California housing market at 'tipping point': UCLA

[Zorro]

Here's a current prediction regarding California real estate...

<snip>

California's housing market is overvalued by up to 45 percent and at a "tipping point" that will end its red-hot growth cycle, the UCLA Anderson Forecast projected on Wednesday.

California's housing market, one of the strongest and most closely watched in the United States and the engine of the state's economic recovery, is heading toward a "soft landing" that will slow the state's economy, UCLA Anderson Forecast senior economist Christopher Thornberg wrote in a report.

The forecasting group said in June that California was facing a housing bubble and predicted it would deflate slowly rather than pop as many analysts have projected.

As the state's housing market cools, many of the building and finance jobs it created will start to disappear and consumers emboldened by rising home values will pull back on spending, Thornberg wrote in his latest forecast report.

<snip>

More at: http://news.yahoo.com/news?tmpl=story&u=/nm/20050928/us_nm/economy_california_dc_1

I personally don't see how prices here in California can continue to climb the way they have for the past four years. $500K in LA won't get you much these days, and I don't see how people can afford mortgages at those prices.

[Book Lover]

1. I'm in the SFBA and I agree

Back home on the East End of Long Island, you can get 1+ acres and 6 rooms for $700K. Here it gets you a 3 room rancher. Only so many people are going to put up with that...

[Robertwf]

2. I remember

when I laughed at houses priced at $35K, thinking they were outrageously overpriced for our neighborhood. It humbles me now to see houses for sale at 1/2 million and up. People are leveraging loans like there is no tomorrow. We all know that the tipping point is near and it's our kids who are going to be tumbling when it comes. What role do the feds really play, other than setting interest rates?
The sad thing is that overpriced houses cause the donut effect--People have to move to less expensive areas, leaving the inner cities because they are economically uninhabitable.

[necso]

3. I'm seeing

some (physical) signs that the housing market (in niches in SoCal, anyway) is slowing down. But many folks haven't come around to this point of view (that house prices are not, generally, going to rise much more -- or much longer). And people's appreciation of a situation and their expectations for it can play a significant role in what actually takes place. (Especially in a market where speculators and speculation set prices, or at least drive them one way or the other. Which is part of the reason the government churns out reams of hopeful, useless economic numbers, along with an assortment of positive spiel.)

I think that the slowdown will grade into slow retreat followed by rapid decline when people finally catch on -- and all-too-popular, bullshit loan structures finally start to kill debtors... and the speculators start to panic.

There's a lot of speculation money in the housing market, and many owners have essentially bought-in to being speculators without knowing it. (People are often naive, gullible and hopeful.)

The bad thing about speculation in the housing market is that, to a certain extent, other buyers are forced to play the speculators' game (these other buyers need a place to live, and owning makes good sense in many cases*), unlike the situation in, say, the stock market, where most people can avoid (directly, anyway) playing the game.

*: And we live in a society (an "ownership society"), where if you don't have valuable assets, you ain't shit.

[SheilaT]

4. What I cannot begin to understand

is how ordinary middle-class people can qualify for the loans to buy those ludicrously overpriced houses.

[Joebert]

5. The loans are the reason this can happen.

When you are ALLOWED to sign a loan that says you get no equity in your home for 5 years, and 100% of all payments for the first 5 years are interest only, this happens.

When that interest only period ends, their mortgage payment goes up by 20% because you are now paying principle as well.

People are able to qualify because the loans are designed to get people into homes under the belief that they will save for the day that the principle needs to be paid.

People believe that by the time that rolls around, they can refi at a great interest rate.

People believe that the house will appreciate so much, that equity will be theirs, and they can sell at a great profit.

Basically, it's the banking industry causing this problem.

[SheilaT]

7. I guess I fail to understand because

I have never lived and tried to buy a home in a market like L.A. But I do know I would prefer to live in a smaller home I could afford than in a huge one that would saddle me with debt and in which I would have no equity.

The three times my husband and I have bought a home we have always bought a smaller and less expensive one than we might have so as to be able to afford it. Our current home is paid off, and whenever I think of purchasing a new one, I think in terms of selling this one and perhaps paying cash for the next one.

I do understand the need for a mortgage, but I don't understand the "need" for the kind some people are getting, such as you described above.

[enid602]

6. LA

They can't. Only 29% of LA City households are homeowners. That includes a huge number of condos.

[Greyhound]

9. They can't. That's why it was essential to pass the "bankruptcy reform"

act. Without the relief of bankruptcy we will become indentured servants. Welcome to the real new world order.

[Zynx]

8. California's real estate market is out of touch with reality.

It is just like when Microsoft and Intel traded at more than 80x earnings. They corrected sharply and the California real estate market will too.

[Zorro]

10. More fuel for the fire

From USA Today:

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High-end housing bubble likely to pop in hot markets

Prices for luxury homes in hot housing markets will likely decline over the next few years, the head of home mortgage buyer Freddie Mac said Thursday.

But Freddie Mac Chairman and Chief Executive Richard F. Syron told Boston business leaders he expects no nationwide decline in home prices, although appreciation should slow for more affordable homes.

Syron said the recent spike in high-end housing prices in places such as metropolitan Boston, New York City and in California constitute a bubble that will soon burst.

He did not offer a forecast on how far prices in those markets could decline. But he said the drop could be big enough to affect the overall economy as owners of pricey homes see their property values decline and become reluctant to spend on other items, like cars.

<snip>

More at: http://www.usatoday.com/money/economy/housing/2005-09-29-syron-bubble_x.htm

IMHO I feel the real estate market will be undergoing a major shift in direction within the next 6 months.