The housing bubble

So much for buying a condo; guess I should wait for the crash.

Only in about 20 metro areas, mostly located in eight states, does the relationship of home price to income defy logic. The bad news is that those areas contain roughly half the housing wealth of the country. In California, the price of a home stands at 8.3 times the annual family income of its occupants; in Massachusetts, the ratio is 5.9:1; in Hawaii, a stunning, 10.1:1. To some extent, there are sound and basic economic reasons for this anomaly: supply and demand. Salaries in these areas have been going up faster than in the nation as a whole. The other is supply: These metro areas are “built out,” with zoning ordinances that limit the ability of developers to add new homes. But at some point, incomes simply can’t sustain the prices. That point has now been reached. In California, a middle-class family with two earners each making $50,000 a year now owns, on average, an $830,000 home. In the late 80s, the last time these eight states saw price-to-income ratios this high, the real estate market collapsed.

I think home prices in metro areas will taper out a bit, but for the most part continue to grow and hold their value.

I think we WILL see a massive housing surplus when the majority of baby boomers start dying off. So it should be much more affordable buying a small house or condo 50-60 years from now, too late to do GenXers much good, but our children’s children should do just fine. (Of course, they’ll also have to deal living in a world of depleted resources…)

In California, a middle-class family with two earners each making $50,000 a year now owns, on average, an $830,000 home.

Jeez! The weather ain’t THAT good!

I’ll definitely be interested (not least because I’m a homeowner) to see how the housing market in LA proper goes. I may be living in denial, but most of what I’ve seen doesn’t indicate an impending crash, just a leveling out of prices. LA still has an enormous net influx of people, and still has essentially nowhere to build new housing within the city itself (outlying areas such as the Sta Clarita valley, Riverside, etc. are building a lot, from what I hear). That means that, no matter how crazy it seems, housing will continue to be very expensive just because of supply and demand. Housing prices traditionally crash either because of a change in that equation (lots of new building, or lots of people leaving), or because prices were irrationally bid up in the years before. No change to the equation appears likely, so the only question is whether there’s been an irrational run-up. It doesn’t look like it to me, but time will tell.

At the same time, it’s true that the prices are starting a real housing crisis out here. A typical family simply can’t own a house unless they relocate far outside the city. Even a condo is out of reach for many. The resulting squeeze is spilling over into the rental market (nobody can buy, so everyone rents, driving up the cost of rent). People are coming out with these doomsday scenarios where the folks in the bottom half of the employment pool simply can’t live anywhere in the city. Expecting them to commute 45 minutes the way a white-collar worker might seems unreasonable. People are making all kinds of wild-ass guesses about what’s going to happen.

Supertanker is probably way more plugged into this issue than I am. Any thoughts?

I’ve wondered about this myself. Everyone likes different things, but for me, LA is a primo place to live. Having lived in places with lousy weather (Syracuse, Chicago), the weather makes an enormous difference to me in my day-to-day life. I love not having to bundle up in winter clothes, shovel the drive, etc. And I couldn’t live my motorcycle-only life if the weather were worse. On top of that, LA has lots of great stuff to do: beach, skiing, camping, hiking, not to mention city stuff like tons of great restaurants, concerts, etc.

I also like the diversity of the city. It’s great having all different sorts of people here. And it brings the great side effect of having a huge variety of good restaurants. Whether you want Mexican, any sort of Asian, Italian, Indian, African, Continental, sushi…chances are there’s a really good restaurant of the type in your area, just because there’s a genuine community to support it. I love that.

But LA clearly has some major downsides: expensive, traffic, smog, natural disasters. I’m always amazed that so many people want to live here despite the cost and the traffic (which are by far the biggest downsides IMO). I can’t even consider moving, because in addition to really liking the city, my job doesn’t exist very many other places, and they’re all places that are also very expensive and crowded. But if I made the same money being, like, an author or something, I wonder whether I would stay. I might, I guess, but very possibly not. It makes me wonder about other folks’ motivations.

I lived in LA for 17 years and San Francisco for 3. I’ve been in Milwaukee for 10 years and, well, my house would cost around $500K in LA Rywill, if I lived in a comparable neighborhood. I bought my lovely house here for $125,000 (it’s now at about $180,000 because of some nice development going on nearby - they’re transforming my community into a "Lake Side Boardwalk Alternative to Downtown).

That’s a $315,000 difference all so I don’t have to deal with a little snowfall each year?*

Your example works much better versus Chicago. Which isn’t much better than LA, price-wise and expense-wise, and the weather is just godawful most of the year. Plus Tollways! Also the property taxes are huge down dere.

*AND I get to deal with traffic and smog and overcrowding too?

I’ve been telling my co-workers this for almost a year now, none of them believe me. If you bought a place more than a year and a half ago, you’re good. Anything within that time, well, I hope that it was an upgrade.

So far as LA is concerned, tyu won’t have to wait for them to die, just retire to cheaper states where their savings and 401K’s will give them a better lifestyle than in CA.

A large fraction of boomers will be dead in 30 years, and even more will have retired to smaller houses.

So far as LA is concerned, tyu won’t have to wait for them to die, just retire to cheaper states where their savings and 401K’s will give them a better lifestyle than in CA.

Already happening - it’s what drove Seattle real estate through the roof in the '90s.

A large fraction of boomers will be dead in 30 years, and even more will have retired to smaller houses.

Agreed, but it’s going to take a while for people to realize their homes no longer command million dollar price tags.

I’m having a hell of a time finding more specific data about the seattle market. Anyone know where I’d find stuff like the income/price ratio around here?

A large fraction of boomers will be dead in 30 years, and even more will have retired to smaller houses.[/quote]

I bought my Burbank house for 500K 2 years ago. These days, it’s probably worth 850-900K (it was a rodent-infested fixer upper that had sat on the market for 3 months and 30K remedied 150K worth of “issues”). I’m about to hop up north (in fact I’m in escrow already) to an ocean house in Santa Cruz. I suspect the Los Angeles market will continue to rise due to the housing shortage crossed with the population influx. I’d even stay a while longer except that I think the market will take a transient hit when interest rates start going back up. and my career is in Silicon Valley. My stint here was solely for my ex-wife’s sake, and well, I’ve already described my reward for that good deed elsewhere.

After the interest rate smack though, I suspect inflation will return and housing prices will resume their rise. However, consider this. With 5% down and two loans at roughly 4.5%, a $2000 monthly payment will cover the interest on 600K or so of debt. That’s enough to buy a 1500 square foot 3BR/2BA house in most of the reasonably pleasant areas of Los Angeles. And all that debt is tax deductible so it tends to work out to be cheaper than renting. So if you can scrapw together 30K, you’re golden.

As for the dead boomers, lots of young Latinos and other immigrants will replace them handily. There’s been a huge influx of Taiwanese into Silicon Valley just this year for example. Don’t count on this place becoming a ghost town just yet. And with just a smidgen of fiscal management, you can knock that debt right down over 10 years.

Hmmm. This is not totally accurate. Assuming a joint income of $100k, and 10% down you would max out at $450k - at least according to the mortgage people I’ve just been talking to.

Fuck its expensive in Burbank.