patrick.net

The housing market will have bottomed when I (yes me) have an offer accepted by a seller.
I call it the "shultzie" confidence index (TM) Here's how it works: I figure I've lost out on offers because either mine were too low (i've lost out by 5-8k on 3 different occasions) or the seller was too high and someone else bit on it (simple logic I know but stay with me). The day will come when I will be comfortable enough with economic conditions, the job market and overall financial stability that I up my offering price OR the seller will be in such a state of discomfort they take my offer because it is the best one. Either way when that 5-8K gap closes - we have hit bottom.
Hey its as arbitrary a measure as any of the others so why not?

shultzie says

The day will come when I will be comfortable enough with economic conditions, the job market and overall financial stability that I up my offering price OR the seller will be in such a state of discomfort they take my offer because it is the best one. Either way when that 5-8K gap closes - we have hit bottom.

Or when people learn how to make a deal. Ever watch "Pawn Stars" on history channel. Some guy waltz into a pawn store and thinks he can get $10K for some item. The owner laughs and says "not gonna happen, but I will give you $$2K for it".

http://www.history.com/shows/pawn-stars/videos/no-stolen-goods#the-art-of-the-deal

RayAmerica says

She also had the head economist from the National Assoc. of Realtors on to spew his nonsense. Interesting that while he was on, they didn’t field any questions from the audience. I had the feeling while listening to it that the program was financed by the real estate industry.

Wow! That would be a heavy departure from the tone of the shows Bob often does. If i was Bob I get rid of her. Im sure plenty of ticked off listeners had a word or two for the NAR shill.

thomas.wong1986 says

Wow! That would be a heavy departure from the tone of the shows Bob often does.

I listen to Bob Brinker's "Money Talk" often. Around here, it comes on Sat and Sun at 4:00PM. I even fastened a platform to hold a radio to my bicycle, so I can listen as I ride.

Bob Brinker does not seem beholden to Wall St types, as he often advises non-commission paying actions such as lattered CDs and no-load funds. However, Bob is glad when house prices rise. Just a few weeks ago, when he was going over the Case-Shiller stats, he was overjoyed by numbers showing price appreciation in a section of the Bay Area. His take was that he loves it when people make money. Puzzling attitude, considering his comments on non-housing issues.

Although Bob Brinker is very objective about true investments like bonds, stocks, and related products, his take on housing "investment" is not so different from his guest host.

I follow the Shultzie Gap Index rules of bottom finding too.

I believe bottom will hit in about 2015

That gives everyone time to adjust to the "new normal: house prices affordable at declining income levels, hangers-ons and dreamers time to spend down all their savings hoping prices will "stabilize or come back (up) to normal."

While I believe there will be a 30% minimum reduction on homes from here, on the West Coast, I have a question:

In Ashland, Oregon, and in the Bay Area, prices have been above "rental return ratios" and "income to price ratios" for decades have they not? What will ever bring these prices back to 1970's levels? Why and how do people afford to keep the houses as rentals? I am about to sell out my house in Ashland, and appreciate any insights to what keeps markets inflated over time (beyond the latest bubble), even beyond what should be the correct price for affordability. I think this phenomenon of "over price" really affects west coast prices, and I have not found this explained.

andyb says

prices have been above “rental return ratios” and “income to price ratios” for decades have they not?

Once you pay a price, you've locked yourself in. As wages and buying power inflate, the rental return ratio looks bad for new buyers but people who bought in the 80s and 90s are still doing OK.

Also, declining interest rates have been propping up the market since 1982:

http://research.stlouisfed.org/fred2/series/MORTG/

if history is any guide we'll be seeing 3.5% interest rates later this decade. Don't ask me how this works, that's just what the chart says.

Bap33 says

I follow the Shultzie Gap Index rules of bottom finding too.

YAY! move over Robert Shiller

I am new to this forum, to make my story shot... I bought and sold three homes starting from 2003 all the way to 2007 when it went nose dive, landed up breaking even with what I invested. Now I am in a rental apartment in Southern California in one of the hottest places in the country a city called "Irvine". I am not fascinated by this city excepting for the fact that we have plenty of jobs. I see prices are softening in and around this area, I noticed a sudden change in the number of condos active in the market past few months and then everyday I notice homes coming up in the market. Banks don't want to flood the market with REO's I guess.

I am not sure when the bottom will come and go, I have noticed my friends buying 700K homes until last year, I advised them not to. but I guess its too late for that... I still talk to another friend when I was invited to his million dollar home two years ago, parked my sedan next to his 7series BMW... I guess now he is feeling the pinch... Debt cannot make you rich. I can imagine his condition... I am happy where I am, Rentals comes with a pool and a club house its a 600+ sft but still happy... not sure if I would like to own a home....

I was wondering if any of you can advice... if I find a home in today's market at a 2003 price with the current interest rate would it be a good way to go? I am not looking for an investment, but a affordable place to live...

Vee says

I was wondering if any of you can advice… if I find a home in today’s market at a 2003 price with the current interest rate would it be a good way to go? I am not looking for an investment, but a affordable place to live…

1997-98 prices plus inflation would be your best bet. 2003 prices should be around $250K or so and not $400K. California prices went ballistic as far back as 1999-2000. We were way into a bubble by then. So asking for 2003 prices is still buying into a bubble. My two cents.

http://www.housingbubblebust.com/OFHEO/Major/SoCal.html

Vee says

I have noticed my friends buying 700K homes until last year, I advised them not to. but I guess its too late for that… I still talk to another friend when I was invited to his million dollar home two years ago, parked my sedan next to his 7series BMW…

LOL! i know someone who had a 7series as well, once he got the bill for a brake job ($4K) he swapped it for a Honda.

"Southern California in one of the hottest places in the country a city called “Irvine”. I am not fascinated by this city excepting for the fact that we have plenty of jobs."

Irvine is hot because it is the go to place for family with kids. The public schools, amentity and the like are top notch and is suitable for young family. The jobs within Irvine are crappy retail/service like job and likely for UC irvine students, the wealth is made elsewhere.

Irvine has grown a reputation lately for excellent schools.

For what it's worth, If i was going to buy a house to live and raise a family in SoCal, it would be Irvine.

Vee ... Take the time to read the following, in particular the section on real estate.

http://www.safehaven.com/article/16977/real-estatecredit-bubble-deflation-19-next-up-5-years-of-financial-hell?source=patrick.net

Thanks for the advice Thomas, You might be right, I have seen prices holding at or around 2003 prices, I did a quick math, Not sure maybe I was so ignorant all these days, its simple numbers I guess, if I buy a home for 100K at 8% interest and if I buy the same home at 200K at 5%, the numbers turn out to be much less for a 30Year loan, but talking to my Realtor, he says a completely different story, he says buying a home at current interest rates is the best decision you can make. I really don't understand why he could lie to me when I can just do a simple match and figure this out. I haven't spoken to him, but I would like him to explain me why does he think that way...

SF ace, Yeah I tried to figure that out "a go to place" as you mentioned, it takes me 30 minutes from my home to get to Target which is less than a mile away.... I spend all my time beating traffic, I don't have time with my kids to do anything if I plan to step out during the weekend. My best time pass is to stay home and do things closer to my community which is less than a mile. So practically everyone thinks the same thing about Irvine, its just the perspective and about the job part, you are absolutely right there are crappy jobs out here, but Irvine is in the center of all other good paying job cities. I am a contractor I commute 200 miles a day getting to my work sometimes, I haven't moved from this place looking for a job past 12years...

Getting back to buying my dream which I mentioned to my Realtor, he said you should go with what you have been pre-approved. I said to him I want an american dream not a nightmare... :)

Vee says

my Realtor, he says a completely different story, he says buying a home at current interest rates is the best decision you can make.

What your agent probably means is that when you are buying a property with financing, in effect you are "renting" money, and at these interest rates, money is renting out very cheap. What has to be factored in of course is what will happen to the actual value of your property. That seems to be the $64,000 question. Even if you are financing with cheap money, if the value goes down on your property and you need to sell in the future, you might find yourself in the same position millions are now in; upside down on your mortgage, i.e. you owe more than your property is worth.

"its simple numbers I guess, if I buy a home for 100K at 8% interest and if I buy the same home at 200K at 5%, the numbers turn out to be much less for a 30Year loan, but talking to my Realtor, he says a completely different story, he says buying a home at current interest rates is the best decision you can make. I really don’t understand why he could lie to me when I can just do a simple match and figure this out. I haven’t spoken to him, but I would like him to explain me why does he think that way… "

30 year loan at 5% or even 4.5% is the fact but 8% interest but half the price is still a guess. My understanding is a 4BR 2000 -2500 sq ft. single family home rents for around 2800 in Irvine (not the gated community ones).

As far as employment, your biggest employer will probably be the University, local government, a few fortune 500 headquarter and a slew of 10M-300M market cap high tech company and satelite office of bigger companies to serve the SoCal market. Then there are the family owned business' contractors and distributor.

All parts of SoCal is traffic hell, not just Irvine. If you have to travel 200 miles daily for your commute (presuming your commute is based on where your contracting job is at, no house will solve your problem as you'll have the same problem anywhere. Irvine is relatively wealthy and should be a key market for a good contractor.

The thing that separates Irvine with other is Irvine has perhaps the best public school district in the state (especially considering that Irvine has a pop of 200,000, not some small community). The way they separate the city into little villages is quite charming. The roads are tree lined, kids bike to school, the ballyards are stunningly well kept. It is close to Newport and Laguna beach.

by asking this question you assume that the market dynamics that have driven the RE market for the past 30 years or so still exist and if they do exist then when would appreciation return.
My short response is that the RE market today does not resemble the prior market in several significant factors:

1. Move up buyers make up a small percentage of the current and potential buyers which is a significant shift from the past. Since the early 70's buyers have been using equity to climb up the housing ladder by making larger down payments using accumulated equity. This has over time has supported new more expensive housing construction and the current spread in housing prices.
Housing equity is now routinely extracted by refi activity and equity lines which has been a strong trend since the 90's so its likely that this trend will continue. This combined with property price deflation along with the reality that long time homeowners usually do not move often creates a new market dynamic towards fewer move up buyers now or in the foreseeable future.
2. Without significant sales velocity from move up buyers the pricing spread will compress towards medium income pricing which reflects most of the financing. We are already seeing this dynamic in sales volume today as sales velocity has moved into the lower price bands due to GSE pricing and investor cash markets.

Employment and inventory levels will be important elements just like they are today but the biggest change in the market will be price compression or the spread from low to medium to high which has expanded during the last 30 years due to the move up buyer's ability to make large down payments .

Thanks Ray, I checked out the link which you posted, it almost sounds like the end of the world, I don't believe the 2012 end of the world thing, but definitely I have a feeling that there isn't something right with the Real estate...

Hi SF, I know everything looks good but I sometime don't feel good looking at things which are so well kept, meaning the expectation from our kids, My kids are so much overwhelmed to keep up with the standards... I feel sad sometime for them, when I was a kid I spend all my time in my neighbors house playing with my friend, but not anymore for my kids... even the safest place like Irvine has crime, We see that in our own community when we see cops attend to the 911 calls, I am not sure why isn't on the TV, I guess its just the LA which rings the bells and whistles...

but again.... I am paying just over 1500 dollars for my apartment, I am not sure if I would pay anything lower than that for the next year or two.... its the feeling that you own a place which you could call it a home... if I can pay a mortgage close to 2K I believe that I can find a decent place.... but thats the big question for me, will I have a job?... can I continue to keep up all my bills?.... equity is of the least concern to me right now....

"My kids are so much overwhelmed to keep up with the standards… I feel sad sometime for them, when I was a kid I spend all my time in my neighbors house playing with my friend, but not anymore for my kids…"

Vee, I will say this from my perspective only. From my observation, getting a degree is not the entry to the corporate world anymore, it requires far more than what was required for me. In fact, if I graduate with the credential I had then and try to get an entry level job now, I do not stand a chance.

Google only looks at resume with a minimum 3.5 GPA at a stanford level institution regardless of experience, otherwise, forget about it. This is the track we are headed, the degree at San Diego state, UC Santa Barbara, San Jose State are pretty much worthless. It use to be 40-50% of college graduate gets a decent starting chance, but now only top 10%-20% All the backend corporate work are outsourced to another country or some remote town. To stay in that top 10-20%, perhaps the kids will have to operate differently.

Most who are managers and above in decision making capacity knows this thus are likely the push their kids to do even better than their parents.

Vee says

but talking to my Realtor, he says a completely different story, he says buying a home at current interest rates is the best decision you can make. I really don’t understand why he could lie to me

"It is difficult to get a man to understand something when his job depends on not understanding it." -- Upton Sinclair

This is also what any real estate course and instructor will say -- it's best to buy when rates are low, to lock in that rate.

And, historically, high(er) mortgage interest rates have come in times when the Fed was trying to combat wage inflation -- early 80s, 1999, 2005:

http://research.stlouisfed.org/fred2/series/MORTG/

so there was truth to that, wage inflation was increasing the buying power of the market, and the higher rates restored balance, but the people who had bought at the lower rates were better off than renters, who had to pay the higher rents that the wage inflation produced.

All things equal, it's better to buy a $200,000 house at 8% than a $400,000 house when rates are 4%, but nobody can really say what's going to happen this decade. We may see 2% rates, like Japan, so people buying now will be able to refi into free money loans as their property valuations double with the new availability of free money.

Or everything falls apart, unemployment goes to 20%, California's checks start bouncing, gas goes to $10, wages fall to $5, nobody can borrow any money any more and if you could it costs 10% since global capital has found greener pastures.

The first future seems more likely to me, but game theory tells me buying now and have the latter future happen is such a horrendous outcome it's better just renting until the situation becomes less unbalanced.

andyb says

Also, declining interest rates have been propping up the market since 1982:

Unlike the market correction back in '73-74, '81-82, or even '88-92, this one is a whopper of a bubble. At least back then buyers were evaluating prices of homes and not monthly payment, but today like you state, your focus is on monthly payment. So I expect 'the over all' prices to be better scrutinized by the buyer and not just what your monthly outlay is.

But unlike the market correction unlike back in 73-74, 81-82, or even 88-92, nowadays there are rich foreigners who will continue to bid and outbid each other, propping up The Fortress.

Ray,
Leftists don't believe in throwing money at everything. Like, they don't believe in throwing money at law enforcement, particularly as it pertains to policing our (existing) immigration laws. Leftists don't believe in funding the expansion of our prisons. Leftists don't believe in throwing money at abstinence education, nor do they believe in throwing large sums at the advanced tactical fighter, nuclear power infrastructure, nor maintaining a large arsenal of democracy.

sybrib says

Ray,
Leftists don’t believe in throwing money at everything. Like, they don’t believe in throwing money at law enforcement, particularly as it pertains to policing our (existing) immigration laws. Leftists don’t believe in funding the expansion of our prisons. Leftists don’t believe in throwing money at abstinence education, nor do they believe in throwing large sums at the advanced tactical fighter, nuclear power infrastructure, nor maintaining a large arsenal of democracy.

I stand corrected. Dittos.

Can't buy a house when you're struggling to buy food and a car. RE bubble has popped. Economy is on deck. So, 20 years or so+. The locality question is interesting too. Gov pays 60% more than private industry... when it pops will VA/DC collapse. Its not beyond belief people will stop paying taxes. just like Marijuana in CA, or mortgage fraud nationally, when everyone does it then the law enforcement stops.

I would not even scoff the argument it will not recover in the USA in our lifetimes. It will recover in places where income taxes are not extracted to pay international bankers. If such a place exists.

William Lyon Homes, in January 2009, I had to take a number to finally get an appointment way in February, I got an email this morning check out this link... what they have to say now... its funny you should read the fine print... and also the sales pitch... There's something to smile about even in this chaos... http://www.getyourmoveonnow.com/

Irvine 31
Tustin 10
Orange 18
Costa Mesa 4
Brea 2
Fullerton 5
La Habra 4
Los angeles 166
Ventura 103
Corona 31
Riverside 27
New port beach 5

TOTAL 406 properties have been listed in the past three days range between 100K and 600K, 70% of all are 300K+ homes.

I am not accounting for "listing delisting gimmick" of properties which Realtors usually do when they want to make the property look fresh in the market...

Vee,

There's probably around 7 million households in LA, Orange, Riverside/San Bern and Ventura/Santa Barbara County to put the new listings into perspective.

Hi SF, very true, numbers are staggering, I wish I had a crystal ball to say what’s next, One could say its the beginning of a perfect storm....I was checking the Stocks this afternoon, its scary, I hope this doesn't happen when I am in my 60's... maybe 70's... the way things are going there isn't a safe heaven anymore.... You guys are terrific, helped me to see things from a different perspective... when I came to this blog and now I see the difference in my thinking.... Lesson learnt... I need to do my homework before I make a decision....

Various elements of Americans that are currently practicing homeownership anxiously await the return of appreciation so that they can upgrade their lifestyle. The appreciation gusher so prevalent the past 30 years has gone into hibernation awaiting a new round of prosperity to appear. Could the past 30 years of RE prosperity been but a short blip in modern economic data ?

lineup32
"prevalent the past 30 years?"
I've been paying mortgages for more than 30 years. I think you are overestimating the period of time for any real housing appreciation. It's more like from mid 90's to mid 00's.
I have owned three houses. The first two houses only increased in value based on inflation and improvements that added actual value, like finished basement and building a garage. For my current home, with no value-add improvements, I estimate it would sell for about 1.6x what we paid almost 20 years ago That's about 2.7% per year, maybe less than inflation during that period. I know my income is more than 1.6x what it was 20 years ago.

FYI, it was really hard to accept for a year or more of the bust, that my home value was declining as much as it did. I have now accepted that and realize that the value in 2006 was just plain wrong. I also know that the decline is not over.

I purchased my first home in 1976, San Jose, Calif for 28K sold it in 79 for 54K, did no improvements, then took the money and purchased in a better area of San Jose for 74K and sold that in 89 for 274K, make no improvements not to labor the point I could discuss the other property that I have bought and sold but yes RE did boom boom in 2000's but it has been on a big up slope since the 70's . I sold in 2005 and have rented since
then, no expectations about the prior boom times in RE returning, markets are always changing and its base to have an open mind.
You can look up my original buy on Zillow: 2030 Cranworth Cir, San Jose. Its value is listed around 364K and when I do the inflation look up on BLS site it shows that this should be selling for around 110K inflation adjusted based on its original price. During the bubble peak Zillow shows it at 650K

oh, so the trick is to be a boomer and just be born sooner?

http://www.westegg.com/inflation/

What cost $164,000 in 1993 (former sales price) would cost $240,447.53 in 2009. (Which is about spot on right!)

I dont know where you get 28K back in 1976 ???

I purchased a home back in 1976 for 28K, the address was 2030 Cranworth cir, San Jose: I sold that home in 79 and purchased a separate home for 74K which was located in Willow Glen another part of San Jose, I sold that home in 89 for 274K

Bap33: My point is that we have gone through a period of very intense asset inflation relative to RE at least here in Northern Calif. This has been ongoing since I first purchased back in 74. It has now become an deflationary
market. I knew nothing about RE when I first started buying, I was a Vietnam Vet and had a VA loan coming my Wife who grew up in a upper class economic family was very knowledgeable about RE and guided our buying and selling of RE for many years. We sold our bay area home in 2005 and have rented since because home prices are still falling and may do so for a considerable period of time.

We'll hit bottom and have a huge turn around in prices once Obama's Loan Modification Program hits high gear. LOL

Marc Faber wrote in his book 'tomorrow's gold' that it takes many years to hit bottom after a bubble. Not 5 but more like 15-20 years. Just like gold hit bottom in 2000, 20 years after it peaked in 1980. Or stocks made a new low in Japan in 2008, 19 years after it peaked in 1989.

I think real estate will take until 2020-2030 before you have a true bottom. However, since the dollar could collapse in the meantime, I am talking in gold terms here.

I think until interest rates start going up and prices drop it's fair to assume that we haven't hit bottom yet.

I think until interest rates STOP going up, it's fair to assume that we haven't hit bottom yet.

Since they only recently started to go up it will take 10-20 years from here before they stop rising.

And like previous cycle it will probably end somewher above 10% to pay on your mortgage on average.

dutchsailor says

I think real estate will take until 2020-2030 before you have a true bottom

It may well take some time since now in Congress everyone is cutting their ties to the GSEs.
The GSEs will not be spun off into another public entity but will be slowly killed off in 10 years.

------------NEWS FLASH ---------------------------------------------------
FDIC's Bair questions housing tax breaks
Count Sheila Bair among the critics of generous U.S. housing subsidies.

Bair, the chairman of the Federal Deposit Insurance Corp., said in a speech Monday that Congress should consider paring back federal tax deductions for homeowners. She said these subsidies helped inflate house prices, harming the very consumers that many of the programs aimed to help.

Tax breaks, exit stage left
Bair took aim at federal tax deductions for mortgage interest, local property taxes, and capital gains on house sales (in certain circumstances). She said these taxpayer subsidies for homeowners, taken together, "are about three times the size of all rental subsidies and tax incentives combined."

Even that probably understates the case. Consider the hundreds of billions of dollars the feds are spending to support Fannie Mae (FNM) and Freddie Mac (FRE) in the name of making mortgages available, and the limited-time-only tax credits that have helped to prop up house prices over the past year.

Whatever the tab, though, Bair said the problem is the same: Government subsidies for property owners push up the price of houses, undermining so-called affordable housing programs run by the likes of Fannie and Freddie.