patrick.net

corntrollio says

The most recent massive bubble is coupled with a lowering of rates, and the bust has even lower rates in some cases, but obviously macro factors had a big effect on both.

This would be why subprime (ARMs, zero down loans, interest only loans, 40 year loans and to poor borrowers) came into vogue in the massive bubble. It was banks trying to make the monthly payment scenario work. When prices got out of line and when higher monthly payments came due to subprime borrowers....the bottom dropped out. The macro spread of the risk didn't help, but I still think one can make an argument for the monthly payment issue here, also.

tatupu70 says

You don't buy with inflation adjusted dollars. Inflation is your best friend as a mortgage holder so adjusting it out is not applicable.

Sure, but it'd be silly to say that interest rates aren't affected by inflation. Certainly in the 70s and 80s, the correlation is more obvious.

Inflation is your best friend if you already have a mortgage, but that's irrelevant to a discussion of housing prices. Inflation is not necessarily your best friend if you are trying to get a mortgage.

JH says

It was banks trying to make the monthly payment scenario work. When prices got out of line and when higher monthly payments came due to subprime borrowers....the bottom dropped out.

Yes, I'd agree with that. It was about monthly payment there, which is why you had bizarre non-prime loans and interest-only crap, and all the teaser rates.

I don't like using the word "subprime" casually, as the media does. Subprime has a technical meaning within the mortgage market. You can read the Calculated Risk posts about this by the late Tanta, but the summary is that:

prime = good Capacity to pay, good Collateral, and good Credit (3 Cs)
subprime = good Capacity to pay, good Collateral, and slightly less good Credit (still have 3 Cs)

Some of the loan products sold during the boom didn't appropriately evaluate Capacity and Collateral, and overweighted Credit. A good example is "Alt-A" loans, which were called that because they were presumed to be an Alternative to A-Paper (i.e. prime) based largely on evaluation of Credit only, but it turned out the financial modeling was wrong, and they weren't an alternative.

Similarly low-doc/no-doc meant you didn't appropriately evaluate Capacity. Sometimes banks also gave loans on properties that were bad Collateral too.

corntrollio says

Sure, but it'd be silly to say that interest rates aren't affected by inflation.

Certainly. Inflation is the largest driver.

corntrollio says

Inflation is your best friend if you already have a mortgage, but that's irrelevant to a discussion of housing prices. Inflation is not necessarily your best friend if you are trying to get a mortgage.

Right--that's why I'd say you have to use nominal prices. Otherwise you mask the effect of inflation.

tatupu70 says

Right--that's why I'd say you have to use nominal prices. Otherwise you mask the effect of inflation.

Right, but we're talking about trying to isolate effects here. There is definitely a partial correlation between rates and pricing, but you have to tease out the effects. I think we're talking about the same thing and not really disagreeing on this except in wording -- there are definitely other factors that affect this and in some cases may affect it more, as I suggested for the 90s and for the most recent boom/bust cycle.

corntrollio says

Right, but we're talking about trying to isolate effects here. There is definitely a partial correlation between rates and pricing, but you have to tease out the effects. I think we're talking about the same thing and not really disagreeing on this except in wording -- there are definitely other factors that affect this and in some cases may affect it more, as I suggested for the 90s and for the most recent boom/bust cycle.

I think so too. My only comment is that there's no point separating out the effect of interest rate when it's always drowned out.

tatupu70 says

I think so too. My only comment is that there's no point separating out the effect of interest rate when it's always drowned out.

I don't think you can say interest rate effects are drowned out by inflation. If that was the case, home prices would only rise with inflation. My argument is that they are beyond that in CA and other expensive areas because interest rates are also extremely low right now.

I don't expect a big rise or a big slump; just a gradual, subtle downhill adjustment. The top was 2013, and it was based in a rally, government bailouts and low interest rates. The rally is getting a little surreal compared to the truth, even for the types who actually believe the media is free.

Call it Crazy says

To Season or Not to Season, That is the Question:

If you don't believe that housing is seasonal, then I don't think you have any business commenting on a housing blog.

Call it Crazy says

Sure it's seasonal.... All that snow in CA, AZ, NM, NV, TX, FL, AL and others has really put a damper on sales....

Do you disagree that sales in the all the above states are higher in the summer and lower in the winter EVERY YEAR?

The seasonality is not solely from snow/bad weather. I'll give you a clue--what takes a break for the summer?

tatupu70 says

Unfortunately, I was wrong.

You haven't factored in the much higher cost of college nor that an expensive time consuming degree is now a requirement to get a job which only required a high school diploma in your parents day. Nor have you accounted for the windfall your parents received in higher prices for their homes along with the ability to refi at constantly dropping interest rates.

Or how about some expectation of job security, the ability of a middle class family to afford a home payment on ONE income and not live paycheck to paycheck. Ask your parents about pensions too.

tatupu70 says

I think we would need to look at historical quintiles to confirm this. Because...

OK here you go:

Your chart is after tax, DTI ratios are calculated on gross income. Therefore, the monthly payment does not change based on DTI ratio whether we have pre-Reagan tax rates or post-Bush tax rates. We just have a little more expendable income than in 1979.

These are the complaints that drove me to figure out if they were also getting away with forcing higher housing prices on us. Unfortunately, based on a monthly payment houses are roughly the same cost. At least they aren't hosing us on that.

New Renter says

You haven't factored in the much higher cost of college nor that an expensive time consuming degree is now a requirement to get a job which only required a high school diploma in your parents day.

That is going to kill housing soon.

Nor have you accounted for the windfall your parents received in higher prices for their homes along with the ability to refi at constantly dropping interest rates.

And that is where they ARE hosing us. On top of this, we need higher down payments because prices have risen more than just with inflation.

Or how about some expectation of job security, the ability of a middle class family to afford a home payment on ONE income and not live paycheck to paycheck. Ask your parents about pensions too.

My wife would prefer to choose to stay home and raise the kids. That's what women's lib did for her...gave her a choice. Unfortunately, housing is the main reason she cannot.

We are trying really hard to do "better" than our parents so that our kids grow up with more than we did. Somehow with a combined six figure income (even after retirement and health care are covered) this is still not possible! ...because of all those intangibles you listed...

So I'm still with you--they still got a better deal...

JH says

Your chart is after tax, DTI ratios are calculated on gross income. Therefore, the monthly payment does not change based on DTI ratio whether we have pre-Reagan tax rates or post-Bush tax rates. We just have a little more expendable income than in 1979.

It is based on after tax--the point was increasing disparity can lead one to make false conclusions based on medians.

Not sure why you are bringing up DTI ratios? Are you implying that incomes haven't increased in the last 30 years--that it's only tax savings?

tatupu70 says

It is based on after tax--the point was increasing disparity can lead one to make false conclusions based on medians.

Not sure why you are bringing up DTI ratios? Are you implying that incomes haven't increased in the last 30 years--that it's only tax savings?

These numbers, since they are after tax and therefore have no bearing on DTI ratios, do not change the monthly affordability argument. I do understand your statement that there is income growth disparity, but 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. Therefore, at least three quintiles are purchasing homes. Outside of the fortress, I don't believe there are enough in the top 1% to drive prices through the roof for everyone else seeking financing. Therefore, I am hard pressed to accept your idea that wealth disparity is a significant driver in the increase in home values.

Rather, the driver of high home values is the willingness of banks and consumers to lend and borrow, respectively, at historically high rates. In 1949, mortgage debt was 20% of household income; in 1979, 46%; now it is over 100%. As a nation, we are not earning more, we are borrowing more. In 2012, the average Californian had $304k mortgage debt, $10k student loan, $14k car, and $7k credit card. (www.debt.org) These are simply averages, but they paint an ugly picture.

JH says

These numbers, since they are after tax and therefore have no bearing on DTI ratios, do not change the monthly affordability argument. I do understand your statement that there is income growth disparity, but 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. Therefore, at least three quintiles are purchasing homes. Outside of the fortress, I don't believe there are enough in the top 1% to drive prices through the roof for everyone else seeking financing. Therefore, I am hard pressed to accept your idea that wealth disparity is a significant driver in the increase in home values.

Outside of the BA, house prices haven't been driven through the roof as far as I can tell.

JH says

Rather, the driver of high home values is the willingness of banks and consumers to lend and borrow, respectively, at historically high rates. In 1949, mortgage debt was 20% of household income; in 1979, 46%; now it is over 100%. As a nation, we are not earning more, we are borrowing more.

No--as a nation, we ARE earning more. But because of wealth disparity, the median hasn't gained much. And therefore, average Joe does have to borrow more.

tatupu70 says

Outside of the BA, house prices haven't been driven through the roof as far as I can tell.

In the very expensive parts of the BA, housing is based on cash and large down payments. However, in most of the BA as well as Southern California, NYC, and other expensive areas, it is the same cost based on monthly payment as it has been over the past 30 years. And the middle class purchasing in most of those neighborhoods is NOT earning more. Only the top 10% are earning LOTS more, and that is mostly at the top 1%. They are NOT the ones buying most of the homes in the BA or LA or NYC. The middle class is and they are borrowing up to their eyeballs to do it.

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.

tatupu70 says

No--as a nation, we ARE earning more. But because of wealth disparity, the median hasn't gained much. And therefore, average Joe does have to borrow more.

That is true as the top 10% wealth gain since 2009 has been due to the stock market run up which 1/2 of it is because of the Federal Reserve policies (i.e., low interest rates to borrow money, etc.) and the other 1/2 of it because of corporations squeezing out more profits (i.e., due to outsourcing to foreign countries, etc.).

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.