Reader Asks About "Limited Supply of Homes"; Home Hunting in California

Reader Brendan from California has some questions about housing. He writes ...

Hello Mish

I have messaged several Certified Financial Advisors and housing experts about the pending housing outlook for 2016 and 2017. Many suggest housing is related to oil and the stock market. Others say employment outlook and QE play a role.

According the NAR, "there is a limited supply of homes" thus the demand will continue. 

What do you think? 

We are saving to buy a home, but continue to get priced out of the market. I am doing everything possible to make a  good family decision.

Thanks
Brendan

Don't Rush!

Hello Brendon. First off I commend you for seeking multiple opinions and not rushing into anything.

That said, please recall the alleged shortage of homes in 2005 and 2006. There was no shortage was there?

Rather, there was an increasing number of people willing to pay any price to get in.

The same is true today. The big difference today vs. the mid 2000s is that local variations are more widespread.

Realistically, there is never a limited supply of homes, but rather a limited supply of homes at prices people are willing to pay.

In California, especially around San Francisco and Silicon Valley, people once again are in a mad scramble to get in at any price.

This just cannot last. So it won't.

Hunting Homes in Silicon Valley

The Washington Post reports on What it’s like to house-hunt in Silicon Valley, the nation’s priciest market.

It’s Sunday, which means house-hunting for Barry and Katie Templin. They have been on the prowl for months and saving for years, looking for a place with reasonable commutes to their technology jobs and good public schools for their two young children. They hope that is not too much to ask, even in Silicon Valley, the nation’s most expensive housing market.

They pull their decade-old SUV up to a house that needs to be torn down yet is offered at $1.5 million. “Home has original GE metal kitchen cabinets,” the listing brags. They walk up to find the house unlocked and empty. Black mold crawls over the walls. The ceiling is caving in. The wood floors groan as they pass through.

“It’s like going into a haunted house,” Barry Templin says.

“I can’t believe this is 1.5,” Katie Templin says.

“It’s because it’s Los Gatos,” explains agent Laura DeFilippo of Alain Pinel Realtors.

Pure Madness

The words that best describe asking $1.5 million for a home with black mold, a ceiling caving in, and original GE metal cabinets are as follows: Pure madness.

If I had that piece of property I would want to get rid of it. When the cycle turns, and it will the seller will be lucky to get one third of that asking price.

That is the dilemma. And that is why Brendon's request for "housing outlook for 2016 and 2017" is far too short.

I advised many to buy in 2009-2011 after pointing out the risks. I cannot do the same today, except in places where valuations are not absurd.

Ramsey Su on Real Estate

I know Ramsey Su as a common-sense real estate expert from 2001-2003 when he posted on a Silicon Investor message board I hosted. He now posts on the Acting Man Blog.

Those wishing to buy a house as well as those interested in real estate in general would be advised to peruse the Ramsey Su Archives on Acting Man.

Specifically, I recommend his most recent post, Fed Action and the Real Estate Market.

Su discusses among other things the "Central Planning Dilemma". He also notes "There are so many things that are fundamentally wrong with the real estate market that I will leave most of them to future rants. For now, I would like to point out that the market suffers from an acute supply and demand imbalance, both geographically and in terms of its mix. All the demand in Silicon Valley is not going to help Texas, which may start to reflect the stress of the oil industry."

Su concludes with "The market cannot handle a 5% or higher mortgage rate. Refinancing still accounts for over 60% of mortgage applications. At 5% or above, the only refinancing business left would be the government’s HARP subsidies. As for purchases, all stressed out first time buyers with high debt to income ratios and low down payments will be wiped out. Without the entry level, the trade up level is gone as well."

I conclude with, if you believe a home you want to buy may not be affordable, then undoubtedly it isn't. You could get lucky, but it's far more likely you would become another trapped victim. Caution is in order.

Mike "Mish" Shedlock