I’m writing this post because I’m so confused about the future of So Cal prices. I hear a lot of people saying too hard to get cash flow, prices at too high versus average income, with interest rates going up many foreclosures coming, and prices will come down,. Etc. VS.
I also hear just as credible sources saying bubble is a myth (honestly it has been a myth so far as people have been saying bubble will burst for almost two years now and appreciation is still going great in so cal), California will continue to grow because the population is increasing so much, and prices will stay high.
SO, can someone provide more insight to settle this debate? It’s so confusing. Also, if CA goes down, will other hot markets go down. What are some of the best markets for sfr and multi? Please help.
I personally believe that the CA market will soon correct itself. I mean in Orange County, the median home price is somewhere near $600K! How many people can afford a home that expensive? Not too mention if it appreciates much more. Market rents are definitely NOT keeping up with mortgage payments. My wife and I were planning a move back to CA, but most investors who live there (not all) choose to invest out of state, and I could do that from here if I wanted to. So we have chosen to move towards a market that is still growing and will probably continue to do so for awhile, while the CA market corrects itself, then maybe we will head that way.
In my opinion, this is a debate that cannot be settled until something happens. Both sides of the table bring STRONG arguments.
Hope this helps.
the economic value of a house is the amount you can rent it for. if the rent covers the mortgage its fairly priced. if not, its over-priced. markets can be over-priced and under-priced for extended periods of time. in san diego, CA, the market has been overpriced since 2002.
right now the disparity between rent and mortage is 1:2. in other words it costs twice as much to buy as it does to rent.
in southern california since 1999,
home prices have increased 125%
incomes have increased 21%
rents have increased 33%.
affordability is currently at 10-17%. with increasing interest rates this can only go lower.
since home prices are limited by incomes, unless incomes dramatically increase, home prices have to go lower.[regardless of population growth or housing shortages. there’s been a housing shortage ever since we started living in caves]
look for underpriced markets. you buy undervalued commodities and sell overvalued ones.
thats what buffet has been doing successfully for many years.
human psychology hasn’t changed in 2000 years. there is recorded history of stock market bubbles and other frenzies going back 400 years. why should this bubble be any different?
Having lived in CA during the 80s and 90s when we went through this previously it is eventually going to turn around again.
Sue
I thank you for your responses. Niravmd, although, I am leaning towards the side of there being a bubble in parts of California, I am still unsure, and want to present an opposing argument to there being a bubble. Again, I am not on this side, I just want to see how people would respond to the arguments that I heard supporting there not being a bubble.
Niravmd, your post is very convincing but honestly I heard these statistics and arguments two years ago, haven’t you? But since then my 2 bed 1 bath in San Bernardino went from $225k in 11/03 to $350k presently. If I had listened to that advice then, I would have not made $125k in 1 ½ years.
Affordability won’t necessarily decrease, higher interest rates mean an improving economy so incomes will be higher.
Also, California is so popular, we have the highest population of any state and the Census stats say it will stay that way adding 9 million through 2030. There’s so many people here and they just keep coming, where are they going to live? Unlike stocks where people can rather freely sell away, it seems a lot less likely for so many people just to pack up and move away. I know a lot of people who really want a home and are begging for any decrease in prices so they can own a house. Demand seems like it is still there.
In addition, I’m not sure what the average CA family income is but I know from some experience with the mortgage industry that most loan program use about a 40% debt ratio. Now I’m sure that there are adjustable loans, stated loans, and option arms but a higher payment in a couple years doesn’t necessarily mean the loan will be unaffordable or foreclosure, maybe people will just stretch themselves a little thinner in their spending. Or maybe the foreclosures will be picked right up at market value by investors or people who want a home (that is what has been happening) causing no decrease in prop values due to foreclosure.
Also, jobs! What are the statistics on job and the outlook for CA? That has to be one of the top two biggest factors that we haven’t even mentioned yet. Niravmd, what areas do you believe are overvalued and are expected to have good job growth and housing demand? Reading your previous posts, it seems you like Utah. Is there a reason why (besides the deal you have with the developer)? Please people, address the concerns in this post. Thank you.
a higher interest rate doesn’t correspond to higher incomes.
we had a rate increase in 1999 and there was no corresponding increase in jobs.
while its true, people have been saying that the markets are overvalued
for 3 years, you should be careful who you listen to. every single news article i have read whether good or bad has skewed the data to
put a specific spin on it.
in every area, you always look at the historic affordibility. in socal,
its been around 17%. during the last cycle, prices crashed after afffordibility hit 17%. it then took 9 years just to break even.
right now we are at 17%. san diego is only 10%. markets can stay overvalued for extended periods of time. but eventually everrything regresses to the mean.
CA is not in the top 10 fastest growing states in terms of population.
depending on who you belive, utah population growth over the next 25 year is between 56 and 78%.
since 2002, 50% of CA job growth has been in the real estate field. if the market does crash, CA will lose a TON of jobs. this has happened
before. infact, in terms of job growth the top 2 are nevada and utah.
all across the country, the median household income is between 50-70k. why should someone in CA pay 50% of his income on his
residence and someone in another state, pay 15% [and live in a house 4 times the size?].
i just read an article in the newspaper saying that we saw 15% gain over the past 12 months. that is completely misleading. the truth is we saw 15% gain during jan 05 and july 04. since then the market has been flat in most areas. infact, in the higher priced areas, it has started to go down.
10% appreciation in RE is not the norm. all of a sudden, everyone thinks its their birthright. people are talking about how much they’re homes went up everyday. magazines are publishing entire issues to it. this is exactly what happens in a bubble. if you want to stick your head in the sand, thats fine, but the indicators are all there.
I finally crumbled and accepted the market rate in the san francisco area as I have lived here for 6 years now and bought a home 2 yrs ago. I am from outhern cal where it is even worse than norhtern cal. The problem with the bubble theory in california is that there is little land left over that would warrant a surplus of housing inventory (afterall, who wants to live in the high desert?!) The coastal communities of L.A. and San Fran will conitnue to stay hot but may cool a bit on the growth and prices, but as for a bubble bursting with prices declinign more than 15 % I doubt it due to the density of the california populous and people’s attraction to sun, surf and hollywood or if you are in northern cal, the liberal communists of berkeley!
lack of land is a common myth. there’s been a housing shortage since man was living in caves.
[yes, 50,000 years ago there was a shortage of caves.]
thats just a myth spread by real estate agents.
if there truly is a shortage, why did the market crash in the early 1990’s ??
the fact of the matter is, house prices follow income. incomes haven’t increased and house prices are too far from their mean economic value to stay this high for long.
Seriously, last year my wife and I picked up stakes, and moved to Texas from La Jolla, Ca. We got a huge house on a good chunk of land fo next to nothing.
My in-laws sold off their 1800 sq ft home in Oceanside, Ca and they built a brand new 2800 sq ft home in Helotes, Tx on a half acre of land for $200,000.
Do you all know of anyone who helps clients sell their homes in California, and helps them relocate to another part of the country? It seems that would be pretty lucrtive, especially if you had a relationship with a builder.
I give you “props”-means thumb up.
I just do not get how people in CA throw away their money on mortgage-paying for their house. i mean, you need to enjoy life!!!
Enjoy life? What do you want to do? How about world class skiing, maybe some fly fishing on a mountain stream, or off the coast for salmon, or rafting or kayaking. Maybe surf, or go for a hike. Do you prefer rain forest, alpine, or desert? Where I’m situated I can do all of that within about 2 hours. Then there’s the weather…
My point is that there’s a lot in California that keeps 'em coming, no matter what the housing costs. And since I bought my home 3 years ago, it has gone up in value by about 200k, so I wouldnt call my monthly payment thrown away. Of course if I arrived in CA today and bought a house at the top of the curve that might be a different story.
Anyway, that rant being said, the current situation is somewhat ridiculous and cannot be sustainable. Rents can’t keep up and neither can income. The thing is most of the houses being bought at these prices are bought with the equity from their last house, so it’s like we’re all just trading up houses. This again can’t be sustainable. While I think there’s a correction coming, i agree with iolani that there’s enough demand that it won’t be a crash. Lets hope.
Or maybe I should sell my house while its hot and rent for a much less monthly payment, and invest my equity in Texas until this plays out 
I agree with MikeInCali about california living nothing like it but I’m biased since this is where I’ve lived most of my life. I also agree with the with the income argument and I think almost 50% of new mortgages interest only. Which will come back to bite alot of people once they move up a little more. If they couldn’t get in with a regular mortgage what’s makes them think they will be able to handle the increase in rates. I see alot of speculators jumping in just because everyone else is buying and in turn take a interest only loan. I know cause I work with a few of these guys. Once these people get hit others will realize that it’s not the greatest way to get in and will stop buying and that in turn will bring down prices. As for land we don’t have any in any of the major cities but we have tons of it in the valley and all around central california. I can’t believe these guys in fresno buying up all kinds of properties in the middle of farmland. Inventory is already in the rise I get reports from several different realtors and they say it has gone up 20% in the last 45 days. Why would anyone buy a house and then have to work 2-3 jobs. Only a fool in my book I would rather rent and save up money till the next wave hits. Just my .02 cents
Very interesting thread…
If you study the numbers and understand why people move here (actors, musicians, surfers, etc.) it is easy to understand a portion of the market.
I firmly believe that people will always want to live here. The weather is just about perfect and the money from multiple industries is prevalent.
Yes, there has been down turns. A few earthquakes (1994, 1987, 1971), a few industry exodus (Palmdale late '80’s, Downey) yet it has always recovered ten fold.
Unless T.V. and the movies leave town young people will continue to flock here, and it is not so bad of a retirement location either.
Though I would not currently invest here, I happily pay more to live here (I moved here in '88 from Alaska and purchased my home in '02). I water ski 8 months a year and mountain bike 12 months a year. You can’t beat it IMHO.
If we can be patient it may be worth investing in again. Though the rents here are still way above the national average (yes, you need to have some coin to live well in Ca, especially L.A.) and they do not make it cheap to be a renter, but they are less then the average mortgage.
I just cannot predict any sort of population decrease in this part of the country. Though when the home buying slows there will be changes.
I just returned home (I live in Valencia, north L.A.) from Bakersfield, Visalia, Fresno, Merced, Modesto, Livermore, Pleasonton, San Jose, Santa Cruz, Monterey, and the southern coast. There is an incredible amount of new construction, especially in the Central farmland areas. It is hard to believe.
I do agree with Nirav’s comments regarding home shortages. There is always a “shortage” when there are more buyers then inventory. Once that turns around there will be a “overage” of homes!
The best approach would seem to be cash flow. Do not gamble on appreciation. Invest in properties that cash flow. If they appreciate, then pull out the equity and buy some more!
Take care,
(honestly it has been a myth so far as people have been saying bubble will burst for almost two years now and appreciation is still going great in so cal),
Actually…this debate’s been going on for much, much longer (anybody remember Y2K?). I started to hear the first alarmist squaking shortly after the ‘Stock Market Bubble’ burst. That’s where this new age term ‘Bubble’ came from.
In my opinion, this is a debate that cannot be settled until something happens. Both sides of the table bring STRONG arguments.
That something is going to have to affect the supply & demand ratio that’s been driving these markets. Whether it’s higher interest rates, or prices attaining levels that shrink the pool of potential purchasers, or chattering Bubblesians from Bubblonia pushing Bubbloney (that purchasers eventually buy into), or maybe all of the above.
“every single news article i have read whether good or bad has skewed the data to put a specific spin on it.”
I WOULDN’T disagree with that.
“lack of land is a common myth. there’s been a housing shortage since man was living in caves.
[yes, 50,000 years ago there was a shortage of caves.]
thats just a myth spread by real estate agents.”
I WOULD disagree with that.
Lack of land & an exploding world population most definately drives housing prices up.
I worked in Japan for two months as a consultant back in ‘95.’ What I saw taking place there…then…is taking place in many areas…here…now. Lack of stable, buildable land there forced prices up–and lot sizes were what we’d consider zero lot line.
Same thing’s taking place in this area. We’ve many large rivers and, therefore, flood plains. The area’s high in demand and growing fast. High demand & short supply is driving prices and the lot sizes continue to shrink (soon we’ll be 4 or 5 short steps from the street (as they are in Japan).
Consequently, I predicted sometime ago that we’d see mortgage terms increase…now we have 40 year mortgages here, and I’ve been told by family members that some mortgage companies in CA are offering 50 & 60 year mortgages (though I’ve not confirmed that).
I wouldn’t be surprised to see 100 year mortgages in my lifetime. That’s been the case in Japan for well over a decade with the mortgage being transferable to heirs (so I was been told).
Someone mentioned San Bernardino County. As Orange County got more & more expensive…San Bernardio County’s been benefitting as purchasers seek out more affordable housing (investment opportunity).
Same thing’s happening here in the Pacific Northwest. Thanks to King County Moratoriums & limited buildable land, Snohomish County to the north & Pierce County to the south are benefitting (excellent investment opportunities).
That’s the key I think…not to catch the wave too early, and not to get left behind, but to look for these outlying areas to grow thanks to high prices.
-Infowell
I Agree