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by Rick Ackerman
MAR 27, 2013
Real Estate Bounce Setting Up a Second Crash
U.S. home prices are rising at the fastest pace since before the real estate crash, according to the Case-Shiller Index. Data for January showed a 10-city composite up 7.3% over the last 12 months and a 20-city index gaining 8.1%. A bullish sign for the housing market? More like a death rattle, we’d say. In our estimation, the collapse in residential real estate prices begun in 2007 is only halfway to a bottom, implying that valuations will eventually fall a further 35% from their 2007 peaks.
Check out the Mountain View, CA home pictured above if you want to know why, even after the real estate collapse of 2007-09, California home prices in particular are still egregiously out of line with incomes.
We rented this house from 1995-1999 for about $2400/month before moving to Colorado like so many other Californians seeking twice as much home for half the price. The three-bedroom rancher was worth about $525,000 at the time, and we wondered who would be so foolish to buy it at that price. With just 1150 square feet of usable space and a small back yard, it had sat unimproved since 1952, when it sold new for around $12,000. The only feature in the house that might be considered an upgrade was the quiet-flush toilet in the half-bathroom. Otherwise, fixtures, carpets and structure were original and well worn. Termites could be heard munching on the garage.
Unbelievably, the home is currently valued at $1.1 million on Zillow.
Anyone who buys it at that price would have to be either crazy, extremely desperate, or confident that a greater fool would eventually appear when it’s time to trade up.
In 1952, this was a blue-collar neighborhood. By the time we arrived in 1995, however, nearly all of our neighbors worked in high-tech jobs in Mountain View (today the home of Google), Los Altos, Menlo Park and Palo Alto. A typical couple had a Honda Civic with an MIT decal on the back window and a hefty loan from their parents, who themselves had borrowed against homes that had been bought and paid for. Software engineers in the area were making from $80,000 to $150,000, but even workers at the high end of that range, especially couples with children, wouldn't have much left over for frills. Our kids went to a highly rated elementary school across the street, in the Los Altos District whose close proximity supposedly added $100,000 to the value of homes nearby. Los Altos proper, just up the hill, was out of reach for mere software engineers, since basic 2BR homes went for around $1.8 million in the late 1990s.
A Little Dumpy
There are of course high-tech hot-shots living in the Bay Area and on the Peninsula who can easily handle a $5000 monthly mortgage payment or rental. At the southern edge of San Francisco, an easy commute down the Peninsula, they've bid up real estate prices to New York City levels. But for most Bay Area workers, even those in the $100,000-$250,000 range, the best housing they can afford would be considered dumpy in just about any other region of the U.S. As a consequence, renters and buyers alike stretch affordability not only until no discretionary income remains, but no savings cushion for emergencies or unforeseen expenses. This is living on the edge, and when it describes as many lives as it does in the Bay Area, the implication is that even a small downturn in the economy – never mind a recessionary bust or an uptick in Fed-suppressed mortgage rates – could cause a collapse in real estate prices that would ripple across the country.
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In Vancouver we have the same problem of high, very high expectations. This listing on the west side (the 'good' side) of Vancouver is asking $1,198,000 and is described as:
"Cute 1729sf Kitsilano 3 bedroom, 2 bathroom starter home on a 33' x 122' lot. Nicely updated approximately 17 years ago, including a large 1 bedroom basement suite, double glazed windows, hardwood floors, kitchen and double garage. Well maintained home ideally suited to live in, hold, or eventually build new."
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U.S. Earnings Update
"The analysts at Sentier Research (a company that provides demographic and income analysis, run by former Census Bureau officials) note that median income has been depressed recently by inflation. While inflation is still quite low, income growth has been so weak that even very little inflation is enough to wipe out whatever gains households are seeing in their paychecks. The longer-run trends are even more depressing." Read the full article at Economix New York Times.
History, Charts & Curated Readings
"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense
"History, real solemn history, I cannot be interested in.... I read it a little as a duty; but it tells me nothing that does not either vex or weary me. The quarrels of popes and kings, with wars and pestilences in every page; the men all so good for nothing, and hardly any women at all - it is very tiresome." Jane Austen spoken by Catherine Morland in 'Northanger Abbey'