San Diego Housing Bubble News and Analysis

Quality thinking material there and hard to argue with your logic as someone not intimate with the area. A further 30 % is not assumed in Wall St by the way!!. Though the apartment sector there or in all of SD does not represent the whole country, it may represent the mortgage sectors whose negative dynamic is causing all the damage.

Bugs, would appreciate knowing where El Cajon sits in terms of the quality of typical mortgagees. Is it sub-prime boom walkers or Alt A long term sitters who don't want to mess with their credit rating or..........?
Thanks
Graham

Another good take on the market Bugs. I think your right on as I've been comparing where I'd like to buy (RB, Poway, Penasquitos), to less desirable areas (Vista, San Marcos, Escondido). The less desirable areas have recently been really moving downward, while the desirable is still resisting much downward momentum. If this trend stays the same then I do believe the less desirable will start to bottom out much earlier. Just makes logical sense as you compare neighboring communities if one is significantly less, or you can get so much more for your money, where are the few buyers that are out there going to put their money. By less desirable, it usually is one major factor, the school system isn't ranked on top, but still the schools are good. Believe me this thought has crossed my mind, just send the kids to private school if I don't like the schools....so we'll see how it plays out. We are of the mindset that as soon as it makes sense for us, we are buying and will stop micro-watching the market as we'll be in for the long haul.

I believe that by the end of this year-winter 08-09, there may be some homes that will be at a decent price point for some buyers. The unknown is how interest rates and the credit crunch will affect peoples ability to buy.

I've been wanting to get out of my condo and buy a house for some time now, and am financially prepared but know that now is not even close to being the time to do it. Sellers are still out of touch with the market but are starting to catch on. Some companies are shutting down and laying off. Stocks are doing the dead cat bounce. The dollar is in free-fall. Inflation is up. We are bombarded daily with deceptive, placating news trying to candy-coat what's happening to our economy. Ya, for me this is a no-brainer: it's not the time to buy. I can't say that things won't get better but I can say that the future is a big, black hole. Even for me, Nostradamus. Buying a house now is like playing roulette. I won't play roulette with $5, definitely not with half a million or more.

Thus, I'm hunkering down and looking to hire some desperate-for-work contractors to remodel parts of my condo to make it even nicer since I'll probably be here for another two years minimum. During this time I am able to save up money for the house, so hopefully what the interest rates are doing at the time I buy will not affect me much.

I've asked before but didn't get any response: does anyone know of a good contractor to do bathroom remodels and such?

I think you are missing two (big) things.

One, the coming tidal wave of option-ARM resets in the prime segment, which reach out into the 2011 time frame.

Two, the degree to which the US and SoCal economy has been dependent on the housing bubble as the engine for economic growth. As the median house price falls, median income is gonna fall right along with it.

So, if the housing bust is a ball game, it sounds like you think we are about in 4th-5th inning. I think we are still in the first.

A 'black swan' event that might help SD is the creative destruction of excess inventory attracts some big companies to the area, particularly in the IE. I can easily imagine a company like Google buying up an office complex in Temecula and offering a free house to any engineer that relocates to there. Could be very attractive to Bay Area renters with families.

kewp, please don't post ideas like that, if anyone can find obscure postings on the internet it will be the folks at google. I welcome any group or type of people to my humble hamlet, minorities, religious cults, hurricane refugees, even the Taliban are welcome but I do not want anyone from the Bay Area to even know where on the map we are, let alone relocate here. I might be able to tolerate their political and social views for short periods of time but if I were to wander into my favorite watering hole and hear the chant "Niners, Niners," I would have to move immediately. Thank you in advance for your cooperation.

I tend to to agree with you Bugs one this one (though I dont always agree with you on everything). I think that the lower end is rapidly declining and will reach a level within the next year where there isnt much in the way of a meaningful decline left. I was trying to get to this point a week ago on one of the threads behind an article by Rich last week. At that point the key from a buyer perspective will be to find the one gem out there. There will be tons of crap out there and finding the one gem out there will be worth the risk of overpaying slightly IMO. When everyone acknowledges we have hit bottom and he have started heading up competition for that one gem will be much keener.

First off, thanks Bugs for sharing your industry insights.

I agree with Bugs but I take except to what sdrealtor wrote.

Now is not the time to look for the gem.

The low end will continue to drop and prices declines will start to infect the higher end all the way up. The contagion will take down even the best neighborhoods.

Wait two more years and there'll be plenty of selection.

Joe Homeowner does not buy based on calculations like piggs would. He buys because the wife wants a house. They look at current payments vs. expected new payments. That's all they care about. The lower the downpayment, the better. If they think they can make an easy $30,000 in equity they'll take risks.

Since prices are set at the margins, the new entrants are the people we need to be concerned about.

nostradamus -
Try calling Arthur-Bradley. 619-640-1410

Their website is not the best, but they are good. Hear they have ads on the radio (don't listen to that particular station) and highly recommended by the people they work with.
I know Brad and he's a nice young man, honest. I think he does the bathroom remodels. Tell him hi for me.

my nickname - jellybean

PW,
With all due respect where did I say "Now is not the time to look for the gem."

IMO, the time to start looking will be after Summer passes. We have several months of big declines left and we really need to reach the off peak months to eek out the last of the major declines. If you can find a gem in Late Summer/Early Fall, watch it for a couple months you may be able to find something worthwhile to buy on the lower end in Late November/Early December. These opportunities will be few and far between. They will be limited to a few areas and mMost likely it will be an REO.

You may not find it but I believe it would be worth looking for the average buyer.

Joe Homeowner does not buy based on calculations like piggs would. He buys because the wife wants a house. They look at current payments vs. expected new payments. That's all they care about. The lower the downpayment, the better. If they think they can make an easy $30,000 in equity they'll take risks.

That's why its a problematic assertion around here that if you wait long enough, your dream house at your dream price/per sq ft. will fall into your lap. It rests entirely on the presumption that thousands of non-piggs like your example from above (that could care less about all the charts and trending) do not exist in the world and won't snag your dream house out from under you before it hits yours dream price.

Decent point Yodle but I've been thinking about the non piggs lately. Between 2003 and 2006 who didn't buy a house that wanted one? Who is left out there to compete with us? I'm starting to think that other than piggs (and others who objected to the prices/fundamentals) and people who were in comas, who are the fence sitters and is that fence very crowded? a few years ago you could get a loan for anything as long as you could breathe and with prices going up, very few sat on the fence. Now the loans are harder to come by and the margins are filled with people who possess even worse credit now but credit requirements are climbing. People who usually snap up bargains (people in the R/E industry) are all broke. Investors are going to want to be closer to 100 in the 100-150x rent multiplier before they get excited and how many are left? Our dream houses were already bought by the "others" and now they sit vacant. With all the vacant homes, is there a high school gym filled with people on cots who are the foreclosure refugees? Even the people looking to move up need buyers, the bottom end is getting hit the hardest. I'm starting to think the "pent up demand" is overplayed because it already feels like I went to disneyland and there are no lines.

When I see sdrealtor and bugs agree, I read that thread a few times and burn it into my memory because it is very likely that prediction will come to fruition.

It rests entirely on the presumption that thousands of non-piggs like your example from above (that could care less about all the charts and trending) do not exist in the world and won't snag your dream house out from under you before it hits yours dream price.

Actually it rests on the assumption that they won't be able, which is why prices fell in the first place. People would still love to buy, they just cannot afford it. So piggs are the people who saw this coming and saved accordingly. Sure there are non-piggs doing the same, but not a lot.

Josh

sdrealtor, sorry if I misunderstood you.

I listen to what the average person says. I talk to people whenever I can.

Piggs are ahead of the curve by at least 2 years.

There's still a lot of optimism out there about a housing rebound and you see that in the prices people are listing their houses at.

By all accounts we are already in a recession. And even if we can pull of out of one, 1% to 2% growth rate feels like a recession.

Joe and Jane Homeowners are now exhausting their savings holding onto their houses. There will be a time when they say, "f--- it. no house is worth the stress." When that happens, the housing crash will occur in earnest.

The average person still thinks that we are in period of "adjustment" and the prices will move up again. When that doesn't happen, the resistance will dissolve in chaos.

Everyone knows that "financing is the gasoline that fuels the market." Financing is harder to come by, down payments are now required, and there's no appreciation to be had. The new entrants are not coming in to support prices.

In my mind, new entrants are the foundation that supports the housing market. And the new entrants are all gone.

The attribute about the Piggs that should stand out is not their predominant bearishness at this point, but their willingness to look forward. To analyze with our heads rather than our hearts.

We were able to predict what would eventually happen because we were willing to project the then-current trends to their logical conclusions. That trait shouldn't end just because that end of the economic cycle ended.

I'm now hoping that when the reasonable opportunities finally do present themselves that those Piggs who are so inclined will be fully prepared to commit. Mentally as well as financially. I don't think the time to start preparing for those opportunities is when the market bottoms out - I think you guys want to start getting your stuff together now, well in advance.

Another thing I'm trying to point out is that, just as sdr has been saying all along, most of the deals that come up between now and the midpoint of the next upcycle will be not be the properties that qualify as your dream house. The people who hold the truly great properties will tend to be those who are best prepared to hold them; they mostly won't be the most marginal sellers who are forced to sell.

In order to recognize the opportunities that will come up you'll want to orient your expectations as to what those opportunities will really look like. If you're trying to get into the primo properties at the best discount I think you're going to have to work your ass off and have a little luck on your side. I think you'll have a lot of really savvy competition for those properties when they finally do come up, and you'll have to be prepared to both commit to and execute those purchase decisions. That won't happen if you're at all uncertain about what you're doing.

There's no question that because of what some of you are looking for you're going to have to wait until the bitter end before your target market gets to that inflection point. I think your window of opportunity will be briefest of all. However, for every legitimate $800k buyer, there are a dozen $400k buyers, and I think those folks will have a lot more choices in general so long as they keep an open mind.

I'm no realty agent and selling isn't my thing, so I think it's okay for me to say (without getting blasted) that being a bear is appropriate when there's a lot of risk involved. It's not so smart when the risks drop to bearable levels. Pun intended.

BTW, I was way too early on the timing of the bust, so I freely admit that the same possibility exists for my timing on this, too. Everyone needs to make their own decisions on this based on their own process.

I think we need to define what a primo property is.

Sorry to say but a tract house that sells for $800k to $1.2 million is not primo. There are several thousand of those upscale suburban houses. When the market bottoms there's be plenty of selection.

If you want to talk about really primo properties, my recollection is that in 1996 those went begging. Owners had staying power so they did not necessary put them on the market but you could rent a Del Mar oceanfront condo for $2500. Some sold. During racing season people from all over the world would come and rent. When appreciation took off, thanks to swelling stock portfolios they bought.

I don't believe that most piggs are looking for truly unique properties.

If you're looking at tract development such as Santa Luz, 4S, Derby Hill, Torrey Hills, San Elijo, La Costa Greens/Valley or whatever you have plenty of time and choices. I believe that prices will revert back to 2002 prices. We shall see.

It looks to me like examples of houses that most piggs would buy are featured on Jim's blog.

Granted, most pigs are not wanting to buy in Oceanside but look at the prices drops on McMansions up there. Those price drops will be marching down south in short order. I'm pretty confident of that.

http://www.bubbleinfo.com/journal/2008/2...

Jim has a squish-down theory about how comp-killers cause prices to drop. I agree with theory but I believe that it needs to be complemented by a trickle up theory, where the ease of entry for new entrants caused prices to spike up.

So now we have both squish-down and removal of the foundation of the market. Prices are being pressured by distressed comp killers and the disappearance of the new entrants.

To me, I think every area will have "primo" property. It might not be "primo" in comparison to other better areas, but it's "primo" in their price range and area. For me, those "primo" houses are the one with large lot and a view.

I just have one observation for bugs on this post. Everyone here talks about house prices going down, and how over valued they were/are, and uses current rents as a multiplier to identify a current "market driven" price that excludes all the bubble mania. My point repeatedly (sorry, I know I harp on it too much) is that rents have risen faster than incomes and normal fundmentals too. Just not nearly as much as housing has.
So in my opnion the 1998 rents need to also be included in the picture and worked into the equation. The basement price wont be based on todays rents, but on past rents+ fundamental growth(population/income changes). In my unknowing mind, take between 5-10% off current rents and you have something more telling. 5% off 1000 is only $50, and wont mean a thing in the long run. But 10% off a $2500/month rent in SFR's is $250 bucks and that will change bottom pricing. If peoples rents are not going up, or are going down, people will be less inclined to buy than if rents were still going up.

Rents move in real time and are even more based on preception than house prices. They are also more impacted by population changes than purchase prices are. In the last bust people fled Socal, reducing demand and consequently price. I personally know 5 people who have left the socal area for other states in the last 6 months, 3 of which was for the reason of being fired, 1 because she got married, and 1 because they graduated college and moved home to Boston. All 5 were college educated and in their mid to late 20's with great jobs or futures. All left because oppertunities were greater elsewhere. These are your future entrants to the housing market, not permarenters like HS dropouts without a clue will be. Without them rents and entry level house demand gets killed. That will affect the higher priced houses every pig seems to be thinking about.
BTW, I personally have not met anyone new to the area in a while.

DWCAP, I agree with you. Thanks for a good post. I believe that we will see rents trending down in the fall. They are already stagnant and moving down in the downtown market.

Bugs, thanks for sharing your thoughts. Can you give me your opinion on the following:

the remaining 10% bleeds off over 3 or 4 years before settling at rock bottom

Do you think this is typical ? If so, why does it take that long for the "last 10%" to bleed off ?

I think the main problem in how slow prices are falling is the fact that people don't buy what they can easily afford, but buy what they can barley afford thus keeping prices up longer.

I've been looking at one particular house in San Marcos recently. It's not bottom end by any means. It's a nice big 5br house in a good community, 10 min drive from the 5. The catch is that it's a REO fixer-upper. In my unprofessional opinion, it needs maybe 30k in repairs. And it has a peculiar dark-blue carpet that most potential buyers would want to replace with a "happier" color.

It's been listed for 580k since September, to no avail. They've lowered the price to 535k a week ago. I don't think it's going to move at that price, either.

By my calculations, if I could get them to accept a low-ball offer of 450k (which does not seem to be out of the realm of possibility), I'd end up living in it for $2000/month (PITI less mortgage deduction) It's impossible to rent a 5br 2700 sf house for $2000/month in San Diego.

Once all the sellers in that neighborhood come to terms with the new reality, I don't think that prices could fall much further. (Unless there is a spike in unemployment or mortgage rates)

The best way to describe the situation (IMHO) is that there's a "fortress" (Carlsbad to Coronado, 56 corridor to Scripps Ranch) and there's everything else. Outside the fortress, there's pain, there are subprime mortgages, there are ARM resets, and there are foreclosures. Inside the fortress, there's no pain yet, but there is a lot of overbuilding, a lot of $1 mil tract houses on postage stamp lots, and a lot of ticking option ARMs. Most of the county could (optimistically) stabilize by 2009. The fortress will slowly shake down and deflate long after that.

I think the main problem in how slow prices are falling is the fact that people don't buy what they can easily afford, but buy what they can barley afford thus keeping prices up longer.

I don't think thats the case at all. Maybe its what ran prices up in the first place, but it's certainly not keeping them there.

Prices are falling slowly because there are literally almost no buyers. The market has become illiquid and seized up.

Everyone that wanted a home in the last decade could get one with the loose lending standards. Now that prices are moving south the few buyers that are on the sidelines with cash & good credit are *not* willing to stretch to make mortgage payments. It doesn't help that sellers aren't being realistic with the pricing.

The only thing that is going to bring about a crash is if/when one of the big banks goes under (like Countrywide), whomever buys up their assets for ten cents on the dollar just dumps all the inventory at whatever price the market will bear.

Lots of people I know, including myself, are waiting in the wings, with lots of cash, ready to pounce on properties when the time is right--so there will be competition for the "gems."

You'd be surprised how many people in San Diego think like "Piggs," and are ready and waiting to make the most of the downturn.

patiently - I think you are right. There is more optimism out there than I anticipated. I've seen some places for sale w/price increases. Defiant almost.

I was at the dentist waiting, flipping through a Times magazine. Don't remember what issue, somewhat recent. Toward the end, a bullish article titled something like "Ignore the headlines," touting buy when there's blood in the streets - now.

Bugs - I'm a little confused. Talk about catching falling knives and dead cat bounce. If prices are expected to continue to decline, then it's best to wait. Some properties may look like deals now at 15 to 20% discount. But if there is anticipated inventory on the way by year's end, would it be too unrealistic to see another 10% chop?

Seems the lower end places will have more people interested, but wouldn't it be true at most price ranges. The people interested in lower priced homes will be scramble to get something they can afford, as the median is trying to get a deal on the median and the higher priced homes will attract many higher income people looking for a deal on higher priced homes.

FWIW - I haven't met anyone new to the area - living here, there is. Plenty of tourists. My engaged cousin 20 something just got a job offer in O.C. One less renter or potential entry level homebuyer in S.D.

GN,

In reference to my "last 10% Bleeds off" remark.

Up until the beginning of this year, I was in the "long slow decline" camp, meaning I figured the slope of the decline would go to about 45 degree or so and it would take 5 or 6 years from the peak to settle down. In other words, I had projected a 1990s type of decline, albeit from a much higher starting point.

However, the big chuck losses over the last couple months - which caught me by surprise - has now resulted in a correction that has already covered a LOT of ground, pricewise. This rate of decline just isn't sustainable over the long term for the simple reason that there isn't enough gas to burn off to last that entire time period. Just as trees don't grow to the sky the leaves can't fall below ground level.

So instead of the Japan-style bleed off that takes several years, I have now come to the conclusion that if this current trend continues we might be looking at a downcycle that more closely resembles a "U" where the downstroke occurs quickly and the extended bottom bleeds off the rest over time.

I suppose we could get a bigger dead-cat bounce this spring, followed by a more moderate decline; or perhaps a series of more radical bounce-decline jogs on the way down.

I think a lot will depend on what happens over the next 3 or 4 months. If there is going to be a significant bounce then it follows that it will take longer to clear the suckers out. If the spring bounce is as weak this year as it was last year then I think 2008 will end up being the big year for declines. That's because by the time you whack another 20% off the current prices you're going to be getting within range of some of the rents.

And yes, I agree with the poster above (sorry, I forgot who it was) who said rents might decline, thereby moving that buy point even lower. The examples I used above were just for illustration; they weren't intended to be a prediction of timing. I've learned my lesson on that one, thank you.

"Lots of people I know, including myself, are waiting in the wings, with lots of cash, ready to pounce on properties when the time is right--so there will be competition for the "gems."

You'd be surprised how many people in San Diego think like "Piggs," and are ready and waiting to make the most of the downturn." - SD native

This is exactly why the argument that "the time to buy is when no one else wants to buy, so now must be the time to buy since sedement is so bad right now" is bullplucky. The mentality of profit has switched from "buy now", to "buy soon when the market bottoms", to get rich. Same mentality, different timeline. The real time to buy if you use this train of thought (I think baseing my actions on what other people are saying is retarded) is when people ask "why buy". We are many years of poor to negative returns away from that.

Bugs I agree with your post. Based on my own thoughts, I am really leaning towards the back end of the depreciate cycle for substantial drops towards more desireable homes in more desireable areas. Of course a desireable home is in the eyes of the beholder.

The more I look at this cycle, the more I think it will indeed differ from the previous depreciation cycle. I see a much more wider variation in the timing of the bottom for various regions. Indeed I can envision the lower end areas dropping more... perhaps to the levels you mentioned and then they will stay flat or perhaps even move up while the higher end areas may indeed still be falling.

I also think there very well could be an underestimation about the stubborness of sellers with heavy equity stakes of yielding to price pressures and simply deciding to ride it out.

Of course we need to see what happens with employment and the 10 year.

SD Realtor

Great posts.

For me and DW it was easier just to come up with a price point for what we want and be ready for it if it comes.

As we see it there are only 3 possibly outcomes:

1.) The price point will arrive we will buy and just happen to have timed the bottom (extremely unlikley)
2.) The price point will arrive we will buy and the prices will continue to decrease or stay flat.
3.) Our price point will never arrive.

Our criteria are:

1.) Great Schools
2.) 2500+ ft single level 3000+ ft if double level
3.) price : 600-650k
4.) 4+ BR
5.) Good lot (decent size, quiet, no power lines)

After that we have a whole list of "like to haves".

Rather than trying to predict the market, we based these
criteria on what it would take for us to move away from our current situation and be happy about it. We will be paying cash so are immune to financing issues.

Some areas we are looking at are probably 20% apart from us in price ...

Frankly timing the bottom (or top) just isn't something we are very good at.

excellent post, Bugs

I agree with you that, in general, prices are not likely to drop to 1998 levels - people looking for a place to live in (assuming that there are loans available and they qualify) are going to buy at a higher price than investors will - the unknown for me in the rent vs buy equation is where rents are headed - I expect nominal rents to decline so I couldn't make a purchase today based on current rents

In a sensible market (let's equate 'sensible' with 2001 prices for this discussion), an investor makes their money by being more knowledgeable than his competition - being able to spot a property that has upside potential or has been mis-priced becomes key - this knowledge is how the smart shopper will find the 1998 values even if prices are at 2001 levels - also, the investor has to spot these properties quickly and move on them before other buyers do (of the properties I purchased, I was usually the first offer on the first day of the new listing and my offers were full price or better)

As you point out, it is important to become familiar with the areas of town that you are interested in - that is how you will learn to recognize a good property when it comes along - having this knowledge will save you time when you are looking at MLS listings - in my areas of interest for rental property, for example, I know which streets are narrow and have cars lining both sides (which gives the whole block a very cramped feeling and indicates that parking is an issue) - when I see a listing on one of those streets I don't have to waste my time driving by it and I don't get all excited thinking, "this is the one!", only to be disappointed by reality - at one point I even made a list of specific street addresses that I was interested in if they ever became available (engineers are weird!) - knowledge you might want to have for your area of interest: where are the parks / schools / bus stops, traffic / noise issues, future development or re-development plans, etc

~

Is the lower end of the market coming to a buy point? That is one tough question to answer - there are so many variables involved and lots of unknowns - because of the unknowns risk is high - as an investor buying rental property I can sit on the fence when risk is high and not try to differentiate market segments - someone who needs to put a roof over their family's head has a different perspective on making a purchase decision

If I were drinking a beer with the potential low-end house buyer and they asked me about buying a house in 2008 I would probably encourage them to rent unless they found their own personal Shangri-la at a price that was well within their means