what's ahead for home values?

[califdreamer]

Went to fascinating real estate talk the other night in Los Angeles. The speaker was Robert Campbell, a So Calif-based real estate prognosticator. He's quite bearish on the CA housing mkt and disagrees with those that are expecting a soft landing.

I'll reel off a few stats and trends he mentioned. In last 5 yrs CA home prices have gone up 130%, income up 20% and rents up 25%. Not sure which time period but 40% of new jobs in state were in RE/construction sector versus the normal rate of 15%. Appreciation trend is 2% over inflation annually for CA and just under 1% over inflation for rest of US. Obviously apprec'n has far exceeded the norm during this boom. Historic home price-to-rent ratio in CA is 5.2 times. Currently prices are 9.5 times rents. If prices reverted to the mean based on this ratio, prices would fall 42%. Since 1968, CA homes have sold at a 63% premium to homes in rest of US. Today the premium is 173%. Prices would have to fall 36% to get this statistic back to normal.

Robert is a great communicator and his argument is compelling. My personal forecast (for what it's worth) is that we'll see a 15-20% drop in home values here in San Diego County. Most of drop will occur in 2007-08. Robert seems to think it will be uglier than that.

I have no affiliation with Robert Campbell.

 

[danm]

DOA. 35% (nationwide median) deflation to come back to CPI related valuations, 29% to meet income levels again. If you're thinking of selling it may be too late, but better sooner than later. Robert is dead on. Global recession will follow the housing bust.

Prices have dropped maybe 10-15% here.

 

[califdreamer]

Thanks for post danm. Which metro area are you in? I assume somewhere near a coastline if your housing is down 15%.

It's been a mixed bag in SD County lately, some zip codes slightly down, some slightly up. I think '06 could be flat or slightly lower with the real mess starting in 2007. You and Robert certainly have the data to back up your assertions for a deep dip in prices.

Another reliable soothsayer in So Calif real estate is Bruce Norris who predicted the CA housing boom spot-on back in 1996. No one believed him when he said CA housing prices would double in a five year period but he was correct. In late 04 Bruce looked closely at the data again and concluded we're in for a serious fall here over the next several years. These guys are not amateurs. They've studied the cycles and the historical data so I don't think their views should be dismissed. Perhaps my forecast is overly optimistic.

Not to belabor the point but one of Bruce's observations is pretty scary. In past cycles, home buyers resorted to exotic loans (interest only, neg am, ARMs, etc.) during times when interest rates were peaking. Today's buyers are resorting to such loans during record low rates that someday are sure to rise.

 

[califdreamer]

Thanks for post danm. Which metro area are you in?

How could I forget? You guys sold your house in SF and, I assume, are waiting for the Crash. Last July when I was in SF I read an article in the Chronicle about the 19% appreciation in the Bay Area (probably June 04 - June 05). Sounds like things have reversed course pretty dramatically. I'm guessing the priciest areas have taken the first hit.

 

[brewer12345]

Nationally, wwho knows? Flattish, I expect. Locally, I think that we will see 10 to 25% drops in selected markets (CA spots, Boston, Denver). Other coastal markets will experience pressure, but it will be dependant on the local economy and population trends vs. supply. In central NJ, I suspect that I am not likely to see much of a fall-off (if any) because the local economy is very strong, people keep coming here in droves, and prices are a relative "bargain" (hahaha) compared to many surrounding areas. Midwestern markets that never did much will be dependent on whether manufacturing ever recovers.

 

[danm]

Yep, north of SF. We sold for a variety of reasons, one being we wanted to unload it anyhow, and it seemed highly likely that the price could not go any higher. Indeed, there is a huge glut around here. Two brand new custom houses (not McMansions) on the way to work have sat going nowhere since fall.

And actually I'm not waiting for a crash personally. We love renting now, and don't want to tie up that much capital in a house, and have to do upkeep, pay property taxes, etc. My pessimistic outlook is after reading Gary Shillings January INSIGHT newsletter (www.agaryshilling.com). Gary wrote an excellent book on deflation, reviewed on this site.

At any rate, Gary has his investment themes for 2006, the primary one being that housing will crash and bring on a worldwide recession. He spends 20 pages showing you why. Every point he makes is backed up with data in the letter. Also being a physicist (he got a bachelors in it, later a PhD Econ/Stanford), I appreciate his hard data to substantiate his thesis.

All I'll say is, hold on to your hats folks!

 

[Michael Moore]

Location is still going to be important. It seems like a housing crash here in San Francisco often means "no longer going up in price", and not "reducing market value".

There is no where to expand to, so there's no good way to add extra homes to the supply.

Since we don't have any plans for moving in the near term, we're not worrying about what the house market does. And even if we were worrying, it wouldn't be much.

cheers,
Michael

 

[brewer12345]

Location is still going to be important.  It seems like a housing crash here in San Francisco often means "no longer going up in price", and not "reducing market value". 

There is no where to expand to, so there's no good way to add extra homes to the supply.

Since we don't have any plans for moving in the near term, we're not worrying about what the house market does.  And even if we were worrying, it wouldn't be much.

cheers,
Michael

5 or 10 years ago I would have agred that it was no tragedy if values stayed flat for a few years. The problem is that with all of the exotic mortgages out there, many homeowners will be in trouble if values stop rising. If enough of them get into trouble at once, we arre all in for it.

 

[TomSimpsonAZ]

Everyone left in Cali, dump your properties and move to Phoenix.....

 

[tryan]

Housing and the economy will tank at the same time.  But WHEN is anybody's guess.  One thing for sure, even it takes 5 or 10 years, the soothsayers will say they called it right.  When in reality the downturn is simply a cyclical event.

If the next "bottom" is anything like to last recession it's 5-6 years out - at a minimum - since it'll take 1/2 as long to find a "bottom" as it did a "top".

 

[califdreamer]

Campbell discussed one of the objections to the "housing market will crash" argument. It's the idea that "location, location, location" and lack of supply will prevent a downturn. Campbell cited cyclical crashes in Manhattan (1987-mid 90s), Tokyo (90s and early 00s) and Hawaii (early 90s), all islands with historically high demand, as proof that once sentiment turns against real estate, scarcity no longer matters.

Since we don't have any plans for moving in the near term, we're not worrying about what the house market does. And even if we were worrying, it wouldn't be much.

Having said that, The Other Michael makes a good point. If you're in an area and you know you want to stay there, it doesn't matter much what prices do (unless, of course, you're in trouble with your home loan).

 

[LEX]

I wonder if the real driver for "regression towards the mean" in high cost markets will come from the next decade's suggested sell off of houses in high cost areas as a function of demographic trends. Clearly there is a real incentive for older home owners advancing in their 60's to cashing in equity and moving to low cost regions with affordable medical and assited care options. 8)

 

[califdreamer]

I wonder if the real driver for "regression towards the mean" in high cost markets will come from the next decade's suggested sell off of houses in high cost areas as a function of demographic trends. 8)

Taking a few points from the presentation the other night, drivers toward reverting to the mean will include businesses and individuals seeking more cost effective options elsewhere, distressed sales from holders of ARMs and other alternative-type mortgages, economic fallout from the inevitable loss of jobs in the construction and real estate sectors and a dramatic slowdown in consumer spending as mortgage equity withdrawals dry up.  One eye-popping statistic presented was GDP growth (between 3 and 4 percent) vs. GDP growth without mortage equity withdrawals (about 1/10 of one percent).  I don't know where that last statistic came from, but it doesn't sound promising for home prices.

 

[dumpster56]

Nationally, wwho knows? Flattish, I expect. Locally, I think that we will see 10 to 25% drops in selected markets (CA spots, Boston, Denver). Other coastal markets will experience pressure, but it will be dependant on the local economy and population trends vs. supply. In central NJ, I suspect that I am not likely to see much of a fall-off (if any) because the local economy is very strong, people keep coming here in droves, and prices are a relative "bargain" (hahaha) compared to many surrounding areas. Midwestern markets that never did much will be dependent on whether manufacturing ever recovers.

That is an interesting comment.

I am ready to put the homestead on here in warren county nj off rt 78 in the next few weeks.

Homes have still been selling, heck even the week after thanksgiving the only one in the neighborhood was sold in a week for just about what they were selling for last summer.

There is very little new building here in new jersey, central nj that is and the trip into pa is still extra time and housing costs are now almost as high so hey Hope this baby CLEAN AS A MODEL sells sooner than later, gonna price it right and get the heck out of dodge!

 

[cute fuzzy bunny]

I see in the local paper this morning that sales in the county I live in and the adjacent county have dropped 25 and 50% respectively for the current quarter ending vs last year. This area is badly overpriced with really no underpinnings to support it. If theres a place to stick the valuation thermometer, this is a good choice. A lot of pretty seedy areas and gang violence, couple of cheesy malls and retail. Few of the "big box" stores other than wal mart and home depot. Lots of open farmland, lots of new home developments where you can buy a bigger new home on a tiny lot for less than a smaller, older home with a big yard.

Small old home, big yard, bad neighborhood, 3 years ago $80k, this year $250k.
Medium sized newer home, big yard, nice neighborhood, 3 years ago 175K, this year 425K.

Lots of inventory, lots of 'reduced price!' signs and notes in the MLS.

What I'd like to hear more about from the real estate experts that are renting large numbers of properties is what they think will happen with rents on these over the next few years. Will rents slowly or quickly rise to meet property valuations? Will everything go sideways pricewise and rentwise for the next 10 years until inflation levels the playing field? Or would they expect valuations to drop suddenly or slide over a long period of time.

I'm sort of stuck in a decision right now. Sell my home that I bought for 250k two years ago for $425-435 and rent the same basic house in the same neighborhood for $1100-1200 tops, or hang in here. Worst case scenario: rents slowly rise over the next 5-7 years to compensate for valuations while valuations go sideways. Best case, rents stay where they are while property values slide slowly over the next 5-7 years, then I buy back in.

So where do people think these two dynamics are going to go?

 

[LOL!]

Our home has appreciated in price at the rate of 2% a year for the last 11 years. It might have kept up with inflation, but maybe not.

I have heard of folks who bought 6 years ago in the neighborhood listing their home at the same price they originally paid.

I predict for the future that home prices in this area will go up at the rate of 2% for the next 10 years at least.

 

[Nords]

Campbell cited cyclical crashes in Tokyo (90s and early 00s) and Hawaii (early 90s), all islands with historically high demand, as proof that once sentiment turns against real estate, scarcity no longer matters. 

Pththththbbbbbbbb... he must've researched the heck outta that one.

Hawaii & Japan were fueled by the same buyers (the same class of "investors" who bought Rockefeller Center).  Hawaii's worst excesses were caused by one buyer-- Gensiro Kawamoto, who literally bought over 200 local homes via a limo tour.  He rented them back out (in many cases to their former owners) but lately has been in considerable hot water over landlord neglect.

The Japanese & Hawaiian RE booms both ended on the day Kuwait was invaded and fuel prices took off.  I sure hope that's not cyclical.  I think the Japanese banking corruption had a lot to do with it too, although that probably IS cyclical.

"Scarcity" does not necessarily apply to an island.  Hawaii underwent record development during the '80s (the joke was that the state bird should be changed to the building crane) so values were further suppressed by all the new homes completed right at the top of the market.  Substantial areas of Oahu are undergoing legislative building approval now, including one "neighborhood" for over 7000 homes.  When those go on the market 5-10 years from now, then it'll be time to start bottom-fishing.

 

[Martha]

TH, I am having a hard time getting my arms around the rent issue too. We are looking at selling our fourplex/home in the spring if prices remain solid. It makes no sense to sell in the winter. Rents have started to flatten out where we live, and home prices continue to increase. For the past several years, few rental properties hit the market and when they do, they sell fast for good money. Our current thought is to sell the place and rent for a while.

 

[cute fuzzy bunny]

Thats the itch I've got Martha. Only things holding me back are not wanting to have to deal with a landlord, hating to move, and this is such a perfect place for a little one to grow up.

 

[Jarhead*]

Thats the itch I've got Martha.  Only things holding me back are not wanting to have to deal with a landlord, hating to move, and this is such a perfect place for a little one to grow up.

TH: I think you answered your own question with the above.

You're a self-confessed mulit-millionaire, so why get involved with homeowner "arbitrage".?

I personally, never concerned myself with appreciation on the way up, and will give this market the same amount of consideration, on the possibility, of the way down.

I'm living in the area, and the home, that I want to be in, and that's as far as I take it.

Gabe seems to be happy where he's at.!

Jarhead, who agrees with ReWahoo, that Texas is the best college football team in the country.

 

[cute fuzzy bunny]

You're a self-confessed mulit-millionaire, so why get involved with homeowner "arbitrage".?

Because thats how I got that way!

Gabe seems to be happy where he's at.!

And thats the most important factor!

 

[califdreamer]

Pththththbbbbbbbb... he must've researched the heck outta that one.

Hawaii & Japan were fueled by the same buyers (the same class of "investors" who bought Rockefeller Center).  Hawaii's worst excesses were caused by one buyer-- Gensiro Kawamoto, who literally bought over 200 local homes via a limo tour.  He rented them back out (in many cases to their former owners) but lately has been in considerable hot water over landlord neglect.

The Japanese & Hawaiian RE booms both ended on the day Kuwait was invaded and fuel prices took off.  I sure hope that's not cyclical.  I think the Japanese banking corruption had a lot to do with it too, although that probably IS cyclical.

"Scarcity" does not necessarily apply to an island.  Hawaii underwent record development during the '80s (the joke was that the state bird should be changed to the building crane) so values were further suppressed by all the new homes completed right at the top of the market.  Substantial areas of Oahu are undergoing legislative building approval now, including one "neighborhood" for over 7000 homes.  When those go on the market 5-10 years from now, then it'll be time to start bottom-fishing.

I think you and Campbell are on the same page.  It is precisely the manic buying mentality of a Kawamoto (or today, homeowners who "have to get in now") that bid house prices to an overvalued state.  Then when any bad news comes along (war, increase in oil prices, job losses, etc.) the "air" in the overbid values is squeezed out.  

There's no question builders, aided by the lenders who funded them, built too much during the 80s real estate boom.  They, too, were part of the manic mindset that created that bubble.  

 

[kat]

Q: What's ahead for home values?

My A: I agree with those who said it depends on location.

I have no first hand experience with the bubble markets .... well, I guess I should include all the times I very seriously considered moving from eastern New York to Boston or NYC. I have friends and opportunities in both places, and they beckoned.

But every single solitary time I ran the numbers, I said I'd have to be a fool.

My region of the US has pretty much always been behind the trends, and often never experienced the trend before it ended. I think it's very likely the home values here will keep moving up steadily, some years more slowly than others. I don't personally know anybody who considers a house more than a place to live, which is good enough for me.

The downside, of course, is not being able to move to the "bright lights" without spending a good chunk of savings and forgetting ER. When I line it all up, I find myself content to stay. Boston and NYC are two and a half hours away and I can visit. The mountains -- my love -- are much closer.

This is just my take on things. From what my aunt in SF says, it's very different out there. Location is everything.

kate

 

[tryan]

What I'd like to hear more about from the real estate experts that are renting large numbers of properties is what they think will happen with rents on these over the next few years. Will rents slowly or quickly rise to meet property valuations? Will everything go sideways pricewise and rentwise for the next 10 years until inflation levels the playing field? Or would they expect valuations to drop suddenly or slide over a long period of time.

Speaking for the east coast, rents have been flat for the last 3 years. I was able to push through 5-10% increases every year from 1997-2002. But now the tenants are simply tapped out. Landlords will try listing a vacancy $200 over market rent (they may have no choice given what they paid for the place) but then settle back to market rent after a couple/few months vacancy. Tenants simply don't have the cash to play along with the housing boom; so lots of new homeowners are taking a bath in negative cash flow.

Personally I think prices will reset before wages rise enough to close the rental gap. Home prices are simply alot more dynamic/volitile than wages.

 

[califdreamer]

Our current thought is to sell the place and rent for a while.

This is what I considered doing last March when I almost sold my house.  In the end I decided against it.  The probelms with selling, renting and then jumping back in to buy are:  it's difficult (or just lucky) to sell at the absolute peak, commissions and other selling costs are a big chunk, moving is a real pain, it's likely living in the rental will not be as nice as living in your home and it's difficult (or just lucky) to get back in at the right time.