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January 23, 2005

Comments

R

I just bolted from LA after living there a month. I had a 90K per year job and housing is totally unaffordable if you have a family. To get in a decent area of LA (Simi, Burbank, Valencia) you are looking at $500,000 for a 30 year old home minimum at about 1400 sqft. This is insane. A new home is $600,000 to $700,00K in the same areas. What most people do is interest only loans which cut your payments by $500 to $600 but you are still paying $3000 to $4000 per month on a home. What most lenders don't explain is 3 to 5 years when the ARM on these loans comes up, your payments increase substantially, so for all of those who want to live there, wait a couple of years after the bubble bursts and foreclosures will be abundantly available.

rl

What about the tax angle on recently purchased homes in California? The typical tax bills are now anywhere between $400-$800 a month! Now add the mortgage (principle and interest), PMI, association dues, insurance, and maintenance.

I'm 34 yrs old, married, no kids yet, with a combined gross income of about 95K. My wife and I would barely have enough to make it if we we had to buy our modest 2 bedroom (1,500 sf) condo at today's prices with the corresponding tax bill. Our property is in western San Bernardino County. We bought in 2000 for 125K and we can now sell our condo for about 315-330k (depending on how fast we want to sell it).

Let us say we sold it, took $200,000, and put it down on a new 2000 sf home for about $550,000. we would need to borrow $350,000. We could afford the the mortgage, but now istead of paying taxes on 125K, we would be paying taxes on 550K! No way.

I just look around and think if people like me, Martin and Kent, with houshold incomes more than double the median.....who is buying these homes and paying all that money?

Jim Ausman

Housing price gain is fundamentally driven by population increases.

Population simply has not been "stable" as many have argued.

http://quickfacts.census.gov/qfd/states/06000.html

http://www.dof.ca.gov/HTML/DEMOGRAP/E-2TEXT.HTM

California tends to grow about 1/2M a year and has done so since the end of WWII. Now if you can convince me that California has stopped being a magnet for immigration or that outflow is going to exceed inflow, then I might think you have an argument. But I see no evidence that population growth in California has stabilized.

A 1400 sq ft home in a nice neighborhood is not "insane" for a middle class family, as one poster has suggested. Remember the Brady Bunch? They had a three bedroom home for 8 people. This is how people lived a generation ago. Average home sizes in 1950 were 1100. Today they are 2200. In most homes, there are unused bedrooms or rooms dedicated to entertainment. While this is nice if you can afford it, some people seem to have gotten the notion that they have a right to all this unused space.

If you spend time in Europe or Asia, you find that even middle class people do not live in 2200 sq ft houses. In places where land is valuable, like The Netherlands or California, people learn to live in smaller places.

In places where land has very little value, like Pheonix or Las Vegas or Houston, people spread out to the point where commutes become unpleasant, negatively affecting quality of life. Southern California kind of has the worst of both worlds: long commutes, no transit alternatives *and* expensive real estate. Something has to give.

I agree that the current housing market looks overvalued. California has gone through a number of mini-booms and busts in my memory, since the early 70s. In each case, prices shot up by as much as 15-20% a year for a brief period, followed by a small decline, then a decade or so of stagnation. We are simply going through another one of these, one probably exacerbated by the easy money policies of The Fed. But the idea that housing prices will collapse during a robust economic expansion shows a profound misunderstanding of economics. If the economy tanks or we go into stagflation, then housing prices will probably fall, but in that case lots of other pieces of the economy will be in trouble, too.

Now my own story: my fiance and I bought a smallish (2400 sq ft total) two unit building in Noe Valley in San Franciso for $710k in March 2003. We rent out the bottom unit for $1950 and have a border in our unit. Counting all the tax breaks we are paying about the same out of pocket as we did before we purchased, when we each rented out a room for ourselves in communal households.

So it *can* be done, if you are willing to think outside the box and accept that 2000 sq ft home is simply not a starter home. Start with a condo or multi-unit when you are childless.

Having said all that, it is a tragedy that young couples with children are not willing to stay here because of the crises in affordable housing. I really don't know what we can do though: the Southern California solution, which is pave over everything in sight, doesn't seem to be working, nor is the Northern California solution, which is to use government money and regulation to build lots of affordable housing.

Anyone have any constructive suggestions?

L Richardson

As a So Cal native who has lived back east for 16 years, I can only offer my own scenario for whatever it's worth. My husband was part of a 6,000 person layoff from a multi-national company last year. We were lucky in that he had a great severance package, but after seven months of job searching in the Atlanta area for a comparable job (we did not want to leave) and no luck. He took a job with a big company (think ears!) in So Cal. We went out there to house hunt and actually found ourselves laughing most of the time at the crap the agents were trying to foist on us. We soon decided that it would be a cold day in Hades before we would enrich some speculator by buying some dump. Now, we actually CAN afford a dump out there because we had paid off our house in Atlanta and are sitting on a nice sum of cash. But stupid we are not. If this isn't a bubble then I don't know what is. When middle class people like us who have the wherewithall to buy and don't, then you know your area is in trouble. So, as I write this my husband is renting a studio apartment and I sit here in Atlanta in no particular hurry to sell my beautiful home. When I do finally go out there we will rent a one or two bedroom condo and enjoy the area while my money is conservatively invested and growing and when the time is right, we'll buy. In the meantime we actually are hoping that he will be transfered in a couple of years back east. Greed is greed, anyway you look at it, and eventually it comes home to roost. Property is a good investment when you don't have speculators in a frenzy and when the value is there. What is hysterical is that the real estate agents were so adamant about us jumping into the market and of course the mortgage broker assured us that the sky was the limit as far as financing because "one could always take an interest only loan, or cash in a 401K". Yeah, right...

Chad

If there really is a housing shortage, why is it that rental rates have not increased as dramatically as housing for sale? Now that 1 and 2 bedroom units seem to be selling in the high $300K and $400K shouldn't the demand for that type of housing also be reflected in the rental market? I just moved from Chicago where I own a condo and started renting out here. Believe me, finding a nice affordable 2-bedroom wasn't a problem. There was a lot to choose from. Most owners here in Southern California can't afford to own the homes that the live in if they had to buy at today's prices. Everyone who's in was able to do so because someone bought there older, smaller place for a few hundred thousand dollars more than they paid for it. Tell me: who's going to be in the market to buy a $500K - $600K 2-bedroom, 1,000 SF unit? That kid just getting out of college? That young, professional couple trying to raise a family? And when the people at the bottom of the market can't sell their small units, who's going to be able to buy up into the next tier and so on?

jon

When something is too good to be true, guess what, it is.
I live in Orange county, california and am currently waiting to get transfered to Denver.
I sold my townhome right before christmas for 543k, I bought in 1997 for 122k. I happened to be renting a unit a few doors down and found out it was being forclosed on.
This was when the county went bankrupt, and every block had multiple houses for sale.
Im taking over my dads ranch in a few years as he is going to retire, so 480k went straight into low risk investments.
I only regret not buying another property, as now I would be a millionair, but the game is drawing to a close, everybody and his mother is a realtor/appraiser/mortgage lender/house flipper.
This is a bubble people, plain and simple.
The people who bought my home where nice folks, but theres a saying, there's a sucker born every minute.


sid

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Luke

By far the most annoying comment here is from Frankke Potential.
Quote: "Dan, please STOP advocating a real estate crash here in Northern California. It's not befitting someone of your position in the journalistic community to be arguing in favor of depression and despair."

So if we don't talk about a bubble it wont bust?
You talk about depression and despair:
I am newly married and I thought that one day I might be able to have a nice little house with a small backyard to teach my kid how to catch. No chance of that happening in California. Even with historically interest rates we could only barely afford to get a dumpy condo. And forget about 20% down! HA! The risk involved when those loans go adjustable in 3 or 5 years is so huge I think it is unmanageable.
So you can bury your head in the sand if you like Frankke. But if I am leaving with my wife (both skilled workers) to start a family elsewhere, then that's got to be troublesome for California - because I bet that we are one of many thousands who leave.

seth

I have been noticing a disturbing trend this summer.
I own a auto repair shop and a large number of my customers are cashing out and moving out of state.
From my vantage point it seems the party may be over sooner rather than later, the scary part is we are noticing a pronounced slowdown, we are sending guys home some days to save on payroll, Im hoping I am wrong, but Im afraid of what
comes after this drunken binge may be very ugly.
worried in O.C.

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