The housing confidence game – West takes major hit in housing prices in the last 12 month period. More aggressive pricing of distressed inventory through REOs and short sales.

It might be hard to believe that home prices have been falling for half a decade now.  What some have a harder time grasping is the idea of lower home prices in the defiant face of a Federal Reserve pushing interest rates into artificially low levels.  The truth of the matter is many regions especially in California remain in bubbles and these areas are entering a second round correction as more distressed properties are brought to market.  We have some troubling data coming out showing a reversing trend nationwide for home prices but also a more significant correction in bubble states.  Wishful thinking would like to believe that home prices will simply move up because that is how things were done for decades and some wish to relive the days of Leave it to Beaver.  Yet we are truly in a new paradigm and household income in the United States has actually fallen for more than a decade and with interest rates at record lows, the only thing that can give is the price of a home.  Let us examine some of the trends currently hitting the market.

Bubble states entering a strong correction

One of the recent changes I have noticed in California has been the aggressive pricing of short sales.  This was not the case even one year ago.  Even in the summer of 2010 when tax credits and other gimmicks were used, many of those on the fence decide to take the plunge based on short-term artificial dynamics.  That short boost has now completely evaporated:

home prices us map

Source:  CoreLogic

The above chart was released this week and shows home price declines over the last year.  The west is not exactly doing well.  This loss is compounded with the first round that hit after 2007.  I would argue that home prices are still inflated in many California cities and we are starting to see more aggressive pricing coming from banks moving short sales and REOs.  If high prices were the name of the game banks would not need to work with distressed inventory since sellers would simply be able to offload properties at a higher price.  Of course the non-distressed inventory is plastered with inflated home prices and many markets in California are simply adjusting to more realistic measures and this is why lower priced distressed inventory is largely dominating the market for sales.

A new shift in income and housing economics

It is amazing how some people will argue simply to justify their own high priced home purchase.  Consumer behavior is fascinating and it reminds me of the conversations I had with people back in 2005, 2006, and 2007 who couldn’t stop talking at cocktail parties about the equity they were gaining each month as if they suddenly had the Midas touch for real estate.  Some that bought in the last two years seem to justify their purchase based on low rates and a lack of understanding of housing economics.  Let us look at hard data here:

mortgage rates us home values

I went ahead and annotated the chart above to make it abundantly clear what was occurring.  From 1970 to the early 1980s home prices and the 30 year conventional mortgage rate all went up.  Why?  Inflation was rampant but also household wages were going up.  In the end it was a wash.  Then, in the 1980s through 1990s you see mortgage rates move lower and home prices still move up.  For these 20 years, you had a bigger comfort at taking on more leverage with bigger and bigger mortgages but also, incomes were moving up.  Then, the bubble takes a hold in the late 1990s and wages did this:

real household income

So while interest rates kept going down thanks to the Federal Reserve household incomes contracted strongly all the while home prices kept going up.  For some it didn’t feel like a contraction because they were putting it on the credit card, taking out an auto loan, or flat out tapping into home equity.  In essence it was papered over with debt but you need to pay it back!  Of course this peaked in 2006/2007 depending at what we are looking at and since then home prices have been going down.  Interest rates are at record lows.  The Fed is underpricing risk yet again just like Greenspan did in lowering rates and actually igniting the housing bubble.  Two things can happen here:

-1.  Household wages go up and home prices remain or increase (this would require healthy job growth in good paying jobs and not putting people to work at Wal-Mart and Dollar General).

-2.  Household wages remain stuck or fall and home prices go lower (this is the pattern that has played out over the last 12 months.  The big wildcard is if risk ignites and interest rates shoot upwards and this can push home prices lower much faster).

These are the only two options with rates at historically low levels.  I heard a couple of people argue that higher interest rates will make home prices move even higher!  This is like saying the poorer you get the bigger your paycheck.

Housing has been contracting now since 2006:

case shiller index and hpi

Aside from the little bump in the summer of 2010, home prices have gone negative year-over-year since 2007.  Anything under that red line means lower home prices.  Home prices cannot operate in a closed arena.  That was the mistake of the housing bubble.  Toxic mortgages and blindly following decades of slow but steady rising home prices gave way to an orgiastic rise in home values even while in the background Americans were getting poorer and poorer.  It was all an illusion built on unsupportable debt and that popped.  Europe is dealing with this right now and we will be dealing with it sooner than many think (i.e., remember the debt ceiling circus?).  The only thing that can change this is a growing real economy yet this is not occurring.

Making predictions in the short-term is a losing game unless you have inside connections.  But on a longer scale, we can derive a few things if we know a bit about history.  From here on out, there will be sizeable defaults and attempts to increase inflation to wash away trillions of dollars of debt.  Yet people are waking up and realizing that the game is largely rigged and money is only as valuable as people are willing to believe.  Think of the $300,000 home in Las Vegas now selling for $80,000.  What physically changed in the structure in the last few years that made the home fall so dramatically?  Confidence.  The same psychology is playing out all over the country.  People rarely think twice about diving into debt if they feel an asset will appreciate.  But what if the odds are it will fall?  What if money is harder to come by?  Now you have a tougher investment decision and the charts above reflect this change in perception.

I have yet to see any solid forecast showing why home prices will go up in the years to come.  To be a contrarian just because you read this in a fortune cookie is nonsense.  This is a new paradigm.  Household wages, demographic trends, and unsupportable global debt point to tough economic times in the next few years and the last 12 months only confirm that.  Oh yeah, and what about the 6 million distressed properties that are still floating out in the market?

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93 Responses to “The housing confidence game – West takes major hit in housing prices in the last 12 month period. More aggressive pricing of distressed inventory through REOs and short sales.”

  • It’s structural, not cyclical. I think the Sheeple are starting to understand this. When it does become commonly understood, buying a house will look like a huge risk to most everyone. Then watch where prices go.

    For now, it’s all about the shadow inventory. How will it be handled going forward? My guess is pretty much like it’s been handled the last 4 years.

  • Why oh why do you not talk about RENTS anymore Doctor?

    The hard bottom in CA will be at rental parity.. We are very close to this already in L.A.

    • Where is the down payment, loan approval, and dependable long term jobs going to come from to make “rental parity” even a thought? As long as home prices continue to fall your still stuck with your house……………

      • Lots of people that got forclosed on in 2007-2008 are about to exit purgatory and will qualify for loans this year again. 20-30 somethings loving at home with parents working 30-40k a year jobs can save a lot of money not paying rent and grocery bills. Eventually they will have a very large down payment a lot sooner than those not living with their parents.

      • Huh, isn’t earning 30 to 40K a year here in LA almost poverty level? I’m not really worried about competing with these people for my next home purchase. If they abide my your magical 3x income rule, what can they afford…a cheap 1 bedroom condo in a marginal area?

      • We Don't Make Those Drinks No More

        CaliOwner wrote:

        “20-30 somethings loving at home with parents working 30-40k a year jobs can save a lot of money not paying rent and grocery bills.”

        Many of those 20-30 somethings are moving back in with parents who’ve had their retirement savings/house values slashed, and/or Mom or Dad have lost their own jobs. In most cases I know those “kids” pay some rent to the parents and/or are fully expected to financially help with household expenses; I’ve heard of few getting a totally free ride…

      • Rents also seem to have inflated together with house values. I live in a 4-plex and the people who live below who moved in about ten years ago pay something like $1,100. We moved in seven years ago and pay $1,425, and the neighbors next to us pay $1,700… Sounds like a steeper increase than an expected 3% inflation, and theoretically we should all pay the same.

    • I’ve had the rental parity discusion with a few people. I’ve looked at quite a few houses that were at rental parity for what I am paying in rent. However, as long as house prices continue to decline by 2 or 3K per month, I have no interest in buying anytime soon.

      Renting has many advantages. You can live literally right next to work, saving commute time and possibly hundreds of dollars a month in gas costs and car wear and tear. Buying a house in this job market will be a gamble for many people, I honestly have never seen many friends and family so uncertain about their future employment.

      • The thing is…. Once you reach rental parity… If you lose your job as a homeowner or a renter.. You are screwed either way. You’d have to move into a cheaper rental.. which doesn’t exist unless you downsize dramatically. Even studios and 1 bedrooms in Los Angeles are at least $1K a month.

        With a 4 bedroom house you can take on roommates if you wish… We live near a college… It wouldn’t be ideal… But we could rent out rooms if need be in a worst case scenario.

        You have some flexibility with a home… You can even buy insurance that will cover your mortgage for 6 months to a year if you have a job loss. (not sure if a landlord would cover your rent with a job loss?)

      • Sorry CaliOwner, you’re wrong. If you lose your job as a homeowner you are way more screwed than if you are a renter. The renter has much lower exit costs, will take less of a hit on their credit, if any hit at all, and is much more mobile. The owner has very high exit costs (6% realtor commissions, costs to prepare property for market, cash at closing if underwater, closing costs) and no mobility. With the new cap & trade state law set to take affect in 2012, more jobs will be making a one way move out of the state. As an owner you won’t be able to pursue any of those jobs, including your own job if your company decides to move it somewhere that’s not business-hostile. So you will be sitting in your house unemployed hoping (praying) that you can find another job so you can keep making your mortgage payments, while a renter pays 1 months rent to break their lease and moves to Austin, TX to take your job.

    • When you talk about parity with renting, make sure you’re factoring in all the additional costs of owning a home and not just mortgage vs rent. Most people over simplify this ratio and fail to look at all the additional costs associated with owning a home.

      As for all these people who were foreclosed on and are now living at home, you suggest are saving all this cash that can be used as a downpayment. Maybe. But there’s also a chance that those people just don’t know how to live within their means; remember they were foreclosed. So, maybe they’re the ones that made November a huge boon for new car sales. Their potential downpayment savings turned into “pocketfire” …. again.

      • please please please quit moving to Austin TX. Go find some other city to make your ppor man’s Cali.

    • I hear what you’re saying about rental parity but what you are not considering is that the new equation for cost of homeownership is: principal/interest/taxes/insurance plus monthly depreciation of 1/2%.

      If your home is at $500k add $2,500 per month in depreciation for the next 3 years (and that’s not deductible).

      People now know that interest rates are artificially low to keep prices up just like the Doc says. I don’t think you can talk about bottoming until the government lets interest rates return to market levels.

      • Monthly depreciation 1-2% for 3 years???? Can we say total economic collapse?

        You realize even 1% depreciation would be another 36% drop in real estate values… (72% drop from peak) (and 2% depreciation per month would mean a ludicrous 72% depreciation from current levels.. over 100% drop from peak)…

        In this scenario.. WITHOUT a rise in interest rates… it would cost half as much to buy a home per month than to rent.

      • To CaliOwner: T.Paine is saying 1/2% per month depreciation, NOT 1-2% per month.

        That has actually been my experience. I’m paying down my mortgage principal at about 1/4% per month, and losing about 1/2% per month in value. Now, I’m hoping that at some point the loss in value stops, but in the meantime I’m losing equity even as a I pay down my mortgage.

      • HenryE. wins the Math Bowl.

        $2,500 is 0.50% or 1/2% of $500,000. Not 1-2%. This scenario envisions the $500k house going down to $400k over 3 years – not a stretch at all considering all of the factors (e.g. student loan debt, budget crises etc.) that we’re experiencing.

    • If we’re talking about rental parity, I think LA RE prices still have room to go down. I currently pay $1750 a month for a place that would cost around $350-$400k in today’s market plus a $850 monthly HOA. When this place costs less than $250k, I might consider buying, or not.

    • Hard Bottom My Ass

      Since the rents are being based off the inflated prices of homes, how can you use them to justify a hard bottom. If home prices drop then rents will drop as well. Rent in California has always been just like housing prices, way to high. Everything needs to come down together as in people can’t affort 3k a month for a 4 bdrm home, then they also cannot afford to pay that in rent. WHAT THE MARKET WILL BARE has finnally bitten the greedy in the A$$!

  • Some that bought in the last two years seem to justify their purchase based on low rates and a lack of understanding of housing economics.
    Where is Ian? $939K, huh?

  • “some wish to relive the days of Leave it to Beaver.”

    Who would have guessed that Eddie Haskell grew up to be Chairman of the Fed.

    • No way. Eddie is very comfortably retired, after making his fortune at Goldman selling crappy MBS packages to some dumb German bankster. Can you just imagine the sales call and his gloating about it that evening over a few martinis?

  • We’ve passed rental parity here in Berkeley/Oakland. Within the last couple of months, it has become cheaper to buy an equivalent property than rent it. I didn’t think I’d see that day come so quickly. And with rents only expected to rise with inflation over the next few years, I can’t imagine house prices could fall that much below rents before the simple rules of supply and demand kick in and prices start to come back to parity.

    • really even in the hills of Berkeley and Oakland…I doubt that, I’d like it to be true, but not happening

      • It’s generally hard to find places in the hills to rent anyhow, so it’s not a good comparison. But I can tell you without a doubt that we’re at parity or beyond nearly everywhere else. 2-bedroom crappy apartments are renting for $2,500 in Berkeley. We’re living in a 2-bedroom house with a large yard that would probably sell for about $450k. With a 3.3%/30-year mortgage including tax and insurance the monthly would be about $2,000. Even considering the additional costs of owning a house we’d still come out ahead.

        That said, I won’t be buying a house anytime soon. There’s still too much uncertainty in the market for me, and even though we’re at parity, I think houses are overprices (as are rents).

    • IMO rents are way too high as well. Landlords use cap rate (cap rate = net income/value) as a tool to set rents. If homes are paid off, landlords can afford to wait until someone comes along to rent at inflated values. The value in the denominator has been inflated by the recent bubbles in the Bay Area causing affordable rents to be insufficient to create a decent cap rate. I expect rents to fall therefore changing the rental parity equation as well.

  • To get an idea of rental parity, perhaps looking at Kansas or Minnesota may give some examples of what a housing vs. rental market looks like when home prices are thought to be descending to relatively stagnant over a number of years.

  • the difference between an reo and a short sale can be, in the case of the short sale a place somebody actually took care of and put a few bucks in. many of the reo’s are taco flats. here you go, an reo on one side a short sale on the other, sure the banks are going to work out a deal with underwater short sale owner.keeps the prices up for the garbage.
    easily the 4 percent is what it takes to make that taco flat livable! no here on the central coast the prices are the same as 2010. 2009 was when I saw a few really good deals.

  • The rent is up and rent parity people must be out of touch “owners” or realtors. Granted renting a house in Los Angeles can be expensive, but renting apartments in Los Angeles is pretty cheap because there’s so much supply and so many young people are doubling up or living in multi-generational households. I know many people making 160k+/year choosing to live at home to pay off student loans and save up large down payments. They see the senior person who hates his/her job who bought at 1.2 million in 2007 slaving away miserably to pay a huge mortgage on a house worth 750k now (that person lost every penny they made in years of servitude at a horrible job). They see the co-worker with little savings that pays 3,000+k per month rent to live in a trendy building but living in a trendy building isn’t so glamorous once he/she is 33 and has nothing to show for it.

    No one wants to be these people, so they’re moving back home or squeezing more people into less space – they are not running out to buy houses. These are young people with jobs! Good jobs! Think about the 80% of kids out of college moving back home. Rent will go down even if the real estate community prints a thousand articles and trolls a thousand blogs propagandizing people that rent is up.

    I also know several renters that have decided to move back in with their parents to save more money. They realized that renting is dumb and buying with too much debt is dumb. Reality has sunk in with young people. The multi-generational household which reigned for the history of humanity until the recent past is once again becoming the paradigm.

    • Really, DK? You know people making $160+ living at home with their parents. Doubtful.

      • $70k and in that exact situation.

      • Wifey and I make over $160K and I strongly considered living with mom and pops. We have no debt, no student loans and no car payments. I thought we could suck it up for three years and buy a bunch of four-plexes when it all bottoms in 2014-2016. Unfortunately…wifey said no. She wants her own place. How about squating on an REO I told her? Then she made me wash the dishes…..

      • yes Fred and all you other morons. Most people who make that kind of money are commissioned and just because you had one good year doesn’t mean the five horrible years you had before or the five horrible years you will have in the future give any sense of stability. Especially since you only have a couple grand a months once you figure in cc payments, student loans, auto pmts, saving for retirement, helping other family members who may have fallen on very hard times, a nice vacation here and there, saving for a rain day, ect

    • If people thought rents were affordable they wouldn’t be leaving California in record numbers.

      • Good point Teresa. This whole ‘rental parity’ paradigm assumes that rents are set ‘correctly’. Maybe rents are out of whack, for unknown reasons. Housing prices got way out of whack for a decade.

        Even if one got the rent/own equation tweaked perfectly, there still could come into play an oddball set of economic circumstances where one would logically conclude that the cost to rent should be somewhat higher than the cost to own an equivalent piece of residential property. Such a time is now, I believe.

        It is my belief that inflation is way understated by the CPI and other broad measures. A quick pass through a grocery store or home improvement center confirms this to even the most ardent Federal Reserve supporter. This has a disastrous effect on rental property owners, as normal repairs are much more expensive. Seen the cost of quality paint lately?

        Normally, in periods of high inflation, wages and interest rates rise. The rising wages help boost the nominal price of homes, if not the ‘real’ price. Rising interest rates also help support home prices, as buyers rush in to beat the next interest rate increase. Obviously, we are in uncharted waters, where a period of high inflation is not accompanied by increasing wages and interest rates. Therefore, one would expect the rent/own equilibrium to settle into a new, lower meeting point.

      • @ Jason
        I think there are two reasons why rents appear to be out of line with incomes. The first is Santa Monica had/has one of the strictest rent control laws on the books. Many tenants stay their entire lifetime in one rent control apartment. You can have on tenant renting a two bedroom apartment for $1000 and another tenant renting an identical apartment in the same building for $2500. So when you see a rental you see the $2500 a month apartment for rent. It is incorrect to extrapolate that all tenants pay $2500 for a similar apartment. I think the other reason is that the west side has a large amount of goofballs from all over the planet who move to LA and live the life of a pretendnaire. These folks rack up debt for a year or so and eventually go home only to be replaced with yet another goofball.
        On the inflation front, I have argued that it is difficult to have true inflation when you have slack in the labor market. What I believe is happening is that the Fed is flooding the world market with dollars which lowers the value of the dollar relative to other currencies. In turn the US bids for food and fuel on the world market with devalued dollars. However, land and labor is mostly local and the devalued dollar is a wash. The real issue is that food and fuel is crowding out land and labor pushing the cost down. We each only have so many devalued dollars to buy stuff with…

    • I’m making ~90k. Living at home. Saving.

      • exactly.. and you and the rest of the savers that will eventually swoop in a form a bottom in the housing market… Women don’t look too fondly on men living at home with Mommy in their 30s.

      • Women living at home with mommy in their 30s are pretty equally pathetic.

      • Pbamma, I hope you have a vagina. Otherwise, you’re never getting laid.

      • Wifey and I make over $160K and I strongly considered living with mom and pops. We have no debt, no student loans and no car payments. I thought we could suck it up for three years and buy a bunch of four-plexes when it all bottoms in 2014-2016. Unfortunately…wifey said no.”

        I make 120 + 45 K in bonuses. Woo f’ing hoo. No debt; no payments beside rent; low low overhead. I would never EVER hedge against life by living at home with mommy and daddy. I’d rather live in a Junkie’s hovel (and I do) How tragic. And you use the word wifey.

        As for the rest of your post –avarice and credulity are in no short supply. It’s just moved form one sector of our FIRE economy to another (flipping/cash flow investor).

      • I’m married. So yes, getting laid occasionally. Living like this does have it’s trade offs. The solution is more frequent short vacationing… which is working out fairly well. We can also afford larger vacations which is good in an early marriage. So, I “think” we’ve worked it out.

        Obviously living in our own place is the ideal… If we’re still waiting out the market for another year, I think we’ll get an apartment in a place we want to live for awhile. By this time we’ll have our large chunk saved up and stashed away. This is another “out” to our un-ideal living situation.

        All of this, I believe, is a much better alternative to jumping in the market last Dec. with no down payment and an obviously declining housing market. Additionally, the mo-in-law loves us in the previously empty house. All said, I think the situation seems to be working out.

    • I’m calling BS on this one….no adult with half a brain or half a social life would chose to live with their parents if they were making $160k a year.

      • Taxe liens and penalties could easily send anybody into Ma and Pa’s basement.

      • right. 160k/year for a young single guy/girl doesn’t seem likely. Maybe a single case here or there, but not the majority.

      • I think you are missing one dynamic here. My folks now in their 70s need help and their 1700 sq ft. house is becoming harder and harder to manage. However their tiny house payment is certainly preferable to the large rents out there. We currently pay 1800 in rent but havent moved in as we like having our own place, but we will do it when they need us to. Their health costs not covered by medical are eating away their retirement savings. Eventually we will need to help them with the payment, as selling and renting isnt really an option with house prices down and rents up.

    • Great Comment DK. I usually just have negative things to say on this site because most of the idiots that make contributions are smokn the hopium but you actually get it

    • “I know many people making 160k+/year choosing to live at home to pay off student loans and save up large down payments.”

      Sure you do.

  • Give it a rest CaliOwner/Kevin:

    You wrote this sometime ago and it sounds like you since you have an obsession with rental parity but never show an actual breakdown or data backing up your assertions of a comparable rental in your area – you can show us the numbers:

    “Well listened to you 2011 prediction and bought in June 2011…. Thanks Alot Dr! When cost to own reached rental parity for me… I jumped. Now 4 months later it kinda sucks that things took such a turn for the worse economically. But i still think my reasons buying may prove wise. If things stay stagnant til 2015 i will have paid off $25k of my mortgage by then… And collected $25k in tax deductions… A little better than renting.

    Lets not kid ourselves… Interest rates will be below 4% or maybe pushing 2% by 2015! Thats my prediction! You liked to compare this market to Japan in the past… Well prepare for 2% loans… Basically free money! Houses will be cheaper, but most that bought now will be able to refinance to 2% because rates that low will bring out buyers.”

    Of course you were schooled on your comments. Now you are proposing people live at home until their late 30s just so they can buy a shack with a 40k income? Multi-generational households? Maybe this works in some cultures but you forget that many people are moving back home, most actually, because they have no jobs or low wages.

    Give it a rest with your obsession to justify your $400k fixer buy in Woodland Hills:

    • Firstly, how the hell was i schooled on my comments? My home is still worth more than i purchased for.. Just got it appraised in a refinance for $20K more than purchase price? Zillow even estimates it higher than purchase price…

      I threw a little extra at my mortgage in the refinance to lower my PMI since I went from 10% equity to 15% equity since i bought… Even if i couldn’t actually sell it for that much… the bank still lowered my PMI by about $80 a month.

      Not sure why i’ve been schooled.. Interest rates very well could drop more next year… And rents are RISING…

      Go to :

      Look up houses in Woodland Hills for rent… WE ARE AT RENTAL PARITY… or better in many cases!

      • “My home is still worth more than i purchased for.. Just got it appraised in a refinance for $20K more than purchase price? Zillow even estimates it higher than purchase price.”

        Really? So your tapping out the equity in a refinance. Great way to build equity that you keep saying. Want to keep making stuff up to justify that purchase.

        Pick a rental in Woodland Hills and post a link to it instead of random around the sandbox arguments. You sound like someone simply trying to justify their timing on the market. You said you bought a fixer for $400k. If it was a fixer, I’m assuming you had to put some money into it which is seems like you tapped out. Woodland Hills is also a big market and something tells me you didn’t buy in a top area of the city.

        Sorry buster, you got schooled and are simply trying to throw crap at the wall to have it stick. I encourage any one to look at your previous posts to follow the trail. No data pointing to good paying job growth or even picking out quality rental comps in the area. Just foot stomping that you made the perfect timing decision of a lifetime. Yeah, we’ve heard that argument.

      • @Sarah
        Amen! I don’t even respond to this clown anymore since he seems to have trouble with basic math….

      • Sarah J, way to put this bozo in his place. As much as I would like Caliowner to go away, it’s actually quite amusing seeing the world through the eyes of a recent loan owner who knows he made a big mistake by purchasing. This best part about is that he comes to a housing bubble blog trying to defend his foolish decision. This is massive buyer’s remorse you are seeing here. It must be eating this guy alive that he pulled the trigger too early and now is losing thousands of dollars of equity per month in his “fixer.” I hope he enjoys fixing that fixer and will probably be a prisoner to that house for the next decade.

        I don’t give a crap about rental parity if home values are going down. Losing another 5 or 10% of the value of still inflated Socal real estate is a boatload of money! No thanks!

    • 22154 Avenue San Luis, Woodland Hills, CA

      $1995 to RENT… $1955 to OWN (20% down – 30 year fixed at 3.95%)

      Rental Parity! (And i even picked a house with one of the lowest rents i could find).

      If you only put 10% down… it’s about $2290 to own (cause PMI is so expensive)… so not quite rental parity… But once you factor in the mortgage deduction and if it doesn’t require loads of maintence.. it’s pretty damn close still. (Also PMI isn’t forever.. it goes away after your equity reaches 20%)

      • I want Kool-Aid… Must have Kool-Aid… I NEED Kool-Aid….

      • Sarah told me to post some rental parity data.. I did above. Here’s another good rental parity comp:

        6640 Sausalito Avenue, West Hills, CA
        Rent Asking Price – $2200 a month
        Zillow Price – $381,600

        This one is at rental parity even including PMI and 10% down payment.


        Those calling for a 40% drop from current prices are NUTS… This house would fall to $153K… and at 4% rates the mortgage with taxes/insurance would be under $1000 a month!

        Whose drink the Kool-Aid now?

      • “Whose drink the Kool-Aid now?”

        How much was your household income again? Your math and writing ability is simply impressive. What international school did you attend?

      • Wow! Real estate market psychology has REALLY changed. During the bubble, I was always arguing with people that prices were too high because buying was so much more expensive than renting.

        Now we’ve gone in the opposite direction, where people are saying that buying only makes sense when the monthly nut is lower than renting. I happen to agree with that, since buying opens you up to all kinds of risks while renting has mainly inflation risks.

      • Exactly, we are exiting the “despair” stage of the curve into capitulation.. that’s what the recent drop below 2009 lows has been…. Now it’s a long slow boring slog of flat and 1-2% gains in housing for the next decade.

        It goes like this

        1) Enthusiasm – 2003-2004
        2) Greed – 2004-2006
        3) Denial – 2007-2008
        4) Fear – 2009-2010
        5) Despair – 2011
        6) Capitulation – 2011- ???

      • Hey Cali, I sold 10/2005 very greedy……….thanks for the reminder…I’ll keep renting and enjoying ever second of it…………..

      • The Nasdaq Composite gave back about 80% from it’s high in 2000 before the bear market ended. That’s what you call capitulation. When the Nikkei crashed in 90, it gave up around 80% before it flattened out. It took 13 years to reach a bottom. The Composite took 9 years to retest its low.

        Sorry, but there’s no capitulation in the housing market. Not until people like you realize there’s no hope of a bottom and throw in the towel. I’d give it another 5 years. Housing will lose 70% from its peak in 2006. Case Shiller index will reach 90 in a few years.

        Reversion to the mean, baby.

      • With the market still in decline and a conservative estimate of 0.5% per month in depreciation, the cost to own is $1,955 P&I PLUS $2,065 DEPRECIATION for a total monthly cost of $4,020. That is more than double the cost to rent, not to mention the loss of mobility and high cost to exit.

        Additionally, what you fail to see in your rental parity argument is the shadow inventory includes thousands of idle housing units. At some point those housing units will re-enter the market. What will happen to rents when those units come back online? It’s very likely we currently have 2 bubbles going on in residential real estate. The housing bubble that is being propped up by the government, federal reserve and banks by any means necessary, and a rent bubble due to the high number of foreclosures and idle housing units in the shadow inventory. When the shadow inventory is released into the market, it’s possible both bubbles will burst and we’ll have a situation where both housing prices and rents will fall.

        If you think the shadow inventory won’t be unleashed at some point, look at the announcements BofA has made the past few months. It all points to cash flow problems. The suspension of mark to market has allowed the banks to pretend on their financial statements that things are looking great, but non-paying homeowners don’t bring in cash, idle shadow inventory doesn’t bring in cash, slow real estate market doesn’t bring in cash in the form of loan origination fees. BofA is looking for cash in the form of unloading shadow inventory, cutting 30k employees and hitting checking account customers with additional fees.

  • The problem isn’t banksters, corruption, and greed, it’s people living in houses!

    America has the ability to think outside the hand fed media and propaganda….not.

    I sincerly hope EVERYONE’S home value drops by 50%, the stock market falls to 6,000, and econimic martial law is enacted. Maybe, just MAYBE, then sheeple will wake-up that this is a systemic problem resulting in their enslavement.

    It’s just a matter of time until I default on my house, and all you people deserve to pick-up the cost to the goold ol’ boys at Chase. I’ll never buy another house, and I don’t give Wall St criminals my money, I save cash, and spurn credit. My grandfather had more wisdom than all 535 members of our corrupt government.

    • nice comment swiller. I feel great knowing others see the reality of the world we live in today. Where have you all been before today. Good the hear your thoughts keep them coming

  • The facts of the matter are that without a healthy or robust job market both home prices and rental prices will be feeling the downward pressure.

    This is not rocket science. The cause and effect relationship between the cost of shelter and the employment level is almost a lock step.

    • Add in the rising cost of food and fuel with falling/stagnating incomes to the mix and you have a little more than downward pressure…

    • Yes I see no evidence of rents actually going up. Is inflation going on? Sure in food. Even in household products it seems. But in rents? No.

  • The multi-generational topic is relevant. My grandparents bought a 3bd 1ba house North of Montana Ave (Santa Monica) in 1955 for $16K (grandpa was a carpenter and grandma was a hairdresser and could afford the house in that area, back then). In 1975, after grandpa died, me, brother, sister and parents moved into the house and built a granny flat ($20K) for grandma from the house we sold in WLA. Me and my siblings all lived at home and got college degrees without student loans (parents told us: ‘as long as you are in college full time, you can live rent free’) we all did that and all moved out in due course with good jobs and are all still employed. Then mother turned the granny flat into a rental unit which pays $1500/mo – which pays all her bills and taxes and then some. By the way, her 2011 taxes on a 3bd 1ba house North of Montana is $2300 a year !!! The tax statement says the land is worth $115K and improvements $75K :). well the house has not been sold in 55 years.

    Anyway, me and my bro and sis are all well employed BUT mother has told us we can come live at home anytime if we lose our jobs. Point is, the house has been in our family now for 55 years, its value today is approx $1.5 million and if mum should someday die, me and my siblings dont plan on selling it… one of us will live in it, or rent it out for $3500+ per month and keep it in the family until the cows come home.

  • Folks, it’s called “Limits to growth” and it’s showing up as higher oil prices, which naturally hits the economy. Is this really such a shocker, that the world can’t grow at 10% per year forever? This deck does a nice job of presenting the data.

    • In the presentation Kunstler states:

      Use natural gas directly in vehicles?

      • Exists now in special cases.
      • Requires huge infrastructure scale-up — pipelines, service stations.
      • Requires extensive vehicle conversions & new vehicle construction.

      These bullet point statements are incorrect. First, many government agencies have bought and are using CNG vehicles compressed natural gas vehicles for their fleet including transportation buses and sanitation trucks from Honda and bus companies. Second, there is no huge infrastructure buildup as companies such as Clean Energy Fuels – T. Boone Pickens, install the compressed pump stations cheaply. Many taxis are now run on CNG. Finally, the conversion to CNG is quite easy and cheap for few thousand dollars.

      Peak oil is true but I believe CNG will be the transition transportation fuel.

  • Take all the explanations you like, I can’t figure out what happened in Vallejo home prices as an example. Prices according to zillow are down TWO THIRDS and now are less median than ten years ago or more. The place looks on realtytrac map like nothing but wall to wall foreclosures and getting worse. Are the reasons more demographic? crime? all one race or ethnicity ? Whatever factors are at play are ominous and may be important to know for what may happen elsewhere, when applied to other areas, but what’s the deal there? There are plenty of jobs in surrounding communities, and these prices are such almost anyone can buy or if nothing else, rent. Is it all being turned into a big section 8 area? Or what?

  • Fred/Will – most of the people I know are late 20s, early 30s and making over 160k per year (finance workers and doctors and lawyers). About 1 out of 3 lives or lived at home w/parents until they bought (or will buy). Of course some have levered up and bought a lot of house and some are paying egregious rents to live in buildings with valet parking and wine storage.
    The younger people in this cohort are far more prone to live with their parents – psychology has changed, they don’t like losing money to satisfy people peddling snakeoil (leasing offices and realtors – they already lost to student loans) – plus they work so many hours that having support via cooking/cleaning/company from parents is beneficial. There is no social stigma to living at home anymore … no matter how much landlords and realtors use journalists and trolls to propagandize otherwise.

    • @DK –
      Indeed! I am a doctor myself, and have a buddy from med school in San Diego who did this through the bubble. Lived with his wife at his in-laws place. Had 2 kids while living there from 2008-11, and saving saving saving. They pounced on a swanky La Jolla place and continued to live with in-laws through the remodel . Granted, this is not a typical family, but there is no stigma. I was honestly jealous. If I lived back with my fam rather than LA, I would have saved a ton of money the past few years.
      This may just turn out to be the perfect solution to caring for aging boomers too. Just move back into the house with them. Put them in a mother-inlaw room in the converted garage and sit on the property. Grandma babysits while both parents work.

    • I agree DK, there should be no shame if you are a successful 20/30 something living with your parents. Living a few years for free with the folks will put you in a really nice financial position. You can be debt free and save a really nice down payment for a house. Nothing wrong with that in my book. If women look down on you for that, you don’t need those types anyway!

  • I bought a new retirement commumity house last month and they are selling for less than 1/2 of the 2006 peak. Lots of repos setting the area comps. and even though I bought from the developer, he has totally lost control of the market.

  • A house isn’t supposed to be an investment vehicle. It’s supposed to be a home. My husband is a composer and we could not live in an apartment. I love to garden and could not do that at the scale I want in an apartment.
    We bought in 2000 and are nowhere near underwater on our loan. Ys, property taxes are an extra expense (equal nearly two and half months’ mortgage payments) and, yes, there are maintenance costs.
    But our home means more to us than a dollar sign.
    If you buy what you can afford and plan to stay there for a while, then you should be happy with your decision for years to come.
    If you are looking for an investment, look elsewhere.

  • Oh sarah J,

    Median household incomes in Woodland Hills are around $89k. If you follow the rules of housing markets and only buy 3x your income than that is a $267k home! But buying 3x incomes has been the safe rule for a long time…. Interest rates are historically so low that 3x income rule no longer works. 3x income in the early 2000s when rates were 8% would have cost the same monthly nut as 4-5x income will buy you now with under 4% mortgage rates.

    Even with stagnate wages and high unemployment.. The monthly nut for owning a home nearly as low as the late 90s.

    • Makes sense if your going to keep your house for 30 years or so (most people hold of to their homes for a lot less than that these days) but what happens when the artificial rates go up to the normal rate? Your property value goes down. its all about discretionary income in the end…

      • Stop confusing CaliOwner with facts and math…. CaliOwner, you are a genius and you make great decisions and all your posts will convince others to drink the same Kool-Aid you have drunk…


    Look at this house. All houses in irvine have gone down but zillow shows that this house has gone up in value. No improvements were done in the house.

  • Let’s be realistic here. Do things feel like they’ve stabilized globally? I think not. Things are way worse then they were a year ago. From here on out, things will only get worse. Why? In the EU, as much as it may seem (by watching the market and following media reports) the enormous debt problems have been solved, they really haven’t, and it’s just a momentary pause until it all finally crashes. Israel, Iran, the Middle East USA, Pakistan; what’s the end game here? What happens is a long steady decline. Housing is the least of your worries….stay liquid

  • Are there any metrics for interpreting the micro-market? The Manhattan beaches and Pac Palisades?
    Looking at overall median incomes and prices and pipelines of foreclosures doesn’t jive in those neighborhoods… though it might predict what happens in say Riverside or CA as a whole. Manhattan beach is, off the cuff, not that far down from peak looking at prices for SFR. Maybe 10% from peak, forget about 8% YOY or 30% from peak. Things just don’t move there!
    So one starts to wander into the dangerous place of self-delusion about taking advantage of Low low rates and starting to whack away at a 30y mortgage. Doctor pay may fall, but there is always work….

  • Ditto to DK: Of the thirty-somethings I know in So Cal who went to decent universities, actually took Econ and are making 100K or more (maybe 10 in this category), every one of them is doing something unconventional and basically trying to sock money away under the matress. What’s happening is a level or two above grocery-store math, and therefore above the comprehension of ‘the masses,’ but, it’s obvious to those 10 younger friends I have. Their attitude: there are no viable investments, a possible economic collapse on the horizon, and significant inflation for all but the top tier–so, time to hoard cash and hope for the best. Funny, that’s exactly what major corporations are doing–each of which is led by teams of highly-educated people who actually took Econ in college. I know it’s hard for someone making 50K to imagine someone making three times that living at home with mommy, but they’re everywhere and very smart. And no jabs, please, about how smart people are not smart. You either understand the articles on or you don’t; no amount of “street education” can replace a few semesters of Econ. We’re in very scary times; remember that the “great depression” had two phases, the first seeming to end on a high note, and the disasterous second phase was followed by WWII. Enough said.

    • It’s also hard to imagine mommies that let you live at home without paying market rents when you have a good job. Where do these parents come from that aren’t: um isn’t it time you like support yourself now. being 30 years old an all?

      Also what kind of HUGE mcmansions do these parents have that can support multiple families? Sure that works if you come from money and actually do have mansions in the family. How does it work out with a 3 bedroom? When mom, dad, a couple of kids, and a couple of their kids are all trying to squeeze in?

    • Besides is it really the case that the only way people making 150k have to save money is to live with mommy and daddy? Give up cable t.v., put down the IPAD, sheesh.

  • Patrick Millard

    One factor that no one is really considering is this. The household income data is actually conservative. It does not take into account that the average household in 1970 depended on one income. Now the average household depends on two incomes. That means higher risk in the event of job loss. It means, less savings. The average savings rate of a household in 1970 was around 11%. In 2006-07 before the bubble burst and unemployment took off, the average savings rate was a -1%. The household income may have increased, but actual wages have been stagnant since the early 1970’s. Early 1980’s at the very least. What does this mean? I think the Dr.’s new paradigm is reality and we are still in the denial stage as a society. Multi-generational households is becoming a new norm. Someone mentioned that our culture doesn’t really go for this. Well, when the $$ aren’t there, the culture will change. The culture is changing before our eyes and we still don’t acknowledge it as a society.

  • Don’t worry because Obamism will solve it all anyway! N.

  • Taz made the only fair point about not being at rental parity if home values are dropping. Still i would say we only JUST reached rental parity in the last 2 months… Its too early to tell what effect under 4% rates will have on the market next spring.

    Another 6% drop next year would be pretty dramatic and cause some panic… Government would probably throw another $15k credit to home buyers and we would have another mini bump in prices like with the $8k credit.

    As for my career outside Los Angeles… I wouldnt have one…. Im here for the long term cause i work in the film /tv industry… Which is doing alright and isnt leaving town.

  • My husband and I live in Modesto, Ca which is in the San Joaquin Valley. My husband was born here in 1949 and I arrived in 1969. This area always has a high unemployment population. Anyway, I wanted to give you our story…so here goes.

    My husband and I built our home as owner builder (no contractor) and during the construction of our home we both worked full time and had two little girls under age five to care for. We saved for four (4) years to finally be able to purchase the land. The house took eight months to complete because during 1986 the weather was very wet and keeping contractors working was difficult to say the least. Anyway, we moved in our home on January 1st, 1987 and raised our family.

    Here is the history of home:

    1) 1987 – home debt was $169,000.00
    2) In 1995- we take out a SECOND MORTGAGE to build a small swimming pool and finally landscape our backyard. Husband and I both working and income increases were only cost of living raises. Husband and I always talked about how we never seem to be any better off even though we were making more money. Hell…I still have the very same living room set I purchased back in 1987….so we never lived to much above our means. Yes…we were guilty of credit card debts in the range of $15-$20 thousand dollars.
    3) 2003 – home debt was $212,000.00. We decided to refinance our home and pay off the Second Mortgage and credit card debt. We felt with houses increasing so much we were not really risking much.
    4)2006 – I get breast cancer….no need to tell you what a blow that was! Around November of 2006 after my treatment was completed my husband and I decided to refinance. Our home was appraising in the low $400,000.00 and at one time it was $535,000.00. Anyway, we thought we were being conservative…we did not over extend ourselves we thought…
    5)2006 – home debt is now $277,500.00
    6)Today on Zillow – $205,000.00 Range $171,000 – $272,000 30 Day –

    So now we are at 2000 levels and heading south as I type this.

    We are the Shadow Inventory you write about. Last August we decided to make a Business Decision regarding our mortgage….we decided to Default and let our home go into foreclosure. Our area is so full of short sales that nothing is moving and banks are not making deals. We did not care to play that game due to our personal sanity! So Bank of America just sold our mortgage to another mortgage agency in Colorado and we look forward to seeing our Notice of Default in the next month or two.We have never missed a mortgage payment in all the years we have been here. My husband is 62 years old and was looking at retiring in 3-5 years. Now that our equity is shot and we don’t have many earning years left we can not afford to stay.

    I am sad to see our home go back to the bank….but I am also glad that we did take money out of our home. If this home is valued below $200,000. we would be almost back at our starting point. So…I have no regrets for that reason only. I know there are many more homeowners like us in our neighborhood. I call this musical chairs….you take our home…..we take yours. The government knows exactly what they are doing…eventually they will own all the homes and Americans can pay their rent to the government. (Imagine what they will do with all of that power).

    Thanks for allowing me to post. I hope I did not ramble on to much. I will continue to read your wonderful posts.


  • Has anyone found data on what happened with rents in Japan over the last 20 years?

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