Housing bubble leaking
By: DAVE DOWNEY - Staff Writer | ∞
NORTH COUNTY ---- The region's swelling inventory of unsold houses, a sharp decrease in home sales and flattening prices all point to a much cooler housing market in the next few years than the red-hot one that prevailed during the first half of this decade, economists and real estate analysts say.
But where the housing market will go from here is anyone's guess, they say.
"It's an irrationally behaving market," said Christopher Thornberg, senior economist for the widely quoted UCLA Anderson Forecast. "It's very difficult to figure out where it is going to go."
Analysts are in wide agreement that the market in San Diego and Riverside counties is caught in a so-called "housing bubble," but they disagree on the implications.
Being in a "housing bubble" essentially means that home prices have ballooned beyond what a region's income levels can sustain in the long run. And that, analysts say, is precisely where Southern California finds itself.
"What you're really asking is, 'What is an asset bubble?' " Thornberg said. "That is when a market price of an asset is completely out of whack with the fundamental value of an asset."
The fundamental value in the case of a home, he said, is how much it can rent for. And all across Southern California, home prices have risen much faster than rents have, he said. As a result, many recent home-buyers are making higher mortgage payments for the type and size of home that others are leasing for much smaller monthly rents.
'Fundamentally unaffordable'
It is inevitable, said Ed Leamer, director of the Anderson Forecast, that the housing market gradually will fall back in line with the rental market, which for the most part has been keeping pace with income growth.
"It can't sit there in a stable, expanded state the way it is now, just because the home prices are fundamentally unaffordable," Leamer said.
According to a report last week by the North San Diego Association of Realtors, prices have risen so high that just 8 percent of San Diego County families in February could afford to buy the median-priced home in North County, which was valued at $635,000.
The median price represents the middle of the price range; half the homes on the market sold for more, and half for less.
Those willing to enter the condo market face marginally better numbers. At $371,700, the median-priced townhome was within reach of 25 percent.
The median price for all homes in North County was $575,000.
Even in traditionally affordable Riverside County, prices have soared out of reach of many families. The median home price in the state's fastest-growing county last month was $410,000, according to a different report by La Jolla-based DataQuick Information Systems.
At the same time, inventories are building up and sales are slowing.
The questions many are asking are: What is going to happen next? Is the bubble going to burst? Is it going to leak out slowly? Or are we in for other surprises?
There are few clear answers, but there are plenty of theories.
Dennis Smith, a Realtor with Taylor Place Real Estate in Carlsbad who closely tracks unsold inventory in San Diego County, suggested that frustrated, would-be home-buyers who have watched as prices have skyrocketed should not sit around waiting for a sudden, substantial drop in prices.
"They've been talking about the bubble bursting for five years now," Smith said, saying that hasn't happened nor is it likely to happen.
Bubble or balloon?
If anything, said Alan Nevin, director of economic research for MarketPointe Realty Advisors in San Diego, the market is about to stabilize at a more sustainable point and set the stage for modest annual appreciation rates of 5 percent or less over the next several years.
"We haven't had a burst. We have barely had a leak in the bubble," Nevin said. "And I think that you'll see come spring, next quarter, that the hole in the bubble is going to be sealed up."
Nevin said that while sales have declined and inventories have risen, there is no reason for existing homeowners to be alarmed that their homes will be worth less a short time from now. He said that is because roughly the same number of people are still shopping for homes. It's just that they are taking longer to select what they want.
"It's taking them (real estate agents) time to make a deal because their clients want to negotiate, whereas last year they weren't negotiating," he said.
Nevin prefers to use the word "balloon" to the term "bubble" to describe the market.
"Bubbles generally are very thin-skinned and pop very quickly, and I'm saying that we are in a balloon that has very thick skin," he said. "Statistically speaking, everything's out of whack, but not practically."
A major correction in the way of a sharp decline in value is just not in the cards, Nevin suggested.
"I wouldn't bet on it," he said. "The (San Francisco) Bay Area's been out of whack for a quarter of a century, and it still keeps growing."
The UCLA economists say that Nevin has a point. But they suggest that real estate analysts who have been waiting for a sharp slip in the market are missing their point about a housing bubble: They never suggested the market would burst.
On the contrary, Thornberg said, the UCLA economists believe that home values will likely flatten out for a long period, as the economy struggles to catch up with the imbalance created by the recent run-up in prices.
"What the price of your house is today is probably what you will be able to sell your house for in 2011," Thornberg said.
Prices slow to react
Leamer said sales probably will decline for an extended period, but prices will not drop because most homeowners just take their houses off the market when values cool ---- unless they are in a position where they have to move. Indeed, a precipitous drop in price would require a significant recession and job loss, he said, and that's something he and the other UCLA economists do not foresee for the immediate future.
Even if prices were to decline, that would not happen all at once.
During the recession of the early 1990s, when defense cutbacks hammered the region, sales slowed long before there was any impact on prices, Leamer said.
In Los Angeles, sales volume peaked in November 1988, but home prices did not reach their zenith until June 1991, Leamer said. Then prices began a decline at a rate of about 5 percent a year. It took until December 1996 for median prices to reach their lowest point, which was 27 percent below the 1991 high, he said.
"So, it was really quite a while before the price adjustment began to factor in," he said.
But that period, said Nevin, was such a severe recession that Southern California isn't likely to see anything like it for a long time. He said San Diego County, in particular, was hit by several major tragedies all at once.
For starters, Nevin said, the savings-and-loan crisis stripped thousands of jobs from the region, and General Dynamics' departure took many more. And a national recession was going on at same time. When it was all said and done, San Diego County had lost tens of thousands of jobs.
Economists agree that scenario is not likely to be repeated in the short term.
However, Leamer said they do believe that the economy, both regionally and nationally, is headed for a sluggish period, and that will serve to keep the housing market soft.
"The U.S. economy has had two engines that have pulled the economy at breakneck speed," he said.
The first was the Internet boom of the late 1990s; the second was the housing boom of the last several years.
"Those Clydesdales that were pulling the economy are not with us anymore," Leamer said, and there is nothing coming along to take the housing market's place as a major economic-engine driver.
Contact staff writer Dave Downey at (760) 740-5442 or ddowney@nctimes.com.
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Mike wrote on Mar 19, 2006 4:21 PM:You have not figured interest only and 5 years arms into the equation. Even worse than job loss how about the inability to afford your mortgage and suddenly become desperate to unload it.
Expert wrote on Mar 19, 2006 5:21 PM:Asking Realtors/salespeople about real estate is like asking your barber about a haircut. Would you ask your butcher about you becoming a vegetarian? Would you ask the fox how the hens are doing? These articles are nothing but ads for Realtors/salepeople hoping to dupe a few more suckers into overpaying. This garbage advice telling buyers not to wait on the sidelines is sickning. Only the biggest fools would pay today's asking prices. I'll bet we will see 50% off current prices in the next few years, and probably even deeper discounts. The Oakland earthqauake in 1989 started the last crash in housing prices and those who watched the market know that many homes sold for less than half of what was paid for them by 1995. With over 20,000 listings on the San Diego market now, not including many more for sale by owner, tract homes, and condos, prices can only go down now. Maybe for the next 15 years like Japan. Lemmings just don't learn from history.
Dee wrote on Mar 19, 2006 5:49 PM:It's unfortunate that the cities don't understand that the market is overloaded. All they seem to care about are their ties to the huge home-builders that influence their clouded minds. Take for instance San Marcos. The city continues to want to build houses rather than cleaning up the streets and getting good jobs in the area. The city should get some companies (like in Carlsbad) to make a long term commitment to the city to attract college educated people that can afford to live in the city. CSUSM would benefit greatly by having some industry for the graduates to look forward to rather than leaving the city to find jobs. When the city figures out what's going on it will be too late.
The Learning Man wrote on Mar 19, 2006 9:13 PM:It's very strange to see how people can 'predict' the future when it comes to housing. If the population who can afford to purchase a home is in the single digit, then the chances of selling it is also in the single digit. Don't be fooled by people saying that California will never see bad economic times like the 90s. We have souring trade and budget deficits, a useless and costly war in Iraq, negative savings rates, outsouring of high paying jobs overseas, high energy costs, and on and on and on. What is it that is good about our economy? Oh, I forgot, people are tapping into their home equities, like ATM machines, to feed the economy. Just like how millions did when they bought stock on margin back in the 90s.
All B.S. wrote on Mar 19, 2006 9:55 PM:What about interest rates? This article makes no mention of what the effects of interest rates are on price. If rates go from 6% to 9% that's a 34% increase in monthly payments on a 30 year fixed mortgage for a 400k home. Also, most folks in Ca. have been buying homes with IO loans and those have gone up at least a full percentage point in a year, making the monthly payment around 25% higher. Why do people use IO's? (BECAUSE THEY CANNOT AFFORD THE PAYMENT ON A FIXED RATE MORTGAGE)! In my opinion this Nevin character is a charlatin along with Dennis Smith. The Anderson forcast should quit trying to perform the C.Y.A operation and stick with their guns. Unlike the last 5 years this time it is different. Rates have increased and buyers are feeling the pinch. Unless rates drop or incomes make a miraculous 50% lurch forward, the housing market is going to crash.
frank wrote on Mar 19, 2006 10:26 PM:the Ponce scam of real estate is over Realtors mortgage lender are trying to get out at 6 percent the rides over
Doyle wrote on Mar 19, 2006 10:33 PM:The "Liar Loan" has fueled and continues to fuel the wild real estate markets we have seen over the past years. In case you are not privy to this label, it is the Stated Income/Stated Asset loan in which the buyer simply states what they make and how much their assets are worth: You go to a loan officer a loan and they run a credit check. They see that you have good credit but after a few questions its obvious that you cannot purchase much based on what you really make they suggest a Stated Income/Stated Asset loan and that you need to make $14,000 per month in order to qualify for the home you want. You state $14,440 and poof! your in the home. It happens ALL DAY LONG. The only verifications the bank will make will be a call to see that you are employed (but they will not ask how much you make) and they will need to know your various accounts (but will not inspect the amounts you stated would be in them). Lots of investors will be jumping off their speculations rooftops soon.
Randy wrote on Mar 20, 2006 1:14 AM:I couldn't agree more with "Expert" (above). It continually amazes me to quotes from the President of the National Association of Realtors saying that we are in for a "soft landing." I would be willing to bet two years salary that California real estate will go down 5 to 10 percent per year for the next 7 to 10 years. If you are considering purchasing a home listen carefully...DON'T DO IT! Be patient and you will be richly rewarded!
Hugh wrote on Mar 20, 2006 1:47 AM:When housing prices plummet and the market takes a big hit, many will blame the lenders and Realtors. Few will see the real problem: Government. The Government has driven this market past all good sense by making money easier to get than the free market would allow. Would you loan $500M to someone with a shaky credit history and too little income? No, but the government will make (or stand behind) the loan and then force you (the tax payer) to make it good. When it all goes down, people will clammer for more and more government to bring the Banks and Realtors under more control, when they ought to ask for less.
Steve wrote on Mar 20, 2006 6:14 AM:Are these Realtors stupid? Do they think that people can’t see through what they’re trying to do? There are so many other factors to consider which will inevitably mean a significant downturn in home pricing: 1. Interest only loans: When these are converted to a fixed rate at around 8% and the average homeowner’s mortgage increases by 1-2,000, they will be sent into foreclosure. The Realtor cited that people will simply take their house off the market. Yeah, it’s really that easy. Are you kidding me? Do you think they will have the ability to do this? Of course not! They will be in foreclosure. 2. Interest rates on the rise: This means that people can’t afford as much and simply won’t buy or move to a region with more affordable housing. 3. Supply considerably exceeding demand: Anyone who understands the supply/demand curve can understand this one. It’s simple economic theory. When supply exceeds demand, prices go down. 4. Consumer confidence is down. People don’t trust the housing market like in the past. 5. Savings rates are the lowest in history.
BubbleWatcher wrote on Mar 20, 2006 9:00 AM:Since 2000, according to the Bureau of Labor Statistics, San Diego employment outside of the real estate and construction sectors has annualized out to just 1%/year. Meanwhile, employment in the real estate and construction industries grew at almost 6%/year. 40% of all new jobs in San Diego in the past 3 years were in either real estate or construction (not even including the mortgage industry). With any slowdown in the real estate sector, a lot of jobs will be at stake. I find it difficult to assume that this will end in a "soft landing". We've seen the most dramatic rise in real estate in our history, it seems the downturn will be just as dramatic.
Terry wrote on Mar 20, 2006 9:26 AM:There are people up here in the Seattle area that are watching as to what happens with the S. California real estate market. Lots of For Sale signs are popping up in my neighborhood with asking prices of about twice assessed value. Historical selling prices have been around 1.35% of assessed value. I guess they are hoping all those "rich" San Diegans will be migrating up here soon to buy that $250,000 house for $500,000.
Jay wrote on Mar 20, 2006 9:38 AM:I wish Thornberg would stick with his guns and abandon the "soft landing" talk. These are the words the sales people use; he's an economist, so why's he saying the same thing? The big job losses (and Thornberg has mentioned this before) will be in the real estate industry itself- building, lending, brokering, selling... I've read that 40% of the jobs in CA created in the last 5 years have been in this sector. The thing you know for sure is that the market is over bought, what isn't as certain is WHEN then bottom will drop out. I don't think anyone thought things would get as far out of wack as they have become, that why economists were premature in their predictions on the drop. This bubble has far exceeded the one that preceeded it in late 80's, and the necessary correction will be far more severe due to its size, the number of non-owner occupied houses, and the "new" lending products used in a big way this time that weren't used at all before. Last time we had this many interest only loans with the expansion of the "roaring 20's" that were corrected in americas Great Depression. After that we went to the fully amortized mortgages that we used to know and love.
Marc wrote on Mar 20, 2006 9:38 AM:All this input is news worthy, to say the least. Its been a long time coming and probably two years over due. Can anyone remember a couple years ago when the market had stalled momentarily, then interest rates started to drop again? It stimulated the real estate economy for another two years until now, the breaking point. Since last year I've been anticipating property values to drop within a 12-18 month span. It is almost a year later and I'm seeing reports of property deflation everywhere. I saw it coming, and many others saw it are now seeing its manifest. In fact, those of us who have been anticipating know its a matter of choice. Nothing more than the stock market.
smhop wrote on Mar 20, 2006 10:42 AM:I agree with everything that has been said by your readers. My question is, why is our media (journalists) so stupid as to be duped by these "real estate professionals". Instead of reporting the facts as seen by economists, journalists seem bent on helping the realtors keep up the hype. Are our reporters not smart enough to see through the scam the RE profs are trying to put over? What happened to "invstigatibe reporting" (ie, gather all the facts, then report) The freaking media is as much to blame for the bubble as all the other puzzle pieces. I would love to see more honesty from reporters.
Dell wrote on Mar 20, 2006 11:07 AM:I dont know why people are so worried about the increase of I/O loans. So far I have not seen any stats that indicate this is a big problem. Just because people get an I/O loan that does not necessarily mean that they are getting the maximum possible loan they could qualify for. An I/O loan at a fixed interest rate is a great deal. It allows you to minimize your minimize your mortgage payment and be flexible with your personal finances. The only problem are people who ONLY pay interest and people who are maxed out with the interest payment. If I have an I/O loan at a fixed 7.0 rate for 1 millon dollars, my monthly payment is about 7 grand. That doesnt mean I only pay 7 grand, that means I pay a minimum of 7 grand. In actuallity even with my I/O loan, I am on pace to pay off my total mortgage in about 21 years.
brendan wrote on Mar 20, 2006 2:15 PM:ok so you buy a home today with 6% comm,1.1%tax,6.5% mortage, are you mad. BUILT in to the asking cost is the comm
George wrote on Mar 20, 2006 2:26 PM:Under only one condition home prices won't tumble (in nominal terms) - that is if the Government start printing enough money to offset the effect of the Asian banks dumping the US securities when Fanny and Freddy default on their paper. But then in real terms it will be Apocalypse for many people anyway.
Ben wrote on Mar 20, 2006 3:33 PM:Let them "ROT on the LOT" for a Minimum of 18 months See Where these Debt Junkie Investers/Owners ARE when their new set rate kicks in. The monthly Burn Rate of mantaining these Profit Castles will turn their Detroit to be neighborhoods into House For Sale Bloodbaths!
Millie wrote on Mar 20, 2006 10:24 PM:Here's my thought on why EVERYONE including the new media is trying to make it sound like a soft landing, it's because they have houses to sell and want to sell theirs first. If they can keep everyone in the dark for a few months then they stand a better chance of selling theirs first.
Proud Reader wrote on Mar 20, 2006 11:06 PM:wow, the NCTimes is finally learning a good newspaper needs to be objective. After a column by Mr. Kevin Forrester, the president of the North San Diego County Association of Realtors, proclaiming the housing bubble is created by misleading and jaded information, after two columns by columnist George Chamberlin attacking news reports on the real estate bubble, after another column by Mr. Andrew Kleske going after real estate bubble blogs, the North County Times' credibility was absolutely in the shredder. Congratulations on waking up to the real estate bubble and the "imbalance created by the recent run-up in prices." Maybe there is hope for this little local newspaper yet.
Expert wrote on Mar 21, 2006 2:50 AM:It looks like most people in these posts see thru the garbage that salesman/Realtors are spewing. One guy, a few posts down, asked why papers keep quoting Realtors and those involved with sales, instead of true experts. It is because the newspaper makes a huge income from the ads that Realtors place in the paper. If the media said things the Realtors did not like, such as the truth, Realtors would not advertise in that paper. Same thing goes for stocks, etc. Remember how stockbrokers were quoted during the stock market frenzy always saying things were great. Then during the stock market crash, the worst they would admit is that stocks were going sideways instead of down. Realtors call that a plateau now. Or, not appreciating as much! HA! When you find a media outlet that does not accept money for advertisements, you might get some truth. Good Luck with that!
WILLIE wrote on Mar 21, 2006 10:51 AM:Wow everyone on here is "hoping" for a real estate crash. YOU WON'T GET IT. What you all fail to miss is that local real estate doesn't need to be supported by local incomes. San Diego is a place where anyone in the WORLD with money wants to live. 2nd homes, etc. It's not like this is the Midwest. Anyone that has $$$ will gladly buy on any drop in price. It's not ok to quote realtors but perfectly fine to keep quoting the UCLA guy over and over, a guy who's been dead wrong on his doomsday predictions for years now? Is there no one else to quote???
MarkMax33 wrote on Mar 21, 2006 11:58 AM:Willie, You need Econ 101. Supply and demand. The supply of buyers has dried up. The supply of sellers and builders has increased exponentially. The supply of money is drying up. Your argument about the weather is a joke, the weather hasn't changed in SoCal for a million years or more. Good luck riding the crash down sucka!
Gordon wrote on Mar 25, 2006 9:02 AM:The whole world wants to live in San Diego. Aren't you all very lucky people. Sounds like Hong Kong in the 80's Good Luck to you when they arrive.
Robert wrote on Mar 25, 2006 9:11 AM:Boy, there sure is a lot of emotion invested in these entires. The price of housing goes up and down. In the long run it goes up a lot more than it goes down. If you buy at a peak and sell at a trough you lose money. Just hold on and prices will go up again. In 1992 prices in San Diego dropped 20 to 30 percent. It was a catastrophy, a tragedy, the end of the world. Now houses cost five times what they did then. Just enjoy your house and the beautiful weather. Life is good.
Jay wrote on Mar 25, 2006 9:26 PM:I suppose there is a lot of emotion in these posts because how you make the largest purchase in your life will effect the quality of the rest of your life. People get exited when they feel that some people are profiting by encouraging people to pile onto a market that many believe to be speculative bubble. Also, the issue with IO loans is that most of the people are using them to speculate or are ignorant and just thought it was the cheapest monthly payment (the kind of people that think in terms of cash flow and live month to month). The later are the marginal buyers that would have been excluded by the lending standards we had up to this latest and greatest boom.
Robert wrote on Mar 26, 2006 11:21 AM:Jay, I agree with you about some of the "creative" loans being peddled. Personally, I wouldn't have anythhing but a 30 year fixed loan because I like the predictability of the payments. If someone buys a house on speculation they are taking a risk. That's why it's called speculation and they should be aware they can lose money. If someone buys a house they really can't afford but used an interest only loan, then shame on them for not seeking better advice from someone they can trust. It's too bad there are real estate agents and lenders who will take advantage of unsuspecting and naive buyers but people need to know life is like that sometimes. Talk to someone you can trust before making the biggest purchase of your life.
M wrote on Mar 28, 2006 12:39 AM:Everyone with $ wants to live in San Diego? Sorry, Willie, but I don't think so.
Scared Buyer wrote on Mar 28, 2006 4:54 PM:I recently put down a down payment on a new home and am getting ready to put my existing home on the market. With the current status of the market I am considering backing out before I sink 30K+ in to options. Any thoughts out there?
North County wrote on Mar 29, 2006 7:44 AM:"Expert" - If you truly are an expert, you should know that Market Point is one of the most respected real estate forcasting sources in southern California. A major earthquake has not damaged the underlying foundations of the homes in this area and scared people into a "fire sale" menatlity. The two scenarios are totally different. People are still flocking to San Diego and the demand is still there. Each small incremental dip in prices opens up the affordabilty to even more potential buyers. Therefore, the supply and demand balance point is at a much higher price than you suggest. If I were "Scared Buyer" I would ask myself how long I was planning on staying in the home and weigh that time line against the extreme likihood of rising interest rates. Each time prices fall, and interest rates climb the mortgage cost remains roughly the same. So if I were planning on staying in the home for a long period of time (and I could afford the mortgage), I would not worry so much about it. If history has taught us anything it is that real estate prices in this region have always recovered from any recession we have experienced. A real estate investment strategy should reflect that over time, the investment will justify itself. Further, with home wnership, you have a tangible asset and a good write off on your taxes.
Working Wife wrote on Jul 5, 2006 8:42 PM:I am imaging that most of the people responding to this thread are majority of baby boomers that are frightened for their retirement dollars to get sucked up by a huge bubble burst. I read all the posts and all I must say is that times have changed people. Most people can afford these prices because we aren't living in a society any longer where the man is a bread winner. Women are working full time jobs, getting higher pay and breaking glass ceilings. Families are having less children and we all need a place to live. The market still has a great demand of buyers, it's just that the market cooling has allowed more decision making time and negotiating room. IO loans and ARMS do not mean everyone with these loans are going into forclosure. We were in an extraordinary market, now it's just getting NORMAL.
Lishy wrote on Jul 5, 2006 8:59 PM:Why so gloomy? I pray for a market crash, as a real estate investor........I'd scoop up all that new unbelievably dirt cheap housing (did someone say 50% off!!!!) hold onto it for the next 20 years and when the next boom comes.......golly, I'm a millionaire, just like all those investors who bought up in the 90's.
TheAceFace wrote on Jul 29, 2006 2:14 PM:There is a lot of talk about soft landings verses a bubble bust and what factors are driving both or what will cause one or the other to happen. However, the biggest single factor that will prevent a soft landing and thereby ensure a bubble bust is rarely mentioned or discussed. I am referring to the Smart Money of which I am a proud card carrying member. I recently sold a 5,000 Manor Home back East at the peak of the housing price boom ("buy low sell high" is the motto of the Smart Money)and moved to San Diego. Why would the Smart Money move to the most over priced real estate market in the country you ask. Quite simply the members of the Smart Money are cash rich buyers of which there are many, especially here in San Diego who are sitting out the real estate market waiting for the coming crash. The Smart Money is predicting a 47% drop in San Diego real estate values over the next two years at which time the Smart Money will be buying ocean view foreclosed homes and condos at bargain basement prices. In the meantime I will continue to enjoy my $860 per month rented two bedroom, bay view condo as I happily watch interest rates climb on my secured investments while simultaneously watching the ARM and I/O loans of others default. And the band played on.
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