of a multi decade not-quite-Great-Depression is grand. If you think it is grand we've got nothing to talk about.

What's Japan's unemployment rate again??? Isn't it like 5-6%, or something like that? Doesn't sound bad to me.

Japan is generally in bad shape for a number of reasons.

1) They generally do not like foreigners working there. This has been discussed on another thread going back a few months. ESL is a large industry (teaching of English) and their standards to work there are very high.

2) The hold large cash reserves and yet asked for help with Fukashima. If they sold off dollars to buy yen then the yen goes up in value. Their economy is largely exported based so this would actually hurt them.

3) The yen has increase in value (or the dollar slid against it..whatever is greater) During the 1990's it was usually 100 yen is a dollar. it rose a bit to 120...now it is about 75 yen to the dollar. Major Japanese companies are at some record lows or close to them (sony, mitsubishi, sharp etc)

Fukashima will not be solved any time soon. The economics of Chernobyl can be an example of what can happen. Forget about any farming in the area..forget about exports. Businesses are going to be afraid of selling anything from that area. OK so you have a service based economy..but what services since so much can be outsourced? Ironically the Chernobyl area has some software development..in games about Chernobyl!
http://en.wikipedia.org/wiki/GSC_Game_World

zzyzzx says

What's JApan's unemployment rate again??? Isn't it like 5-6%, or something like that? Doesn't sound bad to me.

Many of their jobs are also make work McJobs with low wages in a place that is very very expensive to live. Interesting read on the subject.

www.adelphi.edu/peoplematter/pdfs/Nomura.pdf

Bellingham Bob says

I'm not entirely sure about that. We're in a mexican standoff between money creation, cross-default deflation, and government deficit spending.

This is not a long term sustainable situation though. EU and China are both in deep shit, EU looks ready to blow. Lurching from one "save" to another desperately. If the situation comes to a head in any of those 2 areas, or heck even a "minor" one like Australia, you're going to start seeing things change because the credit markets are so interconnected and fragile. Temporarily we'll look even better...while they go through the rest of their bust rather rapidly and so get a chance to start a true recovery much much sooner. Meanwhile we'll still be propping up our own corrupt and largely broken financial system at the expense of the real economy which will permanently delay and real recovery.

tts says

Meanwhile we'll still be propping up our own corrupt and largely broken financial system at the expense of the real economy which will permanently delay and real recovery.

Similar in philosophy with my previous statements below...

MCMSinger says

Yes, this country will be destroyed if it dropped 50%. The problem is this country's monetary & economic system is based upon self-destructive fundamentals to begin with it.

All types of chaos will ensue for sure. (Social, political, economical & cultural)

But for everything to go back to normal, there first needs to be chaos to run it's full course.

This chaos will simply be the consequences of a faulty system that has been allowed to exist for such a long time. Every action has a reaction, I'm afraid.

tatupu70 says

MCMSinger says

tts says

Home prices should be around 3-4x income

More like .5X to 2x absolute maximum. I don't even think 2x annual income is very financially conservative. Even 1X annual income is beginning to push it.

.5X annual income is more financially conservative and better for the economy. People have other expenses and they need to save money.

So rents would fall by 1/2 to 3/4 too then, right?

I'd like for it to rain gum drops and for money to come out of my kitchen sink.

.5 of annual income? That's insane! It should be 4 hours of wages tops.

But they will offer 50 year loans before that happens.

zzyzzx says

What's Japan's unemployment rate again??? Isn't it like 5-6%, or something like that? Doesn't sound bad to me.

Lol! nore have they lost any market share in Auto, Heavy Machinery, Shipping, Consumer Electronics, High Tech, and many other industries. Fact is their market share in industries have risen.

Nore are they asking (or begging) to redeem their US Treasury notes which is about as big as Chinese holding of US Debt.

No, Not bad at all...

tts says

Many of their jobs are also make work McJobs with low wages in a place that is very very expensive to live.

Exactly how is this different from the US right now???

zzyzzx says

What's JApan's unemployment rate again??? Isn't it like 5-6%, or something like that? Doesn't sound bad to me.

tts says

Many of their jobs are also make work McJobs with low wages in a place that is very very expensive to live. Interesting read on the subject.

How "different" we end up being from Japan, all other things aside, will depend greatly upon how we recover our 10% unemployment rate. Will we go the route of Japan, back to 5% unemployment but with menial labor taking the place of yesteryear's glamor professions?

What we're really missing in these kinds of numbers is the *under*employment rate. Nobody at the BLS is running those statistics (or publishing them, anyway)--for obvious reasons--but Gallup seems to think it's around 20% underemployment this year:

http://www.gallup.com/poll/146666/Gallup-Finds-Unemployment-Mid-March.aspx

If we are replacing roughly 25% of our workforce with lower paying jobs to get back to 5% unemployment, I am not sure where all the inflation is going to come from. Without inflation, the argument for rising interest rates is forestalled. Which gets us back to how Japan has been sitting on flat rates for a generation now.

Philistine says

How "different" we end up being from Japan, all other things aside, will depend greatly upon how we recover our 10% unemployment rate. Will we go the route of Japan, back to 5% unemployment but with menial labor taking the place of yesteryear's glamor professions?

Yes. The cozy mid-level jobs are all but fading away.

What I summarize from the comments is that
1) High paying jobs supporting ballooned prices are gone.
2) Even if UE rate goes back to normal,it'll be due to low paying jobs(certainly a guys who lost 100K+ jobs and now working 40K+ will not help home prices)
3) Due to 1) and 2) above banks main business of lending is suffering severely. Banks just don't want to lend against overpriced wooden box.
4) Super low rates is the government's way of keeping the balloon inflated - JAPAN style. It has not worked for Japan,it will not work for USA or any economy in the world.

I don't know about California, but I would have to say it's basically a true statement for my area. I purchased my first house in Pleasantville, NJ for 90k in 1999, it had 800 sq ft with a basement. Same size house in the same area, larger lot, with a basement and a one car garage is going for 99k. With a little haggling I'm sure if I was to buy a house in the 99k range, I could get it for 90k or so. So compared to what I purchased in 1999 I could get more house for the same price. Yes it's more affordable. Add in my salary increased about 35% since then, and a 4% mortgage interest rate compared to the 8% mortgage interest rate I had in 1999, it's definitely more affordable for me.

zzyzzx says

Exactly how is this different from the US right now???

What is the point of this question? I mean technically its actually better over there right now since they have a UHS and their government actually encouraged companies to higher more people wether they needed them or not.

But that doesn't mean their situation is at all good or desirable or sustainable for that matter.

Philistine says

Will we go the route of Japan, back to 5% unemployment but with menial labor taking the place of yesteryear's glamor professions?

Unemployment will likely go down over time but underemployment will likely stay permanently high and the quality of jobs will be worse. As the other guy noted less blue collar "middle class" jobs to go around, more McJobs that keep the food coming and pay the rent but little or nothing else.

Philistine says

What we're really missing in these kinds of numbers is the *under*employment rate. Nobody at the BLS is running those statistics

U6 is the BLS stat you want. Its still juked though since people aren't counted after a while of being out of work.

Philistine says

If we are replacing roughly 25% of our workforce with lower paying jobs to get back to 5% unemployment, I am not sure where all the inflation is going to come from.

Wage inflation isn't the only means inflation can occur though. Cost push inflation occurred in living memory here in the US, the 1970's, yet everyone seems to forget it. The rising cost of materials due to devaluation is slowly but surely being felt despite central bankers efforts to prevent the effects from entering the real economy.