Is it crazy to expect real estate prices to drop between 10-30% over the next few months?

Finance
41

People with median incomes don’t buy median houses, they live in apartments, condos, tiny old houses, or with family or roommates.

I used to think that too, but there are lots of other factors at play. Median incomes can probably stay flat or go down while median housing prices are propped up by investors and foreigners. More than half of LA county residents are renters (source). Even more than that in SF. Rents keep going up (over long term) and the percentage of income that renters are spending on rent keeps going up. Also people move around – those who can’t afford to live in the city can try to move farther away, while those who can, move closer. This could probably continue indefinitely.

42

If employers continue to let people work from home there is no need to deal with LA or SF. Why deal with the high rents, all the outrageous taxes and traffic, and all the stress when you can live anywhere?

Urban housing prices could get crushed.

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43

WFH might impact the housing market in the most expensive places. We’ll have to see how that pans out. It really doesn’t make financial sense to pay SF, NYC or SanJose prices if you can WFH from anywhere. I’m sure some employers will adopt WFH broadly and open some of that up. But I"m not sure how much attitudes will change on it across entire industries.

I mean the reality is that many of us we could have been doing WFH for 5- 10 years but employers didn’t wanna. Several years ago my employer forced 100’s of people to relocate or quit just to have ‘butts in the seats’ and almost all of those people could have just worked remote instead. Now they are WFH. A few of them never really relocated and just worked in another state for a few days of the week and traveled home on weekends. Just for the ‘butts in the seats’ mandate from above.

I don’t really know why some in corporate America are so opposed to WFH but I don’t think that is going to change entirely now that its been proven to work. Also we are making assumptions of the true productivity of WFH longer term.

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44

Well yes, but many older generations that hung onto those properties have done well for their children.

Family inheritance of old home sites. :laughing: Those children are sitting pretty now. Or better yet, large property sites that stay in families are so valuable. Children & grandchildren are not screwed if they are smart & know how to handle their situation,

45

LA county price history: All-Transactions House Price Index for Los Angeles County, CA (ATNHPIUS06037A) | FRED | St. Louis Fed

I bought my first house in 1998. If I’d bought in LA area then and held for 20 years I’d have a 5.8% compound annual growth

Lets go back a generation and look at 1978 to 1998 for comparison. That period saw a 5.4% CAGR

Were homes in LA ever really ‘affordable’ ? I dont’ recall that being the case in my lifetime.

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46

I have heard stories of people buying houses for 100k in Hollywood in the early 1980s… most families were probably making 20-30k a year back then. Now the same house is easily 1.2 - 1.4M and the familes are only making 80k a year in income. Incomes perhaps tripled but the homeprices went up more than 10x.

47

How about the interest rates / monthly payments? Difficulty in getting the down payment and the loan? I think all these things became easier/cheaper. Maybe not for everyone, but for enough. Easy credit inflates the baloon.

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48

They probably don’t think they will get the same number of hours out of an employee working from home. If they have some way of gauging that, or this forced experiment proves that it is productive, it will become more acceptable. They will have to adjust for the percentage who take advantage and only work half a day for a full day’s pay.

49

I remember an internal study conducted by the USPTO about 5 years ago. They had a policy that employees could WFH. The extensive audit was prompted by a clear issue with productivity. They found out many employees weren’t really working on the hours they claimed. Some people lost their jobs or got other sanctions. In summary, you and I are honest, hard working bees. Not everybody is like us.

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50

I guess it depends upon the type of work. Our company was only extending WFH to few employees before (I was one of the lucky few) because some people abused the system. But in Q2, they found out that productivity metrics are actually up and investment levels are way down (less AC, water, travel, etc) while revenues went up as well. Initially, they were gung-ho on everyone returning to work in the office asap, now we’ve been told WFH until the end of the year. I think they’ll just see where it goes over the longer run and simply punish the bad apples that slack off from home and let everyone else WFH if they prefer.

If that trend gets mirrored elsewhere, I think it’ll definitely impact real estate prices. Location close to work become less relevant than your internet speed and equipment if you WFH. And if employers figure that they no longer need to pay employees premiums for living in expensive locations, they’ll be more than happy to let them WFH and pocket the difference in investment costs.

But that trend currently may be balanced by how cheap credit has become. With APY at their lowest ever, it’s putting upward pressure on prices.

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51

Yeah for sure. One of my coworkers watches soccer games while he is AT the office, I can only imagine what he’s doing WFH.

I think it will depend a lot on the nature of the job and the company culture.

I’m on a salary. We’re all engineers that don’t need much supervision. And my company is a meritocracy.
We don’t count hours but if we don’t produce then we’ll get canned (sooner or later).
So it works at my company. Different situations WFH would not fit well.

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52

You also need to remember that all these employees who started working from home almost literally had nothing else to do all day; they were forced to actually stay at home, and not just from work. I’m sure some have been intentionally burying themselves in their work just to get some time away from the kids, who were also stuck at home.

I dont know if Q2 results should be representative of the ongoing expectations. (And I’m not saying it wont work permanently, Q2 just isnt proof that it can)

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53

When you are salaried (an actual salary, not just a consistent $X/hr x 40 hours), you are being paid to get the job done regardless of the time it takes. That type of job is what works best with working from home, since there is no time accountability.

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54

I think it’s at the very least proof of concept enough that it CAN work provided people actually work and not slack off. I know some people hate WFH and some like me who’d prefer it. But it’s been an eye opener for management that we have been much better off than they anticipated considering their reluctance to allow people to WFH before.

And CEO admitted that extending the experiment - now willingly unlike during the shutdown - is partially due to wanting to figure out if it was an abnormality or something they see consistently happening. Time will tell. But for those jobs where management was on the fence - like ours - about WFH, this has provided them some data points. Part of it I think is culture. Some people saw WFH as a slacker’s dream. Once everyone realized this was the new (temporary) normal and that was how work looked like with COVID-19, I think culture may have started to shift.

In the end, I imagine that the forced experiment will still result in more people WFH long term so I still think that it’ll cause a downward pressure on home prices in some downtown areas. But it may take a while to play out too. Longer than a few months since companies are not gonna make huge changes to their workforces on a single quarter of data.

55

Yeah my dad bought a house in the 80’s for like $15k. And candy bars used to be a nickel.

Houses were ~$100k in CA in the 1980
Incomes were $~25k

The median home price in LA county is currently ~$640k
Median income in the county is $68k

So the ratio went from 4:1 to 10:1 Yeah you’re right, its’ through the roof.

BUT …

Mortgage rates were 10-17% in the 1980’s. Today its 3%.

10% interest on a $100k house in 1980 is $10k in interest payments alone. Thats 40% of median income for 1980 just to cover the interest on a mortgage. Payments would be $877/mo or $10.k/yr or 42% of income

3% interest on todays $640k house is $19.2k and just 28% of median income for the interest
Payments of $2700/mo or $32.4k a year which is 48% of income

(I’m just assuming 0% downpayment for simplicity, but saving up a downpayment on a astronomically expensive house is a challenge too for sure)

Also back in the 80’s and before people spent more on food, clothing, cars, etc cause all that was more expensive.

In the 1980’s people spent :
15% food
6% clothes
20% transportation

Now its :
13% food
3% clothing
16% transport

Lets add it all up:

mortgage payments on a median house in 1980 plus food, clothing, transport = 42% + 15% + 6% + 20% = 83%

Interest payments on a median house today plus food, clothing, transport = 48% + 13% + 3% + 16%
= 80%

Bottom line if you add it all up the spending levels on food, clothing, housing and cars is not much changed. Plus everything is bigger now.

How big was the average home in 1980 vs today? And in the 60-80’s families were 0.5 people larger.

56

Yeah for sure. I don’t know but I’d expect that most of the people working from home right now are on salary.

If the jobs aren’t salary then the employers would probably want to find some way to monitor work activity and ensure people are actually at the job during the hours paid.

But I’m sure most of us could easily foil that. Log in. click buttons every few minutes, watch TV… We could even setup automated programs or hire a person in a lower wage nation to do our jobs for us.

57

You’re also ignoring DTI requirements that include property tax + insurance and usually can’t exceed something like 45%, and for the very best terms (like the 3% APR mortgages) might be even lower, like 36%. :slight_smile:

So yes, price to income is definitely out of line compared to 1980’s, but actual affordability is not 10x out of line.

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58

Yeah I would much rather have a house purchased with a low price at a high interest rate than a house purchased at a high price with a low interest rate.

The individual with a high rate can refinance if rates fall in the future and pocket the savings (that’s exactly what happened). They can also opt to save and pay down their mortgage aggressively.

Someone who overpays for a house proped up by artifically low interest rates is SOL.

59

I’d rather lock in 3% for the rest of my life then take 15% now and hope it goes down.

I don’t know anyone old enough to remember actually paying those 10%+ loans who thought that was any kind of good deal even in hindsight.

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60

The point is that yes houses are crushingly expensive now but at least the interest is dirt cheap.

4 decades ago the houses might have been cheap (relative to now) but the interest was crushingly expensive.

So no, its not like the previous generations got some sort of free ride to fabulous wealth via real estate that we’re all missing out on. They had to buy into a market when simply affording the annual interest was barely possible for most people.