Okay, I was wrong. Real estate markets aren’t local. And they’re not national, either. Now they’re regional. Behold the power of the Megalopolis… I would say ours includes the coast from Monterey to Marin, inland through the northern Central Valley of California, right on up the I-80 Corridor into little ole Reno. read
I'm Your Guy!
775-722-4011
EyesWideOpen
What a fascinating article for a cartographer like yours truly. Unfortunately, the map mentioned in the article was not included, but night-time satellite images abound on the internet. Diane, thanks for the cool link.
On a personal note: Today I heard that a home in my neighborhood-of-choice will soon be listed. Fingers crossed X.
Reno Ignoramus
Currently posted on Craigslist is a house located at 698 Riverview Circle in Reno. Looks like a pretty normal 4 bedroom house in a pretty normal neighborhood around Reno High School.
The sales history of this house indicates that it was first sold on October 1, 1976, for $61,900.
Zoom ahead 22 years. It was sold on April 27, 1998, for $169,900.
That is an increase in value of $108,000 in 22 years. Or, $4,900 a year over 22 years.
For those of us old enough to have more than 5 years experience in the real estate market, these numbers are not particularly exceptional. This is what a “normal” real estate market looked like in Reno. For decades.
This house next sold on April 9, 2001, for $205,000. That is an increase in value of $35,100 over 3 years.
Now it is on the market for a hundred bucks shy of $400,000. Or, an increase of $195,000 in 5.5 years. Or, $35,450 a year.
For 22 years between 1976 and 1998, this house went up an average of $4,900 a year.
Now, it is going up $35,000 a year??
Perhaps Diane can explain this. But please don’t suggest that the real estate market that existed in Reno FOR DECADES prior to 2001-02 has somehow just become irrelevant. And please don’t refer to “new paradigms” and “costal markets” and “demographic trends” and other realtor spin jive. I’m talking fundamentals. Clearly the median household income in Reno has not increased by any measure sufficient to support such an increase in the rate of appreciation.
What fundamentally supports a seven fold increase in the rate of appreciation in the past eight years?? Has household income in Reno increased seven fold??
gotlots
The answer to your question RI is that there is no valid explanation within economic fundamentals.
Let us say that Buyer buys the house referred to in your post. Let’s say he pays the $400,000. Up until 2001-02, Buyer would have to have come up with at least 10% down, or $40,000.
If Buyer gets a fixed rate 30 year loan for $360,000 at 6.25%, his monthly P&I payment is $2200.00. Add to that about $400 a month for taxes and insurance. Buyer is looking at $2600 a month.
Prior to 2002, traditional lending standards would have required that Buyer’s PITI payment not exceed 28% of his gross monthly income.
That would mean that Buyer’s household income would have to be $9,500 a month. Or $114,000 a year.
Not even realtors will attempt to suggest that median household income in Reno is $114,000 a year.
But this is a problem for the real estate industrial complex, isn’t it? How do we keep those commission checks coming in when people need to have $114,000 in income to afford a $400,000 house?
Well, we just throw away the traditional standards, and we throw away the fundamentals. First, we get rid of the down payment requirement. That kept too many people out of the game. Besides, why should we expect people to have any of their own skin in the game?
Next, we throw away the lending standards. Just flat out eliminate the 28% rule. So what if Buyer is paying 56% of his income for his house. At least he can buy now, and not get priced out forever. And we can get him a interest only to really hold down the payment. And if even that does not work, we can get him a neg am loan so he can buy this $400,000 house for $400.00 a month. So what if he has no clue what he is doing. Like the “former” lender described in Diane’s post the other day, we can worry about him three years from now.
Next, we eliminate any requirement that Buyer actually has to prove what his income really is. If he wants to say his income is $114,000 a year when it really is 52,000, so what? Do what you have to do to get in on the American Dream. Or else get priced out forever.
That’s how the rate of appreciation increases seven fold, RI.
But I anxioulsy await Diane’s response to your question.
gotlots
Sorry, while we are waiting for Diane’s response, I have to interrupt here with another market meltdown report.
Actually, this is a market meltdown update. Back on August 25, I posted about the house in Somersett at 1900 Russell Pointe Cr. This is the house that was bought for $1,065,798 last September 26, 2005. Almost exactly one year ago. Back on August 25, it was listed for $1,099,000.
Guess what? It is back as a “New” listing with a new MLS #. MLS # 60023214. So, once again, the typical realtor BS about re-listing to get a “new” DOM figure.
And the price?
Down to $869,900. Yes, folks, that is a $229,100 haircut from August 25.
This flipper is now SERIOUSLY underwater. This flipper is now listing $195,898 below what he paid for it.
If Flipper here were to get an offer at 97% of current asking, that would be $844,000. Deduct say 5% for total selling costs, down to $802,000. That puts Flipper at $264,000 less than he paid. Then calculate what it has cost to carry this $1 million mistake, and Flipper here may well be in excess of $300,000 underwater.
Quite a surprise I’m sure to those who think Reno real estate only goes up in value.
Of course, it still has not sold, and so it gets worse every day for Flipper.
Gee, folks, you all could have bought this house in the beautiful planned community of Somersett for $1,099,000 as of yesterday. But by sitting on this bubble, you all have saved yourself $229,000.
And it ain’t done yet. Keep sitting. Can we have any greater example? If one seeks to lock in declining value in Reno, there has never been a better to buy.
retromodernjeff
More than likely you come from a State like California with a large down payment, thats how you afford it. The SFChron had an article that through there research on average over the past 3-4 years, 3600 people have moved from the bay area to Reno each year. That is a lot of money and a lot of home buying. Wait until people in CA get more taxes forced on them and get fed up. AND if they lift that Prop 13 property tax rate cap (which they are trying to do) you won’t know what hit you as far as property value increases in Reno. So its nice to look at the negative side of the coin all the time, but there is another side.
Reno Ignoramus
Gotlots: Thats a great post about the Somersett McMansion going down. A $229,000 haircut? That’s a 20% drop in the asking price. That is a serious statement. Especially when you consider this guy is now $200,000 under what he bought for.
I think what we have here is a Flipper that get’s it. This is a person who sees what is happening. This person has the foresight to take his losses, and not ride the market down over the winter.
We will have to watch this one and see what happens. We will see if this Flipper can find somebody else to ride the market down over the winter.
Diane Cohn
Hi guys. Sorry for the slow response, but I was out of town for the weekend.
Getting back to RI’s original question about how can prices go up seven-fold without a similar increase in real income given the history of the Reno market going back to the seventies… I would simply say demand (or, irrational exuberance, if you prefer). The Californians (who have a long history of making money just living in their own homes) finally discovered lovely little Reno, came over the hill either to live or invest (cash-rich from the sale/refinancing of their own overvalued abodes) fueled by the availability of easy money from lenders, and voila, huge price increases over a period of time.
But now the party’s over, and as you point out, salaries have not kept up. So the market correction continues…
Family Wealth J.D.
I think more than Californians coming over the hill, it has likely been your local area families “moving up” by trading out of their older tract homes and using low downs, multiple loans, variables and interest-only exotic financial planning, to get into larger, newer housing. That type of planning relies upon an absence of negative life events happening to make it work. Then it takes only one downturn, an illness, one spouse getting transferred or laid-off, or interest rates to start climbing, and soon the combination of negative amortization, increasing adjustable loans, and reduced cash flow, puts those families into difficulty. They then are pushed into sales, flooding the inventory. Too many houses offered by too many people feeling economic pressure to sell, combined with the developers’ increased inventories as planned in better times. The result is unrealistic supply for the current demand.