Micro markets in realestate

[yieldmatters]

Do micro markets exist independently of the macro situation in realestate? I've had this argument with many on this forum. The argument is generally this "I don't care about the macro factors as my particular location will be fine - it is special (for whatever reason)". I think all areas are related eventually (rise and fall together) but it takes time - look at western and eastern sydney for example, they appear to be completely independent but I think it is just transitory - eventually eastern sydney will drop too.

Anyway - this is an interesting article from the LA Times where they put forward some arguments more clearly than me that different area's pricing is related to eachother. One area drops, the area next door is likely to drop and so on.

Enjoy the read ...

http://www.latimes.com/business/la-fi-howlow27nov27,0,3723059,full.story?

 

[BayView]

Hey Yield,

interesting article.

Having lived here since 2005, when the boom was almost at the top, I have seen a lot of this close up.

The predictions are bad for LA (and the country in general), and even as far north as Santa Rosa where we now live (Santa Rosa Aussie doesn't roll off the tongue) there has been a price correction in a lot of areas. Generally, prices are still dropping across the country, but only in certain areas and certain property types. Micro-markets if you will.

What I've seen is that - as the article intimated, that the more affluent areas aren't really affected by all this at all as the wealthier folk don't tend to have credit and cashflow problems, plus so many of the houses are unique enough that they are harder to compare to the house up the road. For example; in a place like Beverly Hills, you can get a French Provincial home next to a Spanish Villa, and a Georgian Mansion next door to that. And as for places like Bel Air and the exclusive parts of the Hollywood Hills, well, forget it; those places are in the several millions and price is not an issue for the purchasers. The houses there are rare, unique and amazing.

Then there is the middle-class areas where the mass-produced "Edward Scissorhands" estates are. The majority of houses in theses areas are basically the same, give or take a few 100 square feet and a different facade and colour. If one house in the street sells for a song in foreclosure, then pretty much every other house in the street will be valued accordingly the same. So, the middle-class are copping the brunt of this, and anyone in this income bracket who is cashed up to still buy could do well in the near future. But from the people I've met here, there are very few people in the middle-class that are in a good financial position. Most are keeping up with the Joneses, blowing their incomes on crap and expensive cars and not planning for retirement other than a 401k. And if there is a major share-market crash anytime soon, then god help the country. Most of the country will be retiring broke, in a house that is worth bugger-all from when they first bought it.

Then there are the areas which are on the fringe in price and location. Places like Watts, which was historically a Black haven, this area is now being taken over by cashed-up Mexican families who all work their a*ses off, and pool the funds to buy. These sorts of areas which were cheap and undesirable, are becoming more desirable, albeit a Mexican suburb (as is the whole country) and the prices are moving up.

The trick for investors, is to identify the differences between the areas, as there are plenty of areas that are not following the trend across the country.

I think the next 2 years for cashed-up and experienced investors is good in the USA, then the market will level out and the same old merry-go-round will start again.

 

[feihong]

Hey Yield,

interesting article.

Having lived here since 2005, when the boom was almost at the top, I have seen a lot of this close up.

The predictions are bad for LA (and the country in general), and even as far north as Santa Rosa where we now live (Santa Rosa Aussie doesn't roll off the tongue) there has been a price correction in a lot of areas. Generally, prices are still dropping across the country, but only in certain areas and certain property types. Micro-markets if you will.

What I've seen is that - as the article intimated, that the more affluent areas aren't really affected by all this at all as the wealthier folk don't tend to have credit and cashflow problems, plus so many of the houses are unique enough that they are harder to compare to the house up the road. For example; in a place like Beverly Hills, you can get a French Provincial home next to a Spanish Villa, and a Georgian Mansion next door to that. And as for places like Bel Air and the exclusive parts of the Hollywood Hills, well, forget it; those places are in the several millions and price is not an issue for the purchasers. The houses there are rare, unique and amazing.

Then there is the middle-class areas where the mass-produced "Edward Scissorhands" estates are. The majority of houses in theses areas are basically the same, give or take a few 100 square feet and a different facade and colour. If one house in the street sells for a song in foreclosure, then pretty much every other house in the street will be valued accordingly the same. So, the middle-class are copping the brunt of this, and anyone in this income bracket who is cashed up to still buy could do well in the near future. But from the people I've met here, there are very few people in the middle-class that are in a good financial position. Most are keeping up with the Joneses, blowing their incomes on crap and expensive cars and not planning for retirement other than a 401k. And if there is a major share-market crash anytime soon, then god help the country. Most of the country will be retiring broke, in a house that is worth bugger-all from when they first bought it.

Then there are the areas which are on the fringe in price and location. Places like Watts, which was historically a Black haven, this area is now being taken over by cashed-up Mexican families who all work their a*ses off, and pool the funds to buy. These sorts of areas which were cheap and undesirable, are becoming more desirable, albeit a Mexican suburb (as is the whole country) and the prices are moving up.

The trick for investors, is to identify the differences between the areas, as there are plenty of areas that are not following the trend across the country.

I think the next 2 years for cashed-up and experienced investors is good in the USA, then the market will level out and the same old merry-go-round will start again.

Hi Mark:

Great post, and I really love the way you dissect the Californian property market in Aussie tongue

 

[alexlee]

You don't need to find the 'bullet-proof' suburbs to get rich in property investment. You just have to buy the relatively cheap (not just in dollar terms, but at that point in the cycle) properties. Overall, a recession will hit nearly all suburbs and a boom will also hit nearly all suburbs. BUT often with lags that may last years (e.g. currently Northern Sydney v Western and South western Sydney).

I have no issue with buying in an area that then falls, because I know that if I'm already buying below the long term trend.
Alex

 

[BayView]

Too right Alex;

I think that it is easy to get caught up in the hype and media stuff, but if the investor simply does the D.D on an area and selects the best property in that area that they can afford, then the future will be o.k, regardles of the overall climate.

I understand where Yield is coming from (after a few months of arguing with him; but nice arguments) that the prices can't keep going up forever if they are well above the debt levels we can all supposedly carry, but eventually this situation returns to more normal levels (a correction) and away we go again.

 

[lizzie]

You just have to buy the relatively cheap (not just in dollar terms, but at that point in the cycle) properties.

i felt - more what came out as important in the post was that rather than buying at the right time in the cycle, it was more important to have sufficient cashflow to comfortably finance the debt.

i gather that the middle classes reflected in the post were mortgaged and credit carded to the hilt and couldn't absorb a rate rise, hence had no choice but to walk away.

but if they'd only had the mortgage, then perhaps they could've held on until times improved. or is it a case of sheep mentality where some are walking, and the others follow whether they need to or not?

 

[yieldmatters]

Hi Mark:

Great post, and I really love the way you dissect the Californian property market in Aussie tongue

I liked Mark's post too - it was a good first hand run down on the LA market. The exclusive suburbs being too unique to drop in value is a really good point. Maybe that is what explains Eastern Suburbs in Sydney holding up (or increasing) while Western Sydney is flat or dropping. Eastern suburbs are unique - beachfront suburbs not far from the CBD of Sydney. It is not something that is easily substituted by other houses elsewhere around Sydney regardless of price.

 

[alexlee]

I think the Eastern Suburbs are largely supported by high salaries at this point. If/when the sharemarket tanks and those executive salaries disappear, you'll see the Eastern suburbs fall too. However, they will always be desirable areas, so they'll recover quickly, too.

When the inevitable recession comes, the east will get hit too. The difference will be that the West is already pretty beaten down, so there isn't much further to fall (before yields make them attractive again, perhaps to somepeople to whom yield matters?) Sure the East will always be more expensive than the SW. But how much more expensive? And will the gap keep getting bigger, or snap back periodically?
Alex

 

[yieldmatters]

Sure the East will always be more expensive than the SW. But how much more expensive? And will the gap keep getting bigger, or snap back periodically?

I think a western suburb house will become a substitute for an eastern suburb house if the price gap between them becomes large enough. Hence a drop in prices in the west will pull down eastern suburb prices eventually ... because the substitute (a cheap western suburb house) becomes too attractive to pass up. It happens in a slow messy fasion though. A little unemployment would speed it up for sure. Imagine a dual income couple living in Bondi and one of them loses their job and they struggle on the $1M morgtage - they can default or they can sell up and buy something cheaper in the west. I think they would sell up and move to the west - this would put downward pressure on prices in the east and upward pressure on the west - until a new balance is formed again. Hence the relationship I see between different micro markets.

As for Mark's discussion of Beverley Hills mansions - they may be absolutely isolated because it is just simply a different world. Maybe some very select parts of the eastern suburbs in Sydney are a bit like this as well. No house anywhere in Australia will ever be a substitute at any price gap.

 

[BayView]

As an addition to what I mentioned in the last post;

A lot of the people I have talked to here who are thinking of buying are saying: "I'm going to wait until the market drops a bit more - maybe the middle of next year".

So, this mindset is common, and must surely have an effect on prices as there are probably more people around who can afford to buy right now, but are simply sitting on their cheque book, forcing prices down even further.

 

[alexlee]

A lot of the people I have talked to here who are thinking of buying are saying: "I'm going to wait until the market drops a bit more - maybe the middle of next year".

And if the market really drops from now until the middle of next year? Those same people will say 'it's dropped as I expected: I think it'll drop further' and STILL not buy.
Alex

 

[BoatBoy]

Imagine a dual income couple living in Bondi and one of them loses their job and they struggle on the $1M morgtage - they can default or they can sell up and buy something cheaper in the west. I think they would sell up and move to the west .

If only more FHB's and youngsters thought like this instead of insisting on $500k inner city unit's or slightly outer McMansions as their first home.

It would seem that those more affordable houses just are'nt good enough for the newer breed, hence an apparent "Housing Affordability Issue"

Dave