Why the Housing Market is At or Near Bottom

[Torie]

I know we have hit bottom absent further general economic deterioration when the rate of return on buying and renting out a reasonably nice house begins to generate a nice return compared to other investments - say 4%-5% NOI in Socal (not for a fancy house, but not for a dump either).  And with fixed interest loans at that rate, that means basically you can buy a house in theory for nothing down, and still not have any negative cash flow. That to me creates a floor. It would require a decline in rents really to break through it.

[Torie]

Once household formation begins taking off with 'Echo boomers/Gen-Y' cohort, than we'll see some sort of revival, but nothing like 2002-2006.

I wonder how long it will take for inflation adjusted prices to be as high as in 2006-2007. Probably never?

Well assuming the Feds don't demand and then create a subprime leveraged world again, improbable, but if 1) the economy bounces back, and 2) interest rates stay near zero, then yes, we could get back there. The odds of 1 and 2 going together however, are about as high as you and jmfcst becoming fungible on social issues. Another avenue is to just make green zones out of whatever buildable land is left out there, the better to save the planet while at the same time, say doubling my net worth. I like it!

[Torie]

Yeah, barring some other constraints prices shouldn't rise as much as they did, but they will to some extent. But I do think the bottom is more or less here, though I wouldn't be surprised if we stay around here for another 3-5 years with housing prices just bouncing around at the same spot. A decline in inflation adjusted prices perhaps. Do you think prices will fall in LA County and OC more, or will they stay relatively high due to demand? "Saving the hills" does help keep prices higher but in California, the topography pretty much makes high prices inevitable.

 For example, if the Santa Ana mountains weren't there, another freeway or large road could be easily built into Riverside County and housing prices would go down in OC. But building a road through the hills, even after clearing the environmental hurdles, would be a highly expensive proposition and would likely get saturated quickly in any case. Thus, we are left with the  mess on the 91 and the differential in housing prices between the two counties.

Well there is also a difference in climate and air quality and well, ambiance, between Riverside and OC, perhaps, that might generate some of the price differential action.  

Yes, given NOI rates versus the cost of money, I think we are basically at the bottom (some places are really bouncing back up now, like well, where most of my real estate empire is ), except maybe in a few of the center of the storm subprime pockets, like out there in Stanislaus County, and Desert Hot Springs and whatnot, provided CA's economy does not tank, driving down rental rates. Just how much stress CA's near terminal fiscal problems, combined with its out of this world dysfunctional governance (where basically the game is for special interest groups to loot the state for all its got, with politicians they own, while the looting is still good), will put on CA's economy is beyond my pay grade. But it's out there.

[Torie]

Nice chart. I hadn't realized how flat to declining housing prices were through the 1990s. I bought in 1988 and knew that there was a decline in the recession of the early 90's, but since there was so much new construction growth in my area after that, I didn't pick up the lack of price growth.

That chart doesn't necessarily imply flat-to-declining house prices during the 1990s, does it?  Just that they were not increasing at any rate higher than that of rents.

True, but I went to the web site and saw that adjusted for inflation house prices were flat in the 90s.

Was it just because of Gen X'ers relatively small size?

In general, over the long haul, to wit the long term secular trend, housing prices simply go up at the inflation rate, absent some perturbation, like a change in demographics, or a slash in property tax rates, or cheap and loose credit (sub-priming gone wild) or whatever. In fact, when you strip out the leverage, they kind of act, at least for apartments, like a long term TIP. Someday, I will try to match the value changes of my real estate portfolio with long term TIPS. The subprime thing did however generate a variance, as the cap rate for real estate went up a bit, while going down for TIPS.