Runaway housing prices

Posted:
in General Discussion edited January 2014
Moving this nice conversation that was going to take another thread off-topic here so we can enjoy.



Quote:

OFF TOPIC:



So, please explain to me the phenomenon of runaway housing prices in California? I understand that supply/demand are driving the EXTRAORDINARY increases in housing. What I fundamentally disagree with is "the greater fool" mentality going on in real estate..."if you don't buy it for what I'm asking, the fool waiting in line behind you will. Besides, you'd be a fool not to buy this house...mortgage rates are at an all time low."



And my thinking is "who cares about the ****ing rates when I have to borrow half a million dollars just to buy a fixer upper?"



I recently had a lender willing to do "whatever it takes" to get the loan approved even though it was quite obvious that our combined household income could not sustain a $3500 mortgage. Not many first time home buyers can take on this burden. But, that doesn't stop the lenders from rolling out the cash to purchase these houses. So, what happens? Guys like me who have absolutely no choice (or get left behind) but to struggle and struggle to handle these exorbinant mortgages. We don't have bad credit and we're not classified as "sub-prime", it's just that we ONLY earn a middle-class income...and we may default on this mortgage. It's a sad sad situation we're in in this country.



I guess my point is that no-one can convince me that a 40 year old house with two bedrooms and one bath that needs plumbing and electrical work is worth almost half a million dollars when five years ago it was worth roughly half that amount.



It's not runaway. It is simply supply and demand as you mentioned. There are a couple variables at stake. First in the late 80's and early 90's there was a large run up on real estate in California. This bubble popped right around 91 in part because of interest rates and in part because of the recession. Real estate normally appreciates at about 4-5% a year but it sat still for basically 5-7 years depending upon which part of the state you were in. That means there was latent appreciation sitting there.



Another factor is that real estate didn't grow as well for a while because everyone was so interested in the stock market. They sat in their homes they already owned and instead maxxed out their 401k's or bought stocks. So this held down prices for a while.



When the stock market tanked people stopped putting as much into 401k's, interest rates fell to all time lows and gee what am I going to do to invest my money now? Most decided to buy a home, upgrade to a larger home, buy a second home, etc.



Now this huge increase in demand ate up the latent appreciation, then crossed into investment dollars being used to get larger homes they couldn't get later, and now has finally reached down into the bone of most people's budgets. Thus we are really in a bubble phase right now. In fact I think it was Bunge I mentioned to about 6 months ago to be careful because home prices are probably about 10-15% above what they should be.



However even then with the "fool" mentality, it just depends where you are buying. The beach areas are insane but also the most desireable place to live. It is about 75-85 degrees there most of the year.



My personal decision was to move inland. I bought a 4 bedroom house for less than I could have bought that 2 bedroom fixer for by the beach. The lender will likely find a way to get you the loan because loans are so safe now. The property secures it. You have mortgage insurance on top of that and he really doesn't care because you pay your loan fee which he gets and then he sells your loan off to Fannie Mae.



Could the market get overheated and drop, yes, but it still isn't like the stock market where a $100 stock can drop to $.50. People still need a place to live and the house still holds that value for them.



I personally am waiting for the bubble to burst. I want to go grab some beach property with my money made from my inland properties purchased at much lower prices and safe even at deflated prices.



However there is the possibility that we will end up like most East Coast cities. There are places in New York City that no one will ever be able to afford to buy. Instead you hire a broker and pay a large fee just to get someone to allow you to rent an apartment. That is the breaks.



Nick

Comments

  • Reply 1 of 15
    scottscott Posts: 7,431member
    I'll jump in here.



    If there's a demand for housing at the sub $200k level how come no one is stepping up with developments? I'm thinking townhouses and condos and the like?



    I'll take my answer off the air.
  • Reply 2 of 15
    saabmp3saabmp3 Posts: 52member
    Honnestly, if you can't afford the housing a particular area, then you shoudl move to a different place. You might say that your job is keeping you there, but if you are not making enough money to support the place that you are living then a change of venu is in pace. I just purschased a house in rochester NY for sub 100k and it's beautiful. The reason it's so cheap is because housing is generally cheap out there, there are TONS of developers building 200k houses everywhere.



    Take it to another end, my main house is in Boston. If you want to complain about 500k houses then don't even think about moving here. The house the orginal poster described would go for about 1.5 million, maybe more. If it were in good condition then pump it up to 2 (this is assuming that the house is in a good neighborhood in either cambridge or boston). The reason that housing is this expensive is because people make enough money around here to support that, they obviously don't in Rochester (what do I care out there, I'm a college student, I'll move somewhere else when I get out). There are very few people who complain about the housing costs because when somebody buys, somebody pays so the money is always moving around, people understand this.



    If you can't hold it in california, then maybe you need to move to a different part, anyways, when you buy a house, it's not wasted money, you can hopefully sell it again for a higher price, just make sure not to buy something incredibly expensive just when it is at the "bursting" point.



    BEN
  • Reply 3 of 15
    scottscott Posts: 7,431member
    Yes and that's how we get sprawl.
  • Reply 4 of 15
    trumptmantrumptman Posts: 16,464member
    Quote:

    Originally posted by Scott

    I'll jump in here.



    If there's a demand for housing at the sub $200k level how come no one is stepping up with developments? I'm thinking townhouses and condos and the like?



    I'll take my answer off the air.




    Well from what I have seen in the beach areas, they are building townhouses and condos. I don't think I have really seen any single family housing tracks built down there.



    Away from the beach it is ALL single family housing.



    As for the why, I don't know why. I'm not a contractor or developer. Perhaps they make more selling 3000 sq ft houses on 5500 sq ft lots than they do getting permits for and building a lot full of townhouses or condos.



    Nick
  • Reply 5 of 15
    airslufairsluf Posts: 1,861member
  • Reply 6 of 15
    scottscott Posts: 7,431member
    Is that the reason? Here I thought sprawl was the great threat to cities these days. Running service out to all those houses 40+ miles from the city? I also consider dense cities a boon for the environment. High population density makes mass transit a reality and uses smaller amount of land per person.
  • Reply 7 of 15
    shetlineshetline Posts: 4,695member
    I think housing prices demonstrate one of the ways that a market economy doesn't always produce desirable results, results that are a good reflection of compromise between buyer and seller. Instead of the forces of supply and demand leading to prices where both buyer and seller can be reasonably happy, housing prices often settle in just short of intolerable pain for the buyer.



    The biggest factor in housing prices is location, specifically proximity to jobs. I think one of the biggest problems is that, for those of us who absolutely loathe the idea of being stuck in traffic for four hours of every day, there are far too many people willing to tolerate these conditions. As long as enough people will tolerate endless traffic jams, companies will continue to open and maintain offices in terrible-to-commute-to places. We all end up paying a premium for being "in commuting range", even when commuting range means two hours of miserable rush hour driving conditions. If you want the "luxury" of spending only an hour a day in transit, you'll likely either have to rent a tiny, over-priced hole-in-the-wall or pay country estate prices for a modestly comfortable dwelling.



    Unfortunately, our simple individual decisions -- buy/do not buy this house, take/do not take this job -- are insufficient to completely untangle the complex economic feedback loops that effect housing prices, where jobs are located, and related infrastructure for supporting businesses and residences.



    I'm not sure how to fix this situation. Markets sometimes get things wrong, but attempts to change market outcomes through regulation and incentives don't have stellar track records either. As long as enough people are willing to wake up before the crack of dawn, drive two hours or more to work, work all day, then slog back home through the same congestion, with just enough time left to eat, go to bed, and do it all over again -- we're all screwed.



    For my own part, I've currently got a very good paying job only 6 1/2 easy-to-drive miles from a house that's worth 65% more than what I originally paid for it. While I'd not be too happy to have to pay the current price of my own house, it's still not a bad deal compared to housing prices elsewhere.



    I've been lucky. If I lost my current job, given the current job market for software engineers, I'd very likely be stuck with the choice between a miserable commute or hideously overpriced housing. Chances are I'd settle for the miserable commute, hoping for it to be a short term thing, and (not that I'd say this in an interview!) I'd be looking for another job closer to home from day one.
  • Reply 8 of 15
    scottscott Posts: 7,431member
    Interesting. I wonder how much external factors have in a seller holding on to a house and waiting for the best offer. For example the tax break makes it easier for a seller hold two montages at once. Also the low interest rate can help out too. If sellers had to get out of one loan to get the other you'd see prices come down.
  • Reply 9 of 15
    willoughbywilloughby Posts: 1,457member
    trumptman you mention houses being 10-15% higher than what they should be. Do you think this is only in California? Do you think its a nation wide problem?



    My wife and I can't decide if we should buy or wait. Renting stinks of course and we're not making any money that way, but I don't to buy a house that isn't going to make me money either. \



    I'm in the suburbs of Philly and the housing prices out here seem really high as well. However, I don't want the bubble to burst. Wouldn't that be a much worse situation for the economy as a whole?
  • Reply 10 of 15
    trumptmantrumptman Posts: 16,464member
    Quote:

    Originally posted by Willoughby

    trumptman you mention houses being 10-15% higher than what they should be. Do you think this is only in California? Do you think its a nation wide problem?



    My wife and I can't decide if we should buy or wait. Renting stinks of course and we're not making any money that way, but I don't to buy a house that isn't going to make me money either. \



    I'm in the suburbs of Philly and the housing prices out here seem really high as well. However, I don't want the bubble to burst. Wouldn't that be a much worse situation for the economy as a whole?




    It certainly isn't nationwide. Believe it or not there are places where no housing appreciation has occured. Likewise there are places like San Diego County where the appreciation has been 50+% a year. I was speaking only of the Inland Empire region of California where I live. Here a house that would have been about $140-165k a year a go has now suddenly jumped to minimum of $165k and upwards of $200k. It is year over year 20% increases.



    Real Estate is a VERY, I emphasize VERY local issue. If you are looking to buy I would recommend going to the most successful people. By this I mean each Real Estate office has a top seller. Go to a large office and speak frankly with a top seller. The reason they are who they are is likely because they know alot about the market and can reasonably move houses. There are always deals in every type of market.



    The last house I bought I jumped on because the folks suddenly just dropped the price and wanted to go. As I mentioned the 3bd 1bth houses are selling for $165-200k. Well I picked this one up at $143k.



    As for the bubble bursting and the economy. No it won't be bad. As I mentioned I would be looking to buy. So would others. There are people who have bought EVEN MORE stock since the market collapsed than they did when it was sky high.



    The last and best advice I can give is this Willoughby, don't act from fear, ignorance, or hearsay. Being unwilling to risk gets you exactly that which you fear, which is nothing. Go out and buy a few hundred dollars of real estate books. Yes a few HUNDRED dollars. When you are talking about a transaction in which they could save you a few THOUSAND dollars. (more like $10-40k) They are easily worth it.



    The second is find an online MLS listing service in your area (Like realtor.com) and start looking. After looking a few thousand homes in your and other areas you really start to think about things you learned from the books. Nice extra large corner lot, yeah but does that mean I get twice the traffic and noise. It might or might not depending upon location. What is cosmetic and what is major in repairs? Is this neighborhood renovating or declining?



    Have fun,



    Nick
  • Reply 11 of 15
    northgatenorthgate Posts: 4,461member
    Quote:

    Originally posted by shetline

    I think housing prices demonstrate one of the ways that a market economy doesn't always produce desirable results, results that are a good reflection of compromise between buyer and seller. Instead of the forces of supply and demand leading to prices where both buyer and seller can be reasonably happy, housing prices often settle in just short of intolerable pain for the buyer.



    The biggest factor in housing prices is location, specifically proximity to jobs. I think one of the biggest problems is that, for those of us who absolutely loathe the idea of being stuck in traffic for four hours of every day, there are far too many people willing to tolerate these conditions. As long as enough people will tolerate endless traffic jams, companies will continue to open and maintain offices in terrible-to-commute-to places. We all end up paying a premium for being "in commuting range", even when commuting range means two hours of miserable rush hour driving conditions. If you want the "luxury" of spending only an hour a day in transit, you'll likely either have to rent a tiny, over-priced hole-in-the-wall or pay country estate prices for a modestly comfortable dwelling.



    Unfortunately, our simple individual decisions -- buy/do not buy this house, take/do not take this job -- are insufficient to completely untangle the complex economic feedback loops that effect housing prices, where jobs are located, and related infrastructure for supporting businesses and residences.



    I'm not sure how to fix this situation. Markets sometimes get things wrong, but attempts to change market outcomes through regulation and incentives don't have stellar track records either. As long as enough people are willing to wake up before the crack of dawn, drive two hours or more to work, work all day, then slog back home through the same congestion, with just enough time left to eat, go to bed, and do it all over again -- we're all screwed.



    For my own part, I've currently got a very good paying job only 6 1/2 easy-to-drive miles from a house that's worth 65% more than what I originally paid for it. While I'd not be too happy to have to pay the current price of my own house, it's still not a bad deal compared to housing prices elsewhere.



    I've been lucky. If I lost my current job, given the current job market for software engineers, I'd very likely be stuck with the choice between a miserable commute or hideously overpriced housing. Chances are I'd settle for the miserable commute, hoping for it to be a short term thing, and (not that I'd say this in an interview!) I'd be looking for another job closer to home from day one.




    I couldn't have said it better myself. This is EXACTLY the situation I'm in. Yes, the reasonable side of my brain constantly reminds myself that this is an investment and the "just short of intolerable pain" will subside eventually.
  • Reply 12 of 15
    trumptmantrumptman Posts: 16,464member
    Well check this out, I called about a refinance on a few of my properties. I have one in particular that because it was a risky initial purchase had an interest rate of 7.75% (I remember when about 18 months ago people use to brag about having an interest rate below 8%)



    Anyway so I call and get the rates for refinancing. The loan amount owed on the house is about $108k. I get the savings amount for the refi and discover it is only about $60 per month. When I think out loud about it for a second commenting that it isn't that much savings. (The fees are about $4000 to refi) The officer chimes in that it isn't that large a loan!?!



    I know that is only a three bedroom house, but just so you guys know... $108k isn't that much money anymore.





    Nick
  • Reply 13 of 15
    shetlineshetline Posts: 4,695member
    Quote:

    Originally posted by trumptman

    I know that is only a three bedroom house, but just so you guys know... $108k isn't that much money anymore.



    I think you should demonstrate the piddling value of this amount of money by sending $108K directly to me. I'll gladly act only mildly pleased, or even disdainful, to help prove this important point about the value of money.



    Now, I know you weren't personally endorsing this view, just passing along what the banker said, but trust me, this gesture will help you learn his valuable lesson.
  • Reply 14 of 15
    spookyspooky Posts: 504member
    here in the Uk as a lecturer I would have to get a 200% pay rise to get my first house in the area where I currently rent!

    Its madness.
  • Reply 15 of 15
    trumptmantrumptman Posts: 16,464member
    Quote:

    Originally posted by shetline

    I think you should demonstrate the piddling value of this amount of money by sending $108K directly to me. I'll gladly act only mildly pleased, or even disdainful, to help prove this important point about the value of money.



    Now, I know you weren't personally endorsing this view, just passing along what the banker said, but trust me, this gesture will help you learn his valuable lesson.




    Hey I wasn't the one who said it, the loan officer did. Perhaps I could put you in touch with her to see if she will meet with your request. I will only charge 1 point on that $108k to put you in touch.



    Nick
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