Sunday, April 01, 2007


Looks like the local real estate community spinsters are working overtime to drum up a reason to say "its a great time to buy". Not that they ever need a reason for that.

Before we get to the latest article. Lets look at some some other measures of "affordability". During the most recent speculative mania, the dot.con bubble, YHOO was trading at 100 times earnings, while JDSU was trading at 200 times earnings. Both stocks were projected to continue growing at 50-100% per year. We all know what happened with those projections. Those projections sound very similar to some Realtors who claimed "10-15% for the foreseeable future" and "we should see 20-25% increases in 2006".

So was YHOO more affordable as a stock compared to JDSU? Within a few years both stocks had dropped over 80%! They were both incredibly over priced and no matter how hard the cheerleaders at CNBC tried to pump up the market, eventually some sanity returned and the true valuations appeared. That is what will eventually happen to our housing market. The fundamental drivers of local real estate prices, primarily household incomes, will eventually catch up with mass speculation fueled by cheap and easy credit.

Our affordability index (HH income to Median home prices) has gone from 38.5% in 2001 to 13.5% in 2006. Median prices have gone from $93,000 in 2001 to $276,000 in 2006. Meanwhile HH incomes have gone from $36,000 in 2001 to $37,500 in 2006. How could home prices go up so dramatically and HH incomes not even keep up with inflation? Mass speculation fueled by cheap and easy credit. The same things that drove the last speculative mania. The same thing that has driven every speculative mania since the Dutch Tulip Bubble, the South Sea Bubble, the 1920's Florida land bubble, the 1929 stock market bubble, the 1980' Japanese bubble in real estate and stocks and all the other speculative mania. As with all these once the credit spigot turns off and investor sentiment changes the game is over!

From today's Bakersfield Californian:

City leads in affordability

Experts not surprised by reports touting Bakersfield's market

BY JOHN COX, Californian staff writer e-mail:

News that Bakersfield's home market was listed as the most affordable in California last year doesn't surprise Michael Marlowe "at all."

In fact, the owner of Michael Marlowe Realty in Bakersfield said affordability is the silver lining behind a recent report by the California Association of Realtors that Bakersfield's median home price declined by 5.1 percent to $280,000 between February 2006 and February 2007.

As he and many other Bakersfield real estate agents see it, the area's relatively low home prices -- as compared with other metropolitan areas across the state -- ensure that the city's home market will not experience the free fall predicted in other markets across the country and the state as the nation's housing market cools.

"The value in Bakersfield is pretty good," Marlowe said. "Our home prices won't drop as much as other areas because of our affordability to begin with -- our original affordability."
A recent report by BusinessWeek Online supports the belief that Bakersfield remains an affordable place to buy a home.

The 2006 Coldwell Banker Home Price Comparison Index, which looked at major metropolitan areas across the nation, found that Bakersfield's home market was the most affordable in California. It compared the prices of 2,200-square-foot single-family residences with four bedrooms, 21/2 baths and a two-car garage.

The index determined that no other market across the state posted a lower average price than Bakersfield's average of $303,750. (Beverly Hills ranked as the most expensive, with an average price of $1.8 million.)

Local real estate agents have welcomed the index as a nugget of good news amid a series of troubling reports. Several forecasts have called for a 5 to 6 percent decline in home values this year. Also, the number of Kern properties entering some stage of foreclosure in February was 634 -- almost 31/2 times the total in February 2006, according to RealtyTrac, an online marketplace for foreclosure properties.

Local appraiser Gary Crabtree, who makes people in the real estate community wince with his public prediction that Bakersfield's median home price will decline by as much as 6 percent in 2007, says the forecast would be worse if not for affordability.

"We still have that going for us," he said.


Anonymous said...

Nice synopsis of the current situation.

Christopher Thornberg (Economist from UCLA) presented an analysis of Amazon's stock when it was selling for $200 a share during the tech bubble.

Based on dividends alone (NOT speculation), the question how much of the complete 'book/CD/DVD' market would Amazon have to capture to justify that $200/share price, based on dividends?

Turns out that even if Amazon had captured 100% of the market (a monopoly), Amazon stock STILL wouldn't justify $200 a share. Then, as now, market frenzy was at play.

While it goes against my grain to look at a house PURELY from the investment standpoint (and not primarily as a home/shelter), let's play the flippers game here...

During the Great Housing Bubble of 2000-2006, speculative buyers were rushing to buy ANY property, simply because they saw that housing was not only a place to live, but an investment that offered a good ROI (return on investment), especially if they could use OPM (other people's money) to get into the market, AKA leverage.

The reality was that the speculative real estate game made sense, as the rapid price appreciation made MANY real estate investors VERY wealthy, earning more than most people earn in their jobs. So as a short-term spec investment, it actually made great sense to buy real estate in 2003 at $800k if you could 'flip' it in a month or so and sell for $900k.

It was a nice game, until it ended.

(FWIW, we’ll overlook how housing prices in California haven’t made ANY sense for ‘buy and hold’ investors since 1999; anyone who wanted to purchase a home for use as a rental would no doubt find their expenses wouldn’t be met by typical rents; but I digress).

But now that we have all these over-valued homes in 2007, with nowhere to go but DOWN, how can anyone justify buying at those prices NOW that we KNOW the game is over?

Answer: they cannot. The flipper's game is up, and so should their inflated prices. The odds of that investment returning a profit are no ZERO (in fact, depreciation is GUARANTEED), so why buy into a losing investment?

The reason an investment is different from putting your money under your mattress is because there’s a reasonable expectation that it will provide a good ROI in the future. An investment that offers a greater chance of returning better profits would cost more, right?

If someone sold a stock on Wall Street that was almost guaranteed to LOSE money, would you buy it? I’d think not…

And that's what we have now with housing prices.

Now that we’re past the ‘peak’ of the Great Bubble (and the sub-prime “free money” spigot has been shut down since Mar 07), how exactly does these price make ANY sense ANY longer?

Have the stuck sellers/flippers NOT read the headlines for the past few months? Are we expected to sacrifice OUR financial futures, just so THEY can enjoy the easy life now? Am I supposed to be the last idiot holding the bag?

Why would I buy a leaky balloon that would allow my “equity” to be eaten alive, just for me to get “upside-down” in a mortgage?

Anyone buying at these prices will find their home GUARANTEED to become an "equity black holes": your mortgage payment check will go to the lender, but the money won’t be coming back out (at least, until the next speculative cycle inflates prices to similar "pie-in-the-sky" prices)...

But that raises the question: at what price does buying a house make any sense, after a bubble?

Oh, yeah: put the frenzy aside, we're now we’re back to asking about fundamentals of housing, like opportunity costs, e.g. the cost of the rent vs. own calculation, etc.

Bakersfield Bubble said...

"But that raises the question: at what price does buying a house make any sense, after a bubble?"

I am also asking that same question. I don't think anyone will be able to call the absolute bottom...

Matt said...

YHOO and JDSU never had positive P/Es, in reality. Their "earnings" left out the cost of stock options.

Anonymous said...

I would guess the newspaper is looking for the most positive angle so that they can sell more advertising. The companies would probably really gripe if they had to pay a whole bunch of money for property ads running right next to bad market stories advising everyone not to buy.