The question of housing affordability – 17 US markets near potential price bottoms. Two are in Southern California. Southern California also has counties where mid-tier cities are overpriced and continue to correct.

http://www.doctorhousingbubble.com/housing-affordability-17-us-markets-near-potential-price-bottoms-socal-midtier-housing-real-estate-prices/

Housing affordability matters.  One of the biggest line items used to qualify home buyers is yourhousehold income.  This is why it is hard to understand why some people simply choose to ignore the most important factor in sustaining housing markets.  Household income drives rental prices and also drives household values historically.  Should these ratios get out of whack because of exotic mortgages or imprudent lending then prices will rise but as we are seeing, will adjust lower back to more historical trends once the unsustainable trend pops.  Some arguments hold very little water in the current landscape.  Many markets in the US may be near market bottoms and we will highlight 17 of them.  They all have very similar characteristics and some are here in California.  Other areas are still over priced by historical measures.  Let us examine the markets where price bottoms may have been reached.

17 US markets with potential bottoms

In many markets of the US if you have a solid job buying a house looks to be a good financial move.  Yet some people are so niche focus that they forget that the US is much bigger than say Culver City orBurbank.  Some may argue that lower interest rates may change the equation but keep in mind low rates apply to the entire country so wouldn’t these income to home price metrics adjust everywhere thus pushing prices up evenly?  Of course but this is why some markets may be stabilizing while mid-tier markets in Southern California fell over 5 percent in 2011.  Let us take a look at a wide range of markets where home prices may be reaching bottoms:

The list varies across the country.  I’ve included a handful of California markets as well.  In these areas if you have secure employment and would like to settle down, there is likely to be very little reason not to buy.  This isn’t a question of being a bear or a bull.  It is a question about understanding home values in a historical and local context.

Home price to area income ratios absolutely matter.  You’ll notice one key element here as well.  Even with low interest rates a historical home price to income ratio holds steady.  Each one of the affordable markets above has a home price to median household income ratio ranging from 2.43 in Bakersfield California to 3.15 in the San Bernardino and Riverside markets here in Southern California.  You mean we have some affordable homes here in SoCal?  Absolutely.  In these markets buying makes sense if:

-You have secure employment

-Plan to stay long-term (i.e., 7 years or more)

The cross section above is extremely diverse.  You have markets in areas like McAllen and Fort Worth Texas that had almost no bubble even during the craziness of the housing mania.  Then you have markets like Pensacola Florida and Merced California that have collapsed so bad that home values are coming back in line with local area incomes.

Where the bubble still roams

The above list includes 11 states and we can include many more as well.  The nationwide median home price is close to $150,000 so in many areas, home prices are looking attractive.  Los Angeles and Orange counties are not two of those areas.

The Los Angeles Case-Shiller data includes Orange County.  For the year of 2011 prices continued to move down in these markets:

December 2011 (latest data)

Month to Month: Down 1.1%

Year to Year: Down 5.2%

Prices at this level in: August 2003

Peak month: September 2006

Change from Peak: Down 40.8% in 63 months

Low Tier: Under $289,982

Mid Tier: $289,982 to $474,017

Hi Tier: Over $474,017

If home prices were viewed as cheap don’t you think sales across the state would be soaring?

So why are prices still inflated in these markets?  Let us go back to 2000 when the bubble was already starting and look at three California counties:

I would argue that the housing bubble in Southern California started in the late 1990s but we’ll be conservative and use 2000 as our baseline.  When we look at the metrics above a ratio of 4 seems to hold for home price and income.  So compared to our affordable list above, this translates to one more year of household income tacked on to the median home price.  As we stated before, low interest rates help the entire nation so why is it that the majority of markets across the country still maintain stable ratios even today while these markets remain inflated?  The fact that home prices in mid-tier regions fell over 5 percent in 2011 tells you that yes, home prices in relation to incomes do matter and that is why prices continue to fall.

Home prices in these markets today are more inflated than they were in 2000.  If we look at incomes and home prices today versus the baseline of 2000 we realize that these markets have gotten more expensive even with prices of today and slightly higher incomes:

Where nationwide it takes roughly 3 years of household income to buy a home, in these three counties in 2000 it took roughly 4 years of household income.  Today it is over 5 years of household income and the economy is doing more poorly than it was in 2000:

California unemployment 2000:                 5 percent

California unemployment 2012:                 10.9 percent

What should you take away from all of this?  Home prices in a large cross section of the country look to be affordable.  Prices in Los Angeles and Orange counties are still inflated.  For home prices in these regions to get back even to their 2000 ratios, prices would need to adjust lower by:

To reach 2000 ratios

Los Angeles:                       -$78,264

Orange County:                                -$108,480

San Diego County:           -$65,308

Since most first time home buyers are going in with 3.5 percent FHA insured loans, the above gap is likely to wipe out any down payment.  To buy in these counties a tiny amount is needed:

FHA 3.5 percent down payment

Los Angeles:                       $10,115

Orange County:                                $13,720

San Diego:                           $10,675

Yet some want to get the green light to buy.  Look, if you have an absolute need to buy and your life is completely unfulfilled until you buy in one of these mid-tier markets, go ahead.  No one is stopping you.  In fact, the banking controlled government wants you to overpay.  But if you look at this from a purely investment perspective, many other US markets do make sense on every front.  For Los Angeles and Orange County mid-tier markets they do not.

Condo market pricing

http://www.housingviews.com/2012/01/04/condo-prices-largely-weaken-in-october/

October 2011 data for the S&P/Case-Shiller Home Price Indices were released on Tuesday December 27^th, revealing monthly declines in condo prices in four of the metro areas – Boston, Chicago, Los Angeles and San Francisco. The San Francisco index reported the largest decline, down 2.6%; in October versus September, but Chicago was close behind, down 2.5%.  The LA condo index fell by 1.7% and the Boston index by 1.6%. Condo prices in New York rose marginally, by 0.1%, in October, their fifth consecutive monthly increase, and are showing positive annual rates of change, up 0.5%.

With October’s report, Los Angeles condo prices have fallen 15 consecutive months. The index was down 8.2% in October 2011 versus October 2010, which is worst annual rate of the five markets covered by our indices, and hit a new crisis low in October 2011. San Francisco’s condo market is now down six consecutive months and also posted a new crisis low in October. Average condo prices in San Francisco are down 8.0% versus October 2010. Chicago prices are down 7.7%.

The chart below compares the index levels for the five condo markets covered by the indices, rebased to 1995 = 100. The blue and red lines represent Los Angeles and San Francisco, respectively, where you can see the 15 month declining trend continued for these two markets in October. On average Los Angeles condo market prices are back to their mid-2003 levels; while San Francisco prices are back to mid-2002 levels.

S&P/Case-Shiller Condo Price Indices. Sources: S&P Indices and Fiserv.

On a relative basis the New York condo market is the most stable, as the table below highlights. New York condo prices were the only ones up on both a monthly and an annual basis in October.

The chart below illustrates the differences between New York, Los Angeles and Sand Francisco over almost 12 years. The green line clearly shows the New York condo market is the best relative performer coming out of the recent crisis.  Condo prices are still up over 102% versus January 2000.  By comparing the green, grey and orange lines, you can see that the New York condo market has been fairly stable over the past three years and has been on an upward trend since January 2011; whereas the California markets continue to weaken. The LA condo market has fallen by 40.8% since its July 2006 peak; the San Francisco market has fallen by 35.6% since its October 2005 peak; but the New York market has only fallen by 12.8% from its February 2006 peak.

S&P/Case-Shiller Home and Condo Price Indices. Sources: S&P Indices and Fiserv

Future of housing in bubble markets 2011

 Slowly the market is working its way through on a nationwide scale but what about those markets that still have bubbles?  Banks may try to recapitalize on a larger scale and slowly move on inflated markets as their balance sheet becomes better (aka more taxpayer backing).  The future demand is likely to come for lower priced homes just like we are seeing today.  There is little evidence showing household income stabilizing or moving higher in recent years.  This would be the first place to examine if we were to see future changes in the trend of housing.


http://www.doctorhousingbubble.com/protracted-winter-imminent-for-housing-from-1917-to-1945-home-prices-lagged-the-overall-inflation-trend-30-year-real-estate-winter/

Housing compared to JAPAN

http://www.doctorhousingbubble.com/japanese-asset-bubble-lessons-from-the-economic-asset-bubble-of-japan-the-heisei-boom-what-parallels-exist-between-the-japanese-asset-bubble-and-our-current-financial-environment/

Price Vs Renting index

http://info.trulia.com/index.php?s=43&item=129

Ratio of 15 and under is good for buying and Ratio of 20 and over is good for renting. 

Orange county Housing

http://www.doctorhousingbubble.com/the-orange-housing-bubble-orange-county-income-real-estate-bubbble-5-charts/

Irvine housing

http://lansner.ocregister.com/2011/04/21/analyst-why-irvine-new-home-sales-are-booming/107489/

Housing

http://www.bloomberg.com/news/2011-08-24/u-s-home-prices-fell-5-9-in-second-quarter-as-foreclosures-depress-value.html

http://www.fhfa.gov/Default.aspx?Page=215&Type=summary

http://www.npr.org/2011/06/08/137029194/for-many-its-still-a-good-time-to-buy-a-home

Interesting story of a billionaire who is contending for democrate senate

Contrarian Jeff Greene got rich investing in real estate and superrich betting against it. These days he's buying distressed assets and hoarding cash.

Jeff Greene

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Jeff Greene got rich investing in real estate and superrich betting against it. These days his contrarian instincts have him buying distressed assets and hoarding cash.

If the rich are truly an eccentric bunch, newly minted Forbes 400 member Jeffrey Greene will fit right in. The Los Angeles real estate mogul insists he shuns publicity and extravagance--yet his public relations firm directed a reporter to meet him aboard Greene's 145-foot yacht, Summerwind, docked at the Sag Harbor wharf amid the playlands of New York's tony Hamptons.
From the yacht's highest deck, on a cloudless summer day, the other, far smaller pleasure craft anchored nearby look like toy boats bobbing in a bathtub. When Greene is not sailing he bounces between five homes, including a 63,000-square-foot one in Beverly Hills, Calif. Greene dubbed the mansion Palazzo di Amore prior to using it last year to host his $1 million wedding, which the 53-year-old is quick to point out was his first. Boxing bad boy Mike Tyson was Greene's best man. Celebrities like director Oliver Stone looked on as reporters chronicled the affair.
Greene heads down the circular stairs to the living room of his yacht and reclines on a large, L-shaped leather sofa. His wife, Mei-Sze, svelte, tan and two decades Greene's junior, settles in next to him wearing white jeans and a barely there tunic. She places a hand in her husband's and, like a high school sweetheart, leans in every once in a while for a kiss.
"I got into real estate very much by accident," says Greene, tan and wearing white shorts and a polo shirt the color of money. "But I've never had more fun than now."
Making Greene's life so much fun these days: money. After making and losing and making back a sizable fortune over two decades betting on real estate, he has amassed a supersize one the past two years betting against it. Greene is one of those rare people who smelled trouble in housing when times were flush and made a contrarian bet that they wouldn't last.
He did so by creating his own virtual hedge fund and buying credit default swaps that rose in value as subprime mortgages fell. Greene says the trade was up 1,400% in 18 months until the fall of 2007. That seems to have earned him a quick $800 million profit and catapulted Greene onto The Forbes 400 with a net worth of $1.4 billion.
Greene's winning trade says a lot about him. It was brilliant, brash and, in running counter to everything he'd spent his life doing, infused with insecurity, opportunism and contradiction.

In that, at least, there's an element of consistency. Greene is the son of working-class Jewish parents from Worcester, Mass. His father ran a business selling textile mill machinery, lost it and struggled to make a living. His mother was a Hebrew school instructor who taught Greene to save his pennies, look for value and never pay retail.
A nerdy teenager, Greene played classical trumpet in the Doherty High School band and took extra classes to get a head start on college. Admitted to Johns Hopkins, Greene paid his way by selling circus tickets over the phone. Quickly promoted to manager, he traveled the country during his summers off in his Datsun 510, overseeing telemarketing centers and eating at Pizza Hut buffets to save money. Greene graduated after two and a half years. He spent the following three years saving up $100,000 from his telemarketing sales and then entered Harvard's M.B.A. program in 1977.
Greene began putting his savings to work in business school. He put down $7,400 to buy a three-family home, and rented out rooms so he could live for free. By the time he graduated in 1979 Greene owned 18 properties and was generating more than enough income to cover his $4,500 annual tuition. He sold out a few years later for what Greene says was ten times his cost, pocketing a $1 million profit.
"In real estate you make 10% of your money because you're a genius and 90% because you catch a great wave," he says. "I caught the biggest wave in the history of New England."
Convinced the West Coast offered more opportunity, Greene moved to Los Angeles in 1980 and began buying properties. By 1991 he had amassed $35 million worth of equity. Then property prices collapsed. Within a year Greene figures his holdings were worth $15 million less than the debt he owed against them.
He scraped by long enough for the market to begin recovering and sold an apartment building at a $2 million profit. Greene immediately reinvested the proceeds in the rising market. By 2006 he had amassed nearly 7,000 rental units in southern California that pushed his net worth to $700 million.
He hasn't been bashful about throwing some elbows along the way. In one case Greene took actor and movie director Ron Howard to court. The dispute erupted after Howard and his family rented a contemporary glass home Greene owned in the ritzy Brentwood section of L.A. for $28,500 a month while filming a movie. Howard moved out a month into his six-month lease, claiming the house was infested with rats, leaked and had faulty appliances and polluted water.
Greene sued for breach of contract in California state court. Howard countersued for breach of contract and misrepresentation. Howard's lawyer says Greene knew the house was a shambles but lied about it. Greene says Diana Ross was happily ensconced in the home for a year before Howard, whose story-telling Greene says is not limited to the silver screen. A judge ultimately ordered Greene to pay Howard $616,000. Greene appealed the case to the California Supreme Court but lost.
"The moral of this story is, don't ever try to be in a lawsuit against a celebrity in Los Angeles," Greene says (the state's Supreme Court is headquartered in San Francisco).
Other celebs hold Greene in higher regard. That may be partly due to his taste for lavish, all-night parties at his 12,000-square-foot L.A. home, replete with a karaoke stage and disco. It was at such a soiree that Greene befriended Mike Tyson and Paris Hilton. Madam-to-the-stars Heidi Fleiss, another partygoer, ended up spending a year as his houseguest when Greene was single and after she had served time in prison.
"It probably doesn't look good for a single guy to have had Heidi living with me, but we weren't dating," says Greene. "She's a nice girl. I've had her over to Passover dinner with my mom."
Despite his active social life Greene kept a close eye on his business and a few years ago began fearing that a real estate bust was looming. He was especially concerned about how high prices on commercial real estate had become in relation to net rental values--rent minus operating costs. The multiples got up to 25, as high as he'd ever seen them. Meaning: Investors were paying more in mortgage interest than they were taking out of rent. They were expecting to be bailed out by greater fools.
Greene was determined not to lose his real estate fortune a second time. He started calling "every smart person I know" to find a way to hedge his portfolio. That included party buddies, business school chums and money managers.

In early 2006 Greene called hedge fund manager John Paulson of Paulson & Co., to whom he had been introduced in the Hamptons a few years earlier. Greene says J.P., as he calls Paulson, suggested he could short real estate by buying insurance on bonds backed by subprime loans. Greene says he sat down with Paulson for half an hour and looked over a ten-page offering memo for a fund that would make such bets. When he asked whether he could do the trades himself, Paulson told him he was unlikely to gain bank approval, Greene says.
"No one told me how to do the trades," insists Greene, parrying rumors that Paulson was infuriated that his strategy had been purloined (Paulson declines comment). "It was like somebody told you to short oil, but you have to go do 1,000 hours of work to figure out how," says Greene.

housing market was peaking, Greene convinced Wall Street banks to allow him to trade credit default swaps; he is believed to be the first individual to do so. Greene put up $30 million to buy swaps that would pay off from a default from paper backed by subprime mortgages. He increased the bets by $20 million over the next year, focusing on packages of California and Nevada loans and those known as 2/28s--30-year mortgages whose borrowers had been drawn in by 2-year teaser rates that were destined to be higher for the next 28 years.
Initially the market moved against Greene, and by the summer of 2006 he was sitting on a $5 million paper loss. He held on, and the market started to turn, eventually leaving Greene with his $800 million win.
These days he's cashing out his swaps and investing elsewhere. He likes muni bonds. Traditionally, he says, high-grade 30-year munis yield about 80% as much as taxable 30-year Treasurys. But recently hedge funds have been forced to sell to cover losses elsewhere, pushing muni yields to 0.3 percentage points above the yield on Treasurys.
Other Greene plays: paired trades, like one in which he is shorting Treasurys (through interest-rate swaps) and going long Ginnie Mae securities of like maturity; his thinking is that he will profit when the spread between the two narrows from 2.5 percentage points, which is double the historical norm. He's also buying collateralized loan obligations for highly rated companies like Calpine (other-otc: CPNLQ.PK - news - people ) and Dole Foods, whose yields are likewise abnormally high under today's stressed-out market conditions.
Greene's biggest bet, which includes $800 million of his $1 billion in investable assets: cash. "Being in cash, or very near cash, is the smart place to be because things are dropping in value," he says.

Whatever the product, that's the kind of market Greene likes. "I bought it," he says, gesturing to his yacht, "six years ago from a guy in Singapore during the SARS crisis. I paid $6 million, and it would have cost $20 million new." That takes the sting out of the fact that the 350-ton vessel costs $100,000 to fill with fuel and burns 50 gallons per hour. ("Don't print that! It's a bigger carbon footprint than we'd like to have," Greene cautions.)
"A lot of my friends say, 'Now that you've made it big, aren't you going to buy a bigger boat?' I say, 'What for?'" says Greene. But hasn't he been shopping in Hong Kong for a 165-footer? "I'm a trader," he explains sheepishly. "Under the right circumstances I'd consider a new boat. I'm not ruling it out."
Nor, it seems, are Greene and John Paulson ruling out a rapprochement. The two traders exchanged greetings in jpmorgan's box at last month's U.S. Open men's final, and Greene introduced Mei-Sze. It's not Passover with Greene's mom, but it's a start.