Are you planning to sell your primary anytime soon?

Submitted by Coronita on March 18, 2014 - 12:53pm
Yes
7% (3 votes)
No, my home price hasn't exceeded peak prices yet
37% (17 votes)
No, even though my home price has met or exceeded peak prices
57% (26 votes)
Total votes: 46
Submitted by scaredyclassic on March 23, 2014 - 9:33am.

If things get nutty again, sell.

Ok. I'll try to remember.

Submitted by FlyerInHi on March 23, 2014 - 11:52am.

scaredyclassic wrote:

Perhaps I could buy a 1000 acres in Nevada and just let the dead dessicate naturally. Maybe in cages to protect from predators?

It would be a little weird to have dead rotting people all over, but I bet id get used to it.

If you buy a whole county, you don't have to pay property taxes and you can be your own local government.

Btw I was watching a show about leather making. They used brain oil for that

Submitted by ocrenter on March 23, 2014 - 3:28pm.

To me, we are seeing some value elevation, but it is simply because of the scarce inventory artificially driving up the pricing? If you are looking at selling of the primary, for sure you will have to be looking at renting for a while.

Looking back, it would have been an easy decision to sell back in 2006. It may not have been obvious to the general public, but there were so many indicators pointing to an impending crash. What about now? I just don't see any signs of an impending crash at this time.

As for myself, we are so comfortable right now that we would not consider it unless we can truly clear $500k of tax free profit.

Submitted by flyer on March 23, 2014 - 4:02pm.

I realize everything is relative, but there was a time in San Diego, and in other locations, where you could buy your dream home and enjoy life, as scaredy mentioned, without incurring extreme debt, as CAR mentioned. That happened to be our experience, and the experience of many we know.

Some of us sold some of our investment properties during the peak, but none of us ever plan to sell our primary.

IMO, as long as homebuyers today go deep into debt knowing they have the resources to survive, regardless of how things go in the economy, I'd say "go for it." If not, and they decide to "go for it" anyway, it would be my hope that we don't have to hear them complain if things don't work out as planned.

In about 20 years, plus or minus, I fully expect the new "complaint" to be, "I just don't understand why I can't afford to retire."

Submitted by elzocalo2 on March 23, 2014 - 6:25pm.

I sold in 05 when my rental (home for 3 years which I was able to keep when i bought another one) more than doubled in nominal purchase price (sold it on craigslist -the ultimate bubble test!!). It was a humble 800 SF home in Linda Vista built originally for WWII workers by the feds when they took the land from the City (read about the Linda Vista Housing Project one of many constructed under the 1940 Lanham Act : 3,000 dwelling units for more than 13,000 people with a 300-day construction deadline).

In 06 I sold my primary and happily rented in OB for years until i saw a chance (my one and only) to buy in OB which i did (2011). I then put the newly bought house in Craigslist rentals for what i thought was an obscene price and boom, rented it and happily stayed in my rental paying much less than my tenants were paying me (both houses in OB: about 900SF, 7k SF lot). Then, in early 2013, bought a second one (large mid-century townhome, corner unit, ocean view ... back to Linda Vista). Today I still have the same original tenants in OB (got lucky w fab tenants) and moved to the LV townhome. So..... I am back where I started with two much better properties and some pesos in the bank ;)

I don't think i would sell either one in the near future. With that said, i am with Rich: if things got nutty again, i take the cash and run with no hesitation.

Submitted by UCGal on March 24, 2014 - 1:17pm.

flyer wrote:

We would also like to pass it along to our kids, and we know a lot of people who are planning to do the same. That may only constitute a blip on the inventory radar now, but it may have a more pronounced affect over time.

I'm 2nd generation in my house, and the kids are fighting over who will buy it from us. (We didn't inherit the house - just the prop 13 tax rates. Dad needed the cash to put into his next home when he downsized.)

On our block there are multiple 2nd gen owners. I can think of 4 others besides myself. Some inherited, some bought out their parents. Most of the parents were original owners.

It's just boring tract homes - but in a nice location with large lots for being w/in San Diego city.

Submitted by The-Shoveler on March 24, 2014 - 2:10pm.

The only way I would sell my primary (if I was not needing to move for some other reason of course)

Is if I saw a return to No down No Doc loans and the other crazy loan products of 2005-6 era.

Without some major economic downturn (not caused by housing) I don't see a crash coming of a size that that would warrant selling.

10%-20% would not be worth it to me anyway.

Yes it was the crazy loans that enabled the crazy prices, but it was mostly the crazy loans that caused the crash, not the prices IMO.

IMO in SD it makes it real difficult to determine fair value, You basically live in a resort most of the world would love to live in.

Well most of coastal SD anyway.

Submitted by flyer on March 24, 2014 - 10:04pm.

UCGal wrote:
flyer wrote:

We would also like to pass it along to our kids, and we know a lot of people who are planning to do the same. That may only constitute a blip on the inventory radar now, but it may have a more pronounced affect over time.

I'm 2nd generation in my house, and the kids are fighting over who will buy it from us. (We didn't inherit the house - just the prop 13 tax rates. Dad needed the cash to put into his next home when he downsized.)

On our block there are multiple 2nd gen owners. I can think of 4 others besides myself. Some inherited, some bought out their parents. Most of the parents were original owners.

It's just boring tract homes - but in a nice location with large lots for being w/in San Diego city.

I definitely think a trend is developing, UCGal. As I mentioned, we're seeing this with most of our friends, and you are as well. It will be interesting to see if this has a strong affect on inventory/pricing going forward or not.

Submitted by NotCranky on March 25, 2014 - 10:17am.

I am speculating that my primary property will out perform pretty big in 15 to 20 years, so I won't sell in a merely inflated local market. The other reasons people posted for not selling are important too.

Submitted by Jazzman on March 25, 2014 - 12:11pm.

What's interesting here is that home prices have not reached their peak prices (as Rich points out), but most people who voted believe they have. You could substitute the question with "if homes reached peak prices, would you sell". But you're still left with the nominal vs real problem.

Here's an interactive chart from the Economist that examines this question. They state that the last nine months has pushed prices in some cities into the "over-valued" category. It's also interesting that prices in real terms in San Diego are higher than Los Angeles, Las Vegas, and New York. But we're clearly some way off peak prices. In real terms we're back to 2004 and 2008 prices. How real prices are calculated, and how accurate they are is another question. http://www.economist.com/blogs/graphicde...

Submitted by dumbrenter on March 25, 2014 - 12:47pm.

elzocalo2 wrote:
I sold in 05 when my rental (home for 3 years which I was able to keep when i bought another one) more than doubled in nominal purchase price (sold it on craigslist -the ultimate bubble test!!). It was a humble 800 SF home in Linda Vista built originally for WWII workers by the feds when they took the land from the City (read about the Linda Vista Housing Project one of many constructed under the 1940 Lanham Act : 3,000 dwelling units for more than 13,000 people with a 300-day construction deadline).

In 06 I sold my primary and happily rented in OB for years until i saw a chance (my one and only) to buy in OB which i did (2011). I then put the newly bought house in Craigslist rentals for what i thought was an obscene price and boom, rented it and happily stayed in my rental paying much less than my tenants were paying me (both houses in OB: about 900SF, 7k SF lot). Then, in early 2013, bought a second one (large mid-century townhome, corner unit, ocean view ... back to Linda Vista). Today I still have the same original tenants in OB (got lucky w fab tenants) and moved to the LV townhome. So..... I am back where I started with two much better properties and some pesos in the bank ;)

I don't think i would sell either one in the near future. With that said, i am with Rich: if things got nutty again, i take the cash and run with no hesitation.

I'm considering the same... keep renting where I live, but buy & lease it out to tenants. But cash flow in that case is so little..

Submitted by FlyerInHi on March 25, 2014 - 2:49pm.

I would sell everything without hesitation if there's another bubble then wait for a market crash and buy back.

I don't think we are at that point yet. Right now, prices are driven by low inventory and well paid folks in the big metros have no choice but to pay high prices.

If I see an increase in construction and investors buying for appreciation only, then that would be an indication to think about selling. It's a planning process. I don't mind renting brand new construction, or nicely remodeled housing, but I hate that typical renters' grade rental. Yuck as far as livability.

Submitted by The-Shoveler on March 25, 2014 - 3:39pm.

Very difficult that, it only crashed because they wanted it to.
IMO anyway.

When city workers no longer worry about their pensions I would start to worry.

Submitted by FlyerInHi on March 25, 2014 - 6:51pm.

The-Shoveler wrote:
Very difficult that, it only crashed because they wanted it to.
IMO anyway.

Who is they?

I might not be smart enough to predict the next crash but I could buy at the next bottom. The first indications of an adjustment is when it's much cheaper to rent than to buy at prevailing interest rates.

Real estate is all about cycles. There will be more cycles, you can bet on that.

Right now, tech companies are in growth mode. They are willing to pay high salaries to attract talent. Something could cause tech to crash and capital and jobs to dry up. Sag stagnation a slight layoffs could cause tumbling in prices. Massive layoffs, then all bets are off. Like defense layoffs in california before, or IBM layoffs back in that 90s.

Don't know when that will happens, but when it does, we will know.

Submitted by Rich Toscano on March 25, 2014 - 7:09pm.

Jazzman wrote:
What's interesting here is that home prices have not reached their peak prices (as Rich points out), but most people who voted believe they have. You could substitute the question with "if homes reached peak prices, would you sell". But you're still left with the nominal vs real problem.

Well, I wouldn't put it that way... PRICES have reached their peak level in some areas... it's just that VALUES haven't. At the risk of being a bit pedantic on the terminology (but in the hopes it will clarify the conversation), here's my take:

Price is the price -- number of dollars paid. Not adjusted for anything. If something sold for $500k in 2005, that was the price, and if it sold for $501k last month, it has achieved peak "price." (for whatever that's worth). As I argued above, the "price" alone is a pretty meaningless number because it fails to account for changes in the factors that drive home pricing.

Valuation is the comparison between the price and factors that determine what a home's long-run sustainable price should be. This is the number that matters when trying to figure out if homes are expensive or cheap.

Many areas have achieved peak pricing, but nowhere has achieved peak valuation. Peak valuation was INSANE. I'll trot out that graph again:

San Diego Home Valuation Index

For the SD housing market to achieve peak valuation right now -- ie, for home prices to be as high compared to rents/incomes as they were at the bubble peak -- would require a 57% increase in (aggregate) home prices.

So yeah, if that happened, I personally think it would be crazy not to sell. But, I think there is virtually no chance of it happening, so it's really a purely hypothetical question...

Submitted by an on March 25, 2014 - 10:06pm.

I totally agree with Rich. If we see peak valuation again, I'd sell in a heart beat, both rentals and primary. I'll sit tight until things crash. But if it's only peak price, I won't take the risk and sell a primary and rent. Too high risk and not high enough return to make me take that risk.

Submitted by an on March 25, 2014 - 10:06pm.

.

Submitted by elzocalo2 on March 25, 2014 - 10:40pm.

oops

Submitted by elzocalo2 on March 25, 2014 - 10:40pm.

Initially there was no cash flow but it reduced my tax liabilities. I refied early last year with the master, pedelmuth@pacificinvestmentproperties.com (Peter is here occasionally) and cash has been flowing since (modest but there are many other considerations from my perspective)....

Submitted by CA renter on March 25, 2014 - 11:53pm.

Rich Toscano wrote:
Jazzman wrote:
What's interesting here is that home prices have not reached their peak prices (as Rich points out), but most people who voted believe they have. You could substitute the question with "if homes reached peak prices, would you sell". But you're still left with the nominal vs real problem.

Well, I wouldn't put it that way... PRICES have reached their peak level in some areas... it's just that VALUES haven't. At the risk of being a bit pedantic on the terminology (but in the hopes it will clarify the conversation), here's my take:

Price is the price -- number of dollars paid. Not adjusted for anything. If something sold for $500k in 2005, that was the price, and if it sold for $501k last month, it has achieved peak "price." (for whatever that's worth). As I argued above, the "price" alone is a pretty meaningless number because it fails to account for changes in the factors that drive home pricing.

Valuation is the comparison between the price and factors that determine what a home's long-run sustainable price should be. This is the number that matters when trying to figure out if homes are expensive or cheap.

Many areas have achieved peak pricing, but nowhere has achieved peak valuation. Peak valuation was INSANE. I'll trot out that graph again:

San Diego Home Valuation Index

For the SD housing market to achieve peak valuation right now -- ie, for home prices to be as high compared to rents/incomes as they were at the bubble peak -- would require a 57% increase in (aggregate) home prices.

So yeah, if that happened, I personally think it would be crazy not to sell. But, I think there is virtually no chance of it happening, so it's really a purely hypothetical question...

You have to admit, though, that this line is looking very "peak-ish" relative to the more normal RE cycles. The price deflation from those peaks was pretty damaging, even if it wasn't as bad as the ~2008 crash. Looks like it's rolling over, too.

Thoughts?

Submitted by The-Shoveler on March 26, 2014 - 5:27am.

FlyerInHi wrote:
The-Shoveler wrote:
Very difficult that, it only crashed because they wanted it to.
IMO anyway.

Who is they?

The same people who brought you Owners Equivalent Rent and separated assets from income.

who needs assets ...

Submitted by The-Shoveler on March 26, 2014 - 5:34am.

"Don't know when that will happens, but when it does, we will know."

Sure OK.

Submitted by ocrenter on March 26, 2014 - 6:47am.

Rich Toscano wrote:

San Diego Home Valuation Index

Rich, a graph is worth a thousand words.

essentially if we look at past cycles as a guide and remove the abomination that was the bubble, the current peak is essentially the typical rise in valuation that cycles up and down every few years.

So I suppose the question to folks that would want to consider selling is would they have sold their primary resident in 1980 and 1990? and not if they would have sold in 2006.

Submitted by The-Shoveler on March 26, 2014 - 7:17am.

I sold my primary in early 2005 which was just below peak in the area where I sold it. (I must tell you though "IT WAS NOT EASY !!!").

I would not have sold in 1990 or 1980. by the time you get done with fee's etc... rent ... convenience it would just not have been worth it (but it was a PITA going through it owning as well).

IMO very unlikely we would see a 2007-2009 crash in our life times that would make it worth it again.

So I imagine China's RE chart must look somewhat similar, you think China's RE will crash or be inflated away/Bailed out ?

Submitted by Rich Toscano on March 26, 2014 - 8:01am.

CA renter wrote:

You have to admit, though, that this line is looking very "peak-ish" relative to the more normal RE cycles. The price deflation from those peaks was pretty damaging, even if it wasn't as bad as the ~2008 crash. Looks like it's rolling over, too.

Thoughts?

The 90s downturn was pretty bad, but the thing is, only about 40% of that decline (eyeballing it) was prices returning to "fair value," while the other 60% was them falling from "fair" to "very underpriced." So basically, that decline was only as bad as it was because homes ended up really cheap.

So to anticipate that kind of decline again, you are basically depending on houses becoming very underpriced. I wouldn't want to do that, any more than I'd want to depend on them becoming or staying overpriced.

I can't emphasize that enough... just because something became undervalued in the last cycle, doesn't mean it will in this cycle. The safe assumption is that it will return to (or near) the median at some point... to assume that it will move far from the median is a much bigger speculation.

It's only an 11% drop to get back to the median valuation, and that assumes it happens overnight (ie, if it happens over a longer time period as rents/incomes are catching up, it's even less - in the 80s, prices never even declined nominally). (Assuming we get back to the median... I think it's a good assumption that we probably will at some point, but we should keep in mind it's not a guarantee).

To me that's nowhere near compelling enough to make me want to sell my house, which I like living in and want to keep living in, and on which I have a nice low mortgage rate. To someone who was looking to move anyway, perhaps it would be different, but I'm not in that category.

However, if we were to get back up to peak bubble level valuations, that would be a very, very different story. The extent of the overvaluation then was just staggering. To put the numbers on it, to return to "fair value" (the median):

- from here, valuations would have to drop 11%. If this happened over the course of several years, we might not see a nominal price drop at all.

- from the bubble peak level, valuations would have to drop 43% -- almost 4 times as much. There's no way this is happening without a nominal price decline, and probably a significant one. But more to the point, more than anticipating price changes: it would be an extremely overvalued asset. I just don't want to hold on to an extremely overvalued asset. My capital is best deployed elsewhere.

So to me, it's a very, very different situation than it was at the bubble peak...

Submitted by Rich Toscano on March 26, 2014 - 8:02am.
BTW I also had some thoughts in the latest in my writeup on valuations... I copied the relevant bit here:

---

Despite the recent runup, San Diego housing valuations are still dramatically lower they were during the bubble.  However, homes are far from cheap -- at 12% above the historical median valuation (down from a recent high of 13%), housing has become nearly as expensive as it got during the 1979 and 1990 peaks.

This isn't a very big sample set, but for what it's worth, here's what happened each of the last three times housing valuations rose to this level:
  • Late 1970s --Valuations rose just a bit further, then fell into a multi-year decline.  Nominal prices actually rose slightly during this period, but valuations dropped as high inflation drove up incomes and rents.
  • Late 1980s -- Once again, valuations rose a bit further then declined for the better part of a decade.  This time, there was an actual decline in nominal home prices of 17% per the CS index.  Meanwhile, rents and incomes rose, further reducing valutions.
  • Early 2000s -- Valuations exploded upward during what became a monumental bubble, eventually (many years later) crashing back down below the historical median.
So here we are at this level once again.  What will happen next?  Here are a few reasons why I don't think that's knowable.
  • Again, small data set.  I only have data on three prior cycles, not enough to draw general conclusions from.
  • The first two times during the data set that we reached this level, we saw big valuation declines.  But that doesn't mean that valuations magically decline once you hit this level.  The 1990s bust was exacerbated by a pretty bad local recession, and the early-80s valuation decline coincided with both a serious recession and extremely high mortgage rates.  In other words, the outcome from here is partly dependent on what happens in the real world.  (That said, housing's high valuation puts it in a vulnerable situation, as a positive economic outcome already appears to be "priced in").
  • And then we have that pesky little incidence in which valuations reached these levels, just started to falter, and then flung up to previously undreamt-of heights.  The primary fuel for the housing bubble was an overly accomodative central bank that was providing excess liquidity in an attempt to mop up after that prior bubble... sound familiar?
  • I've used the historical median as a baseline for comparison, but it's entirely possible that the sustainable level of "fair value" pricing could creep up over time.  That can only really be known in retrospect.
  • And then, of course, we have interest rates.  This chart shows how monthly payments stack up against rents and incomes:

San Diego Home Valuation Index

Despite last year's move up -- a result of both rising prices and a jump in mortgage rates -- this chart shows that monthly payments are still very much on the low side of history.  For as long as that continues to be the case, it could allow valuations to "float" up above normal levels.  When it changes, though, that will remove a major tailwind for housing valuations.  (And, that really does seem to be a "when," not an "if," because rates are only as low as they are due to central bank intervention that must end at some point... as to when, that's anybody's guess.).

Submitted by livinincali on March 26, 2014 - 8:05am.

The-Shoveler wrote:
So I imagine China's RE chart must look somewhat similar, you think China's RE will crash or be inflated away/Bailed out ?

It will crash. Math dictates that outcome. Hyper Inflation has not tended to be good for asset prices. Look at the chart below showing Argentina apartment prices. During the hyper inflationary even of 2002 home prices went down.

Submitted by The-Shoveler on March 26, 2014 - 8:10am.

OK just for a fun,

Cards have been dealt, time to place your bets,

I bet China RE does not decline more then say 15-20% price wise.

IMO The China Gov has too much at stake.

Submitted by Rich Toscano on March 26, 2014 - 9:20am.

livinincali wrote:
Look at the chart below showing Argentina apartment prices. During the hyper inflationary even of 2002 home prices went down.

That chart shows that Argentine home prices went down in DOLLAR terms... not in peso terms. IE real values declined, but nominal values did not.

Submitted by Jazzman on March 26, 2014 - 9:51am.

"Valuation is the comparison between the price and factors that determine what a home's long-run sustainable price should be. This is the number that matters when trying to figure out if homes are expensive or cheap."

Not sure I quite understand this statement. What are those factors? Income, disposable income, inflation, interest rates, supply, buyer incentives (deductibles, loan guarantees), personal debt levels? Rents are a comparison, not a cost that can be lumped in with incomes in my view, because you aren't doing both at the same time. In terms of recent "bubble" talk, what strikes me as relevant is the very sharp increase in prices over a relatively short period, which drives at the heart of the statement "[what] long-run sustainable price should be".

This is probably a semantic thing, but "valuation" to me is based on the cost to produce, margins, supply and demand, and in the case of RE what someone if willing to pay. Current values relate to current selling prices, and when comparing to past values, you need to take into account the cost of living. Affordability is incomes to price, and rents an indicator of what people can afford. From what I hear renters are being gauged at the moment so that might distort rents as a measure. But maybe that's just me.

Submitted by livinincali on March 26, 2014 - 9:54am.

Rich Toscano wrote:
livinincali wrote:
Look at the chart below showing Argentina apartment prices. During the hyper inflationary even of 2002 home prices went down.

That chart shows that Argentine home prices went down in DOLLAR terms... not in peso terms. IE real values declined, but nominal values did not.

I did some more research on this and it's not exactly that simple. Homes in Argentina were transacted in dollars during this time frame because of the previous pegging to the dollar. So you borrowed money in US dollars and bought homes using US dollars. Wages were generally paid for in pesos which then needed to be converted into dollars to pay the mortgage. Probably a bad example. Nominal prices did technically decline because they weren't priced in pesos but the inflation rate recorded probably related to pesos purchasing power. Basically it's not an apples to apples comparison because of some oddities with Argentina's somewhat dual currency system at the time. One thing that did happen was rents in US dollar terms went down dramatically. So investment property performed poorly during this hyper inflationary event.

Here's the article where I got the above information.

http://www.globalpropertyguide.com/Latin...

Submitted by an on March 26, 2014 - 10:38am.

Jazzman wrote:
From what I hear renters are being gauged at the moment so that might distort rents as a measure. But maybe that's just me.
I'm not seeing renters being gouged, at least not in the areas I'm looking to buy. A 2/2 apartment on the West side of Mira Mesa for example was going for $1400/month 6-8 years ago. Today, the same apartment is going for $1550/month. That doesn't sound like gouging to me.

Submitted by Rich Toscano on March 26, 2014 - 10:39am.

livinincali - I wasn't weighing in on whether they were "good" or not... just pointing out that they did not decline in terms of the currency that hyperinflated.

Submitted by Rich Toscano on March 26, 2014 - 10:45am.

Jazzman wrote:
"Valuation is the comparison between the price and factors that determine what a home's long-run sustainable price should be. This is the number that matters when trying to figure out if homes are expensive or cheap."

Not sure I quite understand this statement. What are those factors?

Sorry, I talk about this a lot, so I kind of glossed over it in my post. The fundamentals I like to use are rents and incomes. Incomes indicate how much potential home buyers earn to pay for housing, and rents indicate how much it costs for the competing form of putting a roof over your head in SD. This makes sense theoretically, and the relationship between home prices and rents/incomes has been highly mean-reverting over time... ie, the ratio of home prices to rents/incomes is a good measure of valuation.

Submitted by an on March 26, 2014 - 11:02am.

Rich Toscano wrote:
Sorry, I talk about this a lot, so I kind of glossed over it in my post. The fundamentals I like to use are rents and incomes. Incomes indicate how much potential home buyers earn to pay for housing, and rents indicate how much it costs for the competing form of putting a roof over your head in SD. This makes sense theoretically, and the relationship between home prices and rents/incomes has been highly mean-reverting over time... ie, the ratio of home prices to rents/incomes is a good measure of valuation.

I personally like to compare monthly payment to rent than income. The reason why I don't like to compare to income is because it seems like every city have a different mortgage to income ratio. So, if there's a change in a city in one direction or the other with regards to mortgage to income, we won't be able to notice the change until we're looking backward. However, if you compare mortgage to rent, you'll see in almost real time what the people in that city is willing to pay for shelter. So if there's a change in the amount of $ you're willing to pay for shelter, the rent will reflect that pretty quickly. So, while mortgage to income might show that things are getting overvalued, mortgage to rent might say it's still fair valued because the people in a particular city has changed and are will to pay more for shelter. Same can be said on the other spectrum about undervalue as well.

Submitted by livinincali on March 26, 2014 - 11:18am.

Rich Toscano wrote:
livinincali - I wasn't weighing in on whether they were "good" or not... just pointing out that they did not decline in terms of the currency that hyperinflated.

Yeah I agree but it's kind of a weird case because they aren't/weren't transacted in pesos either. It was an my lack of understanding how real estate is transacted in Argentina. The data that says Argentina house prices in pesos performed like this doesn't seem to exist.

Bottom line is that Argentina devalued the currency currency by giving up the dollar peg and that lead to a hyper inflationary event. Based on the information I have it would appear that almost all assets prices failed to keep up with that hyper inflationary event but many of those assets did better than cash.

My overall point is that assets that are typically highly leveraged assets aren't necessarily going to do well in an hyper inflationary or high inflationary environment. The interest rate problem in an inflationary environment becomes a significant problem for the price of leveraged assets. Especially when that interest rate is coming from record lows. Nobody lends at an intentional loss, well except maybe Freddie and Fannie because it's good for vote buying.

Submitted by The-Shoveler on March 26, 2014 - 11:34am.

Don't open mortgages in a currency your country does not control LOL.
I feel for the people who took out loans in Euro’s (really bad Idea IMO).

Ultimately it is the Central bank and the PTB (ie... here congress/Prez) that decide what the out come will be, it is not always a clear path, the same mantras being said today would have been disastrous advice in the 1970's

Submitted by Jazzman on March 26, 2014 - 11:36am.

Rich Toscano wrote:
Jazzman wrote:
"Valuation is the comparison between the price and factors that determine what a home's long-run sustainable price should be. This is the number that matters when trying to figure out if homes are expensive or cheap."

Not sure I quite understand this statement. What are those factors?

Sorry, I talk about this a lot, so I kind of glossed over it in my post. The fundamentals I like to use are rents and incomes. Incomes indicate how much potential home buyers earn to pay for housing, and rents indicate how much it costs for the competing form of putting a roof over your head in SD. This makes sense theoretically, and the relationship between home prices and rents/incomes has been highly mean-reverting over time... ie, the ratio of home prices to rents/incomes is a good measure of valuation.

Real (median) incomes have been declining since 2007 in California. If house prices have been increasing, doesn't that make houses less affordable?

Submitted by Rich Toscano on March 26, 2014 - 12:16pm.

You are comparing real incomes to nominal home prices...

Submitted by Rich Toscano on March 26, 2014 - 12:20pm.

Also, I don't really understand the argument... home prices are MUCH lower than in 07, hence more affordable.

If you are arguing that recent home price increases have outstripped income growth over the past couple years (and thus become less affordable over those couple years)... nobody is arguing otherwise!

Submitted by The-Shoveler on March 26, 2014 - 1:31pm.

Why OER was a really really bad Idea,

It cut home prices loose and now we see over short periods of time large fluctuations and over long periods of time the loss of affordability among the lower rungs of the income ladder that rely on cost of living tied to CPI.

Well IMO anyway.

Submitted by FlyerInHi on March 26, 2014 - 1:40pm.

AN wrote:
I personally like to compare monthly payment to rent than income. The reason why I don't like to compare to income is because it seems like every city have a different mortgage to income ratio. So, if there's a change in a city in one direction or the other with regards to mortgage to income, we won't be able to notice the change until we're looking backward. However, if you compare mortgage to rent, you'll see in almost real time what the people in that city is willing to pay for shelter. So if there's a change in the amount of $ you're willing to pay for shelter, the rent will reflect that pretty quickly. So, while mortgage to income might show that things are getting overvalued, mortgage to rent might say it's still fair valued because the people in a particular city has changed and are will to pay more for shelter. Same can be said on the other spectrum about undervalue as well.

That's a pretty good way of looking at things in my opinion -- what you pay to rent vs. what you would pay to buy (and what is the norm in a certain city).

For sure, in some cities, people have more tolerance to paying more of their incomes for housing. I think the tolerance is getting higher in San Diego because of tech.

A 2/2 condo/townhouse is a pretty good gauge IMO. I would say that rent is more like $1,800 in Mira Mesa and $2,100 in UTC/La Jolla. Of course, it varies based on the condition and fit/finish of the unit. Those rents support higher house values.

Submitted by CA renter on March 26, 2014 - 10:13pm.

Taking this...

ocrenter wrote:
Rich Toscano wrote:

San Diego Home Valuation Index

Rich, a graph is worth a thousand words.

essentially if we look at past cycles as a guide and remove the abomination that was the bubble, the current peak is essentially the typical rise in valuation that cycles up and down every few years.

So I suppose the question to folks that would want to consider selling is would they have sold their primary resident in 1980 and 1990? and not if they would have sold in 2006.

and this...

Rich Toscano wrote:

The 90s downturn was pretty bad, but the thing is, only about 40% of that decline (eyeballing it) was prices returning to "fair value," while the other 60% was them falling from "fair" to "very underpriced." So basically, that decline was only as bad as it was because homes ended up really cheap.

I just noticed that the price declines from the ~2005 bubble didn't go to the same "undervalued" level seen after the late 70s and late 80s bubbles. Interesting, especially when you consider that the internet bubble was getting in full swing in the mid-90s, yet housing prices continued to decline a bit even from there. That's when I bought my first house, FWIW, because it was obviously a good deal at the time. While we also bought in 2011, it didn't feel like as good of a deal, especially price-wise. Yes, interest rates made things more favorable, but I always consider price over payment.

Okay, so we had the internet/stock bubble AND incredibly accommodative interest rates after we got to the "natural" peak of that housing cycle in 2001, and these two things got us out of the post 1989 bubble and ushered in the bubble of the 2000s, but what do we have now?

We're already near historic lows on interest rates (implying that we can only go up from here over the long run), and while the tech sector seems to be going strong for the moment (looking quite a bit like a bubble to me, too), what will come next? If we see prices decline from here, either because of a recession or because interest rates rise (or both!), what would get us quickly out of the next downdraft?

I think things look worse from here than they did near the tops of past RE cycles, but could just be a pessimist. It's easier to get out of a RE slump when rates are high because lowering rates can quickly make higher prices more affordable. And it's easier when people have adequate savings and/or incomes are rising, but incomes have been stagnant to declining for many, many years, with the exception of a handful of sectors, mostly tech and finance.

See per capita income here:

https://www.census.gov/hhes/www/income/d...

Of course, they adjust these numbers using the CPI rates, but most of us know those numbers are far lower than what we see in real life, so it's even worse than what they're showing there...which is that we're at ~1998 levels. No income growth for most people over this time.

Submitted by Rich Toscano on March 27, 2014 - 7:50am.

CA renter wrote:
incomes have been stagnant to declining for many, many years, with the exception of a handful of sectors, mostly tech and finance.

See per capita income here:

https://www.census.gov/hhes/www/income/d...

Of course, they adjust these numbers using the CPI rates, but most of us know those numbers are far lower than what we see in real life, so it's even worse than what they're showing there...which is that we're at ~1998 levels. No income growth for most people over this time.

You are doing the same thing as Jazzman did above -- you are comparing REAL incomes with NOMINAL home prices. That's just not a meaningful comparison. Additionally, I suspect you are looking at nationwide numbers... since we are talking SD home prices, I think it's important to focus on SD income data.

The nominal per capita income for San Diego is up 73% since 1998. Those numbers come straight from the BEA, using San Diego income per capita up through 2012, and estimating based on statewide per capita income for 2013 (which makes no difference at all to the big picture).

So it is definitely not the case that nominal SD incomes are at 1998 levels! In fact, they are the highest they've ever been, and they are 73% above 1998 levels.

Despite this, homes are overpriced compared to incomes -- that's the point of the valuation graph, to compare actual SD incomes and rents to home prices, and that graph indicates some degree of overvaluation. I'm not arguing otherwise. But to compare nominal SD home prices with inflation-adjusted nationwide incomes is just not a meaningful comparison at all.

Submitted by Jazzman on March 27, 2014 - 2:29pm.

Rich Toscano wrote:
You are comparing real incomes to nominal home prices...

Apologies! I should have said real prices. Real home prices increased as well. I don't disagree with your findings. I just feel differently about it.

Real Prices

Submitted by joec on March 27, 2014 - 2:59pm.

One thing a lot of the bubble claimers also need to be aware of is as bad as the incomes and all that is, please note that the wealthy or decent income people who are buying homes in a lot of the desirable areas we discuss here (not the 60k home in the midwest)...are probably doing pretty darn well. Stocks are at all time highs and if anyone just stayed invested, they have near tripled their money already.

Those people's income, I'm assuming if they had any stock assets, retirement, decent paying jobs, etc...are making very high and good incomes. Companies are getting bought out for more and more crazy stock prices which they will sell and raise cash, etc...

Please also note, NOT EVERYONE IS SUPPOSED to buy a home. Yes, I am screaming this out there. If you look at a lot of the statistics, the people who are doing poorly are mostly recent grads and NON-college educated people < age 25. As I've stated before, I don't think single men (or many young women) look to settle in an area and buy a home so they making low incomes, etc...doesn't has as much of an effect as expected (or hoped).

People who are in their 35+ or older have already established jobs and are probably doing pretty well...At least from what I see.

The main problem, again, is lack of supply, high high rents where renting cost is the same as buying costs when taxes are factored in which puts the bubble talk out of reach currently. Until rates go high enough where buying is more expensive or rents come down or something else, there is just no tracking. Case Shiller just came out and SD was up near 20% YoY. I think San Fran and San Jose were slightly higher in spots 1 and 2...

As the chart in one of the messages above shows, if you're just looking to buy a place for your family with kids in a decent school district and you don't want to rent (normal negative aspects of renting), buying could end up being cheaper for you...and yes, I do agree it's not cheap, but I think as a few have posted, people are willing to allocate more assets to housing costs...

Personally, again, if I was single/no kids, I'd lived in the cheapest shack I could find.

Submitted by The-Shoveler on March 27, 2014 - 5:42pm.

CA renter wrote:

See per capita income here:

https://www.census.gov/hhes/www/income/d...

Of course, they adjust these numbers using the CPI rates, but most of us know those numbers are far lower than what we see in real life, so it's even worse than what they're showing there...which is that we're at ~1998 levels. No income growth for most people over this time.

Exactly People wonder What happen to the middle class, sure some of it was factory work going over seas etc.., but the real issue is the CPI changes in the early 1980's

The under reporting of CPI is the real culprit,

Again OER was a really really bad Idea and no one even notices their being robbed. Inflation is not robbing workers, under reporting it is LOL.

Think of it as compound interest in reverse.

Submitted by Jazzman on March 27, 2014 - 7:16pm.

joec wrote:
One thing a lot of the bubble claimers also need to be aware of is as bad as the incomes and all that is, please note that the wealthy or decent income people who are buying homes in a lot of the desirable areas we discuss here (not the 60k home in the midwest)...are probably doing pretty darn well. Stocks are at all time highs and if anyone just stayed invested, they have near tripled their money already.

I'm certainly not a "bubble claimer", and even non-bubble claimers concede homes are over-valued. The problem is that it should come so soon after a major bubble, and in an economy still struggling to recover. You need to ask yourself whether that is a healthy sign.

Many might claim that growing income disparities have priced out many who would ordinarily have been able to afford a home.

Stocks, like real estate, have benefited from monetary easing. Earnings tell a different story. You might want to ask whether that is a healthy investment environment.

Those people's income, I'm assuming if they had any stock assets, retirement, decent paying jobs, etc...are making very high and good incomes. Companies are getting bought out for more and more crazy stock prices which they will sell and raise cash, etc...

Please also note, NOT EVERYONE IS SUPPOSED to buy a home. Yes, I am screaming this out there. If you look at a lot of the statistics, the people who are doing poorly are mostly recent grads and NON-college educated people < age 25. As I've stated before, I don't think single men (or many young women) look to settle in an area and buy a home so they making low incomes, etc...doesn't has as much of an effect as expected (or hoped).

Home ownership is encouraged by the government. Two thirds of the economy is consumer driven. Increasing home ownership, and increasing home values increases consumption. Home ownership is a good thing, but as you say, encouraging those who may be best suited to renting, may not be.

People who are in their 35+ or older have already established jobs and are probably doing pretty well...At least from what I see.

The main problem, again, is lack of supply, high high rents where renting cost is the same as buying costs when taxes are factored in which puts the bubble talk out of reach currently. Until rates go high enough where buying is more expensive or rents come down or something else, there is just no tracking. Case Shiller just came out and SD was up near 20% YoY. I think San Fran and San Jose were slightly higher in spots 1 and 2...

Low rates have driven demand, and low supply has driven up prices. Again, you need to ask whether that makes for a healthy, sustainable housing market.

As the chart in one of the messages above shows, if you're just looking to buy a place for your family with kids in a decent school district and you don't want to rent (normal negative aspects of renting), buying could end up being cheaper for you...and yes, I do agree it's not cheap, but I think as a few have posted, people are willing to allocate more assets to housing costs...

I think there is a danger in this. Maxing out on a loan is a high risk venture and clearly exacerbated the housing bubble. Buyers need to keep well within their means, and not be tempted by teaser rates. It is better to lower your expectations though some, perhaps understandably, find that bitter pill to swallow.

My philosophy is that it's better to try and understand causes than to accept things blindly. Even if you can't do anything about it, you have the satisfaction of hopefully making better informed decisions.

Personally, again, if I was single/no kids, I'd lived in the cheapest shack I could find.

Submitted by CA renter on March 27, 2014 - 7:52pm.

You're correct about nominal prices vs. real incomes, Rich. Also, I tend to look at the larger housing market, not just San Diego; you're right about SD, too.

These home price increases are being seen across the country, and much of it is being driven by speculators/investors. That's a trend that always raises red flags to me. Even in our neighborhood, it seems like *at least* half of the homes are being flipped. Sometimes, they are selling homes for $200K+ more than they bought them for just a few months before, which makes absolutely no sense at all. I thought the new rules for appraisers would fix this, but apparently not.

Submitted by spdrun on March 27, 2014 - 8:06pm.

With the way indices have been going the last few months (month-on-month, not year-on-year), hopefully we can replace "are" with "were" pretty soon.