patrick.net

Things can still go either way.

http://research.stlouisfed.org/fred2/graph/?g=94P

blue line is year-on-year job growth.

red line is federal deficit spending divided by wages.

The takeaway from this chart is that from 1960-1990 jobs were increasing 2-5% (and when they crashed it was thanks to the Fed raising rates, but that isn't shown here).

The post-dotcom job recovery only got to 2%, and that was with the $7T housing bubble spending of 2002-2007:

http://research.stlouisfed.org/fred2/graph/?g=94Q

shows how once lending (red line) failed, hiring (blue) dropped in response.

Anyway, back to the first graph, the red line at the end shows how the deficit spending has reversed the 2008-2009 job crash.

So the economy and housing market is utterly dependent on what Congress does next year!

I'm not bearish on the fortress, I think it's insulated from wider economic realities, thanks to people cashing out of the business and sticking around anyway.

If Romney wins I expect the Democrats and non-insane Republicans to coalition & give him a pretty nice stimulus package that will give his first term a dose of 1980s style recovery.

If Obama wins I don't know what's going to happen next year, legislatively

Probably pretty shitty, an extension of what 2011-2012 has been.

State-wise, I'm long-term bearish, too. We've been writing checks our finances can't cash and cutbacks and tax rises are in the cards.

Whichever hits, that's not good for the state economy.

My overall thesis is just a long slide still. I don't see the hope for positive change, things getting better like what the 1990s gave us.

The dynamics of the 2010s and 2020s are entirely different from the 1990s. Mainly the median boomer was aged 38 in 1995, in 2020 he will be 63. BIG difference.

Hrhjuliet and Delurking, I thank you for this post and the comment. I am in the Bay Area and wonder the same thing. Houses seems suspiciously priced. Your post and comment are thoughtful and data based. Let's hope the name-callers and bullies can follow your lead in the responses.

As a side note, I have noticed how a friend of mine who bought in 2009 gets very passionate in arguing that for one reason or another that housing prices won't drop further. I guess it is because he is in that boat. I want to say to him that it turns out that the passion of your argument isn't going to impact the outcome. Either they are sustainable prices or they will fall. His bluster isn't needed. He isn't going to sway the outcome by being emphatic and pressured in an argument with me. I don't think he can detach himself, so I just listen and sometimes raise issues that are at odds with the idea that the "cool factor" of SF will sustain these prices.

-He says to me that people will always want to be here. I remember reading that the population of CA is decreasing.

- He says that VC money is flying around and will keep prices up. I remember reading that VC money is like 5% of what it was at the peak of the tech industry and earlier in the bubble years.

- He says that the "cool factor" and nice weather of SF will sustain the prices. I wonder if he may have a tiny bit of a point to that in that people are willing to sacrifice and use two incomes to pay for a home here to a more extreme degree than other places.

- WHen I ask how jobs and income figure in to housing prices, he references the tech industry. And argues that the tech industry can sustain prices at the current levels. I seem to remember reading about how tech industry is often finding cheaper places in the US to do business (like Austin). I am not saying tech isn't here, too, but I am wondering if it is less skewed for BA than is has been in the past.

- He thaws foreign investors and existing millionaires into the argument, too. I seem to remember reading things here on Pat.net that made these seem a bit like urban myths that were not capable of sustaining prices quite this high.

So, I am interested in hearing the reasoned opinions of others. I am not sure intensity of discourse is going to make my friend right. Thanks for the post.

BG

There doesn't need to be a downturn. Things can just muddle along as they have been for a while. Nothing will change the situation.
The same forces driving up Manhattan real estate are working in the bay area=foreign buyers.
If you must struggle to make payments on a $700K+ mortgage somewhere you are taking a pretty big risk.
But, where I live for example the weather is very nice and the location is almost ideal. It's not far to drive to interesting places here and there.
What is that worth to someone? I don't know.
Is real estate here vastly overpriced? Almost, but those who buy here lately are employed in high tech so they have bay area salaries not local salaries.
Then the cops and firemen of course can afford anything.
I'm so old I can remember when neither of those occupations could make you rich.

bg says

So, I am interested in hearing the reasoned opinions of others. I am not sure intensity of discourse is going to make my friend right. Thanks for the post.

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.

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.

Call it Crazy says

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....

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.

freak80 says

Could there be down-side "overshoot"? Anything is possible, but historically that hasn't happened.

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.

hrhjuliet says

So, it doesn't seem to be following anything historical to begin with.

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?

freak80 says

If you don't mind me asking, where are you looking to buy? Are you in an "expensive" market like SF, NYC, DC?

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. ):

hrhjuliet says

yet I'm sort of stuck. ):

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.

The government is the housing market.

And trying to predict what the next crazy thing the government will do is not so easy.

StillLooking says

The government is the housing market.

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?

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.

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.

freak80 says

Use Patrick's rent vs. buy calculator,

We used that calculator before. A fantastic tool, but I forget where "it lives" on this site. Do you have a link? Thanks. (:

Call it Crazy says

If I own, I have to deal with the other landlords (the bank and city taxes), so where is the better place to be???

Freak80 had a great suggestion: freak80 says

Use Patrick's rent vs. buy calculator,

Hope this helps you too. Your questions are as tough as mine. Good luck. (:

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.

hrhjuliet says

When do you think the next real estate downturn will occur? Why?

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.

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.

Call it Crazy says

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.

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.

everything says

Still, with how low they've had to drop rates to battle deflationary pressure, cheap borrowing makes a person wonder what lies ahead.

Another concern of mine.

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....

Goran_K says

Fly over states:

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. ;-)

Goran_K says

Prime areas of California: Probably a 20% drop to come.

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.

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.

"....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.

hrhjuliet says

We used that calculator before. A fantastic tool, but I forget where "it lives" on this site. Do you have a link? Thanks. (:

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.

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.

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...

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".

edvard2 says

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.

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...

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....

"....Fundamentals say the cost of housing is RIGHT NOW far below the mid 1990s......."

In 1998 I could buy a brand new 3/2/2 on an acre of land for $110k in my area. Taxes were $1300. Gas about $1. A 15oz bag of dorittos for $1.69. Today, that 15yo home sells for $160k. Taxes are $4000. Gas almost $4. A 10oz bag of dorittos for $4.39. Insurance, hoa, upkeep all triple. Back then savers were making billions from interest that went into the economy. Debtors could actually get credit. Yeah, we have low interest rates today. It is because our economy is so low. I'll take the mid-90's with 7% mortgage rates and costs that were 1/3 what they are today. Those were affordable times compared to today. Still not as affordable to what we had before the Federal Reserve destroyed our dollar.....

"....If you're claiming we're 100% higher than the bottom, then you're also claiming housing has to lose another 50%...."

I am claiming that prices simply lost their gains back to 2003 levels. And in the decade before 2003 many areas saw prices go up by 100% and greater. Meaning we are still overpriced. Walmart can jack up the price of milk to $10 today. Mark it down to $7 next week. Is it a great deal now that they marked it down 30%? Or do you remember that just last week it was selling for $3?

Real estate has fallen much more than this recent disinflation. Japan is an example. We saw it too last century.... And can we compare rents when they too have risen so much?

"...never been a 2-year moratorium on new foreclosures in any state......."

You can find charts all over showing inventory levels and finalized foreclosures. Going into 2010 they were ramping foreclosures. Then something happened towards late summer. You then see inventory falling. That was when robo-signing was exposed. The banks stopped most of their foreclosures until the recent settlement this year. Even today they have to try and work out refis and short sales. You can look at the charts and line the decline of inventory up with the dates of robo-signing....

The chart also shows that areas with high-paying jobs are holding up better. Not surprising. DC won't go down since it has the power to tax. The NYC financial sector owns DC. Movie stars in LA still make lots of money. Boston and SF have high-tech industry. Vegas? Atlanta? Not so much.

edvard2 says

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".

I have heard stories of those who would risk life in prison to own a pair of sneakers.

Value is simply a measure of the number of people standing in line, ready, willing & able to complete a purchase. Supply in the Bay area is restricted by water and steep hillsides. That shortage in supply restricts ownership of subservient peasants.

Cheeseus Sonofdog says

Real estate has fallen much more than this recent disinflation. Japan is an example.

Of course. Japan had a much bigger bubble.

Look at the graphs. The bubble is over. Sure there could still be some slow deflation. But the exteme movements are over.

The USA is relatively stable. We have the worst economy, except for all the others. Europe is a clusterfuck, as we all know. China has a massive RE bubble and ghost cities. Nations supplying China with metals (like Australia and Brazil) will get hit when China goes down.

"..I'm not sure where you live, but property taxes are not generally 3% ......"

I live in Palm Beach County Florida. Our budget was $1b a decade ago. They jacked up impact fees by 450%. Then we had the housing boom. The budget went to $4b within five years. When the crash brought home prices down 50%, the county just jacked up our milage rates by 40% over a three year period. Maening they still get $4b every year, even though that should have been a one time windfall due to the bubble.

In 1998, mortgages and subprime were availble to most. Todays 3.5% you mention is not. Hence, the majority of homes being bought are by cash investors. Hence, most overpriced fannie mae homes are coming back on the market when the buyer can't get a mortgage or the appraisal comes in.

Upkeep costs can certainly be triple. I would love to replace my roof for what it cost me 15 years ago. I would love to buy a gallon of paint for $8 again.....

Cheeseus Sonofdog says

Upkeep costs can certainly be triple. I would love to replace my roof for what it cost me 15 years ago. I would love to buy a gallon of paint for $8 again.....

I would love to buy gas at 89 cents a gallon as it was back when I was in college in 1998-1999.