I enjoy your blog immensely. The writing is witty, elegant, and absolutely to the point.

Don’t think we don’t have a bubble out here in the midwest. We do, even though it isn’t as insane as in your neck of the woods only because the lending was not quite as crazy. Here, we will only write some minimum wage worker for a $300K condo, not a $750K house. People are more inately conservative here, but that has not kept the moderate-priced housing from becoming really overpriced relative to local incomes.

However, if you compare Chicago prices of 1999 with those of 2005,or even 2003,the runup is insane. Prices have even tripled in select neighborhoods, notably those that are “gentrifying” or “up and coming”, however you want to put it. Now, these are not absolute slums like those you show us in SoCal, but they are still “marginal” with above average crime and bad schools. What saves them is truly beautiful old housing stock. There are hundreds of really lovely 20s vintage courtyard buildings and six flats that anyone would want to preserve.

But they are still overpriced in terms of what the target buyers for these rehabs and good intact vintages are able and willing to pay, including me. Figure that the max debt:income ratio for a 30 year fixed is 3X, in other words, a sensible buyer should not have a mortgage more than 3X her income, and that’s only if there is no car payment or significant card debt. By that yardstick, this stuff is overpriced, and is now falling fast, though not fast enough for this bitter renter. Most of the places bought in this city in the past 5 years are on “creative” loans, about 80% adjustable loans, even though there are fewer IO and reverse amo loans than in SoCal.

Even in Ohio or Michigan, the prices are way higher than they should be, even though I’m sure they looks like gifts to people in CA. You can buy a spectacular vintage 3 bed 2 bath condo in Shaker Heights, a top tier suburb of Cleveland, and it has herringbone parquet and exquisite millwork and high ceilings, for $144K. You couldn’t touch such a place for less than $400K in Chicago. So why doesn’t it sell?
Because you can’t make a living in Ohio, or Michigan, right now. So, relative to the means of the local population, the prices there are obscenely high.

The housing “bezzle” is a nationwide bomb set to blow. One economist quoted last year in THE ECONOMIST estimated that it would take up to 10 years for housing prices in the U.S. and the salaries of buyers to be back in parity.

Tom Elias (Blowhard)
Daily Breeze
7 June, 2007

Yes, there have been small declines in some relatively overbuilt parts of this state. But in places where homes have not been overbuilt, or where in-migration continues at a fast pace, prices are still rising slightly or just staying flat.

By Tom Elias

It happens every year about the same time pitchers and catchers report to Florida and Arizona for the start of spring training: “For sale” signs pop up all around California like toadstools after a heavy rain.

And this year, there was good news and bad news in the springtime for both buyers and sellers.

First, the bad news. The intense boom of the 1995-2005 decade has plainly petered out. Anyone who buys a California home and expects to make a 20 percent profit in less than one year - the same kind of expectation fostered by the dot-com stock balloon of the late 1990s - is in for a serious disappointment. In the most heavily populated parts of the state, there will still be profits, but they will be in a more normal range, about 4 percent or 5 percent per year.

That is also the good news. For while the rest of America, places like Miami, Denver, Houston, Phoenix, Boston, Washington, D.C., and other boom markets of the last 10 years are suffering declines, that’s not true in most of California.

Yes, there have been small declines in some relatively overbuilt parts of this state. In the third quarter of last year, home prices in Orange County dropped by 0.8 percent - less than 1 percent - from the previous year. In Sacramento, the drop was about 3.5 percent and in San Diego County approximately 2.1 percent.

But in places where homes have not been overbuilt, or where in-migration continues at a fast pace, prices are still rising slightly or just staying flat. That’s also true in places that are built out, with little hope for new housing that isn’t constructed on the sites of previously existing homes.

Examples of these phenomena are Seattle, with a 14.6 percent price rise during last year’s third quarter and the Inland Empire area including Riverside, San Bernardino and Ontario. Prices there were stable, even as the number of houses and condominiums sold was down. Reason: Many people who expected to make a quick profit pulled homes from the market when they realized windfalls weren’t coming.

In the Los Angeles-Long Beach market, buyers paid 5.2 percent more this spring than a year earlier, and in San Francisco they paid an average of 3.8 percent more.

None of these positive numbers will blow investors away. But they ought to be comforting to recent homebuyers who paid top dollar and worried they might lose equity they saved for years to create.

In fact, price increases have slowed gradually for most of the past year all over California, but the state has been spared any precipitous drop. It’s one thing not to be making windfall profits. But it’s no disaster when prices remain fairly stable while wages and salaries gradually catch up with prices that have risen sharply for about 10 years. That kind of pause can even be constructive, as it both allows a new cadre of homebuyers time to save up the down payments that can get them into the market.

It’s also a familiar part of the California real estate cycle. Booms in California generally last eight to 10 years, followed by leveling-off periods of about four or five years.

Immigration is the reason this state rarely experiences true busts after its booms. The more people pile into California, the greater the demand for housing. Demand begins at the bottom of the price scale, but when owners of the cheapest housing sell to newcomers at a profit, they suddenly gain the ability to move up to a new level. This propels the homeowners from whom they buy yet another step up the ladder.

http://www.dailybreeze.com/opinion/articles/7876447.html