Fear and Greed Counterpoint

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Quite some time ago, I wrote Fear and Greed, or How Did The Housing Bubble Get So Big?. I re-ran it just a few days ago, to once again illustrate what went wrong.

But Fear and Greed can keep the market down as well as send it up.

Right now, rates are pretty darned good. They're not going to shatter any records, but 5.875% on a thirty year fixed rate loan for less than one point retail is nothing to sneeze at. With a 20% down payment, a family making San Diego Area Median Income of 69,400 per year can afford monthly payments of $2600, which works out to about $433,000 for a single family detached property. That's full on PITI payment. With no down payment at all, this same median income family can afford a condo costing about $301,000, and that's with association dues and PMI included as well. Keep in mind this is the median income family, where half the population makes more, half less, no tricks, no government assistance, no stated income, no negative amortization - just a thirty year fixed rate loan where nothing changes (except in a good way, when PMI gets canceled if they have it) until and unless the consumer decides to change it. If you don't know where to find perfectly good homes meeting this criteria, and in areas with great schools and convenient commutes as well as convenient shopping, give me a call because I do. They won't be billionaire's homes in Rancho Santa Fe, but your family will be perfectly happy there. I've been lazy of late, but I have a whole category for bargain properties. As of the time I'm writing this, the most recent posting was Nov 12, 2007, and there isn't a property in the last dozen that one of the families above couldn't buy. A lot of the ones I've posted on are still on the market, though. Why? Partially because most agents have forgotten how to sell the property that fits in a budget (if they ever knew), but mostly because the media keeps telling everybody how bad things are. Hello! These are the same bozos that were telling you real estate can't miss as even a short term investment in late 2005, and running specials on "What's a fair margin for a negative amortization loan?" right up until the day Business Week ended the party by calling them "Nightmare Mortgages," and in some cases, after. Media makes their money by convincing people who don't know any better to pay attention to them so they can sell advertising space. They are not about Truth. They're about getting people to pay attention to them, and Fear and Greed $&euro££ pap€r$ and indu¢&euro p€op£&euro to pa¥ att€ntion. The cold hard fact is that prices, at least in my usual stomping grounds, are affordable for average families - more affordable than they've been for years.

It's not like there's any shortage of people that want to live here in San Diego. Nor are people packing up and leaving in droves, like they did in the early 1990s. Land itself is expensive here, the total amount available is sharply limited, and almost all of the places than can be built upon, have been. Nor are any of the municipal governments doing anything to encourage higher density so more people can be accommodated. The one city government that hasn't been completely hijacked by the "keep housing scarce so we can make a big profit when we sell" lobby is El Cajon, which even has a few older detached single family homes in decent areas below $300k, and a development of brand new 1800 square foot townhomes being sold out at an asking price of about $350,000. That same price buys about 1100 square feet right next door in La Mesa, while in the suburb on the other side or El Cajon, Santee, the best equivalent is about 1700 square feet with an asking price of about $380k. Nor do I expect the grip of the "we've got ours!" lobby (even if they do pretend it's all concern for the environment) to weaken any time soon. It's all the same to me, professionally, but folks hoping their children can afford to live here so they can see their grandchildren grow up might want to reconsider voting to restrict development next time it comes up.

Those who are counting upon the rental market to stay the way it is should rethink. The last ten years rents have stayed almost constant due to people wanting to keep the places rented, in order to have some of the mortgage offset, lest their tenants (who are usually focused upon cash flow) go buy something. Especially considering the easy credit that was available in the era of Make-Believe Loans. However, the rental vacancy factor is only 2.6%, and there are now an awful lot of people who have ruined their credit and do not have the option of buying for at least two years. Add in the fact that (as I warned almost two years ago) landlords are not seeing the huge capital gains that motivated them to keep rents low, and we're starting to see rising rents. High demand, low supply, and a significant captive market. What would you expect to happen to rents?

But until inventory starts dropping and people wake up to the high demand low supply situation we have here, it's a buyer's opportunity. Actually, I've seen considerable evidence that the high end market has already begun the process of recovery. Executives, entrepreneurs, and highly paid professionals - properties with an asking price of a million or more have an average 118 days on market, as opposed to 103 for all properties, when it's usually at least forty to fifty percent higher, not a mere fifteen. Of the properties that have sold in the last six months, the average days on market was 81 for sales prices in excess of a million, as opposed to 71 overall, again a 15% differential, and the percentage of listings over a million ask that sold was within 1% of the overall figure, which is highly unusual, because the people that make enough money to qualify are a very small part of the population. Nor can they get 100% financing - it doesn't exist right now for those properties. I've got lenders that'll go up to three million residential, but even full documentation they want to see a minimum of 10% down right now once you get over a million dollar loan, no matter how good the credit. (Loans under the conforming limit, it's still pretty easy to get 100% financing done, so long as you're full documentation of income)

My point is this: The only thing holding the local market back right now is mass psychology. Fear and Greed being fed by the mass media, just as they were being fed when the market was rising thirty percent per year. There are more people that want to buy than there are properties available - particularly properties below half a million dollars. It's just Fear of losing some money, albeit temporarily and only on paper, and Greed for an even better price, that is keeping people on the sidelines. Meanwhile, those sidelines are getting more and more crowded all the time with people "waiting until the price is right." When Fear and Greed stop holding people back, it's quite likely going to look like the Oklahoma Land Rush of 1889.

Unlike the Oklahoma Land Rush, nobody's going to shoot "Sooners" this time. Actually, I'd expect them to welcome you the same way potential buyers have been welcomed these past two years, with low prices and a lot of seller cooperation, because until the both the market turns and the average seller realizes it, buyers have all the power in negotiations. And there really isn't a reason other than Fear and Greed to be hanging out on the sidelines. We've all seen how Fear and Greed can hurt when the market is rising. If you wait until it has become obvious that the price fall has reversed itself, well, you're not going to get directly hurt, but you will have missed what may be the period of lowest prices from this point going forward for the rest of most people's lives.

Caveat Emptor

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This page contains a single entry by Dan Melson published on January 7, 2008 7:00 AM.

Practical Applications: Credit Cards versus Home Equity Line Of Credit was the previous entry in this blog.

Buyer's Markets Are A Great Time For Moving Up is the next entry in this blog.

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