Wednesday, March 19, 2008

Are we There Yet?

We have certainly come a long way. But how much farther do we have to go?

Last year, it was easy to be confident about the future direction of home prices. Rents were crazy cheep compared to purchasing the same home. As a result, home prices had to come down (rents weren't going up because frustrated sellers were flooding the market).

However we are now entering a rather grey area. Depending on your assumptions (and especially your location) things can go either way. For example, the home we are looking at comes out fairly even with our rent (with costs fully loaded into both sides) except for maintenance. This is a big exception, because the home is older, and in need of extensive maintenance.

From my limited calculations, in El Dorado Hills, we have another 10-15% to go. At that point, we will hit the rent adjusted value as well as the inflation adjusted value. Homes that are priced around 10-15% below comps in my price range are also flying off the market around here. So I feel fairly confident about this estimate.

29 comments:

patient renter said...

The velocity of the red line on this graph from SL is a good indicator of where we are and where we're headed.

http://bp3.blogger.com/_oqQI_LytgCE/R4xayz1SoOI/AAAAAAAAAnE/Uvj2U66YACY/s1600-h/SacramentoRealEstate90svNow.JPG

Mystere said...

Actually, PR, it's neither.

First, as far as where we are, the graph is outdated. Given that the peak occurred in 8/05, and that the red line reflects a 28.7% decline from peak, it appears that the graph relates to data from early last fall. At present, the median is approximatley 35% off peak (which would put the red line at the very bottom of the graph), not 28.7% off...not that I'm a big fan of medians, in any event.

Second, as far as where we're headed, its a great indicator...if you believe RE is going to zero. Oh wait, you do believe that..

Nice pic, but I'll suggest that relative to the inquiry made it's far more productive to focus on fundamentals. You know, things like price/income and price/rent etc. in the specific community being evaluated. Just a thought.

Anonymous said...

It really depends on the property and how much the bank is ready to deal. REOs are the only things worth looking at anymore and I'm awating that next crop.

PVMarkets said...

Patient renter ... that is a fascinating chart. Looking at this against the backdrop of the 90s is truly telling.

As to the question "Are we there yet" ... I don't think so. The decompression in median prices has to work its way across all the price segments. I don't think the EDH area, for example, has seen this decline yet.

Also consider the other econmonic factors that need to work their way through the system:

1) Add'l waves of ARM resets
2) Further tightening of lending rules -- reducing the group of "eligible buys"

Mystere: I agree the fundamentals of price/income and price/rent have to prevail. This is the point of equilibrium ... Do you have any opionion on where the market is on this? My initial thoughts were for pricing to revert to 2001 plus adjustment for inflation. As far as EDH goes, I think we still have a ways to go (-20%)

Of course, this all assumes that the economy holds. In the 90s scenario, unemployment was a significant factor. So far, this has not manifested in the current scenario ... but if it does, all bets are off.

Anonymous said...

It is not very often that renting costs more than buying.

I will probably get killed with data for writing this, but last I remember this being the case was 98 here in Sac and that was at a cyclical bottom.

Given how overpriced real estate became, it will probably over react to the downside, but if you can find a house to buy that you want to live in for a long time and it is the same price as rent? Why not buy it?

Buying Time said...

Tia - I'm really confused now. How do landlords make a profit if rent doesn't cover purchase, taxes and maintanece costs?

And why would anyone want to buy if renting was decidedly cheeper?

Back in normal times, people typically rented because they didn't have good credit, or enough downpayment saved up (not because it was more economical than purchasing).

patient renter said...

"Actually, PR, it's neither."

You're on crack. The pic shows a dramatic price velocity. Unless things stop on a dime, which historically never happens in housing crashes, it indeed is a damn good indicator of where we're headed.

You're good at parroting "fundamentals" but so far not so good at actually using them to back up your position.

"Oh wait, you do believe that.. "

Save the pathetic strawman stuff.

Buying Time said...

I certainly don't expect you all to agree. But I do expect you all to get along.

So lets keep the slings and arrows to a minimum.

Anonymous said...

"Tia - I'm really confused now. How do landlords make a profit if rent doesn't cover purchase, taxes and maintanence costs?"

Time. The right question to ask it how much do I have to put down in order to have positive cash flow? If history repeats itself, homes will continue to be a good store of value and appreciate. If you have an investment property that is break even, the loan will amortize and the house will go up in value over the long haul. Along the way you get to depreciate the property faster than it actually wears out.

husmanen said...

Yes, we have come a long way and we have a long way to go. The comments by 'Patient Renter' and 'Looking in EDH' include references and data.

The most telling flags are the rent/price and the median income/median price. Where I live, in Folsom, the costs to own are not twice (or more) than the costs of renting, things have changed drastically in the last nine (9) months.

Rents are still out of sync, by at least another 20%. When considering the Gross Rent Multiplier, Net Operating Income and Cap Rates on a home it still doesn't pencil out (>20% difference).

The macro issues are big and getting bigger, as 'Looking in EDH' mentioned. We cannot lose sight of a recession's impact on employment in the area and eventually the rents.

The price decreases haven't even slowed. Our greatest leverage as potential buyers is time.

Wishing the market is at bottom or close doesn't make it happen.

patient renter said...

"The macro issues are big and getting bigger, as 'Looking in EDH' mentioned. We cannot lose sight of a recession's impact on employment in the area and eventually the rents."

Absolutely, another macro issue to always consider, which puts us in a completely different position from where we were a year or two ago, is lending standards.

Mystere said...

PR, funny how you squeal like a stuck pig when called out on your bs. Hallallujah, we're going to zero and to the gates of hell with all who might disagree! Heaven forbid that any reference to fundamentals should get in the way of some good eye candy about where we've already been.

And I generally agree with you, BT, as far as arrows and such...so I'll otherwise leave it at that.

Looking_in_EDH, I wouldn't count on future ARM resets creating a major calamity. As I've said since last year, the effect of the anticipated wave of ARM resets will turn out to be much ado about nothing. As you saw again yesterday, the Fed aggressively is lowering rates. This impacts, immediately, the short term rates on which ARM reset calculations are based. Even if and as reset, these rates quickly are becoming a non-issue as far as creating further problems from here. And additional cuts by the Fed certainly are in play going forward.

Yes, underwriting has tightened and that will have an effect. But so will the increase in the maximum FHA conforming loan limits, the change in capital requirements for the GSEs, the plunge in new housing starts, etc. It's quite a mix of things that needs to be taken into account.

With respect to your criteria of 2001 + inflation, if you're using 3% or 4% annual inflation, then 7 years of it (without compounding) amounts to an aggregate of 2001 pricing + 21% to 28%. That doesn't strike me as unreasonable and, in any case, dialing back to 2001 as a base year squeezes out the air from the huge bubble years. My objective always has been (a) to buy a home, not just a house (i.e. I'll pay somewhat more to get the home I really want, rather than settle and get the rock bottom deal on a house that is lesser suited to me), and (b) not to step in the dog poo of buying a bunch of bubble air. Beyond that, as I intend to buy and hold for a long time, *the* bottom isn't all that consequential to me.

patient renter said...
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patient renter said...

"we're going to zero"

I'm not sure why you keep mentioning "going to zero". I assume you're confusing me with someone else, or you just really like strawmen.

"PR, funny how you squeal like a stuck pig when called out on your bs."

That the market is declining and will decline is BS? Uh huh. Congrats on calling me out. Lereah would be proud.

smf said...

"I'm not sure why you keep mentioning "going to zero". I assume you're confusing me with someone else, or you just really like strawmen."

Could it be me? Then again, I have not stated so. But Myst has definitely made it appear as so.

And of course, she has yet to answer my question:

What happens when you have more houses than people available or existing to purchase them?

"I wouldn't count on future ARM resets creating a major calamity."

The vast majority of those with ARMs were not paying a dime of principal and only partial interest. A reset, even with lower interest rates, does nothing to help them. If they were barely paying interest in the first place, their payment was about 1/2 what it would have been with a small conforming loan. Even a lowering of the interest rate does nothing to help them.

"With respect to your criteria of 2001 + inflation, if you're using 3% or 4% annual inflation"

Real long-term housing charts show that house prices barely go above inflation. Assuming 3-4% annually assumes that there was a reason for houses to inflate in price. If we pick different time period, different results can be seen.

But anyways, our house is really for sale this time, and we know already which house we want. From a high of about $800K for a similar model, the latest one that sold was for $560K in 11/2007. Others have been stuck.

Their prices seemed high originally. Till Zillow informed us that those 'high' prices were LOWER than their previous price. The model that sold for $560K is at 2003 price! And this is Gold River! Yeah, the high-end will be immune...

Mystere said...

"I'm not sure why you keep mentioning "going to zero""

I'm mentioning it because that's what you've stated, whether you intended to or not, by posted a chart with a vertical red line and saying it's "where we are and where we're headed."

Let's be clear. What I called you out on was posting such a chart in reply to an original post that expressly asked the question 'how much further to go?" For the reasons I stated above, the chart neither is an on point response to that question nor does it serve the purpose for which you ostensibly provided it. What is does do is exaggerate through implication. And we all know by now that I'm a stickler for exaggeration.

Further, what does that chart *really* show...that prices have dropped like a stone, that the lower end is selling in much greater proportion than the higher end, that some areas of the greater Sacramento are impacted much more than other areas, some combination of all of the foregoing?

Smf, not sure what question you're talking about. If it was from the other thread, you'll find my response there. Beyond that, with respect to ARMs, what you said above has nothing to do with whether the incremental burden of "addt'l waves of ARM resets" will create a further problem. The item I responded to concerned the issue of the reset itself, not whether borrowers were or are otherwise overburdened. Regarding inflation, there's no assumption being made that house prices appreciate at a greater rate than inflation..

patient renter said...

"the chart neither is an on point response to that question"

It perfectly answers the question, are we there yet? Unless you think that housing declines stop on a dime, the chart gives you your answer - No, we're not there yet and we're not close.

"nor does it serve the purpose for which you ostensibly provided it. What is does do is exaggerate through implication."

I'm not implying or exaggerating anything. I'm SAYING that prices will go down, nothing more, nothing less. The exaggeration and the "zero" comment came from yourself.

Mystere said...

How does it "perfectly" answer the question, when you still can't accuratley identify the question presented, even after I've quoted it for you?

The chart says nothing about how much *further* prices have to decline. Actually, it says nothing about the future at all, as it speaks only to the past. What it shows is that the -median- has adjusted very rapidly in (what I presume is) the greater Sacramento area. We all know this, right? Anything you extrapolate based on the chart as to the future is by means of implication, right? It does not speak at all to how much *further* (median) pricing may decline, right?

You know, if you flip the chart upside down and pretend we're in 2004, it's like dealing with the increase evangelicals all over again...prices will rise forever!

No, that last part really isn't intended as a shot at you, PR. It's just a giggle about the irony I see in comparing the two overall environments.

patient renter said...

"still can't accuratley identify the question presented, even after I've quoted it for you?"

Two questions were asked. I answered the first (read my last post), you're referring to the second. Quit playing dumb.

patient renter said...

"The chart says nothing about how much *further* prices have to decline."

I was assuming you were bringing to this conversation a basic knowledge of the history of housing cycles. I guess I assumed too much.

Housing declines do not stop on a dime and markets turn to bottom very very slowly. Read Shiller.

Mystere said...

Nice try. Last I checked, Shiller didn't complile data on the Sacramento market. And we wouldn't want to let fundamentals in the Sacramento market bear on the question...when we have a chart to hug, right?

No more time for you on this.

... said...

Whew...

BT - the market was doing some recovery last summer when the financials started crashing - assuming that is done with, you should see a quick slowdown in the "velocity" of the price drops very soon. Why? this quick drop was caused by increased buying in the bottom end by cash investors and first time buyers. THe prices are already down - they're just now going to be reflected in the median price.

The quicker reaction of the market (higher "velocity") I believe is due to increased information flow - quicker news and quicker reactions by the market - maybe even market panic.

G - go ahead and wait for the REO of your dreams, save up your elbow grease and have some reserve $$ for the zero disclosure purchase - extra closet for the MJs....ha!

BT - investors often buy with negative cash flow looking for the market with suppressed rents, future demand, future appreciation potential due to growth - hey are they talking about us?

Folks, had the recovery happened last summer, the supply of new homes would have stayed fat. But after the past 9 months, with builder failures, closures, mothballing, financials pulling $$ from the market, etc., that industry is now incapable of flooding the market with homes for a few years.... the "supply" from foreclosures is a false number when ooking at the total supply of housing.... those people moved from a foreclosure into a rental.... they didn't move away, so the foreclosures didn't really increase the total supply or reduce total demand.

Very large problem over the past few months is the supply of money for loans.... for ANY buyers... maybe that is being fixed.

Anonymous said...

Then don't let the door smack ya on the way out

Mystere said...

Trolling by Gwynster? Now there's a first!

Alas, I'm not leaving. I'm just not going to waste any more time with such foolishness. If and when the discussion turns to the fundamentals, I may chime in again.

Anonymous said...

"investors often buy with negative cash flow looking for the market with suppressed rents, future demand, future appreciation potential due to growth - hey are they talking about us?"

I know a lot investors have made money carrying negative cash flow, but this is a really bad strategy. Nobody can predict the future and negative cash flow is a one way trip to bankruptcy should the markets diverge from historical means and stay irrational too long.

Another bad strategy is counting on tax policy. It can change quickly and should only be the icing on the cake when evaluating an investment property. Just ask a real estate investor from 80's that was counting on accelerated depreciation schedules to pencil an investment.

... said...

Shiller is interesting but why did he pick a particular starting year? so his chart would show 200! a little change would have left it at 150-180 tops. when did the modern mortgage start (on his chart) how did it impact things?


Try Paul Krugman .... heres a good article

http://krugman.blogs.nytimes.com/2007/10/20/the-two-americas/

this might help you BT with why you might not ever see 3:1 price to income and why you will see appreciation here again.

Sac - its all gambling, hedge funds, t bills, bonds, stocks, etc. just the odds are different.

Didn't anybody like my Costco toilet paper hedging?

alba said...

fundamentally speaking....the rent prices in my area, similar pricing as EDH, are too high. If housing goes down by xx%, why doesn't rent? And if rents do actually go down, as a reflection of the value of the home, what is the lag time? We have actually considered renting another home (move - for a dog), but rentals in this area are still HIGHER than our rent, established in June 2005. If rents do reflect current value of homes, even with a 6-month lag, they must come down SIGNIFICANTLY from today's prices...considering the fundamentals.

The macro picture hasn't played itself out yet, so if there's some sort of correlation between rent and current home values, I would expect huge drops in both...particularly in EDH and Rocklin.

... said...

Again supply vs demand....

Is the supply of rentable homes increasing faster than people who need to rent?


Demand is created by people moving into the area AND people moving from foreclosures.

Supply is created by foreclosures and (used to be) many new homes being built (now down 60% YOY or so)

Anonymous said...

Sac - its all gambling, hedge funds, t bills, bonds, stocks, etc. just the odds are different.

I think you are missing the point. Debt and negative cash flow stack the odds against you in a big way. Investing with earned cash is not gambling.

And I did like your toilet paper hedge joke.