patrick.net

prices were somewhat reasonable in 1993, 1997 was already bad.

If we are heading to 1972 prices the LEAST of anyones worries will be how much they paid for a house...

Los Angeles Renter says

So on a monthly payment basis.. A 400K home is costing a family the same out of pocket to own as a $270K home in 1997.

Sure, on a monthly payment basis. But it will take you 50% longer to pay off the 400K home, at an identical rate. That matters.

The only way for prices to go is down. You don't need to be a Master's Degree Economist to see that the combination of the economy, jobs, and interest rates can only put pressure downward on home prices. Those of us privileged enough to know of Patricks housing blog also know of the shadow inventory, Freddie, and Fannie. Oh, by the way, next time you are lounging on Sunday and see the homes 'sold' in the Real Estate Section, go look up a few on propertyshark.com. A person didn't buy it, a bank did...

FortWayne says

prices were somewhat reasonable in 1993, 1997 was already bad.

As I recall, in SF there were fairly large lofts going for $160-200K. Many were from converted warehouses. Around that time we had med incomes around 50-65K. Then everthing went balistic upward to $750K or so.

http://www.nytimes.com/1997/04/27/realestate/live-work-law-for-artists-roils-san-franciscans.html

A report released this month by the National Association of Home Builders put San Francisco's median residential price for 1996 at $285,000. With prices beginning at $175,000 to $200,000, lofts are the cheapest nonsubsidized units on the market, according to David Becker, a broker with Ritchie Commercial Real Estate. They are, nonetheless, still too expensive for the artists for whom they were intended, Ms. Hestor said.

oops, sent to the email.. Well someone else told my Columbian Hair Stylist that if she wanted to buy in LA now, 'make sure your family wants to live there and you don't have to put any more money in fixing things' LOL What irritates me is that even if I wanted to pay 30% or so more than 1997 prices, 'whoever' is releasing all the garbage, 2 bedrooms 1 baths, 1st floor units looking out onto walls, etc. It's unbelievable.

I've come to the conclsion that RE prices are in constant ebb and flow. Home inflation isn't constant, but in flux from 5.8% appreciation to 3.78%.

In a market like we experienced between 2000-2007 the curve as a whole moves to reflect 5.8% gain from 1935. Then in the down turn like we've been experiencing that curve falls in tandem to reflect a 3.78% inflation.

While it is easy to trend from 2006 to 2011 and say home prices fell 10-20% YOY for that time line. But if you look back to the historical data, it's in line for a constant 3.78% inflation.

Here's the trend on a typical South Florida house purchased in 1964 for 16K.
At this rate, the average low lines up for what I paid in 2010 160K, and puts me on track to only gain a paltry 100K in 12 years.

16000 3.74% 598.4 16598.4 1964
27072.35844 3.74% 1012.506206 28084.86464 1974
45807.03695 3.74% 1713.183182 47520.22014 1984
68262.68573 3.74% 2553.024446 70815.71018 1994
125452.4895 3.74% 4691.923106 130144.4126 2004
156371.1916 3.74% 5848.282567 162219.4742 2010
162219.4742 3.74% 6067.008335 168286.4825 2011

252033.2927 3.74% 9426.045146 261459.3378 2023

With this model, using the market average high, appreciation happens accross the board quickly.
The house would be 30K more than I paid in 2010, but on track to gain 200K in appreciation in the next 12 years.

16000 5.80% 928 16928 1964
27072.35844 5.80% 1570.196789 28642.55523 1974
45807.03695 5.80% 2656.808143 48463.8451 1984
79891.16671 5.80% 4633.687669 84524.85438 1994
130484.2615 5.80% 7568.087166 138052.3486 2004
183008.8694 5.80% 10614.51443 193623.3838 2010
193623.3838 5.80% 11230.15626 204853.5401 2011

380877.9388 5.80% 22090.92045 402968.8592 2023

I think anyone buying a house today, in this market, can expect somewhere between these two models 15 years out.
How ever, it is unrealistic to expect someone to pay 400K for a Ham and Egger house in 15 years. Because wage inflation has not adjusted in line with RE in over 20 years.

This is what the bubble market was like and shows just how unsustainable that market really was.

16000 8.74% 1398.4 17398.4 1964
27072.35844 8.74% 2366.124127 29438.48256 1974
45807.03695 8.74% 4003.53503 49810.57198 1984
99478.23044 8.74% 8694.397341 108172.6278 1994
137836.8863 8.74% 12046.94386 149883.8301 2004
227877.4893 8.74% 19916.49256 247793.9818 2010
247793.9818 8.74% 21657.19401 269451.1758 2011

677271.3407 8.74% 59193.51518 736464.8559 2023

At that rate, we would have had $736464 starter ranch houses.
That's just unrealistic to entertain, and it's ludicrus that our Government would like to implement policy to make it so.
Not in a time when our Government is looking to create more minimum wage jobs.

I respectfully disagree, at least for the San Fernando Valley. Virtually the only non distressed sales here are from people who bought long ago or people willing to take a loss! The analysis can be done from redfin.com. I'm personally glad I did not purchase 2 years ago as I would already be underwater.

Well I did preface South Florida market.

Don't be a prisoner of the times.
I'm not saying now is the time to buy everywhere. I'm saying when the inflation rate line up with historic averages then that would be a time to buy.

Once you're in historic averages, you don't need to sweat what the market might do in the short term. Somewhere you're immediate quality of life has to be worth more than a few years of depreciation. That's provided, you've bought it at the fair price.

Our problem now, is we've gone from Greed at one extreme, wanting to buy a house at any price and expecting unrealistic YOY appreciation, to being so concerned about buying at the absolute bottom.

The market at this rate is going to grossly over correct. But I suspect the bounce back for the first few years of rebound are going to yield 10-15% followed by some single digits and even possibly back to negative numbers by time the 15 we're years out.

But I'd bet on it, that it will be at least 3.??% average when you go back and follow the historic trend.

I have to end the conversation when folks tell me they bought a 1br condo in south Florida, in the bubble. That means they paid anywhere from 125K-250K and the place is now only worth 28K on average.

What gets me, when I did carpet back in the 80s and 90s, the snow birds that lived in them then, told me they paid 30K for them in the 70's. They were worth on average 60K to 70K back then.

The GOP, then if you want you don't have to end the conversation with me because I did not buy in South Florida during the bubble and 125K to 150K is right on the money. Not saying I want a one bedroom, but even 60 - 70k is reasonable if a person wants it.

Well you at least understand why, because you're here.
I usually end the conversation because I don't want to ask them...
"What were you thinking buying a condo with such low historical value, in a town, where there are twice as many many new condominium units being built, than there are existing units.
And that's not to say we had a deficit to begin with.

David9 says

then if you want you don't have to end the conversation with me

David9, meet The Artist Formerly Known as Tenouncetrout who has no bounds in his rambling and irrelevant responses. They are generally difficult to decipher and don't generally present coherent thoughts.

And your response is what?

It's not polite nor adheres to Patrick's guidelines he's been trying to lay out. Though his be nice policy means, anyone that doesn't agree with the Patnet left should take their comments as is with out conflict. And the hard left here are free to crap on anyone's thread they don't agree with impunity.

I'm done handing your asses to you, I'll just get banned anyway. You'll end up running and sniveling to Patrick and then he'll ban me anyway. Then just parts of my thread will be taken out of context and posted in a separate disconnected thread.
What's the point?

Edited in the Spirit of Patnet's guidelines.
...and the edited parts have been read by the intended.

The GOP says

It's not polite nor adheres to Patrick's guidelines he's been trying to lay out.

Actually, discussing the substantive content (or lack thereof) of your posts, as I did, is fully within bounds. Patrick, feel free to correct me if I'm wrong.

Your post, however, called me a douchebag, which is out of bounds. However, I'm not going to flag it just to show how embarrassing your posts are.

The point is that you're rambling on and on with non-sense about South Florida, when absolutely no one is talking about South Florida. Why? Your 4:33 and 5:22 posts did not provide any new information and were basically just rambling.

And since when am I hard left? Since when are you hard right? You occasionally write incoherent posts about Elizabeth Warren who is generally not a champion of the right.

OK fancy pants you win, you got me, I can't get one over on you.
Now leave me a lone.

Hello, not sure who to reply too. I took no offense by anyone's comment(s).

About the possibility of still 'bubble' area's falling further. This owner is willing to take a $134K loss... http://www.redfin.com/CA/Woodland-Hills/21650-Burbank-Blvd-91367/unit-318/home/3983668

Like Software testing, we can analyze every possibility for quite a long time. Maybe he/she hit the lotto, lol! Good for them. To me, it's a big red flag not to buy in this area right now. There are other listings like this too.

What is the draw with condo living?
Especially a building as ugly as that, at that price. That building looks like Dentist Mall.

It wasn't terribly long ago, $250K bought you a nice spread in Turnberry Isle.

Dan8267 says

Vicente says

Yes, let's return to those times.

I'm with you. The late 90s were great. Hell, I'd blow Clinton to get back that economy.

Me three

Los Angeles Renter says

1997 Interest Rates were 7.5% on average
2012 Interest Rates will probably average 4% at the highest the rate things are going..

At 7.5% banks were very willing to give the money,now even at 4% banks are very unwilling to give the money. Go figure.

Bay Area Home Sales Up, Prices Down from Year Ago

October 14, 2011

http://www.dqnews.com/Articles/2011/News/California/Bay-Area/RRBay111014.aspx

Thomas, you live in Si Valley right? Can I ask, do you own your house? If so, and you think prices will fall to 1997 or lower, why not sell? just curious.

I own, I don't think prices will go up anytime soon, but I don't think they will fall to 1997 levels either, based on higher salaries in high tech than prevalent in 1997. Plus, there's still some .com money that people have, enabling home purchase. I know, I still have some of it. Didn't spend it all on Hummers and cosmos.

but if I thought prices would drop by 50%, I would sell and rent; the inconvenience would be worth a few hundred K.

SiO2 says

I own, I don't think prices will go up anytime soon, but I don't think they will fall to 1997 levels either, based on higher salaries in high tech than prevalent in 1997.

Interesting question. I think prices will stay mostly flat nominally and inflation will make housing cheaper (i.e. wages theoretically should go up, although they haven't been doing that so much lately). I think we would have had a lower drop during the initial part of the bust, but the government softened the blow with massive stimulus. We're still seeing massive stimulus right now with the ridiculously low interest rates, although even those historically low rates haven't greased the market back to record sales.

The real crisis is that prices are staying artificially high due to stimulus. This can create a never-ending cycle of stimulus if politicians feel as if they need to continue to create a false floor in housing prices. Even if this means that people have the same payment as a much lower price at 8%, it will still take people a lot longer to pay off the massive principal balance, on average, than that lower price at 8%. In addition, this can prolong the so-called crisis -- if people are still buying $800K houses in areas with good schools on the Peninsula at 4% or less, and those people later want to sell those $800K houses for a nominal profit, the economy is going to have to be pretty damn good (or wages must rise quite high) to compensate if interest rates rise to 8%.

Low prices are good. Low prices mean more potential buyers and more transactions. Low prices mean those who didn't pay absurd bubble prices still make a reasonable profit, albeit not as much as they expected on paper. Low prices mean fewer fees to realtorsused house salesman and banksters. Low prices mean less principal to pay off. Low prices mean less money gets wasted on housing and more gets used for either other necessities or more productive things.

SiO2 says

Thomas, you live in Si Valley right? Can I ask, do you own your house? If so, and you think prices will fall to 1997 or lower, why not sell? just curious.

Owner in Los Gatos since 1992. They can fall as they have fallen from 1989 peak to mid 90s bottoms.

Corrections eventually happen. Mid 90s prices represent 1985 prices plus inflation. 2010 below was simple the second shoulder forming.. Soberity is a b*tch.

SiO2 says

based on higher salaries in high tech than prevalent in 1997.

Higher salaries were due to $150B of venture (Rich People) funding small startups. Currently we are back to mid 90s levels regarding $funding, but fewer deals.

Back in the mid 90s we had some 315 or so public companies, 400+ by 2000, and today dropping near 200 public cos. (employers). We were employing lots here to lots everywhere else around the globe..... What does it tell you ?

Go all the back to the 80s where we had real fundemental growth in job creation and incomes,... did prices of RE jumped by equal magnitude as we seen post 2000.

Yes, eventually everthing falls back to a norm.

"1997 home price $270K at 7.5% interest rate (20% down) = $1527 principal/int month
2012 home price $400K at 4% interest rate (20% down) = $1527 principal/int month"

This analysis is foolish for the following reasons:

1. Run a simple loan amortization and you'll see that at the lower price your gross cost to own the house free and clear after 30 years is $597,709 vs $629,982 if you buy it at the higher price.

2. Your net (after tax) cost to own the house free and clear is even lower at the lower price because you have more interest to deduct each year.

3. You don't run the risk of your home's value dropping to $270,000 when interest rates do increase to 7.5%.

A lower price at a higher rate is the better way to go.

Proverbs, it really is that simple isn't it? buy low, sell high. It is always better to buy at a low price than a high one.

Proverbs227 says

A lower price at a higher rate is the better way to go.

And that will be Affordibility 2.0 from the NAr.

Proverbs227 says

A lower price at a higher rate is the better way to go

Actually, a lower price at a lower rate is the best way to go.

:-) Yeah! 1997 prices at 4% will work. Here in the San Fernando Valley, some non-prime cities like Canoga Park, Van Nuys, Reseda, etc. are at pre-recession 1993 prices. (Which in my opinion are higher than 1997 prices)

David9 says

at pre-recession 1993 prices. (Which in my opinion are higher than 1997 prices)

1997 was probably the bottom of the market after the 1990-1991 peak during the 90s housing bust. It is probably more than your opinion that 1993 prices are higher than 1997 -- probably fact for the market as a whole, especially when you adjust for inflation.

Big :-) Yes, even at work everyone says how diplomatic I am.

Hi, Thomas, sorry to keep on you, but I am curious. If prices will go back to 97, that's perhaps a 50% drop from today in higher-end areas like LG. So, why not sell if your asset will drop in price by 50%? If I knew that a stock, or a house, would drop like that, I would sell. Tell you what, I will even pay you 1999 price for your house; that should be a great deal, since that was higher than 1997.

Regarding salaries, my experience is that salaries are higher than in 1997. Not only for me personally, but for a given title (e.g. Sr Engineer). The company where I work is profitable, and is hiring even now (and even in the US). I understand that this is not the case for everyone, and I am fortunate - but, I am not the only person who is employed and making more money than in the past, as evidenced by the fact that people are still able to buy Fortress houses at prices higher than 1997.

SiO2 says

If prices will go back to 97, that's perhaps a 50% drop from today in higher-end areas like LG.

Not if you adjust for inflation, is it? At least, when I did this calculation recently on this forum for Marin County's median sales price (not that median tells you the whole story), I got a much lower percentage -- maybe 20% when adjusted for inflation.

SiO2 says

Regarding salaries, my experience is that salaries are higher than in 1997. Not only for me personally, but for a given title (e.g. Sr Engineer). The company where I work is profitable, and is hiring even now (and even in the US).

Friend of mine was a Vp at 3Par, its hard to say how long before he will pick up a gig. HP bought out 3Par. Others have seen their job vanish and they took jobs they once had some 10-15 years ago with paycut. Controller to Accounting Manager, Accounting Manager down to Sr Accountant or Some Consulting gig.

Engineers ? There is a glut of them in the US. Especially since there are currently fewer employers in SV and many options to relocate elsewhere. Half of my employers R&D is overseas. Im not pleased with any of that.

SiO2 says

If prices will go back to 97, that's perhaps a 50% drop from today in higher-end areas like LG. So, why not sell if your asset will drop in price by 50%?

Asset ? My financial assets which I started by saving back in '82 have and are doing well. When I bought, LG was a city in SCC like many others. My focus has been career, not trying to get rich. Nothing special about LG when I bought. But it was far enough from work. Of course, some people from elsewhere believe its special. Where were they back in the 80s?

Corntrollio - I'm not sure if the claim of 1997 prices should be inflation adjusted or not. But even if so, if you look at Thomas Wong's chart, the SJ index is now about 580, but the inflation line is 300. So if it will go back to that line, that's almost 50% drop.

Thomas, I'm sorry to hear about your friend. Like I said, not everyone has a job. Maybe that's part of the widening separation between Fortress and elsewhere - those with jobs are doing well or better than before, those without, not so much. So if the average salary is increasing, it will create demand in certain areas, but if the number of jobs is declining, the area with demand will shrink.
If the number of jobs decreases by a lot, the salary will ultimately decrease based on supply and demand, but for now at least it is still difficult to find skilled engineers, therefore they can command a good salary.

I consider the house to be an asset, as it has some value, and I could sell it. Unlike some clothes, even if I spent $1000 on a suit I couldn't really sell it for $1000 or even $500. If I thought my house (or any other asset) would drop in value by 50%, I would sell it. I don't think the house will drop that much, therefore I keep it. I wonder why people who think prices will drop by 50% would keep a house; I suppose that the enjoyment of ownership (which has been discussed before) outweighs the financial loss.