Home prices really falling in California
Posted by Frugal on June 19th, 2007
I just checked my local housing market this past weekend. It appears that prices are down at least by 5% from just a couple of months ago. This is true for both new homes and resales. End game is slowly coming. The 2008/2009 negative ARM reset is not even here with us yet. It could be ugly.
Finally, I can walk into a sale office for new homes, with the ability to purchase the home outright without putting my name down on a long waiting list. And the price got cheaper even compared to a few months ago.
Just a note to all the home buyers out there, the housing market will play through series of tango in the upcoming decline. First new home prices will undercut resale prices. This is happening now. Then resale prices need to come down to match or be lower. Then the drama replays again and again until it reaches bottom. Two months ago, some of the resale home prices are simply outrageously stupid. Why would I buy a 20 year old home which is more expensive than a new home? Be warned. Don’t be those stupid buyers. Real estate agents will be working overtime and cheat you into buying one of those resales. You think they would have told you that the new homes just around the corner are cheaper, but since they don’t get any commission from those sale, these “buyer”’s agents will rather let you lose out tens of thousands of dollars on a stupid deal, and tell you straight in the face that “home prices always go up in the long term” or “all the people who got rich made their money in real estate”. Don’t listen to their lies. Sometimes, I can’t believe how these agents can face their conscience day-in and day-out. That even includes my Christian friend (as my buyer’s agent) who hasn’t told me a thing about any new homes. I guess lack of disclosure does not officially make him guilty.
With the mortgage rates jumped up by some 0.5% in the last week, that will spell disaster for the home inventory. There seems to be a rush too for all these home builders to rush out and build up their lands. I haven’t seen so many new communities opening up for such a long while. The bad news for the builders is that each new phase gets postponed further out due to lack of demand.
Still I can’t figure out how these people around me can afford such expensive homes. If I include the opportunity cost of down payment by treating it as an interest-bearing at the same mortgage rate of 6%, a home that I just looked at for the price of $710K has a total annual cost of $60K, roughly 5,000 dollars per month. My own home has an opportunity cost of about $22K a year, or about 1,800 dollars per month. I really don’t understand how people can afford a $5,000 dollars per month, without putting up several hundreds of thousands of dollars for down payment.
Well, of course, the real estate agents still keep repeating the same words. “There is never a better time to buy a home.” “Markets have stabilized.” “Prices will not come down too much.”
I’m not really sure about that. I do hope that all of my blog readers won’t lose out when they buy their next home. It could very well determine whether you can be richer 5 to 10 years later by $100K to $200K depending on your personal situation. That gain is obviously not coming from buying a home, but rather coming from not losing that much of money in buying a home I believe. The only financial discipline that you would need to stick to is to save up your money if you’re a renter. If you tend to squander through your disposable income, you might as well buy a small home.
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June 19th, 2007 at 9:50 pm
i agree bay area housing is overvalued. but i do not see any decrease in prices in areas with good school districts
June 20th, 2007 at 5:12 am
Frugal -
From someone that has sold two houses in 5 years; I agree with you and partially with Pacman.
I also live in the Bay Area; and most average families that I have spoken with directly about their living situation ARE STRETCHED. Where they are working off ARMs and have very little or negative savings on a month to month basis. They are able to get by on negative savings by selling some of their stock options or borrow money from their parents. Worse case when one father spoke of selling some of his 401K to make the payment (are others doing this I wonder???). Most have some stock options, just enough to cover payments and at least one vacation trip a year – however they must sell stock to make it as their savings are close to nil.
Exceptions to the average family would be multi-millionaire families that made enough on stock options to purchase the house outright – this is true in many cases in the Bay Area. The other exception I have seen in my area is long-term residents that were born/raised here – they have either a low cost entry point but have to make the decision to either pass it off to one of their kids or cash out as the numbers look too good.
For myself I sold my last house in Palo Alto (good school district) and one of the only suburbs that is holding up well – at some point, average families will have to make a decision how much ’stress’ they can take on in a popular area where others(non-average) may buy without any hesitation. You can almost call Palo Alto a Flipper’s target market for now.
I believe the popular areas will become stagnant with continuing interest rate increases(my opinion) and recession pressures that will effect dual-income families / corporate employment. Much of the tech entry-level development has already moved to India and China; there’s more to come.
As for the less popular areas, outside of Palo Alto
– there is an growing inventory of houses for-sale on a monthly basis. There are deals being made now, sorry to those that are in a bind as I have been there before!
The high-end($2M+) is unfavorable for those families that couldn’t really afford it in the first place but was betting on a nice pick-up from what they oringinally paid for post 2000. (i.e. the bigger the house, the bigger the net payout in dollar terms) I’ve heard of two exceptions where the family bought at the 9/11 dip and flipped later (Atherton, Los Altos Hills). However a majority are wealthy enough to not care.
Since 2005 – when I sold, I have remained firm on my belief that 2008 could be the year of reckoning. I could be wrong or early on this, but for me much timing depends on how the FED plays out with interest rates.
I was too early on the tech/Nasdaq bubble; sold-off in 1998.
I waited too long for Gold to pick-up(over 10years); but it has finally paid off.
I was early on Currencies (pre-Euro, Canadian, New Zealand and Australia); very nice now.
What next? Anything you can benefit from with higher interest rates.
I’ve been going against the grain on this one since I sold my last house; and people are shocked in disbelief. Well it’s possible Bernake could drop rates, but in the medium/long-term, it has to eventually trend upward.
May 29th, 2008 at 11:28 am
I am planning to Buy a 2.4M Commercial property with 20% down. This is leased out for next 22 years with additional 4 five year options. The NNN rent for Next 19 Years will go directly to bank, which is financing the 80% of purchase, to pay down Interest and Principal. I will not be getting any cash in my hand. The property will be free and clear after 19 years. I think it will amount to yearly 20% return on Investment.
Do you think it is a good investment for my future retirement? Also would you know the tax implications for atleast 19 years?