When I graduated from college and moved to California in 2003, the housing market was already running away from reality. All level-headed signs pointed to a bubble. John Talbot’s The Coming Crash in the Housing Market hit the nail on the head, or so I believed. I saw Talbot speak in Palo Alto in 2005 defending his well researched hypothesis, and he nearly got run out of the auditorium.
The insanity lasted longer than we (probably John, myself, and the three other housing bears) thought. Housing ran up parabolically until 2006, and did not roll over in earnest until 2008. In July 2010 I wrote a renter’s manifesto in which I declared I’d never buy a home.
And for the past 22 months, we’ve happily rented a 2 bed 2 bath condo, which I believe was originally intended for sale around the $500K mark, for $1650/mo, far less than the mortgage payment alone would have been.
Since that time, the facts have changed, at least in my local market of Sacramento. And when I say facts, I mean prices, which have continued to collapse at a breathtaking double-digit annual rate in percentage terms. Headlining the Sacramento Bee today is a report that median housing prices in Sacramento have reached two-decade lows when adjusted for inflation. Now THAT’S a bear market!
Median prices for new and existing homes in the Sacramento region, adjusted for inflation, have dropped to their lowest levels in at least two decades – even below the doldrums of the last housing bust in 1995, according to a Bee review of data from CoreLogic, a real estate tracking firm.
The median price of homes in the Sacramento region was $178,000 during the last quarter of 2011. That’s 10 percent below the median from the previous year and 58 percent below the median from 2005.
Sacramento County sports a thin six weeks of official inventory – though the “shadow” inventory of foreclosures-to-be is a significant unquantified overhang. Still with mortgage rates at historic lows, the local housing market malaise is puzzling on paper – perhaps until you consider that most current home owners are underwater!
We’re now seeing homes listed in the Midtown area (where the action is) for less than $200/square foot – I was shocked to find things this cheap, as I hadn’t paid attention to the local real estate market much in the past three or four years.
If we put on our technician hat, though, this is not a market to be bought – it’s one that continues to grind lower:
We’re still seeing lower highs and lower lows here in Sacramento – even in the most desirable neighborhoods. (Source: Trulia)
The wild card, however, is interest rates. If rates move up – and there’s a lot more upside potential than downside from here – this will end up being the time you wish you bought. If rates continue to grind lower – a bet on Bernanke being able to tame the long end of the yield curve over an extended period – then waiting the housing market out may be the way to go.
After all, when thinking of 30-year mortgages, the goal is actually not to minimize the purchase price, but rather to minimize the monthly payment (provides we’re talking about a traditional mortgage, of course).
Many otherwise good traders go broke trying to predict the direction of interest rates. So if we but away our crystal ball, step back, and look at this from a probabilistic standpoint, we’re now seeing housing that’s cheap, and rates that are low.
The Economist also recently took a look at global house prices, and concluded that US prices were undervalued with respect to both rents and income (check out the piece and you’ll see that much of the developed world appears quite a bit pricier than the US).
US houses could get cheaper from here, and rates could go lower from here – but they are each at low enough levels for me to admit that I’m now intrigued (especially with regards to my home market). Hey, even us permabears need to enjoy an occasional sunny day, right?
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