State of the economy and affect on housing in S California

User Forum Topic
Submitted by wallers on March 20, 2015 - 10:36am

Hi
Wondering if anyone has opinions about what is happening with our economy now and in the near future and price affect on the southern california housing market. I think looking at the health and future of our economy might be a better indicator of where the housing market will go??? Opinions on where we are at?

Our economy is stable. Things are booming. No problem.

Things will flatten out. Stock market and housing market can't stay at all time highs but won't crash.

We are in for it.

I don't know anything about economics or investing but hearing some pretty scary stuff. Do you believe it or do you believe the opposite or somewhere in between.

Things such as - QE screwing the economy and enriching investors and driving a "false market". Historically some are calling for a recession within the next few years. 4 trillion debt because of qe but nothing to show for it but investor run up. Rates need to rise at some point. Household incomes way out of whack with home prices. House market decline leads to serious economy issues. Same for stock market. Other economies having issues which will affect us. Inflation with the strong dollar affect overseas trade.

3 Stages of the home price decline. Do you believe this?
Josh Pollard formerly of Goldman.
Unless the calculus of history is a poor guide, there is a 60% chance that home values decline materially, in fact, the correction is already underway. This probability rises when new negative shocks emerges. The home price decline will be defined by 3 Stages:

Stage I: Hot to Cool: Active since Summer 2013*, Price growth is slides across the country as flippers lose money outright in the red-hot investor markets (NYC, San Francisco and Las Vegas); New home absorption rates - sales per community - are declining; investors slow their home purchases; total home sales decline year over year; developers lose pricing power, press outlets shift from positive to mixed about the health of the housing market.

Stage II: Demand to Supply: Small shocks convert demand pools into supply ripples. A first wave of investors begin trimming prices to get ahead of future declines; discounts increase to incentivize purchasers as purchasers increase their delays for better deals; developers reduce land budgets as cancellations tick up; major financial press outlets take a more negative tone toward housing lowering confidence overall.

Stage III: Deflation & Response: Falling home prices create a negative deflationary feedback loop that foreshadows a once-in-a-lifetime policy response. Deflationary economics take full hold; leveraged bets on real estate unwind in quarterly ripples due to the public reporting cycle & asset manager redemption schedules; willingness to lend shrinks; the broader consumer finally understands it is a bad time to buy a home, a shrinking housing market negatively impacts jobs causing recession; the estimated effects of never-before-seen public policy reactions determine when and where prices eventually trough.

Submitted by spdrun on March 20, 2015 - 10:44am.

Pollard's analysis isn't scary. It's the most cheerful thing I've heard today. Don't look at it as people losing money; look at it as a potential for a big fire sale.

This being said, flippers aren't losing money, at least not yet. I also don't think that home prices will correct below their 2008 and 2012 lows even if we do have a correction.

Submitted by The-Shoveler on March 20, 2015 - 10:59am.

None of the above IMO.

IMO we will see slow steady (somewhat boring) growth.

Boring for the next 5 years is what I see coming.

Anyway IMO.

Submitted by livinincali on March 20, 2015 - 11:14am.

I think the odds are definitely higher than usually for a surprise on the downside. When everybody thinks things will keep growing and the worst case might be flat to little growth I get somewhat nervous. There's definitely some signs of a coming recession and I don't see many people paying attention to them. China is slowing, Europe is in recession, Japan is in recession, and I don't think we remain uncoupled or unscathed forever. I think we will follow the rest of the world into recession and nobody seems prepared for it so I expect some serious volatility once people finally realize it.

That said I'm still inclined to believe a euphoric blow off top in the markets before we see a big time correction. Maybe this fall is when it shows up.

Submitted by fun4vnay2 on March 20, 2015 - 11:40am.

The crash happens when people least expects it.

To be honest, I have been an ardent observer of things happening and I can say for sure things have been pretty bad in general for middle class.

Jobs are being created but most of the jobs are lower paying jobs.

A lot of good jobs are being outsourced to cheaper places. A drop in unemployment rate, sure ..

Housing Market: The prices are being propped up artificially by Govt.

Submitted by FlyerInHi on March 20, 2015 - 11:45am.

spdrun wrote:
I also don't think that home prices will correct below their 2008 and 2012 lows even if we do have a correction.

There are economic cycles. But other than the Great Depression and maybe the Great Recession of 2008, recessions are just 2 quarters of negative growth. A recession doesn't undo the wealth gains since the recession prior.

(I'm not looking back to the 19th century and before)

Submitted by flyer on March 20, 2015 - 3:43pm.

When life is going well, it is human nature to think everything will be fine--forever. As a society, I think Americans as a whole are, perhaps, the most guilty of this ridiculous mindset, and, unbelievably, many raise their kids to think that way (I know quite a few, and it hasn't worked out well.) The reality is--everything will be fine--until it isn't--as many found out during The Great Recession.

Imo, those who financially survive, and even thrive during the inevitable cyclical economic corrections they will encounter throughout their lifetimes--are those who expect the best and plan for the worst. That, of course, means different things to different people, but it is possible to position yourself in that way.

Submitted by Coronita on March 20, 2015 - 3:59pm.

Strong money still > overleveraged money for most home purchases.

With that, I don't think we'll see a housing crash until that changes.

People's payments (assuming they have a mortgage pretty much stays the same), so it depends on if people can continue to make the payments. Stronger hands probably can/will.

San Diego in general has fared pretty well during the last downturn. Silicon Valley is...what downturn?

Submitted by joec on March 20, 2015 - 6:07pm.

Whenever someone asks these questions, you have to ask yourself are you asking because you want to buy and want it to crash or are you a seller or owner and you want it to keep rising?

You can just scan the posts above and get the same read from the same posters as to where they stand since they have posted about the same thing before and their position is the same. This makes it so that the poster and most anyone is very biased as to what will happen when generally, most of the time, a lot of people are just flat out wrong. Also, the things you hear in the news are to sell news and sensationalize the situation when really, it's all pretty boring so it's not as bad as people state in the media. It's all pretty stupid, but they are there to sell ads.

People have a tendency to also put too much in what they want and think that their position is the "correct" one.

Ask yourself where you are based on my comments above and be careful that you are actually wrong to think that way since you are simply choosing to see what you want to see or happen.

That said, a lot of people (mass media, business shows) have actually been predicting a housing crash so I don't see that everyone thinks that it's going to go up forever. People keep harping that interest rates will go crazy and inflation will be out of control and they have been wrong for the past 5 years already.

All that said, I agree with the general view of some posters that it will just move up slowly and that's it. There is way too much cash on the sidelines (look at all time highs on stocks) for it to crash because if there is a drop, money will move in.

You also have to look at the most important thing such as rents. Rents are insanely high as been posted here and Rich (owner of this website) have stated very clearly with data that we are nowhere in bubble as in 2006-07...

I have posted also that buying at times maybe even cheaper than renting in the same area in the same house (20% down, tax benefits for higher income folks) so how can it go down or "crash" as some people want?

If you aren't in dire straits, everyone in that situation (owners) will simply rent out their house instead of selling and I see a ton of these (not literally of course) in my area because their loan payments are so low.

Also, anyone who bought recently had very strong finances as the mortgage market was overly hard. Contrary to many other people perhaps, for many areas in San Diego and LA and the coast in general, I don't think any "middle class" are really the buyers here anymore.

For 500-1 mil houses, the down payment (using how houses used to be bought), people would have to come up with 100k - 200k in cash. Most regular "middle-class" folks can't get anywhere near that so the market these people support now are moveup buyers, foreigners (large chunk) and lots of highly educated, well paid folks. These people tend to have better jobs, better family support, and more savings so unlike when the bubble crashed with 0 down, ninja loans, these people won't sell houses for less than they paid if they don't have to, especially if they can rent it out.

Unlike 30-40 years ago (I was already in the states)...communities are not as diverse where the doctor is living next to the blue collar guy etc so certain areas will continue to slowly command a premium.

tl;dr:
Slow growth in desired areas mentioned (SD, LA, Coastal, Bay Area). No crash at all. Low inventory...all IMO.

Submitted by spdrun on March 20, 2015 - 6:22pm.

#1 - sellers don't control the market. Buyers do.
#2 - sellers with 20% equity can actually go down 10-15% if they want to sell. Not everyone wants to be a landlord.

Submitted by fun4vnay2 on March 20, 2015 - 6:40pm.

I've been saying so:: Of course, this time is different than others..
It would be interesting to see how long govt can keep the rates low.
Japan's rate is low for looong time..

Submitted by FlyerInHi on March 20, 2015 - 9:55pm.

joec wrote:

That said, a lot of people (mass media, business shows) have actually been predicting a housing crash so I don't see that everyone thinks that it's going to go up forever. People keep harping that interest rates will go crazy and inflation will be out of control and they have been wrong for the past 5 years already.

You know the broken clock joke about people who make predictions but are never right....

Those naysayers weren't even slightly right as the Dollar has gotten stronger.

Runaway inflation and dollar collapse those guys were predicting means that prices will skyrocket in nominal terms, not drop. So they can't even do math!!

It would be kind to say that the clock is right once a century.

Submitted by Jazzman on March 20, 2015 - 11:30pm.

wallers wrote:
Hi

Stage I: Hot to Cool: Active since Summer 2013*, Price growth is slides across the country as flippers lose money outright in the red-hot investor markets (NYC, San Francisco and Las Vegas); New home absorption rates - sales per community - are declining; investors slow their home purchases; total home sales decline year over year; developers lose pricing power, press outlets shift from positive to mixed about the health of the housing market.

Stage II: Demand to Supply: Small shocks convert demand pools into supply ripples. A first wave of investors begin trimming prices to get ahead of future declines; discounts increase to incentivize purchasers as purchasers increase their delays for better deals; developers reduce land budgets as cancellations tick up; major financial press outlets take a more negative tone toward housing lowering confidence overall.

Stage III: Deflation & Response: Falling home prices create a negative deflationary feedback loop that foreshadows a once-in-a-lifetime policy response. Deflationary economics take full hold; leveraged bets on real estate unwind in quarterly ripples due to the public reporting cycle & asset manager redemption schedules; willingness to lend shrinks; the broader consumer finally understands it is a bad time to buy a home, a shrinking housing market negatively impacts jobs causing recession; the estimated effects of never-before-seen public policy reactions determine when and where prices eventually trough.

There is a lot of truth in the above that was particularly relevant to the previous housing bubble. I think what is different this time is the finger is very much on the pulse, or as some may argue, in the dike. 2012/2013 saw price increases reminiscent of 2004, but by 2014 it leveled off probably due to affordability issues. The point is it didn't crash, or least it hasn't yet. It is really anyone's guess as to what happens from here on. There are too many variables to even take a stab at it. I personally would like to see a correction of the more recent gains, but in a civilized manner. If you look at everything that contributes to asset bubbles you need to ask two questions: What happens when they are removed, and when will they be removed? The logical answer is that the reverse happens—and possibly at a similar rate—when it is realized prices are neither sustainable, nor supported by fundamentals. For that to happen, things need to get heady. Since we just experienced the bubble of all bubbles, mini-me bubbles are met with complacency. So nailing down the inflection point, or turning tide, is much harder. Complacency, though, could be what continues to feed bubbles in other assets that then infects everything else. The writing is on the wall, but the script isn't legible yet.

Submitted by moneymaker on March 21, 2015 - 4:41am.

All good stuff above. If everyone recalls the last bubble it took 2 years from peak to trough even though it all seemed to happen in a flash when people recall or talk about it. I think some good recent charts are in order.

Submitted by wallers on March 21, 2015 - 10:37am.

Thanks everyone. Yes, all of what posted makes sense.
I can google housing crash and lots of articles about the doom and why. Some well written from respected people. Same for house prices remaining flat. Same for house prices moving up. You can find anything you want depending on what you want to find.

Last time around I didn't even think about bad loans etc. SO with this latest craze I guess I am looking to dig deeper to see what is really going on and if we are on solid ground with the economy/investors since that seems to be the driver? And then all the info about the fed pumping money in.

The thing I am wary about (but again don't know) is that if house prices were so investor driven what happens when investors start dumping and leave. Will they dump. Will they hold. Who owns what. Is the market really investor driven? It seems to me the housing market now is treated more like the stock market instead of people just buying homes. So are homes just like the stock market? Big ups and downs. Speculative driven. Then the Fed pushed all cheap money in. That is said to be unprecedented. What is that going to mean?

In the end just as people have said I guess we don't now till something happens or it doesn't. Some bullish, some bearish, some in between. But was curious about the "indicators" of what potentially could happen. You know where you just say to yourself how did I not see that coming.

And yes I just moved here. Want to buy a house. I won't lose money because I will have a long hold. The homes I want are 20% more than I can afford (well revise that to I could get it but I would be uncomfortable if I had any job issues) But could be somewhat happy with buying something 20% less and it would be less than rent. But then what if I wait two years and buy that house for 20% less and get what I want. But then what if I live in a rental and pay more than owning and things just plug along and am not happy renting. Or what if things keep going up (the herd mentality that is also scary buy now but it gets to me like everyone)

Ah the questions. I wish I had a crystal ball.

Submitted by fun4vnay2 on March 21, 2015 - 10:25am.

Right now, assuming with 20% down,even with historic low interest rates, it is cheaper to rent than to buy a house. At Least in my area: SR/Sabre springs..

From what I experience/observed, rent never increased drastically as some people mentioned in this forum.

A 2 BR/BA condo in Mira Mesa was almost 1600/month 8 years back and I see the similar rate today as well.

Submitted by wallers on March 21, 2015 - 10:33am.

Yes you are correct. Sorry did not give all the info. I would be putting 50% down which makes it cheaper for me to own than rent. But yes, with lower down payments it is cheaper to rent than buy from what I see where I am looking in San Diego.

Submitted by fun4vnay2 on March 21, 2015 - 10:36am.

Then you'd need to include the lost opportunity cost tied to your house down payment.
so rent may seem cheaper than own but that wont be the complete picture.
same can be said about 20% down as well.

Submitted by wallers on March 21, 2015 - 10:47am.

Yes you are correct about that as well. If I buy now can't buy later. Have to stick with I bought long term.

Submitted by fun4vnay2 on March 21, 2015 - 10:59am.

Looks like the investors are fleeing away from the real estate market now.
Investors are not really into holding the real estate as rental but flipping after few months for profit.

I see the similar craziness in real estate what I saw in 2006/7. I was under pressure in 2006/7 to buy but finally bought my second house in 2011.
IN 2006/7, people told me few facts stating the reason that prices in san diego would never go down:
here are few of them:

1) In SD, land is limited unlike tx, you have desert on one side and ocean on another. With tough zoning in CA, it makes residential land more precious.

2) SD has best weather , everyone wants to live here so prices can never go down

3) SD has very rich people with lots of money. This would make real estate never go down

3) SD has companies like QCOM where people are in very high paying jobs with tons of stock options. Today, the QCOM is not the same QCOM it was 8 years back. The myth is broke that in QCOM you have a permanent job and you ca be millionaire because of stocks. QCOM stock is in doldrums.

Few of my buddies went head and bought houses for 800/900K in SD in 2008. Those houses dropped to 500/600K in 2011.

Currently When I talk to realtor they say: One should buy now lest priced out forever LOL

Everyone says: this time is different.

I learn a lot from this forum and hats off to the people here.

I am looking for a house to buy now and am in the sidelines.. but I see similar craziness in the areas I'm interested in and this does not portend good per my gut feeling.

Off topic: I see big flight of high paying knowledge based jobs out of USA in general and out of san diego in particular to cheaper cost places. This again portend bad for middle class jobs..

Submitted by utcsox on March 21, 2015 - 11:25am.

rockingtime wrote:

From what I experience/observed, rent never increased drastically as some people mentioned in this forum.

A 2 BR/BA condo in Mira Mesa was almost 1600/month 8 years back and I see the similar rate today as well.

This is absolutely false.

Submitted by spdrun on March 21, 2015 - 11:43am.

rockingtime wrote:
Looks like the investors are fleeing away from the real estate market now.
Investors are not really into holding the real estate as rental but flipping after few months for profit.

Do you mean that investors are no longer buying, or trying to dump what they bought?

Submitted by fun4vnay2 on March 21, 2015 - 1:00pm.

THis is from what I paid 8 years back and what my friends are paying right now.
I was paying almost 1550 in 2007 and last when I moved out in 2011, I was paying almost the same money.

I don't really see any rent appreciation which can be called drastic.

I see rent increase but not drastic.

Submitted by fun4vnay2 on March 21, 2015 - 1:01pm.

I see investors already made their money and thus don't see the same investor's activities.
They don't the appreciation rate to justify the real estate transaction cost which can be as high as 5-6% of total cost.

Submitted by wallers on March 21, 2015 - 1:38pm.

Yes, I have heard all the same arguments about why SD will be stable from realtors.
But one thing that boggles me a bit is that if that were the case then the 1920's house that took 90 years or so to get to 400k. In 4 years it hit 600k (minimal to no improvements also all loose estimates)but point is 200k in 4 years and 400k over 90 years. Well... that seems off. Maybe not. But from what I understand (and again don't know) household income has not had even close to that sort of growth. If everyone was moving here and buying up the place and that is why it is what it is I feel there would be a different historical trend. Not everyone decided to move here in the last 4 years. But again maybe I just see what I want to see.
On the investor fleeing comment from what I see they are still in the game. At least where I am looking. I asked my realtor about a fixer house that just went on. Sold all cash in a few days. Think there is a dumpster outside now waiting for the demo to begin. And this house wasn't a steal of a deal either. For an investor to make money at the price point they paid they are going to have to ask a sizable price even in this market.

Submitted by fun4vnay2 on March 21, 2015 - 2:50pm.

Investors are still there but the bulk of them made their money and are gone.
UNless the investors see a big upside potential, they won't be spending money here..

Wage growth is another story. Wages are more or less stagnant for last few years.

I work in a field which pays quite a lot close to 200Ks/year and I see big time automation and outsourcing of jobs to cheaper places..

Submitted by scaredyclassic on March 21, 2015 - 2:51pm.

Noone knows

Submitted by flyer on March 21, 2015 - 3:38pm.

wallers wrote:
Yes, I have heard all the same arguments about why SD will be stable from realtors.
But one thing that boggles me a bit is that if that were the case then the 1920's house that took 90 years or so to get to 400k. In 4 years it hit 600k (minimal to no improvements also all loose estimates)but point is 200k in 4 years and 400k over 90 years. Well... that seems off. Maybe not. But from what I understand (and again don't know) household income has not had even close to that sort of growth. If everyone was moving here and buying up the place and that is why it is what it is I feel there would be a different historical trend. Not everyone decided to move here in the last 4 years. But again maybe I just see what I want to see.
On the investor fleeing comment from what I see they are still in the game. At least where I am looking. I asked my realtor about a fixer house that just went on. Sold all cash in a few days. Think there is a dumpster outside now waiting for the demo to begin. And this house wasn't a steal of a deal either. For an investor to make money at the price point they paid they are going to have to ask a sizable price even in this market.

Your observation concerning why it has taken so many years for homes in San Diego to appreciate at the current level would, imo, be due to the fact that San Diego was not really "on the map" business-wise until around the 80's, when, companies "discovered" it in a major way, and the need for housing became greater.

Prior to that, it was predominately, a "Navy town," and also had some other major employers such as the city and county, General Dynamics, Rohr, Hazard Construction, and others, but nothing on the level we see here today. It has also always been a prime destination for retirees.

Many of the families, like mine, who have been here for decades (we all tried different places in the world, but ended up coming back) also got into real estate development and investment, insurance, and other fields to meet the growing demands of the population as the county grew.

So, what you are experiencing as far as property values go at this point in time is the result of this evolution. Can it be sustained?--will property prices continue to up or down?--as others have said--we can all guess, but I don't think anyone really knows.

If you plan to be here long-term, and can easily afford the investment, it's definitely something to consider.

Submitted by Jazzman on March 21, 2015 - 3:47pm.

wallers wrote:

The thing I am wary about (but again don't know) is that if house prices were so investor driven what happens when investors start dumping and leave. Will they dump. Will they hold. Who owns what. Is the market really investor driven? It seems to me the housing market now is treated more like the stock market instead of people just buying homes. So are homes just like the stock market? Big ups and downs. Speculative driven. Then the Fed pushed all cheap money in. That is said to be unprecedented. What is that going to mean?


Reports abound of investors buying between 30-50% of properties is some markets. Some of these investors are large and bought anything and everything. They bid up the price quite a lot, but I expect are in the same boat as everyone else, i.e. waiting to see which way the tide turns. There has probably been some shedding of dead wood, but no stampede which is difficult to do with something as illiquid as RE. I don't think there is much investing currently, as increased prices have put downward pressure on capitalization rates, and since prices have leveled off, overall returns on investments have wavered.

Another perspective to watch is shares and bonds. I believe many RE investors would prefer to be invested in traditional financial products (me included), and are waiting for a similar scenario to play out. With so much uncertainty, bricks and mortar offers a more tangible alternative to the volatility of paper. If you believe that the Federal Reserve holds the key to an unraveling of all over-valued assets, then at some point we will see a correction. Since things have held up pretty well so far, it may take a recession to jolt an undoing of all the 'good' work. Historically, one is due.

So a decision whether to buy, or not, revolves around either making the compromise you speak of by lowering your expectations, or sticking to your guns and allowing a principle dictate your actions. Which will be the more financially astute may not matter as you can't blame yourself for not knowing the future. If it's of interest, even during the trough of the crash I found property prices in soCal to be over-valued so voted with my feet and never looked back. The value you place on things doesn't always need to be supported by clever numbers. If something seems expensive, it means you do not place an equal value on it. So you walk away.

Submitted by wallers on March 21, 2015 - 4:50pm.

ok thanks everyone! great info. I think I am going to rent and see how this all plays out.

From all the info here and everywhere generally speaking it seems prices will either remain somewhat the same/maybe a bit up for sometime and things will trudge along or go down. So financially it might be prudent to wait and see with minimal risk of a continued large price increase (buy now or be priced out forever!). Plus there is the possibility of staying calm and being rewarded for waiting for lower prices.

On the personal side I like being a homeowner. But if I can't get what I want perhaps than maybe it's not a great idea to buy anyways.

Submitted by joec on March 21, 2015 - 6:36pm.

wallers wrote:
ok thanks everyone! great info. I think I am going to rent and see how this all plays out.

From all the info here and everywhere generally speaking it seems prices will either remain somewhat the same/maybe a bit up for sometime and things will trudge along or go down. So financially it might be prudent to wait and see with minimal risk of a continued large price increase (buy now or be priced out forever!). Plus there is the possibility of staying calm and being rewarded for waiting for lower prices.

On the personal side I like being a homeowner. But if I can't get what I want perhaps than maybe it's not a great idea to buy anyways.

I think the bottom line for a lot of people to also consider is if you don't own ANY property, then buying something you can easily afford to LIVE in is not the dumbest thing in the world. You have to live somewhere and like the poster who bought for 330k and her house is now worth 550k or so, whatever the equity is worth shouldn't matter if you can afford the payments and are long term.

There are way too many variables within the housing market alone as well as way too many variables in each of our lives. You can wait a long time, but say you are in your early 30s, married and have 1 kid with 1 on the way and you want a stable environment to have them grow up. Sure, you can say it's overvalued and it will revert, but what if that takes 20 years, or 30 years? By then, you're 50-60+ and looking to retire. Ultimately, it's just money and again, that 1st home to live in shouldn't matter as much if the payments aren't that bad. Also, some areas never stay down forever. I know all the properties my parents bought in the bay area are higher then they paid when they bought. I believe decent places in NY is the same and most of coastal CA.

Sure, you can rent, but it's nice when you know your housing payment for the next 30 years and no landlords possibly kicking you out with a month notice cause their kid is coming back from college, etc...or the constant rent increases.

Another thing I have mentioned is all the time you waste here or any housing forum (I wasted tons more prior to buying) is a waste of time. I simply love not caring or having to worry where housing prices will go.

Also, I think only certain areas had a lot of investors. In a lot of the higher end or at least over the 600-700k markets, I really don't see people buying to flip or rent homes out in that price range. It's all families here (4S/Del Sur).

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