Home prices and rents

The L.A. Times has a front page article today asking if the slowing San Diego real estate market portends a coming slowdown or crash in house prices nationwide, as the bubble happened first in San Diego and has been strongest there.

All the signs are there; prices are slowing down, sales take longer to make, 14% of sales are to speculators, risky mortgages are used, etc.

The majority of buyers in San Diego still use loans with an “interest only” option, a type of adjustable rate mortgage in which borrowers need only pay interest in the first few years before the monthly payment mushrooms.

Prices are so high that many no doubt pay far more than the recommended 28% of gross pay on their mortgage, leaving them with no cushion in case of problems.

Only 9% of [San Diego] households can afford the area’s $493,000 median home price — the level at which half of all homes sold for more, half for less. By contrast, affordability statewide is 16%; nationwide, it is 50%.

Let’s say the home was $500,000 with 20% down. With a fixed mortgage of $400,000, that’s about $2,200 a month plus $400 a month in property taxes, making $2600 a month total. To afford that they’d need to make about $115k a year. And that’s not including insurance, utilities, etc. (A far riskier interest only loan would be less, at first, and then could easily soar.)

Affordability isn’t just a problem for homeowners. Renters also are faced with steep prices. Two married couples here in L.A., friends of ours, were living in back units of a house until recently. The property sold. They were, in effect, evicted quickly, had to find a new place fast, and gasped at the new rent.

In one case the current owner paid them $5,000 to leave within three weeks. This was decent of them but still abrupt,. Had they stayed they’d have been evicted eventually. They managed to find a comparable apartment nearby, but it’s $1,400 a month for less than 700 sq. ft., with a skinflint landlord who doesn’t want to repair anything. (And with first, last, and a damage deposit, well, there goes most of the $5,000.)

In the other case, the couple was told they had three weeks to leave period, no money offered. They found another house, for $1,700 a month (what we pay for our mortgage.) It’s your basic 50’s tract house, maybe 1100 sq. ft, with no air conditioning in an area of town where it’s been over 90 degrees every day for several weeks now. Both couples now pay sharply more than they want to.

There’s something wrong with a system where the renter has no rights and can be evicted so quickly. Property rights should not reign supreme over the right of people to have affordable housing and not be thrown out because the place sold.

Sue and I are exploring the idea of leaving L.A. and buying a house elsewhere outright or nearly outright for what we have in equity. Yesterday it took us nearly two hours, on a Saturday afternoon, to drive a total of 30 miles to visit friends, then return. This is becoming the norm for Los Angeles, and it gets worse every month. Sue is a Forensic Accountant, about to be a CFE. If you know of a position, let me know! We’re looking at Hawaii, Connecticut, and D.C. but not ruling out other areas.

Unaffordable housing and impassable freeways are not a recipe for stability and calm. Money goes for wars, not mass transit, while renters have few rights and increasing can barely afford where they live. Home owners too. A tiny percentage gets wealthier while the rest struggle.

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