patrick.net

i'm not buying until prices start increasing.

does that make me bearish? it doesn't because the astute person will notice that i'm not making any predictions. i'm just impartially watching the current market as it declines.

i've told people to wait, they never listen because they think they know better (they don't).
if you want to buy, go ahead.

in my experience, the best investors have patience (and are analytical). the worst are trigger happy (and emotional).

having said that mortgage payments on a median priced house are extremely affordable, price/income and price/rent for the sf bay area are close to historical norms so buying now, if you have to, probably isn't a terrible idea.

does it make sense to rent that house?

could you rent it for the same as the mortgage or more?

bear in mind, two incomes to support a house, is a disaster if one of you gets sick.

I love common sense. Thanks guys - I needed a dose of that.

Even ARM Mortgages at this point makes sense.

@ Hysteresis - I'm trying to be analytical. I will admit my patience is wearing thin though.

@ patb - I don't know how it is in your area, but around here it's hard to gauge what houses would rent for. I access to asking rent, but no data as to the actual rent agreed to between the landlord and the tenant or the lease terms. The advertised rent data is all over the place - and doesn’t account for the condition of the house, what utilities may or may not be included in the rent, etc., etc.

My personal metric is income vs. price - you can't spend what you don't earn. Based on that - prices are still elevated. Heck this area has a lack of affordable RENTAL property – to say nothing of affordable real property for purchase.

My personal metric is income vs. price - you can't spend what you don't earn. Based on that - prices are still elevated.

EastCoastBubbleBoy says

I don't want to be one of those people waiting for 2000 prices to return. Flat out not likely.

That has already happened in multiple areas around the country. It's happening in the midwest for sure.

Realtors Are Liars® says

Interest Rates Are Falling-CHECK

As I said back when rates were 5%, this is actually a reason to buy. While interest rates may be 3.5%+ now, they could in fact go down to say 2.25%. Ceteris paribus, that would increase what $1050/mo net cost of ownership could buy from $350,000 to $430,000! And lower interest rates also imply lower investment returns overall, which reduces the opportunity cost of paying down a mortgage.

Realtors Are Liars® says

18 MILLION Excess Empty Housing Units-CHECK

There are not 18 million empty units in the market I want to buy, since i want to buy a house in neighborhood established in the 1960s.

EastCoastBubbleBoy says

My personal metric is income vs. price - you can't spend what you don't earn. Based on that - prices are still elevated.

Well, it has to be *disposable income* vs. monthly payment. Interest rates cut in half from here would in fact make houses much more affordable, thus increasing their price.

OTOH, disposable income has to worry about the return of Clinton tax rates, $5+ gasoline, increased FICA & Medicare (we probably need to double these to avoid blowing ourselves up), 30% tariffs against our major trading partners (China, Japan, Mexico, & Germany), higher health insurance costs thanks to PPACA, higher food costs thanks to peak oil (and more of our food supply exported to pay on our trade imbalance), college becoming unaffordable for most like it was back in the 1930s, etc etc.

What we spend for housing is determined by our collective surplus. This nation has been living in bullshitland since the 1980s and I don't know how long the veneer of irrationality can continue to be maintained.

But if the bullshit is to continue, it's going to be like Japan, with depressed interest rates. That's the only way they can maintain their 400% debt-to-GDP ratio. We're not there yet, but another 10 years of trillion dollar deficits will put us in the same ballpark.

This is known as the giant error of pessimism.

‘The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born, not an infant, but a giant.” So wrote AC Pigou in Industrial Fluctuations (1927).

I agree with Bill.

It appears that interest rates are going to be basically where they are now OR MUCH LOWER for the rest of our lives. So maybe house prices will go sideways from here 4eva. I think thats pretty close to the Japan scenario which really sux for everyone except the FedGovBanksWallStreetHedgfunds who get to keep living as zombies and taking million dollar salaries at taxpayer/saver expense.

toothfairy says

This is known as the giant error of pessimism.

‘The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born, not an infant, but a giant.” So wrote AC Pigou in Industrial Fluctuations (1927).

This is my sentiment as well. A lot of people here saw the insanity of the bubble years & were thoroughly disgusted with it (myself included). Now, many of us WANT to see it crash & burn, and for the irresponsible & stupid to see some sort of "punishment." That's all good & fine, but the market isn't free & in reality, the consequences for the stupid will probably be softer than they should be. Just as the overly optimistic bought into "prices always go up," the overly pessimistic are buying the, "prices always go down" mantra. Prices are going down now, but at least around here, there will never come a day when prices go negative & someone pays you to take their house. If that day DID come, the Bay Area would look like Detroit & nobody would want to live here anyway. This "1965 prices" stuff seems sort of silly. Considering how many people in the Silicon Valley pull $100k or more, prices aren't going that low unless the tech economy dries up (it could). The market will bear what it can, and in the SV it can bear a lot more than $150k houses presently.

With that said, at this point, I see nothing wrong with waiting to buy for for a few more years. Prices aren't going to go up in the foreseeable future, and it seems entirely plausible that prices will keep sliding down for at least a few more years. It's a waiting game now, and those with some patience will probably save a 15-20% as compared to right now.

Are we being too bearish on housing?

I think you are being too impatient waiting for housing prices to fall.

At $14,000 annually just for property taxes alone, most likely you can continue waiting.

This is a bearish forum so expect advice on here to be one sided with no opposing views.

Buying now is great assuming you get a deal. Buy under market value to help stave off further declines. Prices may drop further (10% some predict), but if you factor that into your asking price then you won't have to worry.It's not unusual to get 10% or more under recent comp sales.

So why time the bottom? You can wait for prices to go up if you like but who knows if that might be another government trick like the tax rebate from 2009?

Not sure why everyone thinks a home has to be cheaper than renting, I'm against the patrick clan (herd) on this one. Nobody buys a car expecting it to increase in value. Cars decrease as soon as you step in them and nobody here complains. They could all take public transportation but instead they pay a premium for freedom to drive on their own. Homes don't have to be any different. You pay for perks of home ownership. If you can get a deal and buy under market value to stave off future price drops, go for it.

Bellingham Bill says

As I said back when rates were 5%, this is actually a reason to buy.

I dispute this idea because lower interest rates offer price support and if interest rates trend higher, prices are likely to fall. At the same time, the real question is: is there a threat for interest rates to rise anytime soon? Answer is a resounding NO, even more so if we have a recession.

I also agree that low interest rates matter if you are financing your house, but if you sit on a pile of cash - then equations change.

Bellingham Bill says

. This nation has been living in bullshitland since the 1980s and I don't know how long the veneer of irrationality can continue to be maintained.

LOL, true. Exponential debt all the way!!!

Bellingham Bill says

We're not there yet, but another 10 years of trillion dollar deficits will put us in the same ballpark.

I think US is trending like Japan. Even more so given all other countries are also in deep trouble.

snyderkv says

So why time the bottom? You can wait for prices to go up if you like but who knows if that might be another government trick like the tax rebate from 2009?

you need to be analytic and know how to play the odds.

i didn't know at the time how much the home buyers tax credit would affect prices(turns out it had a large but temporary effect.)

but i did see a ton of excited buyers at open houses. i would see the same 3 or 4 families at every open house in an area. they were so happy that they were going to get an $8k tax credit on a $600k house (which is only 1.3% of the purchase price).

i just told myself i'm not going to follow the stupid people. i'm glad i didn't follow them.

You are not being too "bearish".
The notion that the USA requires people to go into debt to buy crummy houses at ridiculously inflated prices is an economic fiction that although absurd, has many proponents.
Who are they? Well, governments love property taxes. Those millionaire cop, firemen and other worker pensions have to come from somewhere.
Construction trades, and guys who put those granite counter tops in kitchens depend on the idea.
If you wonder how an economy can do without people owning so many houses, check out Switzerland.
They have a fantastic savings rate, a high GDP per capita, a high income per capita, a super strong currency, ETC. Yet, they don't own more houses per capita than we, probably fewer.
If you believe that those slack-jawed clowns shuffling around the mall will be making vastly higher wages than you in the future, then by all means, house prices will go UP in maybe 20 years.

As someone previously mentioned, as interest rates inevitably go up, this will put downward pressure on house prices.

PockyClipsNow says

It appears that interest rates are going to be basically where they are now OR MUCH LOWER for the rest of our lives.

That's the silliest overstatement of the Year.

I fully expect the highest interest rates in not only the US history but possibly globally, just as soon as the economy revives.
And banks can devise a new scheme of accessing Risk. The old models are as out of date, as sending Soldiers into Iraq, with Civil War era muskets.

That is the reason why as interest rates fall, either congress passes new legislation at the bank lobby behest, to impose more fees and other deterrents. So to make those low interest rates less attractive to the consumer. And for good measure to make doubly sure there aren't many takers, the required FHA loan fico score has never been higher.

"Renters
If you are currently renting, I would consider all of the same points I raised for first-time homebuyers. Especially if you are comfortable where you are, there is no reason to feel urgent about buying a home in 2012.

A common complaint from renters is that they could afford a mortgage for what they pay in rent. But consider as well that, if the price of your “target” home is falling at $20,000 per year, you are still $20,000 ahead each year by not renting.

In the Bay Area, many renters have been “saving” $50,000 to $100,000 or more each year, simply by staying on the sidelines.

This isn’t to say that we all need to try and time the exact bottom of the market. But if that kind of thing does plan into your calculations, rest easy knowing that the bottom isn’t here yet."

http://bayarearealestatetrends.com/2012/01/11/sound-real-estate-advice-for-2012/

Goodness gracious! $14,000 a year in property taxes? Even if you ever manage to pay that sucker off, that's a hell of a lot of money to fork out every month!

uomo_senza_nome says

I dispute this idea because lower interest rates offer price support and if interest rates trend higher, prices are likely to fall.

I don't think interest rates are going to "trend higher" in my lifetime.

Interest rates are only going to go up voluntarily there's wage inflation to fight, which a) is unlikely and b) good for home prices.

If interest rates go up involuntarily (ie without growth to back it), it will BK us forthwith.

http://research.stlouisfed.org/fred2/graph/?g=4r1

shows how we've tacked on ~$20T of super-ridiculous debt since 1998. 100 bp on that is $200B, or $4000 per non-indigent household. Where we're going to come up with that?

The red line shows Fed debt, $15.2T right now:

http://www.savingsbonds.gov/NP/BPDLogin?application=np

We'll be lucky to hold that to $1T/yr growth for the rest of the decade, meaning it too will be $20T+ later this decade. 5% interest on the debt would be a $1T/yr budget line item for interest. No f---ing way can we pay that, how can we when are already running $1.2T/yr in the red?

Then there's the baby boom hitting 65 and getting their pensions. There's untold trillions that have to unwind and they have to find cash for. This is going to wipe out local and state just as bad as the $4T+ owed to Federal retirees (including SSA), especially since government pension payouts are predicate on their funds earning 8% for all time. Another graph I posted showed that federal spending on medicare and SSA is already 25% of wages, and only one year of the baby boom is eligible for medicare. By 2026, all 80 million will be on it.

We can't inflate our way out of pension or medicare burdens. We can't raise taxes apparently, and even if we do go back to Clinton rates (by letting the law finally sunset) that's only good enough to tread water fiscally. We can't cut the defense budget since that's socialism.

I don't see interest rates going up in this scenario. I see them going down, just like the situation as a whole.

Bellingham Bill says

Interest rates are only going to go up voluntarily there's wage inflation to fight, which a) is unlikely and b) good for home prices.

If interest rates go up involuntarily (ie without growth to back it), it will BK us forthwith.

I agree they won't but I don't see how interest rates going higher would be good for home prices when the government IS the mortgage market at the moment.

Even if prices trend higher, it would only be nominal dollar prices and that's not real appreciation by any means.

Either way, housing as an asset is dead at least for the next 5 years.

Bellingham Bill says

No f---ing way can we pay that, how can we when are already running $1.2T/yr in the red?

I agree. The debt ponzi can continue longer than most people's lifetimes.

snyderkv says

Not sure why everyone thinks a home has to be cheaper than renting

It really behooves one to make the correct analysis for one's dominant life expense.

Thus far in my adult life I've paid an average of $8000/yr on housing. Not bad, actually, but the $200,000 this adds up to is 5x my cost of education, 4X transportation, etc.

I screwed up not buying in 2002 like I should have, but I wasn't expecting the ebbing dotcom nuttiness to be eclipsed by the PTB letting the entire system going on tilt 2003-2006.

I had my eye on this house in late 2001:

http://www.zillow.com/homedetails/2491-W-Browning-Ave-Fresno-CA-93711/18707613_zpid/

had I bought it for $300,000 I'd have ~$200,000 equity now and a declining $1000/mo cost-of-ownership.

Clearly buying in 2002 was the right move to make, alas.

I am not personally opposed to buying now, but I think I stated my reasons above for why & how prices might fall a lot further from here -- higher taxes, higher energy costs, higher food costs, higher health costs in the end have to come out of either higher wages or housing costs, since housing costs are driven by our household surplus of NET income minus high priority expenses.

uomo_senza_nome says

Even if prices trend higher, it would only be nominal dollar prices and that's not real appreciation by any means.

Doesn't matter. Money is money, if inflation hits it's not going to miss rents, that's for sure, and my LL doesn't offer 20 year leases.

Realtors Are Untrustworthy says

Prices were already inflated 50% by 2002.

Not in Fresno, obviously, after looking at crappy condos in Santa Cruz and MV all day it was awesome to look at the wonderful -- 15000' lots with a quality of life generally indistinguishable from Los Altos -- properties that were LESS in Fresno, and all "just" a 2.5 hr drive away. Prices were off the hook in the S SF Bay Area, of course, but the appearance of Google, migration of FB, return of Apple (and the invasion of Red Chinese for that matter) I think has forever altered the price dynamics of the Fortress(es) there.

Realtors Are Untrustworthy says

Indeed they were. Prices started inflating in 1996.

Prices started moving up in some areas, yes, this was very uneven until 2002.

I helped my sister buy in Orange County in late 2001, she bought a 3b condo for $200,000 that still zillows for $250,000 now [recent comps bear this out so don't go there], which iMV is a screaming deal since the monthly all-in expense on a $250,000 condo @ 4% interest is $1600/mo, at least $500/mo under rents.

Perma-bearing is fun, but if you're a perma-bear some day you're going to be wrong.

Being isolated from the dotcom madness, prices in Fresno did not start moving up until interest rates fell in 2002 and the ensuing general subprime and NOO boom hit the valley in 2003.

EastCoastBubbleBoy says

So what do you think? Are we being too bearish?

Yep. Few here in 2015 will admit it, but if they had a time machine they would love to go back and beat the shit out of their 2012 selves for being way too bearish and missing the boat completely.

Take the OP's argument.

Substitute the word "oil" for "housing" and roll back the clock a couple of years.

Nobody builds starter homes anymore. This is a direct result of the lack of government intervention in housing; a return to normal for capitalism. Just like before the 1940s, there were either tenements or mansions, with very little built in between. This is true in both the UK and USA, and I suspect of most countries at most times without government intervention.

The end of rent control, public housing, and affordable housing regulations and subsidies in the 70s explains it all. I'd rather wait a year to sell a half million dollar place it cost me 200k to build, than sell a starter home within days, on the same lot for 150k that cost me 80k to build. This is doubly true if I'm building apartments/condos in an urban area.

yes, the builders are being very careful with the product (as they should after the last debacle) and only targeting the demographic that can afford to make the purchase. this also makes the supply of new stuff lower than usual.

not a bad thing in riskier markets where buyers are 50% to 70% mortgage payment to income ratio. the historic "normal" should be 30% to 35%. SFBA at around 70% (and with low rates!) is playing with fire currently, if mortgage rates were to somehow increase (emerging markets will probably prevent any rate increases for a while though).

JasonM says

Yep. Few here in 2015 will admit it, but if they had a time machine they would love to go back and beat the shit out of their 2012 selves for being way too bearish and missing the boat completely.

Thankfully, I bit the bullet and bought at the end of 2012. I skipped right over the "starer" home/condo and got a place that will meet our long term needs for years to come (barring any unforeseen events). So far, it's been a good decision. I got a fair price and yes, luck had something to do with it. (It was a foreclosure, and for those who have read my other posts know it was a two year ordeal).

Marin County real estate is in high demand and inventory in Marin is still the buyer’s greatest challenge. Last week the historic estate Locksley Hall in Belvedere with over 9000 Sq Ft in living space sold for $47.5 million breaking all records of previous sales.

http://themarinrealestate.com/blog/sale-of-mansion-breaks-all-time-record-in-marin-county/

so, i see all these old bumps and realize that some people may have an axe to grind with this site... but 2010 to 2012 was really competitive for buying houses without all cash offers in coastal california.

don't kick yourselves too hard.