Valuation update

Submitted by Rich Toscano on May 26, 2021 - 3:38pm

I'm still trying to put together a post with some big picture thoughts on the SD housing market. The market's confusing in several ways, and my thoughts are more jumbled than usual.

While I flail away at that, here are some updated valuation charts:







For the uninitiated, these measure the price of San Diego housing as compared to local incomes and rents. (We could separately chart prices vs. incomes and prices vs. rents, but tell a very similar story to each other so I've taken to collapsing them into a single measure).

The first graph shows that valuations -- prices compared to rents and local incomes -- are very high compared to their history, having only been higher during the bubble.

The second graph is one of the confounding factors I mentioned. Instead of measuring home prices, it measures monthly payments, thus incorporating mortgage rates into the picture. And this shows that even though (per the first graph) home prices are quite high, monthly payments are pretty reasonable compared to their history.

The interest rate situation renders the current situation very different from the mid-2000s bubble. If someone can lock in financing at these rates, the monthly nut is not actually that bad, and it may make sense to buy. As opposed to the prior bubble, when the only reason to buy was the belief that valuations would keep rising for the rest of time. This is one of the major reasons I don't consider this a bubble, despite the very lofty valuations.

However, to the extent that low rates are what's allowing prices to stay so high, that puts home prices at risk should rates increase significantly.

More to come at some point soon, I hope...

PS - Data note: up til now I've used the rent component of San Diego CPI to determine rents. However, they have been distorted by eviction moratoriums, resulting in a gap between how much landlords are actually getting (CPI) vs. what they are asking for from new renters. I believe the latter is the more appropriate comparison here. So, I've sub'd in rental stats from Zillow, which appear to more accurately reflect asking rents. For more on this disparity see this chart from this article by inflation analyst Mike Ashton.

(category: )

Submitted by deadzone on May 27, 2021 - 10:12pm.

Rich Toscano wrote:

I think there are major bubbles going on in crypto and in parts of the stock market. I don't think housing is a bubble, but I DO think a lot of bubble money is flowing into housing. If I am right, those inflows will go into reverse at some point.

Exactly, even if you deny there is a housing bubble, you can't deny that bubble money is contributing greatly to the housing prices.

But I still have a hard time believing housing is not a bubble. There is clearly significant amount of investment money going into the market. SDR is talking about tract homes in NCC approaching 2mil. Nobody with a rational mind would pay that much for a tract home. That kind of irrationality is indicative of a speculative bubble.

Submitted by deadzone on May 27, 2021 - 10:20pm.

Rich Toscano wrote:

- Behavior: I've literally never seen more bubbly, euphoric, cult-like behavior than in crypto.

Then apparently you were not around during the late 90s .com bubble. It was nuts. Everyone I knew was throwing money at tech stocks, it was a can't lose proposition. You were a fool for not getting in on it. All of the 20somethings were getting rich. Now they invented an acronym for it called "FOMO".

Submitted by sdrealtor on May 28, 2021 - 7:30am.

deadzone wrote:
Rich Toscano wrote:

I think there are major bubbles going on in crypto and in parts of the stock market. I don't think housing is a bubble, but I DO think a lot of bubble money is flowing into housing. If I am right, those inflows will go into reverse at some point.

Exactly, even if you deny there is a housing bubble, you can't deny that bubble money is contributing greatly to the housing prices.

But I still have a hard time believing housing is not a bubble. There is clearly significant amount of investment money going into the market. SDR is talking about tract homes in NCC approaching 2mil. Nobody with a rational mind would pay that much for a tract home. That kind of irrationality is indicative of a speculative bubble.

By the same measure no one with a rational mind would pay more than a few bucks for fermented grape juice yet tons of people far smarter and successful than us do so everyday. You are focused on the house when the vast majority of what they are buying is the land.You're trapped in your own way of thinking. Crypto baby!

Submitted by Coronita on May 28, 2021 - 7:40am.

deadzone and gzz can you guys please stop talking so negatively about crypto.

i hate crypto and dont understand it. but it really pisses me off that really stupid people made decent gains in this and it seems like whenever the stars align and the two of you jointly trash a speculation, it goes to the moon. So please stop sending these ridiculous things to the moon by continuing to jointly trash crypto. in fact if yo hate crypto, then apply murphys law and go buy crypto just so it goes down...while you are at it, can you also buy shares of AMC and GME so you can send those stocks downward too??? those two are also pissing me off. especially after yesterday and this morning where amc is at $34/share for this pos.... im getting really frustrated by these MEME stock pickers and want someone to put a stop to this by adding a lot of negative energy to the buyers group...

Submitted by deadzone on May 28, 2021 - 8:28am.

sdrealtor wrote:
deadzone wrote:
Rich Toscano wrote:

I think there are major bubbles going on in crypto and in parts of the stock market. I don't think housing is a bubble, but I DO think a lot of bubble money is flowing into housing. If I am right, those inflows will go into reverse at some point.

Exactly, even if you deny there is a housing bubble, you can't deny that bubble money is contributing greatly to the housing prices.

But I still have a hard time believing housing is not a bubble. There is clearly significant amount of investment money going into the market. SDR is talking about tract homes in NCC approaching 2mil. Nobody with a rational mind would pay that much for a tract home. That kind of irrationality is indicative of a speculative bubble.

By the same measure no one with a rational mind would pay more than a few bucks for fermented grape juice yet tons of people far smarter and successful than us do so everyday. You are focused on the house when the vast majority of what they are buying is the land.You're trapped in your own way of thinking. Crypto baby!

I'm sure fine wine sales are nuts right now too, just like crypto, baseball cards, comic books and everything else. Given there is so little activity in home sales now, if I were you I would pursue that business for a while, take advantage of the current craziness.

Submitted by deadzone on May 28, 2021 - 8:30am.

Coronita wrote:
deadzone and gzz can you guys please stop talking so negatively about crypto.

i hate crypto and dont understand it. but it really pisses me off that really stupid people made decent gains in this and it seems like whenever the stars align and the two of you jointly trash a speculation, it goes to the moon. So please stop sending these ridiculous things to the moon by continuing to jointly trash crypto. in fact if yo hate crypto, then apply murphys law and go buy crypto just so it goes down...while you are at it, can you also buy shares of AMC and GME so you can send those stocks downward too??? those two are also pissing me off. especially after yesterday and this morning where amc is at $34/share for this pos.... im getting really frustrated by these MEME stock pickers and want someone to put a stop to this by adding a lot of negative energy to the buyers group...

I just cashed out of my AMC a couple weeks ago at $13, I had about 40% gain so didn't want to be too greedy. Should've held in hindsight. I'm losing money on the bitcoin trust so far.

Submitted by Rich Toscano on May 28, 2021 - 9:12am.

deadzone wrote:
Rich Toscano wrote:

- Behavior: I've literally never seen more bubbly, euphoric, cult-like behavior than in crypto.

Then apparently you were not around during the late 90s .com bubble. It was nuts. Everyone I knew was throwing money at tech stocks, it was a can't lose proposition. You were a fool for not getting in on it. All of the 20somethings were getting rich. Now they invented an acronym for it called "FOMO".

I was around (though not plugged into the financial world back then). The 90s was certainly bigger in terms of participation, you are right on that. But among those participating, the behavior seems even more egregious in crypto.

There could be some recency bias involved on my part, but I don't think that would change my conclusion.

Submitted by deadzone on May 28, 2021 - 9:28am.

Rich Toscano wrote:
deadzone wrote:
Rich Toscano wrote:

- Behavior: I've literally never seen more bubbly, euphoric, cult-like behavior than in crypto.

Then apparently you were not around during the late 90s .com bubble. It was nuts. Everyone I knew was throwing money at tech stocks, it was a can't lose proposition. You were a fool for not getting in on it. All of the 20somethings were getting rich. Now they invented an acronym for it called "FOMO".

I was around (though not plugged into the financial world back then). The 90s was certainly bigger in terms of participation, you are right on that. But among those participating, the behavior seems even more egregious in crypto.

There could be some recency bias involved on my part, but I don't think that would change my conclusion.

The main thing I remember from the 90s was the general feeling that these stocks only go up and you can't lose. Housing in the 2000s was very similar. So from mental point of view I see today's scenario as nearly identical. But one big difference today is all the money the government is handing out to the public which they are turning around and trading (gambling) with their Robinhood accounts. Back in the 90s, the folks buying up Tech stock actually had to use their real savings to do it.

Submitted by sdrealtor on May 28, 2021 - 11:19am.

deadzone wrote:
sdrealtor wrote:
deadzone wrote:
Rich Toscano wrote:

I think there are major bubbles going on in crypto and in parts of the stock market. I don't think housing is a bubble, but I DO think a lot of bubble money is flowing into housing. If I am right, those inflows will go into reverse at some point.

Exactly, even if you deny there is a housing bubble, you can't deny that bubble money is contributing greatly to the housing prices.

But I still have a hard time believing housing is not a bubble. There is clearly significant amount of investment money going into the market. SDR is talking about tract homes in NCC approaching 2mil. Nobody with a rational mind would pay that much for a tract home. That kind of irrationality is indicative of a speculative bubble.

By the same measure no one with a rational mind would pay more than a few bucks for fermented grape juice yet tons of people far smarter and successful than us do so everyday. You are focused on the house when the vast majority of what they are buying is the land.You're trapped in your own way of thinking. Crypto baby!

I'm sure fine wine sales are nuts right now too, just like crypto, baseball cards, comic books and everything else. Given there is so little activity in home sales now, if I were you I would pursue that business for a while, take advantage of the current craziness.

why choose? I do a little of pretty much all of those things. So many ways to make money. Always is

Submitted by sdrealtor on May 28, 2021 - 11:21am.

deadzone wrote:
Rich Toscano wrote:
deadzone wrote:
Rich Toscano wrote:

- Behavior: I've literally never seen more bubbly, euphoric, cult-like behavior than in crypto.

Then apparently you were not around during the late 90s .com bubble. It was nuts. Everyone I knew was throwing money at tech stocks, it was a can't lose proposition. You were a fool for not getting in on it. All of the 20somethings were getting rich. Now they invented an acronym for it called "FOMO".

I was around (though not plugged into the financial world back then). The 90s was certainly bigger in terms of participation, you are right on that. But among those participating, the behavior seems even more egregious in crypto.

There could be some recency bias involved on my part, but I don't think that would change my conclusion.

The main thing I remember from the 90s was the general feeling that these stocks only go up and you can't lose. Housing in the 2000s was very similar. So from mental point of view I see today's scenario as nearly identical. But one big difference today is all the money the government is handing out to the public which they are turning around and trading (gambling) with their Robinhood accounts. Back in the 90s, the folks buying up Tech stock actually had to use their real savings to do it.

Housing is nothing like stocks. It has real utility and it can't go to zero. It's kinda silly IMO to discuss them as similar

Submitted by deadzone on May 28, 2021 - 12:58pm.

Agreed, but as usual you didn't understand my comment. I mentioned 2000s housing market because the public was under the belief at the time that real estate prices would never go down. If people believe prices can only go up, then they will be willing to overpay for assets, whether RE or stocks or anything else.

We are once again at that point. But this time there is even more confidence that RE and stocks can't go down because everyone knows the Fed is supporting this and are under the belief that the Fed will not stop their support.

Submitted by sdrealtor on May 28, 2021 - 1:56pm.

I understood your comments and as usual disagree. Most people seem well aware real estate could go down around here. Surely people cashing out do. They know there is short term risk it could go down and likely will at some point but dont care. That is unless there is a total collpase which no one including you beleives is coming. They value and want a nice place to live. They are ready, able and willing to pay for that.

Submitted by deadzone on May 28, 2021 - 3:31pm.

sdrealtor wrote:
I understood your comments and as usual disagree. Most people seem well aware real estate could go down around here. Surely people cashing out do. They know there is short term risk it could go down and likely will at some point but dont care. That is unless there is a total collpase which no one including you beleives is coming. They value and want a nice place to live. They are ready, able and willing to pay for that.

Current RE prices are completely dependent on near zero interest rates and Fed money printing. So clearly if the Fed turns off the spigot there very well could be a collapse. The point is RE is just like any other investment, all about confidence. At this point everyone is confident the Fed will never stop supporting. Just like in 2000s everyone was certain RE would never go down because that's what the NAR kept reminding everyone.

Submitted by sdrealtor on May 28, 2021 - 4:02pm.

The Fed isnt turning off the spigot, we will be in a relatively low rate emnvironment for a long time to come. You view RE as only an investment which may be your issue. You are missing the point that most view RE as a place to live and buying it as an opportunity to lock in a long term home at a fixed cost. Plenty of people beleived RE would go down in the 2000's and not only this blog. Plenty beleive that now. They dont care. I beleive it will likely go down in next several years. I dont care either

Submitted by an on May 28, 2021 - 4:20pm.

deadzone wrote:
Current RE prices are completely dependent on near zero interest rates and Fed money printing. So clearly if the Fed turns off the spigot there very well could be a collapse. The point is RE is just like any other investment, all about confidence. At this point everyone is confident the Fed will never stop supporting. Just like in 2000s everyone was certain RE would never go down because that's what the NAR kept reminding everyone.

Is it that clear? What happened when the Fed raised rates from 5% to 20% in the late 70s? Did RE collapse?

Submitted by deadzone on May 28, 2021 - 5:34pm.

an wrote:
deadzone wrote:
Current RE prices are completely dependent on near zero interest rates and Fed money printing. So clearly if the Fed turns off the spigot there very well could be a collapse. The point is RE is just like any other investment, all about confidence. At this point everyone is confident the Fed will never stop supporting. Just like in 2000s everyone was certain RE would never go down because that's what the NAR kept reminding everyone.

Is it that clear? What happened when the Fed raised rates from 5% to 20% in the late 70s? Did RE collapse?

Different time, different circumstance. But yes I agree historically interest rates vs. home prices wasn't always a direct relationship.

But the problem is now our entire economy is based on the Fed induced wealth effect. This concept of Fed monetizing debt didn't exist in the 70s. It basically started in 2009 and really went bonkers in the last year. So there is absolutely no historical precedent to the situation we are in right now. It is pretty obvious that if they turn off the spigot now, the whole titanic is going down.

Submitted by an on May 28, 2021 - 6:57pm.

So, it's different this time, but it's clear you know exactly what would happen? Right...

Submitted by flyer on May 28, 2021 - 8:02pm.

Very glad to read your take on this, Rich, as it confirms my thoughts about the crypto craze. Things like this are always tempting, so I can see the allure, and it is interesting.

As others, our Plan A has been working well for a few generations, so no need to change course at this point. Keeping it all in perspective, regardless of the level of wealth we build, from whatever sources, we can't take any of this with us, but it does make life more comfortable and enjoyable for us and for our loved ones for the short time we are here.

Submitted by deadzone on May 28, 2021 - 8:57pm.

an wrote:
So, it's different this time, but it's clear you know exactly what would happen? Right...

Yes it is different this time. The Fed monetization, that is creating the current inflation/bubble, has never happened before in the US. What happens at this point is unpredictable since there is no historical precedent.

Submitted by sdrealtor on May 28, 2021 - 9:07pm.

deadzone wrote:
an wrote:
So, it's different this time, but it's clear you know exactly what would happen? Right...

Yes it is different this time. The Fed monetization, that is creating the current inflation/bubble, has never happened before in the US. What happens at this point is unpredictable since there is no historical precedent.

History repeating itself

Submitted by an on May 28, 2021 - 10:42pm.

deadzone wrote:
Yes it is different this time. The Fed monetization, that is creating the current inflation/bubble, has never happened before in the US. What happens at this point is unpredictable since there is no historical precedent.

deadzone wrote:
So clearly if the Fed turns off the spigot there very well could be a collapse.

So if it's unprecedented, then how can it be clear that

deadzone wrote:
if the Fed turns off the spigot there very well could be a collapse.

I'm confused.

Submitted by deadzone on May 28, 2021 - 10:48pm.

an wrote:
deadzone wrote:
Yes it is different this time. The Fed monetization, that is creating the current inflation/bubble, has never happened before in the US. What happens at this point is unpredictable since there is no historical precedent.

deadzone wrote:
So clearly if the Fed turns off the spigot there very well could be a collapse.

So if it's unprecedented, then how can it be clear that

deadzone wrote:
if the Fed turns off the spigot there very well could be a collapse.

I'm confused.

Which part of the Fed buying trillions of dollars of debt, something that has never occurred before in history, don't you understand? What do you think would happen to asset prices if they stopped doing this?

Submitted by an on May 28, 2021 - 11:21pm.

deadzone wrote:
an wrote:
deadzone wrote:
Yes it is different this time. The Fed monetization, that is creating the current inflation/bubble, has never happened before in the US. What happens at this point is unpredictable since there is no historical precedent.

deadzone wrote:
So clearly if the Fed turns off the spigot there very well could be a collapse.

So if it's unprecedented, then how can it be clear that

deadzone wrote:
if the Fed turns off the spigot there very well could be a collapse.

I'm confused.

Which part of the Fed buying trillions of dollars of debt, something that has never occurred before in history, don't you understand? What do you think would happen to asset prices if they stopped doing this?

I don't know what would happen. If I did, I'd be filthy rich. I'm happy that it's clear for you.

What confuses me is not the unprecedented thing but your statement that you clearly know what would happen with the aftermath from something that never happened before.

Submitted by deadzone on May 29, 2021 - 8:29am.

Since the entire economy is based on Fed support, it stands to reason if Fed pulled back, things would collapse. For that reason there is a belief the Fed won't/can't ever stop their current policies. The big question is how long can they keep it up? That's the part that is unpredictable. Can it go on indefinitely? They even invented a new term to justify this, called modern monetary theory.

Submitted by wawawa on June 8, 2021 - 1:49pm.

Fed will throw common people under the bus, Fed will do NOTHING to contain inflation, as doing so would mean price of assets ought to decline. Such a decline in asset prices would collapse the ponzi pyramid.

Submitted by EconProf on June 15, 2021 - 6:44am.

The home price upsurge is pretty much nationwide, and due largely to today's artificially low interest rates. Our ultra-low interest rates are propelling the housing market, and this cannot last, since overall price inflation will rise (are rising), and will ultimately force interest rates up, as happened in the late 1970s and early 80's when Fed Chairman Arthur Burns was replaced by tough-guy Volcker.
Conclusion: buy rental property to the max now and lock in these interest rates. You'll be sitting pretty when mortgage rates double.

Submitted by gzz on June 16, 2021 - 12:08pm.

"artificially low interest rates"

So the market clearing price of loanable funds is "artificial"?

If so please state the current "natural" interest rate, and show your work. Or surely one of the bazillion RonPaul inflation-permadoomers out there have done so, and can provide a link.

"our ultra-low interest rates"

Ultra low compared to what? They are in line with our closest peers (UK, Australia, Canada), and very high compared to Japan and the rest of Europe.

My view is that interest rates in the USA are artificially high, propped up by a Fed that is run by and captured by a rentier class that wants to hold down wage growth and can't accept the true risk-free market rate of interest given demographic trends is negative.

Conclusion: buy rental property to the max now and lock in these interest rates. You'll be sitting pretty when mortgage rates double.

Good advice but for the wrong reason. A rental that pays $2500 a month at a cap rate of 1% should be worth about $3 million. The fact you can get them now in SD for $700,000 is what's artificial.

Submitted by pinkflamingo on June 18, 2021 - 11:25am.

Artificial in the sense that if the fed stopped buying treasuries, the rate would be much higher.

Other central banks manipulating interest rates does not make our rates real.

Ultra low interest rates in absolute terms say in the last 200 years.

https://advisor.visualcapitalist.com/us-...

Submitted by an on June 18, 2021 - 2:27pm.

pinkflamingo wrote:
Artificial in the sense that if the fed stopped buying treasuries, the rate would be much higher.

Other central banks manipulating interest rates does not make our rates real.

Ultra low interest rates in absolute terms say in the last 200 years.

https://advisor.visualcapitalist.com/us-interest-rates/


What's the probability of the fed stop buying treasuries?

If everyone is doing it today, then why would it be artificial? Just because they didn't do it in the past? What make you think they won't keep doing it in the future?

You say the rate is ultra low interest rates in absolute terms say in the last 200 years. But what make you think they won't keep on going lower the next 200 years?

Submitted by pinkflamingo on June 18, 2021 - 11:27pm.

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