Tuesday, April 7, 2009
Friday, April 3, 2009
There are a few problems with this analysis. First, national average wages are being compared to prices in the 10 larges cities, when wages in these cities tend to be significantly higher than the national average. Second, this chart doesn't take into account mortgage rates. Real estate, like any asset can be valued by discounting future expected cash flows. When the discount rate is low a higher price is justified. In 1989 mortgage rates were north of 9% and today they are at half that rate. Third, looking at national numbers obscures what is happening in local markets. A better analysis would calculate the price/wage ratio for each city based on each city's average prices and wages.
For San Diego, Prof. Piggington's Almanac for the Landed Poor (a great blog that has been tracking the build-up and burst of the local bubble since 2004) has produced just such a graph found here. As you can see, the local price/wage ratio has declined enough that it is back in the middle of the historic price/wage range, without even taking into account the increased affordability due to low mortgage rates. To adjust for mortgage rates you would want to look at a ratio of wages to the fully ammortized mortgage payment required to buy the average house. Prof. Piggington graphed this as well here. As you can see, on a mortgage payment basis, housing in San Diego is more affordable then it has been since at least the 1970s. Now, I wouldn't expect today's low mortgage rates to persist forever, but even if rates came back to the 6-7% range, homes would remain pretty affordable on a historical basis.
Prof. Piggington author Rick Toscano goes on to graph price/rent, mortgage payment/rent and other ratios in the full post and is an excellent read. Each measure shows that the San Diego market as a whole is no longer in bubble territory. It is important to note that Mr. Toscano and piggington.com are not cheerleaders for the real estate market. The blog was created to point out how horribly overpriced real estate was back in 2004 and recounted the bursting bubble somewhat with glee.
As I've said before, real estate markets are fractured. While the average home sold in San Diego has come down to reasonable levels, there are many segments of the market that have only experienced modest declines (La Jolla, Del Mar, etc) where homes are still extremely pricey by any measure. There are other more modest areas (Oceanside, most of East County, etc) that have cratered to the point where prices are incredibly cheap on distressed properties. The problem is that in many of these communities it can be difficult to get a loan, particularly in multi-unit condo and townhome complexes. That is because banks won't extend loans when a certain percentage of units are non-owner occupied, and in many complexes, half the units are bank owned or owned by investors who purchased them after foreclosures. These properties can only be purchased for cash, but for those with the cash you can get quite a bargain with 10% cap rates and price/annual rent ratios below 6.
Tuesday, March 31, 2009
These experts further confirm that it is investors who are putting the floor on low end home prices. Mark Goldman, professor of real estate at San Diego State University said, "It’s a great opportunity for first time buyers. But the restrictions are getting so tough that first-time buyers can’t hop in and if they can, they’re being outbid for these by investors -- all cash." Guy Asaro, president of homebuilder McMillin Homes added, “Everyone in the money world recognizes historic opportunity to buy property at below replacement cost. Once this stuff is gone, it won’t be at this price ever again because we can’t replace it at this price whether it’s new or used.”
Obviously Mr. Asaro is a biased source, however, what he says is true. Many homes on the lower pricing tier are selling at far below replacement cost. The laws of economics say this condition simply cannot persist over the long run. For it to persist, houses would have to become an obsolete asset, and I highly doubt that is the case.
Monday, March 30, 2009
As you can see, there have been about a dozen localized real estate busts in the last 35 years prior to the current national bust. In all but a few cases, real estate prices regained previous peaks within about 8 years, the biggest outlier being Houston, which didn't regain its previous peak for almost 15 years after the bursting of the oil-embargo fueled bubble in Houston's oil revenue dependant local economy.
Another thing to remember is that these are nominal prices. Homes were overpriced in most of these markets at previous peaks and so on an inflation adjusted basis most didn't regain previous inflation adjusted peaks until the recent housing bubble caused them to become overpriced once again. Houston has never fully recovered on an inflation adjusted basis.
What does this tell us about the current real estate downturn? I think it tells us not to expect to see 2005 prices again for at least 5 years, which would be 8 years from the peak here in San Diego. I would bet, given the magnitude of the bubble that occured, it may take somewhat longer than average this time around as well. However, another conclusion can be drawn. Looking at any one of the most severe downturns, similar to the current downturn, if you bought a property anywhere near the bottom and held it for 5-8 years, you would have made a very good return on your investment. Even in Houston, which was the slowest to recover, prices appreciated about 23% in the first 5 years of the recovery. If you were able to purchase with 50% down, that would have been a 46% gain on your investment, in addition to the cash flow being collected from rents.
The difficult part, of course, is finding the bottom. In my previous entry, I explained why I think the bottom is at hand in certain segments, but not in others.
Monday, March 23, 2009
Three to six months ago I would receive alerts that properties met my criteria, then a month later, I would see an alert that the price on the same property, still unsold, was being dropped even deeper. Now I never get alerts of price declines. Also, some areas where I used to receive daily alerts of properties listed in my price range I now rarely receive alerts because properties are listing (and selling) for higher prices. El Cajon is one such area. Other areas, such as Oceanside, where I used to receive alerts for properties with prices well below my maximum price points, I still receive alerts, but the prices are now closer to my maximums.
One explanation could be that owners have suddenly started listing their properties at unrealistically high prices and the properties will sit on the market. However, all the data shows an increase in home sales so this is obviously not the case. Instead, it seems that first time home buyers, buoyed by the federal home buyer tax credit and plunging mortgage rates are now stepping up to the plate. Also, many investors are seeing the same opportunities I am seeing and are buying properties.
Here is an AP article that appeared today that helps confirm what I have been seeing. The article is about soaring home sales and plunging prices, but also includes this tidbit:
"However, in a positive sign, seller asking prices are starting to rise in places like San Diego and Orange County, Calif., where declines have been severe, said Lawrence Yun, chief economist for the Realtors. That could be an early indication that prices are stabilizing in the most distressed parts of the country."
Now, I normally take anything said by the Realtors with a grain of salt, but in this case, it confirms what I have been seeing on my own lately.
Also I would like to stress that I believe this is the bottom only on the low to lower-mid range of the market. I think the upper-mid to high end of the market still has a bit further to drop here in San Diego. The Case Schiller tiered index data is only current through December and can be found here as well as graphed below for San Diego. As of December, the data shows the bottom tier was still in a down trend, which I believe is correct. We will need to wait for the January, February and March data to see if prices have actually stabilized.
Friday, March 20, 2009
Personally, from everything I have seen, I think the low end of the market has bottomed or is extremely close here in San Diego. In some areas of the county, condo and townhome prices are down over 60% and are now selling for in the area of 6 times annual rent with Cap Rates north of 10%. Sales are up 56% year over year and it is largely these lower end Bank REO properties that are selling, mainly to first time home buyers and investors.
I think the higher end of the market still has some pain ahead. Most people in this segment were able to ride out the earlier market declines and simply pulled their homes off the market rather than cut their asking prices to reasonable levels. As the recession progresses I think you will see more forclosures and forced sales of mid to high end homes.
On this blog, I will point out interesting articles and data as I come across them and write about my thoughts and interpretation of those articles and data. I will look at various markets, but focus on the San Diego market where I live work and invest.