Thursday, April 07, 2005

CA Affordability: Something Has Got To Give

The California Association of Realtors published the affordability index for February, 2005. Although I post on the figures every month, I am always amazed that more people don't see the crisis in the state.

LABJ; "17 percent of Los Angeles households could afford to purchase a median-priced home in February, down from 22 percent in February 2004."

SOSD; "11% of San Diego area households were able to afford a median-priced home in February, down 4 percentage points from a year earlier. In neighboring Orange County, the percentage of households able to afford a median-priced home in February stood at 11 percent, down from 17 percent a year earlier."

The statewide number was 19% and the most affordable area, the High Desert region, stood at 38%.

42 Comments:

At 3:26 PM, Blogger deb said...

The government's answer to the affordable housing crisis is more "innovative" loan programs. It's like pouring gasoline on a fire. If they would stop providing the buyers so much "funny money" with which to bid up prices, we wouldn't be in such a mess in the first place.

 
At 3:35 PM, Blogger Ben Jones said...

Exactly right deb.

I wonder how the man/woman on the street in CA feels about the lack of affordability.

If only 20% could afford to eat or own a car, it would be a crisis.

 
At 3:36 PM, Anonymous Anonymous said...

Isn't Fannie's mandate to provide affordable housing ? Did they forget about the affordable part ?

Doesn't this make you feel sick ? Why couldn't our leaders do like China did and implement some controls to prevent the mass speculation we are seeing ?

I just cannott believe how badly things have gotten and what surprizes me even more is that if we kept feeding buyers money, they'd keep buying at higher and higher prices !

How low does the affordability have to go before the market crashes ? Does it have to go to the point where only 5% of the population can afford to buy a house ? 2% ? I know one thing: when it hits 0%, the game is over. I think that is where interest rates will play a role. A significant increase in rates is going to cut out a lot of people.

 
At 3:39 PM, Anonymous Anonymous said...

There are plenty of places to rent and it is much cheaper to rent than buy in So Cal. Of course you can't finance rent.

 
At 3:39 PM, Blogger deb said...

The thing that amazes me is the last "price adjustment" (that's the realtor in me :) that we went through in LA, rates were falling. Now, rates will be rising, or at best, stable.

 
At 3:45 PM, Anonymous Anonymous said...

"I wonder how the man/woman on the street in CA feels about the lack of affordability."

I live in SoCal, have owned for about 4 years. Most people I know are completely caught up in the frenzy and couldn't care less about affordability numbers because they're sure they'll be $200,000 richer in 2006 if they buy a $1 million home today. The number of people I personally know who could barely afford a $300,000 house three years ago who are now looking at $1 million plus houses is staggering. I know some people who have owned their homes for less than five years and owe more that double what they paid for it five years ago. Just wait till prices go flat for six months. That's all it'll take.

 
At 4:08 PM, Anonymous Anonymous said...

BREAKING NEWS: Experts are concerned about a housing bubble !

http://www.msnbc.msn.com/id/7405028/

You have to be very concerned when the "experts" start thinking there is a housing bubble ! Who woulda thunk it ?

Is it me, or is the bubble info exploding. 2 months ago there wasn't much on the Internet and now housing articles are plastered all over.

Question: when is Joe perspective buyer going to catch on ? That is when the bubble starts bursting ! Can it be far away ?

 
At 4:09 PM, Blogger Ben Jones said...

(Why couldn't our leaders do like China did and implement some controls to prevent the mass speculation we are seeing ?)

I'm no big government type, but some of the things China is doing make sense. Requiring full downpayments a couple of years ago would have slowed it down. Lending standards should always be maintained.

So why is the Fed doing this? We debate that one around here often.

(How low does the affordability have to go before the market crashes ?)

In the case of California, I think it has already exceeded the crash level, IMO.

(Just wait till prices go flat for six months. That's all it'll take)

I completely agree. And it is supported by the increasing foreclosures in those states where prices have been flat. Colorado, Texas, Ohio, Michigan.

The first hand accounts really improve the discussion, thanks everyone..Ben

 
At 4:20 PM, Blogger Pete said...

I live in the San Diego area and have owned for 18 years. I've lived here all my life with the exception of 4 years in college. I have seen 2 booms and busts here already. Between '90 and '93, I lost 1/3 of the appraised value of my home. The next bust may be even worse as the "creative" financing garbage was not prevalent back then. As for now, prices on SFR's in SD have risen only about 1.9% since last June. I basically look at this as a flat market here in SD already. Iventory is rising at a fast clip as of Feb.'s numbers. I may be wrong, but I think the fat lady has sung for SD. I could see a correction here of up to 50% as the prices here are absolutely outrageous. I keep up with my local blog, Piggington, and read yours daily. Great blog, Ben, from a guy living in a super "bubble" area.

 
At 4:48 PM, Anonymous Anonymous said...

I'm new (this week) to this blog so you may already be familiar with this report:

http://www.firstamres.com/pdf/Cagan_The_Cycle_Turns_0305.pdf

Fascinating!
I'm a researcher not a real estate or finance person.

 
At 4:49 PM, Blogger John Law said...

Snow: Freddie, Fannie Threat to Economy

http://news.yahoo.com/news?tmpl=story&u=/nm/20050407/bs_nm/financial_gses_snow_dc_2

my brother lives in san diego, he has the RE bug, but he still rents. one of his friends had a house for a year and it's value went up $60,000. the wealth affect is probably huge, all those people spending extra money because they think they're making money on their house. it's a shame to make people think they're wealthy and have something collapse on them, especially when they are true believers.

 
At 4:53 PM, Anonymous Anonymous said...

You guys are crazy! There is no housing bubble. Prices will continue to rise. It is all about supply and demand. Got it.

Ha Ha. Got you. Just kidding guys. I live in the San Diego area and I can't wait untill the day this housing market dies. I can't wait to see all the brokers lose their job, I can't wait to see speculators lose everything, but most importantly I can't wait to buy real estate from bankrupt idiots at giveaway prices. I don't think we will have to wait much longer.

 
At 4:56 PM, Blogger Ben Jones said...

(I'm new (this week) to this blog so you may already be familiar with this report)

Hi Anon,
Welcome and thanks for the link. I'm downloading now.

(all those people spending extra money)

Good point John,
The nutty ones are those taking out home equity line for consumption. Buying the house once, buying the house twice..Ben

 
At 4:58 PM, Blogger Ben Jones said...

(I can't wait to buy real estate from bankrupt idiots at giveaway prices. I don't think we will have to wait much longer)

Thats what I'm saving my pennies for. I agree, CA looks ripe..Thx Ben

 
At 5:21 PM, Anonymous Anonymous said...

While I'm firmly convinced that there is indeed a real estate bubble (I'm truly almost sick of reading about it so much), the affordability numbers do have another spin: even if only 17% of the LA population can afford homes at the current prices that's still almost a million people, if they are all chasing a lesser number of homes then at the margin (and "at the margin" is an important point) the prices can still go up until the number of people who can afford homes equals out to the numbers of homes available to purchase. Just like any market, prices at the margin can move up very high in the short term but in the long run this is absolutely unsustainable and higher interest rates will prick this overinflated baloon.

 
At 5:38 PM, Anonymous Hellboy said...

Great site Ben!

I have to problems with these affordability numbers. First, the numbers are based on 20% down with a fixed mortgage( not sure it anyone brought this up yet ). This is not representing what true affordability at the moment is. Can you say 103% LTV ARM interest only loan. That's what affordability is based off of "at the moment". This will change once a CMO pool blows up somewhere, preferrably one of the subprime category.

Secondly, I wish there was someway to adjust for ownership. This way you could get a % of how many people that don't own a house and can't afford one vs. those that could. Seems like it would show the "depth" of the market better?

 
At 6:27 PM, Anonymous Anonymous said...

I can't wait to see all the brokers lose their job, I can't wait to see speculators lose everything, but most importantly I can't wait to buy real estate from bankrupt idiots at giveaway prices.

Great attitude, dude. Rooting for someone else's misfortune is probably not the best plan for success.

My wife and I bought in San Diego last year and we did it the old fashioned way - traditional 30 year fixed loan, 20 percent down, etc. We have worked our butts off for years, renting crappy apts and waiting for our chance. Now a year later, it's getting a too scary when I hear that approx. 1/3 of the buyers were speculating. We love our modest entry level home and don't want to leave but we may now have to sell. It just kind of sucks when it feels like we have so many people rooting for our demise. There are sleazy brokers as well as honest hard working brokers out there, tons of decent people in the mortgage business too. Please keep in mind that not everyone involved in RE is a slimebag. Alot of good people might lose much of what they earned so please keep that in mind.

Ben, I have really enjoyed this Blog. I have learned so much. Thanks.

 
At 7:23 PM, Blogger Ben Jones said...

(the numbers are based on 20% down with a fixed mortgage( not sure it anyone brought this up yet )

Well, I actually applaud the CAR for using the traditional percentages. The current mortgage "products" may be going away soon.

(Alot of good people might lose much of what they earned)

I talk about that a lot. I went through the bust in the 80's, in Texas. People lose everything. Couples divorce, suicides. It is very sad.

I know that there are honest RE professionals and I think they are at the center of a storm right now.

Please consider that maybe the poster needed some room to blow off steam. Many folks post about being badgered by peers for not buying, so I sense frustration on both sides of the debate. I really haven't had any malicious people around. Good luck to all! Ben

 
At 7:31 PM, Blogger alex5151 said...

"Great attitude, dude. Rooting for someone else's misfortune is probably not the best plan for success"

Not rooting for anyone's misfortunes. I just like to buy at very low prices and profit from it. Consider yourself lucky. You have an opportunity to sell your house and go back to renting. Wait a few years for housing to collapse and buy a house of your dreams at a very low price. Yes, many good people will be wiped out, but I have no patience for stupidity. If they have no time to spend few hours a week studying economy and our current financial situation (not rocket science) instead of watching reality TV-they deserve whats coming to them.

 
At 8:12 PM, Anonymous Anonymous said...

I understand wanting to see blood on the streets. The current real estate gamblers are as smug as they are in debt. With the US's current debt levels, outsourcing trends, huge trade imbalances, dependence on foreign money to finance our current consumption and federal debt, the list goes on and on, it makes me worry about extending our standard of living to the next generation. It just seems we've gone from one bubble to another and all based on greed and the need to consume ever amounts of commodities including real estate. It's like no one learned any lessons from the tech wipeout, the greed seekers simply got jobs at Fannie Mae and continued the same accounting fraud and funny money schemes that has allowed this huge amount of leveraging going on in the housing market by already debt strapped consumers.

 
At 8:27 PM, Anonymous Anonymous said...

Wow, starting to see some acrimony on this thread, not unlike my own family. I rent after having sold last year, waiting for buying opportunity. My brother is flipping properties with some success and just convinced his father who retired and sold his home for 800K in cash to flip properties, and now the retiree has three contracts in places like Fresno and Merced. So whenever I say that I am waiting for this overpriced market to come in, they ask why I am rooting for everyone to lose money, and you can see how the tension in the family grows.

The fact is it doesn't matter what you "hope" or who you are cheering for. The market will do what it will do. I tell my brother that I think his in-laws are risking too much for their age, and he says that they are just "being smart." It doesn't matter that I have logic and reason on my side, and all he has is a "greater fool" theory. Markets are sometimes perverse.

For instance, if we are so sure that housing will collapse, shouldn't we all call our brokers and short TOL, KBH, etc? A good broker will talk you out of it in the name of risk managment and diversification. Actually I'm not so sure that we are at the top of the bubble, and even if we are, I'm not sure the collapse won't take 10 years. All I know is that right now the cost/benefit analyisis shows that it is better to rent. When it changes, then I will buy. In the meantime, we all need to control emotions, deal rationally with people like my brother with his flipping stories, and have some patience..

 
At 8:51 PM, Anonymous Anonymous said...

This is it folks, the high water mark:

http://biz.yahoo.com/prnews/050407/flth021.html?.v=4

 
At 9:13 PM, Blogger John Law said...

maybe we should ask why people who own RE are rooting for it to go up and losing non-buyers money!

there is no side to be on, it's all about making money, if your house goes up in value, someone else has to pay for it. if your house goes down in value, someone else gets to pay less for it. it's the exact same situation. one can make money acting or not acting. it's either house or cash, one has to make money, why is it always the house(or those long stocks) that the bias is always for?

 
At 9:41 PM, Anonymous Anonymous said...

I agree with you that it may take longer than anyone thinks for this bubble to implode and it already has for many who have been watching this develop for years. This is one of the laws of bubbles. I don't agree that it will take 10 more years though, and with these affordability numbers we are really at the precipice. As one post mentioned, the affordability index can't go down to 0%, or even 10% in my opinion. The bit about 17% of the people in L.A. still being a million people is irrelevant because only a small segment of the group is in the market at any given time and the affordability index refers to a potential pool of buyers that is shrinking all of the time.

As Ben and many others have pointed out, all it takes is for a period of about 6 months of flat prices for the bubble to start caving in. It doesn't even take price depreciation.

The reason for this is that everybody is so leveraged and living off of their credit cards that they can't take even one year of not being able to refinance their debt before getting in serious financial trouble. Ironically, many people must live off of their credit cards because their house payment is too high!

California is already 2 months into a flat period, although realtors will never talk about this. The sales numbers from the hottest areas (like San Diego and the Bay Area) definately prove this. Inventories are rising and sales are down. Another 3-4 months of this and all hell will break loose.

The Fed, the Asians, Wall Street...all will be powerless to stop the giant market correction. This is not gloom and doom, just the fact of housing prices becoming completely separated from fundamental economics in a way nobody has ever seen. And all of the treasury, securitization and derivitive manipulation can't stretch people any thinner. That's why housing is starting to get flat.

I sold in February and now rent. I feel bad for the honest folks that will get caught in this nightmare, but I definately don't feel bad for all of the speculators and flippers that have stoked this fire. These are mostly the same folks that stoked the Nasdaq fire back in 99. The Fed certainly hasn't helped, but people's greed is largely to blame.

Only hold your real estate if you are planning on living in it for many years and don't really care what it's worth, because there's nothing wrong with owning a house you're living in. Besides, there are other ways of hedging against this "correction" if you must hold.

 
At 9:49 PM, Anonymous Anonymous said...

That's an excellent point - that not all of the 17% is in the market at any one time, that certainly does shrink the pool. I am renting now too after having sold my home which went through rapid appreciation in L.A. Moved to the East Coast and don't know how long I can take these winters so not buying cause I don't know if I can be here for at least 7 to 10 years.

As far as overpaying, people overpay for things all the time. Its not wrong or financially irresponsible to spent $50k on a car when a $20k car would do, if you can afford it. The problem with the real estate market is that people really can't afford it, they can only afford the current monthly. To me the end result will be much worse than the stock market bust because most weren't leveraged to the tune of $300k plus. And remember, even if the market stays flat, people who bought for the speculation will pay at least $50k to get out of a place.

 
At 9:53 PM, Anonymous Anonymous said...

Just watched an hour long Town Hall on the Real Estate "Boom" on CNBC. Big panel of experts half of whom swore no bubble the other half swore there is one. Fact of the matter: if there weren't a bubble they wouldn't have done the show at all.

The lender guru from LendingTree said adjustables and interest onlys won't force anybody into foreclosure if they can't meet their monthly payments later, they can just refinance with another fancy loan that LendingTree would be more than willing to lend. As such this could take 10 years to blow over or people could retire and still own all of the original principal on their mortgages. Ouch. What happened to the generation that bought a house and paid it off in 30 years as they were ready to retire?

 
At 10:12 PM, Blogger John Law said...

I got from that show that equity in a house was almost a dirty word. they didn't say it, but you can tell from the panel and from the general mood throughtout this bubble is that equity is something to be refied again and again to finance other properties. that's good at a certain time and a certain level, but I'd say bad right now.

what happened to just owning a house?

this is so pervasive the only winners will be the really smart money and the people who got lucky. maybe they moved from Cali to someplace a lot less expensive and still had tons of money leftover. maybe they were renting for some reason and missed out on the carnage. the stories from this one are going to be impressive.

 
At 10:23 PM, Blogger Ben Jones said...

The posts are so good they need no comment. Thank you everyone. Please keep it up.

Ben

 
At 11:25 PM, Anonymous Anonymous said...

Hey John, haven't you heard, equity is just something you use for more leverage. I didn't catch the entire show, but the woman at the end who asked about whether she should sell her investment property that she has a good deal of equity in. How come no one mentioned asset allocation? If that's her entire net worth the word is Sell and diversify into different kinds of assets. Even keep a nice 10 to 15% in a nice diversified REIT fund like IYR or ICF so she still has a portion of her investment funds coming from real estate income and appreciation.

Would love to find out how the guy who owns 9 properties in Miami does in the next few years. I wonder if shows like that stroke the flames or causes one to rethink their position. Question is, how do those of us who aren't getting caught up in this bubble steer clear of the eventual fallout? Bonds in an environment of rising interest rates don't make a lot of sense, stocks could get hurt if consumer spending is curtailed from the de-wealth effect, etc. etc. Is cash still King?

 
At 6:14 AM, Anonymous Anonymous said...

I was disappointed in Shiller. They gave him a few chances to talk, but he didn't come out and say what he needed to. When he was asked what the lady should have did, he should have yelled "SELL OUT" and hold cash.

I don't think the bears side got a good representation.

 
At 6:26 AM, Anonymous Anonymous said...

http://wallstreetexaminer.com/?itemid=653



Meanwhile, the oil crisis, housing bubble, and the explosion of the current account deficit are now starting to mingle and converge together like a huge rogue wave. The Fed will not be able to 'manage' a soft landing. It will either have to go with the huge inflatonary wave or let the economy be tossed and crashed upon the rocks. It's going to choose to ride the wave, unless it can't get on in the first place.

The economy will not be able to sustain a continued oil shock - not because of the price of oil but the inability of the Bretton Woods II dollar regime to continue to expand the current account deficit much further. Also there is a potential for a more serious type of oil shock would be where marginal supplies would not be available at any price - or only at a very high price.

The current account deficit is heading towards $800 billion this year. At the same time Foreign Central Banks have a reduced ability or willingness to suck up those dollars. Those extra dollars could be enticed back to the US at ever higher interest rates, but higher interest rates will eventually implode the housing bubble. Plus those higher rates must be paid on the accumulauted foreign debt that now approaches $10 trillion.

 
At 6:44 AM, Anonymous Anonymous said...

Higher rates are going to hurt:

http://money.cnn.com/2005/04/07/news/economy/debt_consumers/index.htm

 
At 8:54 AM, Anonymous Anonymous said...

I too live in San Diego as a renter and can't wait for this bubble to burst. But, I do wonder if and when this will happen because there a lot of people like me waiting on the sidelines to jump in when the market tanks. I've talked with many people who think the market will level, not bust because there are so many boomers and investors out there ready to scoop up property in a heart beat if the market were to turn sour. Most notably are the wealthy retirees from other states who are migrating south. I guess anything thing could happen. I'll keep on saving for a hefty down payment in the meantime. I refuse to get suckered into and interest only ARM like the other 80% of the population down here has. These people have no business buying homes. Why is renting so horrible that someone would risk their entire financial future?

I have noticed that many homes in my area that have been on the market for months have turned into rentals. They probably bought a larger home with the equity from the previous. Now the average person who intended to sell their house to buy another has turned into a landlord. Instead of selling at a lower price they're taking on more debt.

 
At 9:13 AM, Anonymous Anonymous said...

I've got an easy solution to a real estate market that cools slowly: rent. I think that I am going to approach some of the realators with houses that haven't moved and tell them I would like to make a rent offer.

 
At 9:15 AM, Blogger Ben Jones said...

(I have noticed that many homes in my area that have been on the market for months have turned into rentals)

Thanks for the report. You are right, it is a time to be cautious.

 
At 9:17 AM, Blogger deb said...

That's exactly what happened in the early 90's. People who couldn't sell for what they paid rented the homes out to try to ride out the market. Frequently homes would be offered for rent and sale at the same time. The owner would do either depending on the offers they got. If the owner was financially stable, it paid off. I did see many owners who just dug a bigger hole by waiting to sell when they really couldn't afford to carry the place as a landlord.

 
At 9:39 AM, Anonymous Anonymous said...

I remember reading news articles about Argentina when the Beunes Aires RE market collapsed. $1 million dollar penthouses in prime locations were selling for $150,000. That was just 3 years ago and the collapse only took about a year and a half.

Anyway, one of the articles I read was about grandmothers who were selling their bodies to pay for food. I know that souds really bizarre, but I do remember reading about that. I guess this behaviour is the Argentina version of "buy when there is blood on the streets". Since I read it, prices have recovered quite a bit.

 
At 12:03 PM, Anonymous doright said...

RE is being held aloft by EZ credit. If homes get too expensive, they just ease the payment terms (ARMs, neg-am, IO, 40-year loans, etc).

It doesn't seem to matter what the nominal price of a home is so long as the monthly is "affordable". This works because the folks selling these mortgages aren't on the hook---they are reselling them as MBS paper to institutional holders, primarily the CB's of Japan and China. As long as our trade deficit keeps growing, there is a market for this junk paper as Japan (et al) exchanges their excess dollars for dollar-denominated assets like MBS.

Contrarily, if/when we begin to pare down our trade deficit, the market for this junk debt dries up.

The real sea change has been the way creditworthiness is now evaluated. A mortgage used to be based on the collateral---i.e., the value of the home. Now the mortgage is based on the credit score of the mortgagee. In other words, if the mortgage buyer is "creditworthy", then the mortgage is sold.

It no longer matters if the underlying collateral is worth what is being loaned because the mortgage is sold to third parties in a junk debt package. These MBS are sold based on the "creditworthiness" or avg FICO scores of the borrowers.

To me, the rubber meets the road when the underlying assets begin to decay in value. At that point, it becomes irrelevant whether or not the mortgagee is creditworthy.

 
At 12:16 PM, Anonymous Anonymous said...

(Frequently homes would be offered for rent and sale at the same time.)

Yestday I saw a house with a real estate sign covered up with a "For Rent" poster. They didn't even take down the "For Sale" sign, they just covered it up with the "For Rent" sign.

Hillarious !

A couple months ago I thought things were overpriced, but I didnt' think there was a bubble. Now that I know what to look for, I know there is a bubble.

 
At 12:17 PM, Anonymous donutsandcoffeetime said...

---John Law wrote: what happened to just owning a house?----

Believe or not, there was a time not that long ago (let's say 1998) when the vast majority of Americans bought homes to live in and didn't think of them as money-making opportunties.

There have been very few nationwide RE booms and most of them were connected with hot growth markets (SoCal, Florida, Texas during '70s oil crisis, etc). Now we have a nationwide mania.

My guess is that this is due to a combination of EZ credit (debt bubble more than RE bubble) and an echo effect from the '90s stock market bubble. The '90s taught people that you can make money doing nothing but buying hot stocks. That has now transferred to RE.

You can see this mania at work with all the poker TV shows and the fact that Vegas is now the fastest-growing city in USA and gambling stocks have been the best-performing stock sector in the past 2 years (yes, even better than energy or homebuilders.) And every state/locality (except Utah?) relies on casino/lotto revenue to fund key services like education.

All the signs are there. We live in a society that is becoming addicted to EZ money/profits/gains. It's just so much harder to make money the old-fashioned way. I can't see this ending well. At some point, we will see a sweeping backlash against speculation, gambling, etc. We have simply swung too far the other direction.

 
At 12:44 PM, Anonymous Anonymous said...

I wonder how many RE bulls come to this site and read everything and slink away to think about things ?

I'm surprized an RE bull hasn't come on this site and told us were are all nuts. We are moving against the grain, so to speak.

 
At 3:46 AM, Anonymous Anonymous said...

Does anyone remember the details of the US Treasury stopping 30/Yr bonds, making the 10/Yr the longest term?

I always wondered why they would do such a thing. Now, I think it helped direct money into the Fannie Mae mortgage securities.

 

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