Housing values in Western metro areas soaring

Fed's low rate policies the catalyst; but is this too far, too fast?

Housing values in Western markets continue to soar, according to data released this morning (April 25) by Zillow.com. Year-over-year prices for the period ended in this year's first quarter zoomed in Phoenix (up 24%), Las Vegas (22.3%), San Jose (22.1%), San Francisco (21.4%), and Sacramento (20.1%), the leaders. (Phoenix and Las Vegas are rebounding from extremely deep holes.) Nationally, the yearly gain was 5.1%, and prices in Chicago were down slightly and Cincinnati flat. San Diego's year-over-year gain was 17.1% and Los Angeles's 14.9%. Normally, housing prices nationally move up about 3% a year, says Zillow. However, these times are not normal. The Federal Reserve has pounded short term interest rates down to almost zero (below zero adjusted for inflation) and long rates, including mortgages, have been brought to extremely low levels. Speculators, obviously, constitute a good part of this market, and the gamblers seem to be betting on the West despite prices that are already very high compared with the rest of the nation. The Fed's easy money policy depends on unemployment staying high. Thus, the question is, as prices rise, how many regular residential homebuyers will be able to afford these prices. San Diego's median home value is now $396,800.

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Even with the extremely low interest rates, who will be able to afford these homes? Has there been a jump in wages that would allow another wave of home buying from regular residential homebuyers? I thought wages were pretty flat in this area--wouldn't this lead to another round of foreclosures and the sounds of bubbles popping again?

aardvark: No, wages have stayed flat or even gone down, other than for the top 10% or so. The irony is that interest rates are so low BECAUSE, according to Bernanke anyway, of the high unemployment. So you ask the right question: once the speculators have run out of gas, who can afford these homes? Best, Don Bauder

Absolutely. For first time buyers, without family help, the prices are probably out of reach. But I've lived here since 1975. There are many ways to buy that first house.

First, I've found family help with the down payment is prevalent among Californians. When I graduated from San Diego State with my engineering degree, I was suprised when a co-student was able to buy a house in an area that I wanted to buy, but couldn't afford. How? Mommy and Daddy paid the 20% down, that's how.

Second, many Americans move here after selling their out-of-state houses (divorces are one source of local tech employees, at lower wages to boot). Hey, divorce the ball and chain, sell the house, and get out of Dodge. Move to the sunshine. They even settle for less of a house than they had back there. Anything to write back home and brag about the beach sunsets.

Third, immigrants have a tendency to put 5 or more people on the mortgage. That's how my wife and her seven sisters bought their first house in Tierrasanta for Mom so many years ago. Now everyone has a big house. Family first.

How do they buy them? Any way they can. After almost 40 years experience, I see no end in sight. Just the same old cycle. They'll buy them any way they can.

mridolf: Yes, those who say housing has bottomed and will roar permanently upward again are a bit shortsighted. Best, Don Bauder

They are not a bit shortsighted, they are f*cking idiots. NOTHING goes up forever. Sooner or later, everything comes down, in varying degrees. Case in point. We own quite a few rental properties. Most of them are in Southern Cal. but we did have 3 in the Seattle area. Since late last year, we have sold 2 of them. The reasons were simple. At 62, we're pretty confident that we will likely see another housing bubble burst in our lifetime, so we decided we didn't want to deal with quite as many properties as we have, and decided to start paring down a bit over the next 5 yrs or so. We started with the ones in Seattle because all 3 of them are now above the valuations they had pre-crash; actually more like 2005-2006 valuations and with the market the way it is in Seattle, the easiest to sell.

tomjohnston: You make good points. As you recall, economists were certain that housing prices never fell. They read statistics showing that prices fluctuated in some markets from time to time (San Diego is an example), but overall nationally, prices kept rising over time. Federal Reserve Chairman Ben Bernanke made a monumental mistake in stating publicly as the bubble expanded that he was not worried that housing prices were out of line. The Fed (and others) had not studied the vast, complex, intertwined global network of housing-related derivatives that almost brought the economy down. Hopefully, Fed economists will listen to tomjohnston in the future, and realize that housing bubbles and the related derivatives can blow up. But there seems to be no enlightenment yet. The derivatives have actually grown. Best, Don Bauder

From this I predict a deluge of re-finance home scam phone calls.

Murphyjunk: I would not be surprised if we get more such scams, atthough in San Diego, anyway, US Attorney is cracking down on such frauds. Best, Don Bauder

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