Affordability?

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: jcox@bakersfield.com

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.