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July 25, 2005
No mass exodus from the Golden State
You may have read stories about Californians bailing from the bubble. They are selling their sharply-appreciated homes, pocketing the proceeds and renting apartments or moving to cheaper neighboring states. It's a nice tale and true no doubt in some cases, but it's hardly a megatrend. The latest data from the California Association of Realtors www.car.org shows that while the number of homes on the market is up, it's up only modestly so. There were 41,900 homes for sale in the Golden State in June, 5% more than last year. Divide that by that by the number of homes purchased and it now takes 2.7 months to sell a house. The long term average is still much higher: 6.5 months. Prices also remain strong, up 16% in June to a median of $542,000. Why aren't more people cashing out? "Where else are you going to go?" asks CAR economist Leslie Appleton-Young. She notes that even trading into a new house can mean a big hike in property taxes thanks to California's Proposition 13, which links taxes to the sale price. So it seems the number of Californians willing to sell their home and downsize to an apartment remains small.
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The move will happen if prices keep rising to levels that price a good portion of buyers out of the market.
I live in a rapidly booming southern state and I see it every day here. People are packing up to move up north where the pay is higher and housing costs are similar (yet a much better house for the same money) or lower (same house for less money). For now the retirees are picking up the slack but unless the industry backfills with good paying jobs in the mean time, there will be a huge sucking sound coming this part of the country. It's the sound of wealth being sucked out of properties.
Let the congressional inquiries begin...
Posted by: Wes at July 26, 2005 04:40 PM
The clue is in the declining rents we have seen in the San Jose area over the past 5 years even while home prices explode. People are not selling their houses, but buying second homes to rent.
Posted by: Dino at July 26, 2005 05:50 PM
I calculate the cost of selling and repurchasing my home would be $200k before tax. Selling and buying would be a breakeven proposition if prices dropped 30%. Most areas I would consider would only amount to breakeven propositions, and other areas would only make sense under full retirement. Is there ever a good time to trade your best performing asset for a poorer performing one?
Posted by: Lord at July 27, 2005 01:16 PM
s there ever a good time to trade your best performing asset for a poorer performing one?
Well, it would certainly have been a great time to sell the NASDAQ in late 99 even if it was your best performing asset.
Posted by: erg at July 29, 2005 08:50 PM
I cashed out in November, 2004, and am renting for a couple of years. The money has been put to good use in tech stocks and my rent is 55% of what the mortgage payment would be in my area (LA-Ventura County line). I've been calling it a bubble for three years. Three years ago it was simply a bubble and now it's an extreme and perhaps unprecedented megabubble. The arguments that this is not a bubble are all crafted by realtors and realtor-driven organizations like CAR and NAR and they simply do not hold water. I especially love the old supply and demand argument when they talk about California's rapidly increasing population. A look at the census statistics from 2000 clearly shows that the VAST majority of California's population increase is due to Latino immigrants and their birthrate (sorry to offend anyone with facts) and this demographic is not going to be putting pressure on 500K mortgages at 6% or higher anytime soon. The bubble has little to do with supply and demand realities and a lot to do with unsustainably low interest rates (inflation is understated while wages have not risen dramatically), hokey financing pushed by the mortgage industry, and speculation. I attended many real estate seminars in 1999 and 2000 and did invest, selling after properties had doubled within 3 years. Now everybody and his cousin is in some real estate seminar, 1% of the population of California has a broker's license, and consumers are overly leveraged and have a false sense of their wealth based on fleeting equity. As Robert Kiyosaki says, when taxi drivers are giving market advice it's time to get out of the market. It's time to get out of California real estate and speculators will start doing so in droves as soon as prices level off, especially of major stock market indices continue to behave as they have in recent months.
Posted by: Dave at August 6, 2005 04:05 AM
Dave, your rent may be half of what your mortgage payment used to be, but you missed out on the 15% appreciation that occured in the first half of 2005 in many desirable SoCal areas. I doubt if you will ever recoup that tax-free $150,000 in your lifetime. Prices will level off, but not fall precipitously. Employment is strong, and pride in homeownership is a force you greatly underestimate.
Posted by: sam jones at August 8, 2005 11:45 PM
Thanks for the comment. Although there was some appreciation in my area in the first half of 2005, it was not close to 15% (I follow local sales quite closely) and sales have slowed considerably. It's true that one cannot time the exact peak and, even though the top local employers are offshoring furiously, there may not be the employment meltdown there was in 1990 when prices dropped 40+% in coastal areas. I'll be happy if I've guessed the peak plus or minus 12 months. The 1990 bubble burst when the affordibility index sunk to 14%, where it now sits statewide (9% in SD County where a buyer must earn over $100K to qualify for the AVERAGE first mortgage). That bubble was actually smaller than this one but burst more rapidly than this one will because of local employment issues. This one involves a greater percentage of speculation than that one and speculators are about likely to bail very quickly once NAR publishes some statistics that show prices have begun to fall. That, along with increased interest rates that have priced virtually all first time owner-occupant buyers out will start the downward cycle. This bubble will deflate more slowly than the 1990 bubble but perhaps to a greater degree over a greater number of years. It might even merge into the demographic shift related to downsizing when baby boomers hit 70 during the next decade or two. In 1990 CA homeowners had much more equity and a much smaller reliance on hokey financing schemes such as the no money down or IO/ARM options. They also had less transferable jobs (i.e., they were less likely to keep the same job and move to Idaho while telecommuting). In general, they also had much less consumer debt and were not lulled into absurd debt levels by years of unrealistically low interest rates. Surveys show that the majority of homeowners in California expect double-digit appreciation indefinitely. This is kind of delusional thinking that accompanies any bubble and it is fostered by media analysis of the subject, nearly all of which is controlled by the real estate industry. It will change rapidly when prices start to fall and the average homeowner, leveraged to the hilt, realizes he can still bail out and transfer to Denver or Phoenix with only a 15% cut in pay but live in a much better area with a much lower debt load. As for the comment that I will never again be able to invest at this level profitably, I believe the opportunity of a lifetime comes along once every three weeks or so on average. It merely requires one to change perspectives often in order to see it.
Posted by: Dave at August 9, 2005 07:41 PM
Now there is a flood of bubble articles. Here's one that points out the absurd ratios of housing costs/income in bubble areas (mostly Wash DC, MA and California areas): http://money.cnn.com/2005/08/15/real_estate/buying_selling/markets_set_to_fizzle/index.htm
It's also really amusing to see the flurry of "this time it's different" articles that are starting to appear. Yes, it's always a new paradigm. Have fun and join me for some profitable times when the foreclosure boom begins in 2007!
Posted by: Dave at August 16, 2005 09:52 PM
The mainstream media is beginning to pick up on the out migration from CA. Check http://www.dailybreeze.com/news/regstate/articles/1837551.html
Of course we aren't going to lose a major industry like in 1990 when the aerospace industry shrank by 15%. Now we have mainly ... ummm... mortgage industry and construction --d'oh!
Oh well, we also have lots of film and auto industry jobs:
There's also this fun fact:
"One in Four Californians Consider Moving
Thu Nov 18, 5:48 AM ET U.S. National - AP
By JIM WASSERMAN, Associated Press Writer
SACRAMENTO, Calif. - A fourth of all Californians are thinking about moving — either out of state or just to another town — to bring down their housing costs, a new survey shows.
High rents and rising home prices have residents, particularly younger ones, rethinking the value of the mountain views and ocean shores they say they treasure. Of the respondents under 35, for example, nearly half say they might relocate to somewhere cheaper.
The study, released Thursday by the Public Policy Institute of California, found that even many homeowners now see little upside to rising prices that have greatly inflated their property values, with many believing they couldn't afford to buy another house in their own neighborhoods. Sixty percent of the respondents worry their children won't be able to buy homes in their part of the state. "
(more at http://22.214.171.124/search?q=cache:62b4164_ywQJ:story.news.yahoo.com/news%3Ftmpl%3Dstory2%26u%3D/ap/california_moving_out+%22A+fourth+of+all+Californians%22&hl=en&lr=&strip=1)
Perhaps more accurate way to see if outflow demand is real is to look at one way u-haul rates for their cheapest truck:
LA to Dallas $1998
Dallas to LA $669
LA to Kansas City $2139
KC to LA $260
looks pretty grim!
Posted by: Dave at December 2, 2005 12:53 AM
There IS starting to be a sizable outflow. I sent some links with a post last week. Why aren't you posting them anymore? The bubble is bursting. California housing market is toast. The realtorspin is as credible as Bu$hco spin about Iraq. Are you going to sit back and miss this story?
Posted by: Dave at December 7, 2005 10:34 PM
So are you completely ignoring the phenomonon now that other sites and media orifices are now reporting? People are leaving California and will continue to do so for some time. I think by next year you will be able to call it a mass exodus: http://money.cnn.com/2005/12/12/real_estate/buying_selling/net_gainers_cities/index.htm
Posted by: Dave at December 13, 2005 02:01 AM
The Mass Exodus file expands: http://www.usatoday.com/printedition/news/20051222/a_census22.art.htm.
Anecdotally, two of the 17 kids in my daughter's class have moved to cheaper states midyear, their parents cashed out in a zip code where a four bedroom house averages $1.1M and moved to Colorado and Florida. There are no new kids enrolling mid-year.
Posted by: Dave at December 24, 2005 09:15 PM
yup, still no exodus... http://www.pe.com/localnews/inland/stories/PE_News_Local_D_exodus22.379a47b.html
Those empty houses in my neighborhood with the for sale signs are a definite sign of the "severe housing shortage" here in California.
Posted by: Dave at January 25, 2006 03:12 AM
The exodus is finally being acknowledged by mainstream media. It's not just my neighborhood, but statewide:
More people now departing state than moving here
Population trend reversing course for 1st time since '98
Cicero A. Estrella, Chronicle Staff Writer
Friday, March 3, 2006
For the first time since 1998, the people who relocated from California to other states outnumbered those who migrated in from other states, according to a report released by the state's Department of Finance on Thursday.
California, which had a population of more than 37 million in 2005, had a net loss of 28,565 people to other states during the fiscal year that ended July 1, according to report estimates.
A department analyst said the loss can't be blamed on a mass exodus similar to one that the state experienced before the dot-com boom of the late 1990s.
Howard Roth, chief economist with the department, said California's housing costs discourage people from other states from moving here.
Posted by: Dave at March 7, 2006 12:13 AM