Oct162013

Coastal California real estate least affordable in the nation

Everyone wants to live in Coastal California, so we are running out of land. Prices are supported by fundamentals, and it’s different this time. Prices are rising rapidly, so you better buy now, or you will be priced out forever.

Does any of that nonsense sound familiar? Each of those made my list of common fallacies that were widely believed during the housing bubble. Except for the brief hiatus caused by a nasty real estate price crash which exposed these myths for the nonsense they are, these wildly popular beliefs are making their way back into the collective consciousness.

We can add new fallacies to the list thanks to the housing bubble. How about, “The government will either support house prices or bail us out if they fall.” That’s a great reason to buy a house, right? Or perhaps this one, “If you overpay and can’t afford the payments, the lender will modify your loan and let you keep the house.” What could go wrong?

The kool aid intoxication was bad during the housing bubble, and I am seeing many of these foolish notions resurface in the comments on this blog — which I find astonishing. These foolish beliefs are a direct result of the moral hazard promulgated by lenders and government officials working diligently to reflate the housing bubble. This in turn prompts enough buyers into action that we’ve already eliminated the undervalued condition briefly enjoyed in several Coastal California housing markets. We now lead the nation in a lack of affordability.

Where Can the Middle Class Buy a Home?

By Conor Dougherty — October 10, 2013, 12:01 AM

If you’re in the middle class and want to buy a home here’s a piece of advice: Move to Ohio (if you’re not already there).

Some 86% of homes in the Akron, Ohio area are within reach of middle-class buyers in the area, the highest share in the nation, according to a report from Trulia, the real estate listings site. The next two cities on the list, with 85% of homes affordable to middle class, are Dayton and Toledo, respectively.

I don’t want to sound too elitist, but I’ve been to Ohio, and I personally wouldn’t pay much of a premium to live there. Much of the reason for Ohio’s great affordability is due to the weak economy there.

For those of you in the coastal elite who are reading this post for the perverse pleasure of finding out just how unaffordable your city is, you might be surprised to hear that New York isn’t No. 1. San Francisco is the least affordable place to be a middle-class buyer, with only 14% of homes within reach of those making the median San Francisco household income of $78,840, according to Trulia.*

None of the readers of this blog, including my many guests from Patrick.net will find that surprising.

However, we were slightly surprised by the next two most unaffordable places, Orange County and Los Angeles, respectively.

Coastal California has been unaffordable since the first housing bubble of the 1970s. Since we have such stringent growth restrictions, we likely always will be relatively unaffordable. My monthly reports show current pricing as being fairly valued based on historic norms, but that only underscores how unaffordable Coastal California is most of the time.

New York was the fourth least affordable place to be middle class. After that were San Diego and San Jose and Ventura County.

For those keeping score, that means six of the seven least affordable places in the country are in California.

That said, for all the doom and gloom that’s been piled on the middle class of late, they are still able to buy a home in the lion’s share of U.S. metro areas. Among the 100 largest metro areas, in 87 at least half of the homes were within reach of those making the area’s median household income, according to Trulia. Most of the most affordable places were in the Midwest and South.

*Your blogger moved to San Francisco from Brooklyn, N.Y., last week and has found himself in the unlikely position of being nostalgic for New York real-estate prices.

I remember the sticker shock from home prices when I first moved to California. I sold my new 1,800 SF 4/2 house in Leesburg, Florida, in 2001 for $117,000. When I arrived in San Diego, I started looking for houses, and I vividly remember seeing a run-down crap shack in a bad neighborhood asking $180,000. I knew I wasn’t in Florida any more.

Who does high house prices really serve?

Have you ever pondered whether or not high home prices are a good thing? Who benefits from high home prices the most?

In the short term, people who timed the real estate cycle well benefit the most. California real estate has been described as the incumbent’s club because those who owned before prices ran up gained the most benefit. But let’s conduct a though experiment on this and see who really benefits the most.

Imagine a city where households make about $100,000 per year and house prices are about $400,000. Now, let’s dramatically lower interest rates, restrict supply, and perform other manipulative magic to force house prices up to $800,000. The people who owned prior to the increase in prices receive a windfall. But since price can’t move up in a sustainable level any faster than wage inflation, all the tricks and manipulations of price only serves to increase the aggregate debt in the market. Eventually, as the old sellers with equity cash out, new buyers come in and borrow the $800,000 necessary to buy a house. Over time, rather than create mountains of equity, owners end up with mountains of debt. Who benefits from that? The banks.

Over the long run, high house prices only benefit the banks that provide the loans to inflate house prices. Eventually, every owner in the market ends up with extraordinarily high debt levels because they had to take on such large debts just to climb on the property ladder. At each successive move up, they take their equity and their higher wages and increase their debt more and more. A few manage to get out of this rat race and retire their debt, but they are a small minority. In the end, it’s the banks who are the real winners.

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[idx-listing mlsnumber=”PW13206305″ showpricehistory=”true”]

837 OHIO Ave Placentia, CA 92870

$379,900 …….. Asking Price
$434,667 ………. Purchase Price
3/19/2013 ………. Purchase Date

($54,767) ………. Gross Gain (Loss)
($30,392) ………… Commissions and Costs at 8%
============================================
($85,159) ………. Net Gain (Loss)
============================================
-12.6% ………. Gross Percent Change
-19.6% ………. Net Percent Change
-22.9% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$379,900 …….. Asking Price
$13,297 ………… 3.5% Down FHA Financing
4.30% …………. Mortgage Interest Rate
30 ……………… Number of Years
$366,604 …….. Mortgage
$124,453 ………. Income Requirement

$1,814 ………… Monthly Mortgage Payment
$329 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$79 ………… Homeowners Insurance at 0.25%
$412 ………… Private Mortgage Insurance
$580 ………… Homeowners Association Fees
============================================
$3,215 ………. Monthly Cash Outlays

($391) ………. Tax Savings
($501) ………. Principal Amortization
$21 ………….. Opportunity Cost of Down Payment
$67 ………….. Maintenance and Replacement Reserves
============================================
$2,411 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$5,299 ………… Furnishing and Move-In Costs at 1% + $1,500
$5,299 ………… Closing Costs at 1% + $1,500
$3,666 ………… Interest Points at 1%
$13,297 ………… Down Payment
============================================
$27,561 ………. Total Cash Costs
$36,900 ………. Emergency Cash Reserves
============================================
$64,461 ………. Total Savings Needed
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