Thornberg seems surprisingly sanguine that nominal prices won't drop in the Bay Area....but does not discuss how real prices here dropped 25% from '89 to '96 in a period with much less out-of-whack fundamentals.
Jack, the report seems a little disjointed to me - perhaps because there are two authors: Thornberg and UCLA economist Ryan Ratcliffe.
I'd expect the conclusion to be more pessimistic. Thornberg writes: "in California the strong pace of job creation ... has come to a complete halt". And layoffs have only just begun in the various housing related fields. What happens when California starts losing jobs?
Thornberg wrote: "we have not come close to the bottom", "it promises to be painful", "Housing prices fall slowly", "The real estate and mortgage industries will be hit hard", "Consumer spending will take a hit as well". That sounds like he should be more pessimistic.
It seems like with this definition of a bubble, there isn't/wasn't one in DC. I moved down here 7 months ago and had to pay 3500/month for an apartment. I bought (a very similar condo) a couple of months ago and now my mortgage is 3750 +577 fees. Doesn't seem like much difference to me. I figue that if you include lost revenue from the downpayment balanced by the tax deduction, it is pretty much a wash. Maybe DC is different than other places.
If you look at rents in manahatta you will something like this: A 2 bdrm apt will rent for about 5500 per month, and cost about 1.5 mil to buy. Mortgage on this could be north of 8000 not including taxes and condo fees. I think there is potential for prices to come down farther here. However, we have seen sizable price decreases. I look at the NY times frequently and lately I've been noticing a lot of condo prices in the 1200$/sq ft range. This is down from $1500/sq ft about a year ago. So my guess is that prices are down about 25% so far. BTW I live on the upper west side and there are five new condo buildings coming up, and one has just been completed. SoHo looks like a construction zone -- plenty more new condos coming up downtown as well. It looks like we wont be running out of condo supply for a while still here.
I attended the UCLA Anderson Forecast conferene in San Diego on May 06, and heard Thornberg and Ratcliff speak. I asked a question at the meeting: "It seems that we have become completely dependent on buying and selling homes to each other, using MEW to fund our spending spree, on money lent to us by China". Thornberg said I had just wrapped up their entire presentation. But when I asked my question, he got real agitated, started waving his hands at me, cutting me off, when I asked how could the housing prices stay flat in light of the exotic financing; he got even more mad when I asked him what he thought of UCLA visiting scholar John Talbott's book Sell Now. Thornberg distanced himself completely from Talbott. He was very rude.
I e-mailed him later, after I diligently studied the report that was handed out at the conference. This is what you all must realize about the UCLA Anderson Forecast, and why they conclude housing prices cannot fall. THEY DO NOT MENTION EXOTIC FINANCING, EVER! You will NEVER hear them talk about 80% of purchases in CA were made with ARMs, etc. NEVER. In their forecast report, a chart of nominal home prices in San Diego shows that prices were flat in the 1990's bust, when in reality the prices dropped. The chart is not labeled with a source, so I have no idea how they got that chart. It is wrong.
I wonder if their funding sources are responsible for their optimistic forecast. The conference was opened by a 5-minute talk by Ernest Rady, CEO of Wachovia. I wondered why is Wachovia in San Diego - we don't have any Wachovia branches here. Do you know that the week after the conference, Wachovia announced the takeover of CA's largest subprime lender - GoldenWest? So Rady was probably working on the last touches of the GoldenWest deal also, while he was here. Now if you were Thornberg, would you go around announcing problems in subprime lending and a possible housing and bank collapse, if your major underwriter is a bank that just bought out a subprime lender?
History will show Thornberg was wrong. One more problem - their forecast relies on $50/barrel oil.
Now, when he says the economy will be hurt, he is referrring to a slowdown of MEW which will hurt retail sales, and tax revenue. Yet, miraculously, he does NOT predict major job losses in MEW related sectors such as retail, restaurant, hospitality/leisure.
The only job loss he forecasts is in construction. Major job losses. For this reason, he says we cannot have a recession. A recession is caused by job loss in 2 sectors, and construction job loss will be the only sector affected. There is no other sector that can lose massive jobs. His problem here is he ignores MEW-job creation.
His conclusion: since there is no recession in the pipeline, housing prices cannot drop.
The whole report is made on very good data, but the omission of MEW related jobs and exotic financing, make it a weak report in the end. By leaving out tho
I want to add: Thornberg sees painful times ahead for government, as reduced MEW means less spending, means less taxes. Also, the governor's infrastructure plans will be dashed, as construction job loss lowers revenue for the state.
He has some good stuff in his report, pointing out that CA has the largest "informal" labor force in the country (1 million people are not counted in the formal payroll survey), and the highest high school dropout rate. He says that the biggest crisis facing CA is our education system, but that is the one being least addressed.
RobbL: few people I know would consider $750/month a wash. That's $27,000 over three years. Of course the other part of the question is what kind of mortgage you got: Option ARM or 30yr fixed? But of course a normal market isn't one where rents and purchase costs are at parity, because the interest paid on a 30 year fixed mortgage decreases over time. Even in a completely flat market, it is better to have purchased 10 years ago than yesterday. Conventionaly, it is this expectation, and not appreciation, that drives home purchase decisions.
Here's the problem with predicting the correction. Yes, it's not the stock market or gold. You won't see a 25% drop in six days. It will be long term. But what is long term? 6 months or 6 years.
Here in NY I've already seen prices fall 10% to 15% from last year. They still want to call it a soft landing.
It seems that they won't say hard landing unless a third of Americans loose their homes in the next few years.
Remember last year when we would not see any fall in prices?
Todays "USA TODAY" has another bubble article. Again, I am not a researcher, but the numbers they use don't make a lot of sense to me. In DC they list the median rent as 1200 and the median mortgage as 3250 (numbers from memory). The problem is that these cannot be the same kind of property. This makes it seem like one would have to be crazy to buy. In real life it is not like this in the DC market at least. With a 80% fixed mortgage, 3250 buys you a very nice place in DC. 1200 a month means you are living in a shack or a very dangerous area....you sure don't have AC or Parking or Washer and Dryer, let alone a building with modern wiring. Which may be the problem with the statistics...People who can buy, don't buy in bad areas (generally). People have to live somewhere and rents are probably quite low in some areas.
And to Jim A, I am not sure that there will be ANY difference when I do my taxes next year. After all with a mortgage I can itemize and deduct the enormous DC income tax as well. I am not sure how it all shakes out.
I guess if I were an economist or an accountant, I would figure it out, but I know it will be close and in the meantime I know I don't have to worry about my rent going up. (In my 3500 dollar apartment, the landlord could raise the rent at any time with 60 days notice...apparently a common feature in leases here). The article that I mentioned noted 15% yearly rent increases in some cities.
Even in LA, rents ($2500/month x 12 x 1.2)/6% = $600K were reasonable last year (Only capital gain returns are assumed on downpayments in metropolises, thus the factor of 1.2). Changes in both prices and interests rates have been making this less reasonable, but rents are rising and renters are complaining about being forced out due to condo conversions that are continuing to grow. You would think renters would have realized long ago, if you want to live here long term, you must own. Renting is only for the young and foolish in these areas.
You would think renters would have realized long ago, if you want to live here long term, you must own. Renting is only for the young and foolish in these areas.
This is patently false. You can rent a house almost anywhere in LA County right now for ~50% of what PITI would run you on a non-exotic mortgage. I'm looking for a bigger place right now, and I'm finding a fair number of 2-3Bdm house rentals in the $1800-2200/mo range in good areas (Pasadena, Burbank/Glendale), where typical SFR prices are 700-800K and PITI would easily be double the rents, if not more.
You'd have to be a complete idiot to buy in these areas right now.
Lord, you may want to go back to posting on Craigslist, SDCIA, or some other perma-bull/Realtwhore-friendly site. CR is far too data and reality-driven for you.
The point is long term. Currently buying is not favorable which is why inventory is building to high levels. Renters should be happy their rents are only increasing 10% and not keeping pace with mortgage costs, but too many have an entitlement complex.
HARM is absolutely right. I'm not sure where you're getting your $2500 per month for a $600,000 house figure.
Eastside houses cost about that, but rents over here are well under $2000 for a 2br.
A house that rents for $2500 in say, the westside, is more likely to sell for $800-900,000.
And what's with the arbitrary 20% owning premium? Capital gains (and therefore capital gains taxes) are not guaranteed the last time I checked.
Owning is great in a vacuum, but if you can only afford $2500 a month you are not buying in LA. Since that means you're bringing in over $100k per year, it also means you're in the top 10% of the population and you STILL can't own.
If you can get a better deal renting you should take it and be happy. A better time to buy will come in the future. If you could have boughten five years ago and didn't, count yourself foolish and chalk it up to experience. Capital gains in these areas are not assured over the short term or even the medium term but you certainly be assured of them over the long term. Far more assured than equities.
I have to conclude from reading your post that you have no idea what you are talking about. Your post is idiotic or you have some fantasy connection with reality that allows you to think that housing was affordable in LA, even 5 years ago. I know because I lived there for 8 years before realizing that as the trend continued I would never own...ownership was just a fantasy game perpetrated by wankers who were under the misconception that an $670,000 2 bd 1 ba 1000 sqft 'starter home' was affordable (I checked that same home 3 weeks ago and it was Zillow valued at 1.4 mil). I have no illusion about my position and income...I am in the top 10% of wage earners in the US...but I still could not afford that home back then, unless I purchased it using some 'loan program' which was complete insanity. Since I don't normally lean toward insanity...I have had to lick my wounds along with thousands of other upwardly mobile professionals who could not afford 'a cute starter home' either. I can say that you better not go to a party or large gathering of LA professional and spout your annoying opinions because you will most likely begin a riot of fury, the end result which would most likely be your own tarring and feathering, which would be totally your own responsibility as so many people are UTTERLY FED UP with people like you and you imbecile spouting about 'how we should have bought 5 years ago, Lovey, when it was affordable'. It hasn't been affordable in 10 years or more, and the places that were 'affordable' I could never live, because I don't want to have to knock on my own front door when I get home every day to give the vandals and robbers a chance to get out before I open the front door to the dejected mess that was my home. I don't want to live in the projects, or with crack whores and drug addicts. I know people who tried, but were rejected and driven out by the neighborhood they bought into (by rejected I mean that the neighborhood doesnt want you and enjoys your trouble and sorrow, there is no sense of community or comradery for you, that neighborhood enjoys your misfortune because you make them ashamed of themselves because you are hardworking and ethical.) The only good news was that some hopped up crack headed trust funded upwardly mobile excuse for a young urban professional would swoop in right behind you and buy up your crack head infested home for more than you paid just because they listened to idiots like you, who told them 'just pull the trigger'. But that didnt mean, under any figment of anyones imagination, even the upwardly mobile professional who bought in behind you that the home was ACTUALLY WORTH $670,000, only a complete and utter dumbass would have tried to perpetrate that myth. People in CA are going to get what they get I am just glad I never bought in.
Thornberg seems surprisingly sanguine that nominal prices won't drop in the Bay Area....but does not discuss how real prices here dropped 25% from '89 to '96 in a period with much less out-of-whack fundamentals.
So this puzzles me.
Region feels ripples from home building slowdown | HeraldTribune.com | Sarasota Florida | Southwest Florida's Information Leader
Jack, the report seems a little disjointed to me - perhaps because there are two authors: Thornberg and UCLA economist Ryan Ratcliffe.
I'd expect the conclusion to be more pessimistic. Thornberg writes: "in California the strong pace of job creation ... has come to a complete halt". And layoffs have only just begun in the various housing related fields. What happens when California starts losing jobs?
Thornberg wrote: "we have not come close to the bottom", "it promises to be painful", "Housing prices fall slowly", "The real estate and mortgage industries will be hit hard", "Consumer spending will take a hit as well". That sounds like he should be more pessimistic.
Best Wishes.
It seems like with this definition of a bubble, there isn't/wasn't one in DC. I moved down here 7 months ago and had to pay 3500/month for an apartment. I bought (a very similar condo) a couple of months ago and now my mortgage is 3750 +577 fees. Doesn't seem like much difference to me. I figue that if you include lost revenue from the downpayment balanced by the tax deduction, it is pretty much a wash. Maybe DC is different than other places.
If you look at rents in manahatta you will something like this: A 2 bdrm apt will rent for about 5500 per month, and cost about 1.5 mil to buy. Mortgage on this could be north of 8000 not including taxes and condo fees. I think there is potential for prices to come down farther here. However, we have seen sizable price decreases. I look at the NY times frequently and lately I've been noticing a lot of condo prices in the 1200$/sq ft range. This is down from $1500/sq ft about a year ago. So my guess is that prices are down about 25% so far. BTW I live on the upper west side and there are five new condo buildings coming up, and one has just been completed. SoHo looks like a construction zone -- plenty more new condos coming up downtown as well. It looks like we wont be running out of condo supply for a while still here.
I meant to say 5 new cond high rise blgs are coming up within 5min walk of each other -- close to where I live. The more the marrier.
I attended the UCLA Anderson Forecast conferene in San Diego on May 06, and heard Thornberg and Ratcliff speak. I asked a question at the meeting: "It seems that we have become completely dependent on buying and selling homes to each other, using MEW to fund our spending spree, on money lent to us by China". Thornberg said I had just wrapped up their entire presentation. But when I asked my question, he got real agitated, started waving his hands at me, cutting me off, when I asked how could the housing prices stay flat in light of the exotic financing; he got even more mad when I asked him what he thought of UCLA visiting scholar John Talbott's book Sell Now. Thornberg distanced himself completely from Talbott. He was very rude.
I e-mailed him later, after I diligently studied the report that was handed out at the conference. This is what you all must realize about the UCLA Anderson Forecast, and why they conclude housing prices cannot fall. THEY DO NOT MENTION EXOTIC FINANCING, EVER! You will NEVER hear them talk about 80% of purchases in CA were made with ARMs, etc. NEVER. In their forecast report, a chart of nominal home prices in San Diego shows that prices were flat in the 1990's bust, when in reality the prices dropped. The chart is not labeled with a source, so I have no idea how they got that chart. It is wrong.
I wonder if their funding sources are responsible for their optimistic forecast. The conference was opened by a 5-minute talk by Ernest Rady, CEO of Wachovia. I wondered why is Wachovia in San Diego - we don't have any Wachovia branches here. Do you know that the week after the conference, Wachovia announced the takeover of CA's largest subprime lender - GoldenWest? So Rady was probably working on the last touches of the GoldenWest deal also, while he was here. Now if you were Thornberg, would you go around announcing problems in subprime lending and a possible housing and bank collapse, if your major underwriter is a bank that just bought out a subprime lender?
History will show Thornberg was wrong. One more problem - their forecast relies on $50/barrel oil.
Now, when he says the economy will be hurt, he is referrring to a slowdown of MEW which will hurt retail sales, and tax revenue. Yet, miraculously, he does NOT predict major job losses in MEW related sectors such as retail, restaurant, hospitality/leisure.
The only job loss he forecasts is in construction. Major job losses. For this reason, he says we cannot have a recession. A recession is caused by job loss in 2 sectors, and construction job loss will be the only sector affected. There is no other sector that can lose massive jobs. His problem here is he ignores MEW-job creation.
His conclusion: since there is no recession in the pipeline, housing prices cannot drop.
The whole report is made on very good data, but the omission of MEW related jobs and exotic financing, make it a weak report in the end. By leaving out tho
I want to add: Thornberg sees painful times ahead for government, as reduced MEW means less spending, means less taxes. Also, the governor's infrastructure plans will be dashed, as construction job loss lowers revenue for the state.
He has some good stuff in his report, pointing out that CA has the largest "informal" labor force in the country (1 million people are not counted in the formal payroll survey), and the highest high school dropout rate. He says that the biggest crisis facing CA is our education system, but that is the one being least addressed.
RobbL: few people I know would consider $750/month a wash. That's $27,000 over three years. Of course the other part of the question is what kind of mortgage you got: Option ARM or 30yr fixed? But of course a normal market isn't one where rents and purchase costs are at parity, because the interest paid on a 30 year fixed mortgage decreases over time. Even in a completely flat market, it is better to have purchased 10 years ago than yesterday. Conventionaly, it is this expectation, and not appreciation, that drives home purchase decisions.
RobbL, DC is considered a big bubble area - even the builders have said so.
Here's the problem with predicting the correction. Yes, it's not the stock market or gold. You won't see a 25% drop in six days. It will be long term. But what is long term? 6 months or 6 years.
Here in NY I've already seen prices fall 10% to 15% from last year. They still want to call it a soft landing.
It seems that they won't say hard landing unless a third of Americans loose their homes in the next few years.
Remember last year when we would not see any fall in prices?
Todays "USA TODAY" has another bubble article. Again, I am not a researcher, but the numbers they use don't make a lot of sense to me. In DC they list the median rent as 1200 and the median mortgage as 3250 (numbers from memory). The problem is that these cannot be the same kind of property. This makes it seem like one would have to be crazy to buy. In real life it is not like this in the DC market at least. With a 80% fixed mortgage, 3250 buys you a very nice place in DC. 1200 a month means you are living in a shack or a very dangerous area....you sure don't have AC or Parking or Washer and Dryer, let alone a building with modern wiring. Which may be the problem with the statistics...People who can buy, don't buy in bad areas (generally). People have to live somewhere and rents are probably quite low in some areas.
And to Jim A, I am not sure that there will be ANY difference when I do my taxes next year. After all with a mortgage I can itemize and deduct the enormous DC income tax as well. I am not sure how it all shakes out.
I guess if I were an economist or an accountant, I would figure it out, but I know it will be close and in the meantime I know I don't have to worry about my rent going up. (In my 3500 dollar apartment, the landlord could raise the rent at any time with 60 days notice...apparently a common feature in leases here). The article that I mentioned noted 15% yearly rent increases in some cities.
Even in LA, rents ($2500/month x 12 x 1.2)/6% = $600K were reasonable last year (Only capital gain returns are assumed on downpayments in metropolises, thus the factor of 1.2). Changes in both prices and interests rates have been making this less reasonable, but rents are rising and renters are complaining about being forced out due to condo conversions that are continuing to grow. You would think renters would have realized long ago, if you want to live here long term, you must own. Renting is only for the young and foolish in these areas.
You would think renters would have realized long ago, if you want to live here long term, you must own. Renting is only for the young and foolish in these areas.
This is patently false. You can rent a house almost anywhere in LA County right now for ~50% of what PITI would run you on a non-exotic mortgage. I'm looking for a bigger place right now, and I'm finding a fair number of 2-3Bdm house rentals in the $1800-2200/mo range in good areas (Pasadena, Burbank/Glendale), where typical SFR prices are 700-800K and PITI would easily be double the rents, if not more.
You'd have to be a complete idiot to buy in these areas right now.
Lord, you may want to go back to posting on Craigslist, SDCIA, or some other perma-bull/Realtwhore-friendly site. CR is far too data and reality-driven for you.
ARM rates may have topped for now. Could be moving down over the next couple years...
The 90's housing correction lasted approx 7 years.
The point is long term. Currently buying is not favorable which is why inventory is building to high levels. Renters should be happy their rents are only increasing 10% and not keeping pace with mortgage costs, but too many have an entitlement complex.
HARM is absolutely right. I'm not sure where you're getting your $2500 per month for a $600,000 house figure.
Eastside houses cost about that, but rents over here are well under $2000 for a 2br.
A house that rents for $2500 in say, the westside, is more likely to sell for $800-900,000.
And what's with the arbitrary 20% owning premium? Capital gains (and therefore capital gains taxes) are not guaranteed the last time I checked.
Owning is great in a vacuum, but if you can only afford $2500 a month you are not buying in LA. Since that means you're bringing in over $100k per year, it also means you're in the top 10% of the population and you STILL can't own.
If you can get a better deal renting you should take it and be happy. A better time to buy will come in the future. If you could have boughten five years ago and didn't, count yourself foolish and chalk it up to experience. Capital gains in these areas are not assured over the short term or even the medium term but you certainly be assured of them over the long term. Far more assured than equities.
Lord,
I have to conclude from reading your post that you have no idea what you are talking about. Your post is idiotic or you have some fantasy connection with reality that allows you to think that housing was affordable in LA, even 5 years ago. I know because I lived there for 8 years before realizing that as the trend continued I would never own...ownership was just a fantasy game perpetrated by wankers who were under the misconception that an $670,000 2 bd 1 ba 1000 sqft 'starter home' was affordable (I checked that same home 3 weeks ago and it was Zillow valued at 1.4 mil). I have no illusion about my position and income...I am in the top 10% of wage earners in the US...but I still could not afford that home back then, unless I purchased it using some 'loan program' which was complete insanity. Since I don't normally lean toward insanity...I have had to lick my wounds along with thousands of other upwardly mobile professionals who could not afford 'a cute starter home' either. I can say that you better not go to a party or large gathering of LA professional and spout your annoying opinions because you will most likely begin a riot of fury, the end result which would most likely be your own tarring and feathering, which would be totally your own responsibility as so many people are UTTERLY FED UP with people like you and you imbecile spouting about 'how we should have bought 5 years ago, Lovey, when it was affordable'. It hasn't been affordable in 10 years or more, and the places that were 'affordable' I could never live, because I don't want to have to knock on my own front door when I get home every day to give the vandals and robbers a chance to get out before I open the front door to the dejected mess that was my home. I don't want to live in the projects, or with crack whores and drug addicts. I know people who tried, but were rejected and driven out by the neighborhood they bought into (by rejected I mean that the neighborhood doesnt want you and enjoys your trouble and sorrow, there is no sense of community or comradery for you, that neighborhood enjoys your misfortune because you make them ashamed of themselves because you are hardworking and ethical.) The only good news was that some hopped up crack headed trust funded upwardly mobile excuse for a young urban professional would swoop in right behind you and buy up your crack head infested home for more than you paid just because they listened to idiots like you, who told them 'just pull the trigger'. But that didnt mean, under any figment of anyones imagination, even the upwardly mobile professional who bought in behind you that the home was ACTUALLY WORTH $670,000, only a complete and utter dumbass would have tried to perpetrate that myth. People in CA are going to get what they get I am just glad I never bought in.
Typical Baby Boomer rhetoric.
Five years ago I was in grad school, but thanks for rubbing it in.
That's the housing perma-bulls' favorite tactic.
The best time to buy is always 5 years ago.
I hope you'll be able to say that in 5 years.
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