Sunday, October 29, 2006

Housing affordability

I found this (old) link while perusing the net. Whatever you do, make sure you look at the figure on slide 14 (Figure 7).

Ok, its a pdf (you've been warned). What it does is rack and stack local home affordability to the median income. I *strongly* believe that long term home prices are driven by the median income. What this pdf notes is that Los Angeles has the highest multiple in the world for a large city!

Homes in Los Angles are selling for 11.2 times the median income. This puts it as the poster child of unaffordable locations. Forget having businesses locate here... you won't be able to afford the salaries.

Is Los Angeles becoming a 2nd home destination market. Ok, I would ask why? Its not Florida with Northeastern folk swarming down to avoid the winter. We're not Hawaii with year round perfect surfing. Heck, half of my SCUBA friends have stopped diving California waters as its too cold; they only dive on vacation. I cannot imagine the baby boomers excited about our cold waters... Hmmm...

Now what does slide 14, Figure 7 say? Simple, this market isn't sustainable. If that isn't scary, I don't know what is. No amount of cheerleading is going to sustain... that! Severly unaffordable is a 5.1 multiple or greater, seriously unaffordable is 4.1 to 5.0. Moderately unaffordable is 3.1 to 4.0. Affordable is 3.0 times median wage or less. So we currently have 2/3rds of the markets that are unaffordable about to become affordable. (It was ~55 of 65 markets in 1995 versus 20 of 65 today.)

I've noted before that whenever LA broke through 8.0 times median salary it drops to 6.0. What will be the bottom this time? I'm betting LA will drop down to seriously unaffordable before returning to its normal premium. But how long? How much of that will be wage inflation? How much dropping home prices? We won't know until 2008. Whatever you do, don't buy a home in California, Hawaii, or Florida today!


Friday, October 20, 2006

No news

Its all been the same information for a bit. All that is happening is the "buyers standoff" is becoming iconified. Sellers won't sell... buyers won't buy. Here is California, we're losing population (if you haven't read the United Van lines 2005 survey, please do).

I'm not betting on much change in 2006. If I'm wrong, that's ok. 2Q 2007 looks to still be when everything converges and prices start to drop significantly.

From what I'm reading/seeing, prices are dropping about 2% to 3% a month here in the south bay. Exciting? No. Its like watching paint dry.

Please read my post on real estate emotions... We're so stuck in denial... until people realize that its not a river in Egypt, yawn.

The only interesting tidbit is that a coworkers wife is selling a home that priorly sold for $940k for $770k. But that's down in oceanside and I intend for this to stay a southbay centric blog.


Monday, October 09, 2006

Local market observations

My fiance' and I did a little tour of homes on Sunday 10/8/2006. We really only planned on looking at 2 houses (we didn't start until 3:30pm), but instead we checked out a large number.

1. Homes are falling out of escrow. Out of about 20 homes we looked at, 3 were back on the market due to homes not closing.
2. N. Juanita is out barometer (Redondo Beach, CA). There is one block with 5 nice townhomes for sale. While not our first choice, they're an ok backup. The last sale on this block was in January. All townhomes have been on the Market since Febuary. No movement in 7 months. Two of the townhomes proudly sported "sold" or "In escrow" sub-signs for about a month. Both are back on the market. Two more townhomes are under construction on this street (in framing).
3. Man are realtors desperate to be buyers agents. One realtor even anounced she wasn't the listing agent but rather the buyer's agent. I had a few words for her.
4. We're seeing 3 townhomes that are identical for sale near the beach in redondo. Each is trying to be $10k less than the others. The rear unit people seem to be the most willing to cut... and cut... and cut... But $1.24M isn't there yet.
5. Lots of construction still progressing. Some gorgeous new homes just completed.
6. Prices are all over the map. 30% differences in equivalent properties. The price point de jour seems to be $1.2 to $1.3 million.

My comment? Price drops will continue to be slow. But if sales drop much more or inventory builds at all... free fall.


Monday, October 02, 2006

Market Cycles: Time to buy 2008 or 2009?

There is an emotional cycle to a market:

1. Optimism
2. Excitement
3. Thrill
4. Euphoria (market price peak)
5. Anxiety (I'm a long term investor, not a speculator.)
6. Denial
7. Fear
8. Desperation
9. Panic
10 Capitulation
11 Despondency (start of market price bottom)
12 Depression (end of market price bottom)
13 Hope (hey, this investment has picked up off its bottom)
14 Relief (Its almost what I paid for it...)
15 Optimism (cycle starts again)

Judging from the press, home prices, and advertisements out there. I'm going to declare us in Denial. It took 10 months to go from Euphoria to Denial. Does this mean that in July or August of 2007 we'll be in Desperation? Probably, assuming the time scale stays constant. That means Capitulation won't happen until May of 2008 and Despondency through Depression might be summer and fall of 2008; that would be the best time to buy.

Warning: It could be a much slower cycle. But we seem to be progressing much faster than the Japanese recession. Why?

1. The Japanese had an amazing savings rate. They could ride out almost anything. We have zero to negative savings.
2. The internet is spreading information much faster than in the past. Economic cycles are very accelerated.
3. The Japanese economy falling wouldn't impact anyone else's economy. Any guess what American luxury buying habits do if we go into a recession? ;) Look at the Japanese economy, for the first few years luxury sales were down. We import most luxuaries.
4. The US market is far more overbuilt than the Japanese market

Now this speed of the downturn is slower than previous predictions of mine. Cest la vie. However, its pretty obvious that we have to write off 2007 as having no chance of a home market recovery. The only question is when do we hit bottom?