Was I sleeping during this part of "ECON 101"???

I'm not one that usually posts articles from other places, but this article has waaaay too many priceless quotes in it, to NOT share with you.

The logic behind some of these quotes come close to topping the logic of the "we count our equity loans as income" quote I wrote about.

The problem is, I don't even know where to start with all of these choice quotes...but here goes.

The article I am referring to is from the San Diego Union Tribune (signonsandiego.com) titled "Pros see no doom, gloom in slowdown"

Here goes....let's look at this economic wisdom first:

Despite rising interest rates, a growing for-sale inventory and a slowing sales pace, the county's shortage of housing will prevent prices from dropping steeply, speakers asserted.

"It's Economics 101," said Leslie Appleton-Young, chief economist for the California Association of Realtors. "It's demand and supply."

I guess I slept through the part where RISING inventory and SLOWING sales means that there is a "shortage" and that prices won't drop. In the economics class I took in college, they said that supplies grew as demand went down...not the other way around. Let's not even take into account the fact that rates ARE rising, and as you can see in the post below this one, it does affect the amount of money you can borrow.

Let's see what else we can find:

The fundamentals of the housing economy remain sound, said Louis A. Galuppo, director of USD's Burnham-Moores Center for Real Estate. "We may see a decline in sales but not prices."

Again, inventories have grown dramatically the past several months, and there are decreased sales. In the class I took, that means that prices will have to come down so that an equilibrium level is reached. You cannot continue to have inventories grow with sales slowing, and NOT have prices go down.

Another reason homeowners are staying put is Proposition 13, the landmark property-tax-cutting initiative. Passed in 1978, the measure limits tax increases on properties until they are sold. Many owners are reluctant to sell and give up their tax breaks, Appleton-Young said. If they buy a new home at a higher price, "they look at doubling and tripling their taxes."

So let me get this straight, the people that own a home already will be reluctant to "move up" because of higher property taxes. So...does that mean the property taxes aren't just as high if you don't already own a home?!?!? $500 to $1000 bucks a month in property taxes is big increase no matter if you own already or not. BUT, by looking at the rising inventories, it seems that many homeowners aren't so reluctant so sell, but what do I know. See this site for inventory tracking of various "bubble areas" and see for yourself.

Next we have one of my favorite topics...the use of "creative" financing to help borrowers 'afford' the high housing prices. Let's see what the 'experts' say:

Several speakers at the conference addressed the use of new lending products that had enabled middle-wage consumers to attain financing for high-priced homes. Many "creative" mortgage loans have low, introductory payments that adjust upward with prevailing interest rates after several years. In general, they shift risk from the lender to the borrower.

Anfuso said fears that such loans would trigger defaults were misplaced. Many borrowers "are going up the wage scale" and will be able to handle rising payments, he said.

Look at my post below. I know the numbers are for fixed rate loans, but just look at the difference in payments at 1% and 2% increases. I just have a hard time believing that a lot of people will be making an extra $1000 a month over the next 1-3 years to be able to afford the jump in their payments. If you look at California Association of Realtors report numbers, they say that:

"California households, with a median household income of $53,840, are $70,480 short of the $124,320 qualifying income needed to purchase a median-priced home at $530,430 in California..."

Do you really think that most people are going to have their incomes more than double in the next few years to keep up with adjusting ARMs and rising interest rates??? These people couldn't afford fixed rates when they were at all time historic lows, what are they going to do when their adjustible rates and fixed rates are higher?!?!?

Here is a prediction from one of the 'experts':

In her forecast, Appleton-Young predicted a 2 percent statewide decrease in single-family home resales next year. She anticipates a 10 percent statewide increase in the cost of a median-priced resale home.

So there you have it. Sales are going to decrease 2%, but prices are going to increase 10%. With the inventories growing like they are, the cost to borrow money increasing, and affordability at an all time low, I don't see how property can appreciate at 10%.

I'll leave you with this final comment that should put your minds to rest:

Appleton-Young called California real estate a market in transition. "I think we're in for a soft landing," she said.

Well, there you have it. The experts say there is nothing to worry about. I tend to think differently, but what do I know. I just look at the math behind what they are saying and make my own conclusions.

Either way, we will have to revisit this at a later date to see who is right. Who do you believe, and if you had to place a bet, where whould you put YOUR money, on their analysis, or mine?!?!?

SoCalMtgGuy