San Diego Housing Crisis is coming back?
“Is San Diego heading into another housing crisis?” “Is San Diego’s housing market experiencing a bubble?” These are the question that continue to come up as our clients, friends and investor seminar attendees read about rising home prices. So let’s take a look at them.
Signs of a Housing Crisis?
We just watched the film “The Big Short”. It is based on the non-fiction 2010 book of the same name by Michael Lewis about the financial crisis of 2007–2008, which was triggered by the build-up of the housing market and the economic bubble.
(Spoiler Alert!) The meltdown happened because banks were irresponsibly giving mortgages to people who couldn’t afford them. The banks then bundled all those mortgage IOUs into bonds and other more exotic securities and sold them to big-time investors, including pension and hedge funds, under the pretext that they were extremely safe investments. The bonds were AAA because the issuers paid the rating agencies to rate them at AAA even though they did not qualify for such ratings.
HousingWaire reports a new AAA-rated mortgage bond is about to hit the market. “But before everyone goes thinking that this new mortgage bond is a harbinger of the housing crisis redux, nearly three-quarters of the loans in the deal have never been modified, while nearly all of the remaining loans were previously modified and are current.”
Pessimists would say “here we go again” “Housing Crisis is coming back”. While these reactions could be “dramatic overreaction”, Moody’s Investors Service handed the vast majority of the tranches of the deal “AAA” ratings does not give you any comfort if you watched “The Big Short”.
Another sign of Housing Crisis?
Home flipping is back and bigger than ever in some markets, a sign the housing market is overheating again, according to a new report. RealtyTrac found that the level of home flipping — buying and reselling a home within a year to make a quick buck — in 12 markets last year was above the pre-crisis peak set in 2005.
“When home flipping numbers go up, it is usually an indication that the housing market is in trouble,” said Matthew Gardner, chief economist at Windermere Real Estate, who was quoted in the report.
“These sales artificially inflate home prices, making housing even less affordable for buyers and increasing the risk of a bubble,” said Gardener.
It’s different this time
It’s different this time and you can’t simply compare to previous Housing bubble. In 2005, we were told by a mortgage officer that if you are a realtor you could buy a house up to $1 Million with stated income. Not any more. Underwriting standards as well as the regulatory standards have been put in place to prevent another financial meltdown.
Also Home buyer demographic is different. Previous housing bubble was created by speculators who bought multiple properties with 0% down Interest-Only Home Loans, believed that housing prices would keep going up. Before their monthly mortgage payments could jump to possibly unmanageable levels, they thought they could sell the properties for a profit (the interest-only period typically only lasts for the first 5-10 years of the loan).
In 2015, buyers put an average of 24 percent down on their home purchase (down from 28 percent in 2014, and 25 percent in 2013, but more than what has been the traditional 20 percent since 2009). In what could further exacerbate a future housing inventory shortage, buyers in 2015 indicated they plan to keep their home longer than ever – an average of 20 years – substantially longer than the six years cited by home buyers in 2013.
Also, the 2015 average mortgage is down 29.4% from 2005 – 2006 peaks due to low interest.
New San Diego Housing Crisis is already here
Trulia’s chief economist dissected recent housing data to prove what many thought in the first place: There’s not enough home inventory on the market to keep the market healthy, particularly at the lower end. The National Assn. of Realtors followed with a report that existing home sales were down in February owing largely to a lack of inventory. In San Diego the inventory of starter homes in San Diego has fallen 80 percent over four years, from 4,415 in the first quarter of 2012 to 864 in the first quarter of 2016.
Business Insider wrote “this time the crisis is all about one thing: supply” “home prices may increase, and as an investment — not a place to live — buying houses may still be attractive for some time to come.”
“But demand for housing is not going away and will only get stronger.”
“Millennials are growing up, and despite all the trend-piece fanfare suggesting otherwise, will be just like their parents: Millennials will have kids, move to the suburbs, and want to buy a house.”
“The problem is there might not be enough houses, at the right price points, to go around.”
Is it good time to buy, invest?
Timing is everything and Markets are cyclical. Finding the best time to buy and sell is called timing. Timing is one of the most misunderstood concepts in real estate.
It is hard to advise someone not knowing their situation. But first of all, you need to set the Big Goal (read “The Art of Big Goals“). Is your Big Goal to be mortgage free when you retire at 60? Is your Big Goal to flip houses so you can quit your job? Is your Big Goal is to make $5,000 per month in passive income? If you wait for the next 5 to 10 years or so will the market hit the bottom, and can you achieve your Big Goal? If you know where you are going, there is a path to get there. It is always the right time to buy the right property. Any time opportunity meets your criteria and you act, you have timed the market successfully.