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I guess the bigger question is what can the next president do to create jobs that generate income to purchase $600K homes.

In Ca I think this is more of a state legislature question. The rules in place make very few companies willing to open an office in Ca. This did not matter when everyone got rich off internet and housing bubbles. However now there are no jobs, ie I think unemployment in Riverside county will be reported at 10% for August.

In 2004 through 2006 what percent of buyers do you believe were realtors, mortgage brokers, notaries, etc? Do you know who will replace these buyers? Do you think the state of Ca will relax rules enough so that high income jobs can be created in San Diego?

Slightly off topic but I'm wondering what "rules" LV renter is talking about that make it so hard for businesses in California? If businesses had it so bad here, why is there a Silicon Valley? Why is there a large biotech presence in SF & San Diego? A former coworker of mine and I started a LLC, and it seemed pretty straight-forward. It was great tax wise because the LLC was bringing in a few hundred thousand each year but was "barely scraping by" when you got the accountant to massage the numbers. Seems like businesses have it better off than individuals (at least from my perspective).

No Jim, slam that door quickly. Don't open it up to politics. It always goes downhill after people start getting too political. Look at Pigginton; Everything gravitates towards politics, and it gets ugly.

Jim,
Are you looking for 'consumer confidence' or 'lender confidence'? Consumers seem to be willing to 'buy'. It's the money that's tough to get. What would it take for lenders to become confident with residential real estate again?

OK unsurebuyer, I'll bite. The things that keep businesses in AZ and NV include high health care costs for employees, workers comp, high state taxes, high energy costs (due to environmental regs), high real estate costs for commercial land and office space, and very strict environmental regulations as it relates to waste disposal, air and water quality. On top of that, it's very difficult to hire professionals from other parts of the country and convince them to move to CA where, unless they have a large downpayment, they will be stuck renting or buying a very old poc house in a neighborhood with questionable schools. Tack on high salaries and having to deal with unions on top of that list. Don't get me wrong, I love CA and will probably never leave, but if a business is looking at their bottom line, AZ/NV look a lot more inviting.

Consumer confidence is mostly psychological (excluding those who have low confidence because of individual circumstances such as unemployment).

There is usually some kind of short-term uptick after every presidential election, regardless of which candidate wins, because those who supported the winner are filled with confidence that "happy days are here again," and it is reflected in their behavior and buying decisions. But there is usually a bigger boost when incumbent candidates or parties lose, because those who supported the incumbents were already behaving as if times are good and getting better before the election.

After the "honeymoon" uptick, people will go back to making decisions based on their own personal circumstances and what they see happening to their neighbors, coworkers and relatives.

The national statistics reflect what consumers are feeling and doing, they don't do diddly to persuade most consumers to feel or do anything differently one way or the other.

How much income would a family need to TRULY afford 600K house with extra taxes ...220K+/year is my guess. How many families make 220K+ per year in SD county, 5 maybe 10%?....I'm guessing...

Until those tract homes in cbad, etc. get below $200/ft, I'll be watching from my rented house next to the beach for 2.5K per month.

If you run a business that's based on "brain power," like Silicon Valley R&D, it's harder to pull up stakes and move out, because your braintrust knows that jobs don't last, moving away from the employment center reduces their opportunities in the event they need a new job, and once they move out they'll probably never be able to afford to move back in (at least that's been the pattern for the past 50 years or so).

If your business is based on banging out widgets and boxing them up for shipment, places like Singapore and Shanghai look way more inviting than AZ and NV.

I think this goes well beyond mere consumer confidence.

There appears to be a lot of bad stuff being held back, especially by the lending institutions. You probably see this first hand with a lot of home owners/buyers that are hoping for the market to return to double-digit year-over-year gains.

So, although consumer confidence may be lower now than it was a year ago, I believe it could get much worse over the course of the next year, regardless of who is in office. If you have a medium to large sized bank fail, what would that do to the average person's confidence?

Until the markets sort through this mess and the fundamentals reach an equalibrium, we won't have a truly confident consumer.

The average person doesn't care squat how many big banks fail, unless he or she happens to work for one of them or has a friend, neighbor or relative who does. Most people thing the various indices put out by government and private think tanks are all bogus anyway, and go by what they see happening to themselves and people they know.

Unsurebuyer

NC clearly stated a lot of reasons. I will also add items such as OT over 8 hours per day, not 40 hours per week like the rest of the country. If you tell someone you are stressed out at work that mean a leave with full pay for a month.

CA has some of the best education and does create some great technology companies. However, when is the last time Nissan, Honda, or Toyota ever thought about building a factory in Ca instead Tenn or Alabama? When is the last time a major bank said lets build a servicing center in CA? I know these are not exciting careers but these types of businesses create a lot of jobs including many six figure jobs.

Interesting responses. Personally, I'm glad that those types of corporations aren't setting up shop in CA. They pollute the environment, produce very little long term benefit for a community, and usually end up closing shop within one generation (probably sooner now that we're such a global economy).

I'd rather take the innovation centers than call centers. The long term health of the US economy depends on being the ones to design the next greatest thing not build it. If you study the semiconductor industry, you'll see that we lead the world because we are always moving ahead in design and innovation. The large city-sized foundries that build the chips are based in Taiwan & China (used to be the former but nowadays more are being built in the latter).

The crux lies in that probably only 10% (at most) of the workforce is educated enough to go down that path. What does one do with the other 90%?

http://www.cedarcomm.com/~stevelm1/usdebt.htm

This is a great paper that details deficits and GDP accumulation for the different presidents since WWII. The facts show that Republican presidents always borrowed more and cut taxes, which increased the deficit. Clinton nearly corrected the deficit spending problem and reduced the debt growth rate to 0.32%/year and if his policy had been followed for one year after his 2nd term (by Bush) it would have been the first time since Kennedy that the national debt was actually reduced. Instead, Bush cut taxes and increased borrowing. Clinton's last year borrowed $13B and Bush's first year borrowed $133B. In US history all the debt that accumulated to build every road, bridge, school, etc... up to the point where the 2nd Bush took office has been doubled during his 2 terms in office. If you look at the GDP to compare, it doesn't follow the debt. This country is essentially insolvent, but fortunately, governments can't claim bankruptcy and be forced to liquidate its assets to pay its liabilities.

Why point this out? Well, this countries economy has been fueled by a credit bubble for the past 27 years. To pay back the exponentially growing debt incurred by the credit bubble assumes the US economy will also exponentially grow. It does not. It cycles up/down but the debt remains constant. Even if it didn't cycle, there is a ceiling to how much it can grow. Every economy requires energy and we are addicted to oil. Just like it doesn't matter the price of Atlantic Cod Fish, when the resource is gone it's gone. It's predicted that Oil has passed its Hubbert's peak and no way can keep up with exponential demand. Therefore, the US economy will top out sometime in the next 10 years or sooner... but the debt will remain. The only way to refuel this economy is to start solving our debt problem and neither Obama nor McCain have a policy to fix it. Either one will likely follow Bush's borrowing legacy and further drive the country into the ground. If one were to have a policy to steer the country back on a prosperous course it would involve unwinding the false economy that been created by this credit driven economy. That means, all the boom of the bast 27 years would have to be undone.

Now, I don't think that we're ever going to revert back to a 1980 economic level. However, if the new government doesn't put a policy in place to control our debt balloon then it's only a matter of time before China stops buying our debt and/or countries decide to stop mirror our inflation and drop their peg to the US dollar. Imagine if they converted to the Euro as a global currency by which to trade oil from? The US dollar would become the peso.

To conclude, I don't think either candidate makes a difference to the housing outcome. However, for the new year, once the election is over I can see the Fed stop holding its breath. Interest rates will rise if China doesn't want to buy our Treasury Bonds. Banks may finally foreclose on more of their volume and write down their real losses. Maybe clean up some of their books? More banks will go under and credit will further tighten. The Government should raise some taxes to at least reduce the rate at which it's accumulating debt. All this would cause a period of deflation (which is very bad) but it would be the 2nd leg down... not just on the RE market but in all areas of our economy. House prices would fall to pre year 2000 prices and then, if there's anyone left standing, it will be time to buy.

Of course, there's those that don't see a house as an investment. In that case you can spend your $600k on that house you love. Just borrow as much as you can and pay interest only, or be prepared to fully pay it off, because you're never going to be able to sell it at that price in 3-4 years if you have to relocate or loose your job. If the credit bubble is fully deflated then it will take a generation to pass & forget the pain created by this credit bubble for the next credit & RE bubble to occur. Then you'll get $600k for that house. The only other way is that if the Fed pumps enough $ in the economy to fight off the deflation then maybe the rising inflation will drive the $100k/year salaries to become $200k/year salaries. Inflation will save you and you'll be able to sell your house and break even.

I think that short term, there will be very little difference in what happens to the real estate market depending on who wins the election. At least around here, house sales are slow because few people can afford them (except bottom end). I don't see any government policies from either of the two candidates that address that issue. They aren't going to give average families $100K, and they can't make house prices go down, unless via unchecked inflation, which is wildly unpopular.

Long term, the main question is whether the U.S. will continue to spend far more than it earns every year. We've walked on air for 20 years, but I am doubtful we can continue to do it forever. Tough economic times mean pain in the real estate industry, since that's the single biggest thing most people spend on. I don't see either of the candidates talking about this, presumably because people find it a hundred times more interesting to talk about a pregnant 17-year old girl than about some boring old issue like the fundamental problems with the U.S. economy.

To add:
"If the new president can inspire consumer confidence, could it be enough to get buyers to buy? "

Considering the dire economy being delivered to the next president, any attempt the next president may make to stimulate people would either create further damage to the economy or it would be deceitful for him to say "buy" because the economy is okay. The best thing this president could do would be to create a new bubble such as an alternative energy bubble. Invest billions in nuclear and renewable energy technology that, while it may too burst in the future, would provide the infrastructure and technology to break our addiction to middle-east oil. Then we take those dollars to pay off our debts and buy real estate.

Those are just examples. Yes we all agree innovation and tech are great, but it does not seem to be enough to support the 30 million people in Ca. It did not make a difference when everyone made money hand over fist in the real estate industry. What happens now? How can prices not continue to fall if there are no jobs? Do you think all the retirees and foreigners will create higher prices throughout coastal Ca?

It is literally the only thing that fueled real job growth in CA during the period between the defense cutbacks of the late 80's to the beginning of the subprime bubble. No, not every new job created was in tech, but the vast majority of them either were or existed to provide some kind of service to people and companies that were.

IMO there is a good chance that the "next big thing" that should have happened in the middle of this decade after the recession that began it was stalled at the starting gate because all the VC funding (including money from overseas sources investing in businesses rather than ponzi mortgage securities) got diverted into subprime-fueled real estate scams or the war in Iraq, and we won't see anything resembling good times again until some new "next big thing" comes along and isn't similarly derailed. Until then, prices will continue to fall or be stagnant.

People who want houses and can get funding are buying now - even though many of the people buying to my mind cannot afford the homes that they are buying... because they are spending more than 28-33% of their income on the home - meaning they do not have enough money to pay for every day expenses and fund their retirement and have a rainy day fund - and they are likely to be in trouble if they lose an income.
Some people do have hefty down payments and big incomes and stick within the recommended debt ratios for buying a home - that's great - but I never met anyone who admitted to being in that category in so cal.

I think more people will buy as funding loosens up - with the explicit intent of keeping their down payment as low as possible, and having as little skin in the game as possible. It has been demonstrated that you will be rewarded by the non-recourse nature of home loans by walking away if things go against you - so I think new buyers will be very aware of the sea change in attitude and will not hesitate to hand a future home purchase back to the bank when they want to move and the house has lost value. That to me makes it very scary to be a responsible buyer.

I'd also point out that prices are still extremely high. Oh yeah, a few people got creamed by buying overpriced houses with financing that required reworking their loans in order to be able to pay - and now the people who bought a bit less recently have seen their home prices take a hit because of the timing unlucky and the frauds and the greedy. It is very very hard to feel sorry for home owners. They whine about the loss of their home value - they don't offer to subsidize my rent - which has quadrupled due to increased housing prices. Nor have I heard of anyone offering to refund the losing trades in my retirement accounts. If its good for a house, why not for a dot bomb transaction?

And finally, I'm incredibly aggrieved that the likely winner of the next election Obama, keeps referring to people making 250K as rich and therefore worthy of tax increases. We only claim a few charitable deductions and the state tax deduction so we pay very high taxes - which is ok because it means we have the money coming in to pay it - but 250K here in so cal gets reduced to around 150K after taxes MFJ - and once you start funding retirement, it sure doesn't leave much for mello roos, HOA, and somewhere nice to live. So I think if the democrats win, and they stick to their line of 250K earning families are rich, more people will find themselves falling behind if they buy the kind of homes they feel their pay checks should be able to accommodate. I love the way you don't typically find out about not being able to deduct property taxes due to amt until its too late too.

Actually, I DO think the election will affect peoples' moods and, with the help of lower prices, might spawn another powerful spring kick next year. I do not think it will last or form any kind of long-term trend.

Contrary to the past two years, when I thought inventory would come on more slowly (and it did, especially early in the year), I think we'll see an inventory dump next Jan - March.

BTW, to give more detail regarding Jim's mention above, we are seeing at least 3-5 parties looking at houses (especially new listings or anything resembling a decent deal) in about a 30 minute time frame. This, during all times of the day/afternoon, day of the week, etc. There is **no shortage** of buyers out there.

OTOH, we are seeing quite a few empty houses that are not on the market and have no signs on them. We also hear about the people who haven't paid their mortgages for months, and are living for free on the banks (soon-to-be taxpayers') dime.

One more question for Jim...does it look like there's a bunch of properties being removed from the market right now?

"People who want houses and can get funding are buying now"

Sure, we did last year when we did our relo. We just don't expect to see the prices stop falling and start coming back up anytime soon, and aren't even predicting that we'll see the price we paid again before I reach retirement.

When I first glanced at the title of Jim's entry, I thought it read "ERection & Real Estate." "Ah ha..." I thought, "Jim's getting a lttle kinky this week." Oh well... maybe next time.

Agreed with CA renter's thought about unsustainability of next year's spring kick.

During the boom it was a 12-month market around here. The last couple of years it's been active from Feb-Aug, and slow otherwise.

Once we see a more active fourth quarter, we can talk about overall 'market improvement'.

My thinking is that the next president would need to stop the progression of this recession.

So far, it has been mostly a consumer spending recession and the job losses have been confined to real estate and banking. I don't think that affects the general San Diego population very much.

If the next shoe drops and businesses start tightening their belts, then there housing market will get a lot worse. All of the action in RE sales these days is on the low end to investors. Seems like that will continue unabated. But at the middle and upper end, you need job growth.

Today, there are still plenty of 6 figure jobs available in Sorrento Valley (which is why CV is so strong). 6 months from now, I doubt there will be as many. All businesses will be looking at their FY09 budgets a lot more closely in the coming months and I suspect there will be lots of trimming wherever possible. And sooner rather than later the largesse of the public sector jobs will be more closely scrutinized in San Diego and everywhere else

So I think the employment area should be the focus of the next commander in chief. Personally, I don't think raising taxes on the people who create the jobs for the rest of the population will inspire new job growth. Nor will a continuation of the current regime. So I don't see any spike in confidence on the horizon.

Unfortunately, everything that's been "done" about housing so far will have the effect of slowing but prolonging the progression.

Recessions end when things hit bottom with a big enough thud that there's no question in peoples' minds that there's not another slide waiting around the next corner and people who managed to hang onto expendable investment capital decide that they might as well take it out of their mattresses and invest it in *something.*

Softer, quieter landings always take longer than crashes.

GeneK,
I think it will be a hard landing if the Fed raises interest rates or if they regulate/clamp borrowing against home equity. With this new bailout... I mean, something's gotta give.

http://www.dailyreckoning.com/Issues/2005/DR062105.html#CRIPPLING_WEALTH

We are suffering from a consumer driven bubble. The text book symptoms are:
1) Lack of personal Savings (US national average has none)
2) Large trade deficit (US has a huge one)
3) Sky rocketing debt
4) Booming residential investment (yes it was)
5) Excessive credit expansion (US had $2.72T credit expansion in 2004 with zero national savings).

With an "easy money" credit driven housing bubble and rocketing inflationary prices the pre-bubble owners have a perception of wealth. Money taken from home equity loans / borrowing against their home's bubble equity has fueled the economic growth. The above paper, towards the end, refers to a housing bubble in the Netherlands during 1998-99 that had a hard landing. Before their bubble the citizens had 13% household savings rate and strong economic growth. Their credit and house prices bubbled and people cashed out their home equity and spent it. Their savings rate fell to 6.8%. Then in 1999-2000 the Dutch central bank decided to regulate the growth by raising interest rates, which halted further house price inflation. In their case the house prices didn't fall... they just froze at the prices when the rates increased. This was enough to stop people from borrowing against their home equity. People started saving again and stop spending. This drove "the Dutch economy into the worst recession among industrialized coutries." where "The growth rate of consumer spending sagged in a straight line from 4.7% in 1999 to -1.2% in 2003."

The paper goes on to say that in this case the house prices didn't have to fall rather just stop rising to deprive the households of their new wealth.

The paper concludes that "major housing bubbles imperatively end in a hard landing" and "Yet the worst looming problem is always the potential damage to the banking system through escalating bad loans."

Thanks bearing - and would you agree that it's likely the US economy is doing what Netherlands did?

The RE appreciation has reversed, and as a result it sure seems like the consumer spending has halted in its tracks here too.

How about if we put the whole fed government in 'conservatorship' a sort of predetermined bankruptcy where some debts get paid, and others don't.

The Big Start-Over!

Run it like a real business and lower taxes too!

Jim,

Seems to me our economy, while much larger than, is far worst off than theirs. Our debt and liabilities grossly outweigh our phony GDP numbers and many citizens don't have a savings or pension to fall back on when the hammer comes down. And this is just short term. Long term we got the retiring baby boomer issue to deal with that will likely start to impact RE and the economy once we get today's mess cleaned up. Lets hope the boomers don't want to downsize their homes to pay for the lack of social security, retirement funds or 401k.

I personally think the US Gov will stay the course and continue on the same economic path until our creditors (Russia, China & Saudi Arabia) no longer allow it. The Fed doesn't have full control of the market. They are just a player like the other contenders (ie. big foreign banks). They don't set interest rates. Rather, just inject or remove bonds from treasuries market to push their price one way or another to persuade interest rates to change. The one thing they can do is print as many T-bills or dollars as they want, and as long as someone wants some them the Fed has power.

It could be a while before our creditors bring on the squeeze considering they got a lot of skin in our game. If they do then I hope it will be gradual. If they do anything drastic and we bust then they're the ones holding that bag. We get the clean slate. I did read a paper a while back where the Chinese said if the US Gov didn't bail out Freddie/Fannie, just let her go, then we'd have to face dire consequences. Seems that day Ben & Henry were listening. Now you and I will be picking up Fannie/Freddie's tab.

Lets hope the boomers don't want to downsize their homes to pay for the lack of social security, retirement funds or 401k.

Oh, oh. This should be happening a lot in the coming years, but will there be enough, or any equity to cash-in and still be able to buy another?

LA Times noted today that 7.73% of all adjustable-rate PRIME mortgages in California were 'seriously delinquent', or more than 90 days late.

WSJ noted that many economists predict Unemployment rate will keep rising for another 6-9 months. If true, there may be no spring bounce.