Sizing the Housing Bubble

[Alex]

Quote:

Originally Posted by wab Well, I told you exactly what I meant. Regional incomes are the limiting factor in regional housing prices. The ratio of home prices to income is at a historic high on a *national* basis. True, it's even crazier in some regions than it is nationally. LA, where you think things are different, is one of the most out of whack markets in the nation by any metric. Some areas, like SF and Manhattan have persistently high prices due to some unique circumstances, but even those markets are well above their historical craziness.

We'll just have to agree to disagree. the regional income figures do not factor in current equity and net worth of the buyers or the amount of down payment.

I have been hearing about a 'real estate bubble' in Los Angeles for over a decade. A good friend of mine moved here from Texas about ten years ago. At that time he stridently refused to buy a house. Laughing at my wife and I and saying that he would wait for these " crazy prices to come down". Well, ten years later and he is still renting, and waiting, and he's still laughing too - only now he is laughing at himself for being so f'n stupid. Oh BTW, his apartment rent has not come down either, it has doubled! - he is now paying 3K/month for his 3br/2ba place in Marina Del Rey.
.

[wabmester]

Quote:

Originally Posted by Alex I have been hearing about a 'real estate bubble' in Los Angeles for over a decade.

Well, I doubt it has been "over a decade," since prices were still falling in LA during the 1990-1996 period, but you're right in that people were calling this a bubble as early as 2002 or so.* *That's when prices started to separate from the fundamentals.* * It's hard to predict when a bubble will pop, but we have pretty clear signs now.* *If the correction had happened earlier, there would have been much less pain than we're potentially looking at going forward.

As you can see from digging into the data a little bit, this isn't just any bubble.* *It's the largest asset bubble this country has experienced.* *My worry isn't that my house will lose value.* *I'm worried that we're about to experience something similar to what Japan experienced from 1990 to the present.* * A long, painful correction with severe economic impact.

[Scrooge]

Quote:

Originally Posted by Alex Oh BTW, his apartment rent has not come down either, it has doubled! - he is now paying 3K/month* for his 3br/2ba place in Marina Del Rey.

Cheapskate! I was paying almost $3k/mo for a one bedroom apartment in the Bay Area last year! Well, OK, a minor correction -- my client was footing the bill*

[lazygood4nothinbum]

Quote:

Originally Posted by LOL! A different kind of housing bubble may be created with gasoline prices going up:* Homes that are closer to jobs will go up in value; homes further away will go down in value.

this was already becoming a factor here, before gas prices started to rise. perhaps there's some psychology to it, not just economics.

a friend and i kept noticing this very thing. he lives in (what used to be) a much nicer area and in a much nicer house but 10 or 15 minutes further away from downtown fort lauderdale than my house. our houses started off miles apart in value, but now mine has almost caught up to his, also my area has seen more redevelopment because the land was (originally) cheaper than his area to so developers could afford to build and make profit.

hmmm, so i guess maybe my area's nicer now. go figure.

Quote:

Originally Posted by Rich_in_Tampa Interesting point -- I could easily see that happening in Tampa. Or else, the downtown businesses move to the burbs.

doc, the hottest area, i think, in your area is right next to downtown already: hyde park. i think i've toured every street in there (they think i'm a stalker). man, those are great houses.

[honobob]

Quote:

Originally Posted by wab Well, I doubt it has been "over a decade," since prices were still falling in LA during the 1990-1996 period,* ]

Not sure how LA compares to the Bay Area over that time. but here prices have been stable since 94-95 and pretty much soaring since.* At the worst my value dropped <9% after doubling in just two years.* The dot.bomb hurt some high end properties and lofts because the buyers for those types of properties diminished.* Those recovered rather quickly. Have not seen a bubble "bust" in CA and I've been here 25 years.* I thought I topped out at $600K for the near future but a neighbor just sold for $625K!

[wabmester]

Quote:

Originally Posted by honobob Not sure how LA compares to the Bay Area over that time. but here prices have been stable since 94-95...

If "stable" means "flat," then that is still depreciation in real terms. And that is a possible outcome of the current bubble. If prices simply remain at current levels for the next 15 years or so, then inflation and wage hikes will put us back on course. It would still have an economic impact in terms of consumer spending, but it certainly wouldn't be as painful as falling nominal prices.

[Scrooge]

Quote:

Originally Posted by wab If "stable" means "flat," then that is still depreciation in real terms.* *And that is a possible outcome of the current bubble.* *If prices simply remain at current levels for the next 15 years or so, then inflation and wage hikes will put us back on course.

That's pretty much what happened to my Mid-Atlantic house throughout the 1990s. And then - bang! - it went all the way up along with the rest of the real estate market. That's markets for you

[honobob]

Quote:

Originally Posted by wab If "stable" means "flat," then that is still depreciation in real terms.* *And that is a possible outcome of the current bubble.* *

1986 Base year
1987 Up
1988 Value DOUBLED
1989-1991 Still all good
1991 Bubble Burst? Less than 9% down

1991-1995 Enjoying Prop 13 Tax limitations Four years of no double digit appreciation, considering suicide.
1996-1998 inching up again
1999 Neighbor sold for over 3X what I purchased
2000 100K up
2001 Add another $50K
2002-2006 Bubble Burst May 2006? Property worth 7.35X purchase price 20 years ago. Property taxes are $6400 LESS each and every year than the new neighbor pays.
Not sure what your point is but I'll buy all the CA houses you can sell me in 15 years at todays prices.

If you count the leveraging.....I'll celebrate the next "bubble" bust with Alex ...with bubbly!

[wabmester]

Quote:

Originally Posted by honobob 1986 Base year 1987 Up 1988 Value DOUBLED 1989-1991* Still all good 1991 Bubble Burst?* Less than 9% down 1991-1995 Enjoying* Prop 13 Tax limitations Four years of no double* *digit appreciation, considering suicide.

Here's a graph of LA housing prices from 1975-2005:



As you can see, from 1987-1997, prices just kept up with inflation.* *Historically, that has been true with just about every market in the nation since the 1940's.* *Houses are stores of value.* *They simply track inflation (and wages) over the long term.* *If that's your idea of a great investment, more power to you.

I'll leave it as an exercise to the reader to determine what will happen to LA's home prices once they revert to the mean starting from 2005 or 2006 levels.* *My guess is that as long as you don't plan to move for 10+ years, you'll come out even if you were to buy today.* * Not my idea of a great investment, and almost a sure way to drive the economy into a long recession.

[califdreamer]

Back in January I started a thread about a real estate presentation I attended in LA. The speaker, Robert Campbell, shared these statistics with us:

Last 5 yrs, CA home prices up 130%... income up 20%... rents up 25%.

Historical appreciation trend for CA homes is inflation plus 2% annually (obviously the app'n rate has been much higher during the boom).

Home price to rent ratio in CA: Historically 5.2 times, currently 9.5 times. If this statistic reverted to the mean, house prices would have to fall 42%.

Campbell is a housing bear and back in January predicted CA home values to drop as much as 40% perhaps over a period of years.

I would've pasted the thread to this post but I don't know how

Moderator Edit: Here is the link to the Robert Campbell thread.
http://early-retirement.org/forums/i...p?topic=5521.0

[honobob]

Wow Sure can't argue with a graph from somrbody..... .net/housingbubble/
So My $2000 investment in 1978 that is now worth $400K in Honolulu and $5000 investment in 1986- present value of $625,000 that gives me a total of $1,025,000 that could cost me $100K to liquify.

Wab
How could I have gotten here without investing in Real Estate?

Please no more graphs. I gave you actual case histories.

[haha]

Quote:

Originally Posted by honobob Please no more graphs. I gave you actual case histories.

Well, many of us like to see data. But hey, we like your "actual case histories" too.*

Ha

[wabmester]

Quote:

Originally Posted by honobob Please no more graphs. I gave you actual case histories.

Sorry I wasn't more clear. The graph basically agrees with your case history. My point was that after 10 years, your "gains" simply kept up with inflation. For example, 10 years of 5% growth in a savings account would have given you a 63% gain. Not a great investment, but I guess keeping up with inflation is nothing to sneeze at. If you can resist the urge to move for 10+ years.

[honobob]

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Originally Posted by wab Sorry* **The graph basically agrees with your case history.* * .

HaHa* *I Win!* ..but I will not be mocked.* Sorry I am so slow, but when they say "you have two apples and you cut them into eight pieces and give two to your friend and ask how many do you have left?" I count the apple pieces.* So WAB won't tell me how I could have better invested $7000.*Sure $5000 in 1975 in SWA or $300,000 in 2000 in Hansens beverages. I do have 5 rentals plus the DH (dear homestead) so I'm thinking that I'll be 5 times better off that a renter or 5 times better off than I would have been if I had invested in something I didn't understand.* (so when real property adjusts to the 2005 mean where will my paper be?) Up to and including now paper has eluded me.* So if I just convert everthing into singles I'll be rich?!* I anticipate converting "inflation adjusted" real property gains(?) into cash to be invested into liquid/intangible thingies because it's easier to spend and I will be out of my crazy accumulation of inflation tracking real estate.

Owner/landlord/RE salesman/investor(in four states)/Commercial Appraiser in SF/ over the last 30+ years*

Willing to offer a little real world (in my head) experience.* Hoping to get better educated in market investing.* Thanks


HAHAHA

[wabmester]

Quote:

Originally Posted by honobob So WAB won't tell me how I could have better invested $7000.

Well, I suspect that you invested more than $7000 unless you had one of those cool 0% interest-only loans. But you do have a point: leverage is great when the asset value goes up.

Unfortunately, leverage is really bad when the asset price goes down.

As for how you could have made more money: if you had invested the same amount in the stock market in 1986 with the same amount of leverage, I suspect you would have made more money.

The other point that you can see by looking at the graph is that you've made a lot more money in real estate than history suggests you'll make (annualized) over the long-term. Call me crazy, but to me that says one thing: SELL!

[wabmester]

Based on this conversation with honobob, I had to ask myself when does a home make sense as an investment?

There are obviously a lot of variables.* *Down payment, mortgage rate, inflation, equivalent rent, expected non-house investment returns, etc.* *This requires a calculator!

There's a cool rent vs buy calculator here that has just about everything you need to answer this question (except in the rent case, it assumes that you never invest more than your initial down payment equivalent).

So, let's look at the last LA bubble.* *If you bought in 1986, like honobob, you saw great appreciation initally, and then a bit of depreciation, and then it was flat for a couple years.* *After 10 years (1996), your home appreciated at exactly the rate of inflation, but you were leveraged, so you made much more, right?

Well, maybe not.

If you had rented in 1986 (assuming that rents started at 5% of home prices and went up with inflation each year) and invested your 20% down payment in the stock market for 8% returns, you would have been better off renting for the first 8.4 years!

Unfortunately, the calculator doesn't let you make the assumption that your house depreciates annually (which is what might happen if you bought today), but it's still fun to play with.

Homes obviously can be great investments, but buying at the top of a bubble (or even 4 years before the peak, as in honobob's case) could mean that you won't see the payoff unless you're willing to sit tight for a pretty long time.

[TargaDave]

Quote:

Originally Posted by justin I'm involved in the planning/rezoning/approval stages of new residential construction for a number of developers in NC (a non-bubble area). We've seen a noticeable uptick in new developments. Especially near the coast. Those new neighborhoods will have finished houses within a year most likely. I don't think any of those developers are sensing a slowdown in the local markets. It's pretty much "get it done as fast as you can" at this point. Of course, like rewahoo, houses around here frequently sell for $140,000. The median sale price is a lot higher though. Tons of folks from up north and out west putting their equity to work here due to their jobs relocating here, or snapping up a vacation home on the coast.

Justin- From what I see prime coastal NC RE is definitely slowing big time. So perhaps a lot different from the less expensive inner regions


http://www.newsobserver.com/125/story/456911.html


We've been looking at OBX soundside property for 3 years and this year everything has slowed waaaaay down this year. Inventory is up big time, and the prime summer selling season isn't going so well. Starting to see prices come down but still a healthy dose of seller denial. The OBX is pure second-vacation-"speculation" home territory. I don't really follow the other areas too closely.

I'm with Wab on this one. I think by the fall of 2007 the downward slide will be in full swing. Still gathering steam right now

[justin]

Quote:

Originally Posted by TargaDave Justin- From what I see prime coastal NC RE is definitely slowing big time. So perhaps a lot different from the less expensive inner regions We've been looking at OBX soundside property for 3 years and this year everything has slowed waaaaay down this year. Inventory is up big time, and the prime summer selling season isn't going so well. Starting to see prices come down but still a healthy dose of seller denial. The OBX is pure second-vacation-"speculation" home territory. I don't really follow the other areas too closely.

My post was refering to the "less expensive inner coastal regions" - those a few miles from the ICW and/or the Atlantic. Still tons of new developments scheduled to be built. I haven't dealt with any oceanfront or barrier island developments. Most of what I have worked on is in New Hanover County (Wilmington) and Brunswick County.

Of course if the real estate market slows down, the builders will stop building. They always tell us their expected market absorption rate (# units per year) for new construction and then qualify it with "subject to market conditions"!

[Alex]

Quote:

Originally Posted by honobob 1986 Base year 1987 Up 1988 Value DOUBLED 1989-1991 Still all good 1991 Bubble Burst? Less than 9% down 1991-1995 Enjoying Prop 13 Tax limitations Four years of no double digit appreciation, considering suicide. 1996-1998 inching up again 1999 Neighbor sold for over 3X what I purchased 2000 100K up 2001 Add another $50K 2002-2006 Bubble Burst May 2006? Property worth 7.35X purchase price 20 years ago. Property taxes are $6400 LESS each and every year than the new neighbor pays. Not sure what your point is but I'll buy all the CA houses you can sell me in 15 years at todays prices. If you count the leveraging.....I'll celebrate the next "bubble" bust with Alex ...with bubbly!

Hold up now honobob! !!! That data doesn't fit into WAB's carefully constructed dream of endless Schadenfruede moments for the future! He's gonna look awful silly when it doesn't happen in California. How long are you willling to wait for the burst WAB? I'll be swimming in my pool when the bubble bursts, and afterwards too. Wanna know why? Because, I have to live somewhere! ...unless I get a tent on the beach... Hmm.....now thats LBYM!!!!If

For the record, If I could only choose one investment , I'd still take real estate over any other investment, bubbles and all. Cheers!!!

[Brat]

Wab has his tent by the beach.* *

IMHO Wab is watching the residential home market as a matter of personal interest.* Those trying to max the use of their resources pay attention to details.

A housing bubble is only of interest if you are buying, or needing to sell.* If you sell, then buy under the same market conditions it should be a push (transaction costs not considered).