San Diego Housing Bubble News and Analysis

I wouldn't say we are at the bottom when home prices and and incomes match up, we will only be at the fundamentals, house prices could and probably will (who am I kidding, just look at the graph, of course they will!) drop below the fundamentals before they hit bottom. Look at Rich's graphs of historical price/income ratios:

http://piggington.com/images/primer/sdpr...

They go well below the historical averages on their way down from even minor 'bubbles', I can't imagine a different outcome this time, except most likely more severe.

It seems like home ownership rates would be a laggy indicator and tough to figure out at this point. How do you know if it's hit it's historical average that another wave of foreclosures won't hit and push it well below the average.

Alright, while I see the benefit in income and employment rates as indicative of the relative health of the local economy, I am not sure about using these rates to directly measure the health of real estate. Eg: the economy vs. real estate in most of the 90's.

Also, viewing SD county as a single monolithic market is a little like applying normal nationwide economic models to a national housing market. Don't get me wrong. They do have some amount of marginal utility. However, its limited. Certainly it is better than defining it as, say, the "southern california" market. The housing market between say Temecula and La Jolla have little in common in any economic or real property category.

If you are looking to see the bottom I would recommend looking for some benchmarks based on market fundamentals.
One benchmark is price stability. Have a look at comparable closings over time.

Feb 401
Mar 517
April 428
May 415
June 477
July 390

These numbers are are the price per square foot of 2br units in 92101 that are between 700 and 1100 square feet in size.The numbers indicate a wide range and relative instability in that micro market.

Another benchmark to consider is the relative cost compared to rent. In distressed sections of central SD (eg: City Heights), one can buy with 5% cash and the rent will be more than mortgage. When buying is cheaper than renting, generally its a pretty good bet.

Yet another benchmark is the cost of construction. Some areas to the Northeast of town are curredntly selling for less than 175 per square foot (think Menifee). At that price it is often close to the price of construction.

While finding the absolute lowest price in a downturn is difficult and ill-advised (market timing in the boom did not work well either) these are some tricks I use. If you see all three benchmarks line up, probably prices are done falling for a while.

Again my opinion, but I have seen a lot of people new to investing have relative success with this.

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I don't think that is exactly the bottom. You will know the bottom is here or near when everyone knows homes are a deal, but nobody can get a loan to make the purchase of a lifetime.

I don't know if it's a good way to find the bottom, but here's how I look at it :
Real estate makes sense to purchase when the numbers work out. If you run the numbers on a certain area/property type and it makes sense to own it strictly from an investor's standpoint, then it makes sense to jump in.
By this criterion, you may not hit bottom, but at least you will be close enough not to get burned.

all,

Thanks for the response. I will absolutely give you that these ratios I am curious about will not perfectly predict the bottom, but there would be some insight gained by understanding what sort of ownership rates an area ("SD county", "so cal") typically has.

I guess Ill try to pose it in a different way: Lets suppose that both wages and prices just stopped moving completely as of today. What reason would we have for believing they would have to move? I mean, people aren't homeless right now who have gone through foreclosures. They have moved into a lesser neighborhood, or moved to Primm, NV or something. I guess what I am confused by is why we can't be done moving down as of now.

What's so special about Rich's average red line on that graph posted by doofrat? Why do we need to get to there? I guess also what I am thinking as part of this is, couldn't we easily see people's preference for renting vs buying change so much so that the push to this historical average falls short? or is there a magical ownership rate that we should expect to see? and why isnt it 100%? or is it?

Eh, I am making no sense anymore. But i am going to post anyone just because. Again thanks for the help... If anyone wanted to keep rambling with me, Id be interested.

(Finally, I just reread my post and it sounds like I am angling for the bottom to be today. I really dont think that at all, and I want to make that clear. My question is ust posed that way. My gut absolutely tells me that we have years to go, but my brain speaks english and my gut speaks some weird language only identical twins know)

sdduuuude makes a great point.

When you see the bottom, you will recognize the bottom, you will want the bottom, but most won't be able to afford the bottom (because of loan conditions).

Much like the bottom shown below.

Hopefully this is what the bottom looks like

Don't worry, SD real estate values will fall very quickly just as soon as we get this new war going with Russia. Because of our large military presence, SD is gonna get hit in the first ICBM salvo, and once the mushroom clouds clear you'll be able to pick up some sweet real estate deals, even in prime neighborhoods like Mission Hills! BOMB BOMB IRAN MCCAIN 2008!

housepoor - good questions.

I don't think there is anything magic about that particular red line. There are many methods one could use to define the average market. Some will move that red line up. Some will move that red line down.

However, nothing is going to move it up 2x. There is a range around that red line that is considered normal.

The most important thing to understand is that people's preference for owning vs. renting did not change. People were, simply, speculating.

That is, they weren't buying the house as a replacement for renting. They were buying a house because they thought it would be worth more later. This fueled others to do the same, which fueled others to do the same - and viola ! You have a bubble.

If you really want to look at people's buy/rent preference, then doofrat's link is the wrong link. What you really want is the first graph here, comparing home price growth vs. rent price growth:

http://piggington.com/the_san_diego_hous...

To answer your question, I guess we could see people's buy/rent preferences change, but that isn't really what drove these prices up. Speculation drove prices up and now that people don't expect the price to increase, the speculators are gone.

Furthermore, keep in mind that homes are purchased on credit. Easy credit allowed people with lower incomes to borrow more money. Another cause for the price/income chart. With credit drying up, that is another reason why it will come down.

Understanding the connection between housing and credit is just as important as income and rent.