I’d like to get the opinions of other dopers on whether they think there will be a decline in home prices in the near future. This doesn’t have to be limited to California, but that’s where I live, and I know it’s one of certain areas that have experienced much more dramatic price increases in the last few years than much of the rest of the U.S.
It looks like the economy may be improving, and most people are saying that interest rates will begin to rise at some point. Will this lead to a downturn in home prices, if not nationwide, at least in those areas that have had large increases recently? What say ye?
I live in Hollywood and don’t think it’ll be a problem in the major LA areas for one reason: there’s nowhere left to build.
Wanna move to LA? You’ll be competing with other folks who want to live in good areas that are centrally located, which keeps the prices high. They may not go much higher any time soon, but short of a major earthquake or riot that sends folks scurrying back to calmer parts of the country there simply is no more free land left. New developments are being pushed farther and farther away from LA, so you have to offset a cheaper house with a massive commute (I know people who drive 90+ minutes each way on a daily basis to get to work).
So sans a mass exodous, I don’t forsee the housing prices taking a nosedive.
Well, in the Sacramento area, don’t hold your breath. The tech bubble burst in silicon valley cause a huge influx into the Sac area and properties skyrocketed. The rates are not growing as quickly, mind you, but you are still looking at 10 to 20 percent over valued.
The Wall Street Journal has been sounding a (so far false) alarm about housing prices for 2 years. Within the last month they ran a WAG scenerio where the deficit (& other things) would force interest rates higher “just” to 8% by Spring 2005 but that brought an average of 12% correction in the price of a house nationwide.
They made clear that YMMV as to how bad because it was really locality dependant – but if the rates go there it affected every price, every where, downward.
I agree if interest rates go there the market has to correct
Keep in mind that a lower price with a higher interest rate results in a similar monthly payment, and that is what truly drives the market. Monthly payments will likely plateau, and new housing starts will drop as those who can’t afford the monthly payments to buy a home move to rental housing. Before the last boom, vacancy rates were incredibly low. It reached a point that that rents were so high that buying wasn’t a huge leap. As vacancies drop, rents will go down, and the demand for housing will drop. I doubt we’ll see a similar housing boom like that we just had in a long time. Defecits tend to run up interest rates.
I live in Westwood and I agree that, barring a major natural disaster or riots, I don’t think we’re going to see a large price drop in the major LA metropolitan areas. This isn’t a bubble like in the Bay Area where large amounts of new money is pouring into the area driving housing prices up. LA is just effing crowded.
OK, got a question for you. Was L.A. not crowded in 1989 (not sure if that’s the exact time) when the housing market crashed? What’s different this time?
I think there are conflicting drives, in California especially, that drive the housing prices up and up and up. Here, for example, in a meduim-sized town, we have a somewhat expanding economy, lots of people who want to buy homes, but not that many homes for sale. Homes in neighborhoods with good schools are especially valuable, of course, though the several different magnet programs mitigate that somewhat. At the same time, there are stringent controls on what can be built and where. At one end of town, we have environmental protections on a number of species that make it very difficult to build, and at the other end, we have farming land, only some of which is being sold off for building. Many citizens are ‘no-growthers,’ many are advocates for low-income housing, which is very difficult when building is so slow and in demand. All of these factors, and I’m sure several others, combine to produce very high prices. AFAIK, similar scenarios are happening all over medium-sized towns in CA, such as Modesto, Fairfield, etc., and they have the added pressure of becoming bedroom communities to large cities, which we do not yet. Constantly increasing demand + difficulty in building = high prices. I don’t see that changing anytime soon, unless people start moving out of CA in huge droves. Then we’ll start hearing complaints from all the other states…
As someone who loves my town, I don’t want it to become the next Bakersfield. I also want to see it have better jobs available (there is a very finite number of DangerDad-type jobs here). I sympathize with the young families I know who want a home, and I wish people would quit building huge suburban tracts–such as the one I live in myself. And I suppose we all feel that way; completely torn on the issue. We can only blame so much of it on the rich retirees from the Bay Area.
Can you stand an outsider’s opinion? [Hint: say “yes”.]
More people are leaving California than entering, according to census figures. A net loss. You’re losing people mostly to Nevada, Arizona, and…Texas (go figure). If that trend keeps up, it should eventually be reflected in lower housing costs.
That’s not anything exceptional – most of the states with large populations are losing people. Well, except for Texas, it seems. The reasons most often cited are lack of jobs, high cost of living, high taxes, over-regulation, etc. As the big lot of baby boomers start to retire, they’ll prefer to move to places that have friendly climates, low crime rates, and are less of a financial burden to fixed incomes.
I’m guessing that this leaves most of California and the northeast as losers in population retention. Georgia experienced the biggest population growth. Warm climates, reasonably low taxes, less frenzied atmospheres, fewer byzantine regulations, lots of services, proserous economies, job opportunities for those who can/want to work. They have all the right ingredients.
I’ve got to believe that, if that trend continues, there will eventually be a glut of housing in formerly populated areas. This is especially true once the boomers start dying off. If you can wait that out, I bet you could pick up a house for a song. But, who wants to wait that long?
As an aside, a co-worker returned from visiting her sister in California (but I forget the exact location) about 3 years ago. She had a picture of a house for sale, covered up the asking price, and asked me what I would pay for this house. It looked like the typical California middle class tract house – small house on a lot that lived up to the “postage stamp” cliche. Here, a house like that would be lucky to fetch 80K (and it better have some good “stuff” inside, not accursed concrete floors), but I jumped the price and offered a $100-120K assessment.
She moved her hand to reveal a 320K price tag. My gut response was “320,000 for WHAT? A small, ugly house that looks like it was designed by Fisher-Price, you need a magnifying glass to find the land it sits upon, and, what little land there is has dried up, mostly burnt, formerly green things on it that I assume was supposed to be grass of some sort. I’d leave if I had to pay those prices for such a humble piece of housing”.
So, I sympathize.
Otoh, if I was in real estate, I would start dumping it in another 15-20 years. Mathematically speaking, don’t you think there will be excess housing when the baby boomers die off? The only insulation from this will probably be to own real estate in an extremely desirable location. Get out your crystal ball because it’s hard to predict what’s hot and what’s not.
I do think, eventually, interest rates will climb. Probably not right away; that would be a stupid thing for Mr. Greenspan to do right now. A higher interest rate is not a great trade-off; you’ll be paying about the same monthly payment, less will go to the principle each month, the house will (probably) have less real value, and will be harder to sell if circumstances make selling necessary, as buyers will be more selective and value conscious.
Like anything else, a house is only worth what someone is willing to pay for it.
This is not exactly right. I have heard that, ignoring immigration, there is a slight decrease in poplulation in California. However, the total poplulation of California is exploding, and is predicted to double over the next 30 to 40 years (largely through immigration). Increased population = increased housing demand = no massive reduction in housing prices.
I was in the housing market in L.A. A few months back and got out. Not really because I have any hopes that there will be a sharp decline, it was just such a tremendous seller’s market that I felt it created an atmosphere for me personallytat I need to react so quickly to such limited opportunities that it made me extremely uneasy.
I live in the Bay Area, and luckily moved in just before the boom - not that the prices didn’t seem high 7 years ago. I was expecting a big drop, but it never happened, due I think to the buildout close to the Valley.
One thing Skyfire doesn’t appreciate, perhaps, is the effect of Prop 13. Someone just retiring who bought a house 30 years ago is paying almost nothing in property taxes. That is a powerful incentive to stay in a house that is too big for them. I don’t think the people leaving California are the ones with the houses - more the ones who were renting. As mentioned, apartment prices are down and availabiity is up. Very high price house values seem to have been hurt, but moderate ones (which are a lot more than $300 K) haven’t been. Very few of the houses sold around me have been price reduced very much, and their time on the market has been reasonable.
Because of the shortage of land, almost all new houses are big and expensive, and that has helped also. They tore down a strip mall a block from me and put in new houses, and my property value went up also.
15 - 20 years, who knows. But since I’m a Baby Boomer, I don’t care what happens after I die off.
Wow, how timely. This article in my local paper last week says a downturn is quite possible.
Keep in mind that we’re dealing with regional factors as well as statewide and national ones. It says that So Cal will rebound quicker, but that in the Bay Area, due to loss of tech jobs and depressed State funding, the economy & housing prices will be slow to recover.
But the question I’m asking isn’t “have prices gone down?”, but rather “will prices go down?”. The one thing on which most people seem to agree is that if there is a slump in the market, it will happen when interest rates start to go up. Rates have been at historical lows for quite some time now. What I’m wondering is whether the interest rates are propping up artificially high prices. It may be that prices will continue to rise even if the interest rate goes up, but what I’m asking is for conjecture as to what people think will happen in the near future, not what’s happening right now.
Yes, the absurd run-up in house prices will pop somewhere, sometime - there simply aren’t enough gen X & gen Y folks to take up the space created by/for we boomers.
Just as there were too many “commercial” structures built in the 80’s, there have been too many subdivisions built. I know a lawyer, practicing (kinda-sorta) in SF who is building a house in Tracy. (80 miles?). Tracy is a nice place to farm - but they stopped planting crops, and started planting houses about 15 years ago. This is not a long-term strategy - unless Tracy develops an economic base of its own.
So, yes, when the lawyer dies, I expect his house will sit empty for a long time, and will never sell for what he is spending to build it.
But - those $million+ condos on Nob hill will be going for 2 $million about the same time. The 5 $million mansions in Atherton will do OK, too.
The places who’s only reason for existance is “affordable” will either develop other reasons to exist or dry up and die.
The classic example is “Florida Real Estate” - my father bought a piece of swamp, which is why I went to FL (Port Charlotte) and talked to agents - 50% of their listings were vacant due to death of owner, and nobody was buying. One semi-successful development had gone belly-up three times - more homes than warm bodies - I expect to see more towns like that in the coming years.
nitpick (?) nitpickish: I don’t think you should think of the prices as “artificially high”. Think of them as how much the market will bear – right now this is where the prices are.
If Interest rates rise there will absolutely have to be a correction in price – everywhere. Lenders are already lending amounts far beyond what their formulas up until the mid-90’s called for. Once/If Interest rates rise people will simply be able to afford “less house”, there really is no two ways about it – Lenders aren’t going to be able to adjust the qualifications downwards. Also, many people (huge numbers) are still (riskily IMHO) buying ARMS – so that they are squeezing into their dream house today at 4.25% and gambling that in two years they can refinance at (close) to that or today’s level. Imagine these people in a lending market of 8-9+ % ….
The only OTOH I can see is if the product dries up. “Blowero down the road got 575K for his last year and I expect 600K and I won’t sell for a penny less.” The dry up in product might be able to keep prices high (here I would use artificially high) for a while – but houses will sit unsold unlike what we are seeing now it’ll be a very different market … and that can’t last – eventually people begin to settle and that brings a cascade in price … my $0.02.
The Bottom line Blowero : tell me where interest rates will be in '05,'06,'07 and I’ll tell you where housing prices will likely be.
Dang! I left my crystal ball in my other pants pocket. I have no idea. I keep hearing that they will supposedly go up at some point; it stands to reason if they are at historical lows, they’ve got nowhere to go but up. But I’m no expert; I was counting on you guys to give me your informed opinions.
OK, since you’ve asked, here’s an opinion from someone who’s not an expert.
In extreme housing markets, such as many urban areas of California, the conventional theory of ‘interest rise=housing price deflation and visa versa’ do not necessarily apply. There is simply too much demand for a low inventory of housing.
That said, a combination of factors such as interest rise and a depressed economy could soften or deflate prices(see the Contra Costa Times article in my above post). The value on a house I once owned in the 90s went down, in this crazy market, if one holds on to it long enough it eventually goes up.
In my uniformed opinion, if housing prices go down dramatically, they’d be accompanied by a depressed regional or statewide economy that would include things like job loss, pay check deflation, and deflation of property, goods & services.
Will that happen, I guess I’m betting it won’t…but it could.
I bought just outside LA 3 years ago. We’ve slapped on a little paint since we moved in, planted some flowers, and presto! We have 6 figures in equity.
California’s population is booming. There’s no shortage of people who want to buy houses here, and there is an incredible lack of housing. I get half a dozen realtor’s cards on my porch a week begging us to sell, because the house supply has dried up. In short, high demand, low supply, prices go up.
But! you say, there has been a net emigration from California. My sense from the figures I have seen are that they are lower income people seeking cheaper housing in the deserts eastward. So… lower income leaving? Demand not curbing? Prices stay high.
But! You say, the boomers will begin retiring and moving to smaller homes or moving out altogether, and the busters aren’t numerous enough to take up the slack. However, I say, with the sharp increase in home prices, you’d be crazy to sell something you almost own free and clear. A lot of boomers are going to stay put unless prices decline everywhere else. Plus, the “babies on board” of the mid-1980s are heading out for college now, which means apartment rents aren’t going to be low for very long. People on the fence as to whether to pay astronomical rent or just jump into a mortgage will go for the mortgage. Demand for houses stays up. Prices stay high.
No bubble at all, simply good old market forces at work.
The only thing that will make prices drop dramatically will be a serious natural or financial disaster that deeply impacts people’s desire to live in this state. Could easily happen, but so far, no.
I have no idea. I keep hearing that they will supposedly go up at some point; it stands to reason if they are at historical lows, they’ve got nowhere to go but up. But I’m no expert; I was counting on you guys to give me your informed opinions.