Posted on 10/26/2006 12:53:25 PM PDT by GodGunsGuts
The price of existing homes last month fell 2.2 percent, the largest monthly decline in the almost four decades the number has been tracked, according to an industry report released yesterday.
Nationwide, the number of existing single-family homes sold fell 14.2 percent in September compared with September 2005, according to the report from the National Association of Realtors. The number of sales has fallen each month since March.
Prices fell everywhere in the country, with the Northeast and West most affected. Declines were more moderate in the South, which includes the Washington area....
(Excerpt) Read more at washingtonpost.com ...
Interesting chart. The drop begins when Nixon took us off the gold standard. I am NOT an economist, but I've noticed that prior to that, the dollar was very stable.
This will also serve to push prices down:
When prices are high only because market participants expect prices to go even higher, that's called a bubble. And Californians have bought into this bubble with great enthusiasm. Consider the following statistics, all from 2004:
80% of San Diego mortgages were adjustable-rate, meaning that many borrowers were speculating that their salaries or home equity would increase faster than their mortgage interest payments. (San Diego Union-Tribune)
47% of San Diego mortgages were interest-only, meaning that many borrowers were speculating that their salaries or home equity would increase faster than their mortgage interest payments and the eventual addition of mortgage principal payments. (Business Week)
27% of San Diego mortgages involved no down payment, meaning that many borrowers could (and did) use ultra-low rate interest only ARMs with no money down in order to afford far more house than their incomes would typically allow. (San Diego Union-Tribune)
37% of San Diego condo conversion buyers were investors, meaning that, given the comparitively low rents discussed above, the only possibility of these people not losing money is for condo prices to rise enough to cover the current negative cash flow. (San Diego Union-Tribune)
A poll of Los Angeles homebuyers indicated that the buyers expected, on average, that their new homes would increase in value by 22% per year for the next 10 years. (The Economist)
http://piggington.com/bubble
One other thing: Prices have already dropped about 10%-15% in Orange County since their peak. The issue is what happens going forward. LA's market in a bit stronger. Any declines in the zip codes I own in I suspect have been very marginal, so far.
You hit the nail on the head. The USD is a pure fiat currency now. There is nothing holding it up except confidence. I expect the dollar to continue to fall another 30%-plus based on further expansion of the money supply, the triple deficits, and our debt burden. Add to that that many of the oil producing countries are contemplating accepting Euros (instead of just dollars) and you have the recipe for significant volatility for the USD in the years to come.
Man, you really got confused in post 303. There are so many errors in that post that I can't address them all now. Apparently you're a really bull-headed guy who doesn't listen to anything anyone else says. You have your mind made up and no amount of economic logic will change your position by one inch. I'm going out to practice golf and then I'm watching the Chargers/Rams game and later tonight I may get back to you. Are you ever going to budge from your rigid, locked-in position on this issue...maybe one inch in my direction? People have given you so many well-reasoned arguments for at least moderating your position and you just mindlessly reject all the efforts of other posters. I think you may be a Democrat too, and I haven't seen you post on anything much other than real estate and gold.
All I know is this:
If I were the patriarch of a young Southern California family, and wanted to buy my family a home I could feel comfortable buying, and made a nice middle class income, I'd be on monster.com looking for a job in another state so that I COULD buy a home by getting the hell out of California. Because in SoCal, it ain't happening.
PS Nice piece of property! And by the looks of it, very well maintained!!!
One more thing: Please do not put indicate that statements in your posts are from the San Diego Union or Business Week without referencing those sources properly. Instead, include links to the original source articles from the SD Union and Business Week, or at the very least use direct verbatim quotes in quotation marks. In post 303 I cannot tell if those are direct quotes from these sources or if they are a mixture of your views and statistics taken from these sources. Please provide links or direct quotes in quotation marks.
Now take that little Spanish House. Let's assume that one can rent it out for $2750 a month, which times 12 equals $33,000 per year. Assuming that expenses are about 33% of gross income (taxes, insurance, maintenance, repairs and a vacancy or turnover factor), that leaves you with a net income (NOI) of about $22,000. If you divide $22,000 by the 3.5% cap rate, you get a market value of $628,000. The house is probably worth about $650,000, which means a cap rate of about 3.4%, so we are in the ball park, and assuming TIPS rates do not materially increase, and market rents to not materially decrease, there is not in my opinion that much of downside potential for price depreciation.
I hope that helps.
Excellent summary! I understood every word. If only all books on real estate, finance, economics, TA were written so clearly!!! Thanks for taking the time to write it. Now, I'm off to investigate how what you wrote fits into the rest of the housing puzzle. Thanks again--GGG
One other thing. 5 or 6 years ago, the TIPS rates were more like 4%. So that suggests maybe a cap rate for the Spanish house of about 5% or so. $22,000 divided by 5% equals $440,000. You can see that the drop in real interest rates "caused" a 50% increase in value. The house might have been worth about $275,000 back then. The balance of the increase is "explained" by the increase in its rental value from maybe $1600 a month to $2750 now.
Your graph of home prices and rents is a classic example of putting two kinds of accounting numbers on one chart. When you do that it 's difficult to interpret the chart and it's easy to draw incorret conclusions from the chart. Home prices are an asset account while rents are an income/expense account.
Because homes are expensive they are almost always purchased by taking out a loan and therefore the home price that buyers can afford depends greatly on the interest rate of the mortgage. Rents are paid from the renter's income rather than through a loan and therefore the amount a renter can afford doesn't depend on interest rates. What your chart shows is simply that mortgage interest rates declined greatly between 2001 and 2006 and thus affordable home prices increased much more than rents. That's all it shows. You cannot conclude that home prices are too high or rents are too low from that chart.
You did this before on another chart--mixing asset and income/expense numbers. That is not a good technique and it leads to strange-looking charts that are difficult to interpret. I don't care if Piggington is your source; it's still a bad technique. I would try to use charts that compare asset values against other asset values and income/expense numbers to other incomes/expense numbers. Then your charts will be more meaningful and won't be thrown off by the effect of interest rates on real estate prices.
Still searching for the other links:
"Karevoll said another trend in San Diego County in 2004 was the increasingly common use of adjustable-rate mortgages, which he said represented about 80 percent of all new purchases last year, nearly double national figures."
http://www.signonsandiego.com/news/metro/20050118-9999-1n18housing.html
"BusinessWeek Online has obtained the first-ever measurement by metro area of the increasing popularity of interest-only mortgages, and it shows that San Diego rates No. 1, by number of "IOs" in 2004. In metro San Diego, 47.3% of all mortgages required interest payments only in their early years."
http://www.businessweek.com/bwdaily/dnflash/jun2005/nf20050610_5662_db016.htm
Keep in mind those cap rates. If folks have overleveraged, and have to sell, and the cap rates pencil, the price declines just are not there.
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