San Diego Housing Bubble News and Analysis

Schahrzad, thank you for sharing the article. I think you make many good points, but I have to disagree about your view that predicting the bottom is easy. If it were possible to time the market, we could make billions with little or no risk.

Market timing, which simply means being able to know when markets peak or bottom, is an impossible dream.

I think Toll's (the builder) and Bredemayer's (the appraiser) advice is somewhat biased because of their occupations. However, I agree with the general tone of the article: the house you live in should not be viewed as an investment vehicle. That sort of misguided thinking in the last 5 years resulted in many people buying more house than they could afford, inflating the bubble in the process.

Althugh we know that in areas like S.D. prices are heading down, the process won't be monotonous: there'll be drops, flat periods, some reversals (yes, it happens when people think they "see the bottom" and start buying only to see prices drop again). The bottom may be 3 years from now, or may be 15. We will know only after the fact, as has always been the case.

Diego Mamani, I completely agree with you. It's impossible to predict/see the bottom/top until you past it. You can see the general movement/direction of the trend. Especially on a slow moving market like the RE market, it's a little easier to see trend, but it's still impossible to see the bottom. That still doesn't make the Toll's Bro. CEO statement correct though. If you believe that price will revert back to the mean, then even if you wait past the bottom and buy @ 10% above the bottom, I'm pretty sure it'll be lower than it is today, inflation adjusted.

That's very logical, A.N. Problem is, it's quite possible that what you perceive to be "10% above bottom" may simply be a temporary reversal and that prices will continue dropping for a few more years.

Take So. Cal. after the bubble popped in 1989-90. Prices stabilized somewhat in 1991, and many bought thinking that we had reached bottom. Then prices continued their decline until 1996-97. Only when prices started going up steadily in the summer of 1998 and onwards, we learned that 1996 had been the bottom.

PS,

Haven't run the numbers to agree fully with your final argument, but you bring up a crucial point:

"If...you have a mortgage that you can afford"

And I would add, that should mean - afford without going into credit card debt to buy groceries and gas, afford without counting on an annual pay raise, afford if you were to face a financial setback (temporary job loss, illness, etc.).

I find it hard to buy into the idea that as a professional in my mid- (ok, late-)twenties, high income for my age bracket, stable profession, virtually no debt, I am priced out of the housing market forever (and I am priced out, and have been for a while, no matter what a mortgage broker would say). It just doesn't make sense.

I've watched too many of my peers get in over their heads in the past few years. Dealing with the headache of having (and finding!) multiple roommates so that they could make their mortgage payment. Sacraficing all the fun stuff, or going into crazy debt to avoid the sacrafice, all for home "ownership" (or in some cases, because they're convinced they need the tax break, but that's another rant).

Of course, everyone has different situations, different priorities, and I haven't always made the best decisions either, but I must say it's pretty nice that I'm living comfortably, watching my savings build, and I haven't had to eat Ramen Noodles since college.

SMFJ, you were priced out, but only temporarily. And, anyways, a single person in her twenties shouldn't be buying a house. In the last few years we saw many single people buying houses because they thought it was a good investment, or because of the tax break, or because they thought they would be priced out forever. That's all balloney as we well know.

In any case, soon it'll be pay back time for you. Once you get married and are ready to settle down, you will have many houses to choose from, and at prices that are lower than today (at least in inflation-adjusted terms). At the same time, your income will be higher as you acquire more skills and experience. The near future looks rosy for you.

Diego Mamani, I agree about dead cat bounce. the 10% i gave is just arbitrary. My point is that, you don't know where the bottom is until you're well past it and on your way up. Same with the top. So that's why I throw out that 10% number.

I am willing to be corrected in my assertion that you *can* time the bottom in a real estate market, because it moves slowly and is fairly illiquid. It takes many months for the trend to turn, not minutes as in the stock market.

Please give me data to correct my assertions below.

This is how I plan to time the market. I will watch the data and get the "beat on the street" from a realtor. Two sources: data and anecdotes.

Realtors will be the first to know when the market has turned, when investors come in to start buying properties, and bubble sitters are no longer sitters, but buyers.

Data: months inventory and HAI are the two metrics I will watch. Inventory will fall as sales pick up. Median is a 1-year to 2-year lagging indicator. Secondary, DOM should decrease; the true DOM, and a realtor can tell you if that his happening. Reductions should be fewer, showings will pick up.

Diego Mamani, what data do you have to show that months inventory was falling, then turning up again? Prices are volatile, and can shift a few percent from month to month, so I wouldn't use prices. Real estate seems to be a slow moving ship. It doesn't bounce around like stocks do.

From ASU's report: "As the housing market slows, the entry level sector basically disappears, while the move- up markets garner a larger share of the remaining activity. Thus, it is not unusual to see median prices to be fairly stable or even increase as the move-up market works to be satisfied." I believe it will work the same in reverse, when the market picks up again. The entry level sector picks up first, and median prices will resume a larger decline.

In conclusion, I believe I can time the real estate market, and make my purchase within a few percent *after* the bottom. I will wait for the bottom to be behind me, but with RE moving so slow, I can wait for 2-3 months, and will have missed less than 5% of the move up.

I would love to hear any arguments against this.

I'm not one to brag --just could not help it... I was able to time the market with pure luck on my side.

I bought a San Diego house in April 1996 after asking for a deep discount from the seller who could not unload the house after sitting vacant on the market more than 6 months (asking price: $160,000, paid $133,000). I bought at dip of the market.

I sold the same house in October 2005 for $500K - sold at near top of the market. The house was fully paid when I sold, so all proceeds from sale was pure equity/profit. I thank my lucky stars and my guardian angel (of course) for the perfect market timing.

Asianautica: I know what you mean, whether it's bottom plus 10%, or x%, we'll be in the dark until a long period has elapsed.

Powayseller: Your dictum I believe I can time the real estate market is a precious little gem! Now, seriously, the last time the market hit bottom was 1996, but we didn't know that until the 1998 summer house buying season was over. Perhaps it took until the spring of 1999 for smart people to realize that 1996 had been the bottom. And even then, no one was 100% sure because appreciation in 1998-2001 wasn't as steady as in 2002-2005. And you are telling us that you will know for sure when the bottom was only 2-3 months after the fact? That's tantamount to claiming supernatural powers. You should run your ideas by John Talbott, but he'll probably tell you the same thing.

Medieval chemists dreamed of manufacturing gold (didn't work). Some time later, physicists dreamed of building perpetual moving machines (didn't work). Today we dream of being able to time the real estate market. And that's fine, as long as we know that it's just a dream.

Have a good weekend.

Why did it take you 2 years to realize the bottom had occured? This is like Alan Greenspan telling people you cannot recognize a bubble until AFTER it has popped. Perhaps back then people were relying on the median, which, as I said before, is a 1 - 2 year lagging indicator. Why are you so upset with my dictum? Timing a crawling asset's price movement is not even related to making gold out of thin air, but more like making wool from sheep. It's just a logical thing.

I think you are having such a hard time because we have been fed such poor information about real estate cycles. Nobody educates us about real estate cycles. They are infrequent, usually occuring only once every few decades, in a few cities. Few people have become experts at figuring them out. Furthermore, the MLS is relatively new, and doesn't allow us to go back in time to look up the data we would really like, to prove our points.

I would love to chart months inventory from 1995 - 1996, and I am sure we would see a steady decrease in that measurement. I would also love to talk to realtors of that time, who would surely tell us that activity picked up in the summer of 1996, as investors came back in the market, and people got excited again about buying homes. During this time, the median would KEEP DROPPING, because the increase of activity in the low end would make the median pick up in the downward direction. As we know, the newspapers report the median. The median didn't show prices picked up for 2 years, so that makes sense it would be 1998 before the public was aware of the shift.

Again, to prove all this, we would need the actual data. But from what we see today on the way down, my method definitely works on the way down. And that's why I am so convinved, based on the logic, that it will work on the way up. I will use this method to time the real estate market for myself, and yes, if I had known about this method before May 2006, I would have made a ton of money in real estate. The market softened in 2004, so had I known about this method back in 2000, I would have been buying real estate until the March of 2004, when inventory was at 3,000 and started creeping up (months inventory went up). By June 04 inventory was 6,000, and by Sept 04 it was 12,000. Using months inventory, you would not be buying after March 04, selling instead.

I hope this has been helpful. The greatest disservice done to the public has been the use of the median, which has made everyone believe they cannot time the real estate market, when in reality, it is very easy to time. You just have to stop using the median.

Schahrzad Berkland

Schahrzad,

You're on to something, but I think (like others here do) that you're overestimating your skills. What you're right about is that timing the RE market should be easier than timing the stock market, because RE moves much more slowly. But it's still not a cakewalk.

Let me give you an example: the London propery market has been as overvalued as our own local market. After rate raises from the Bank of England in 2004, the London market had a very lousy year in 2005 (very much like SD in 2006). All analyst said: "OK, it's finally going down now, look out below!". So the market dipped a bit in 2005, but came back strong in 2006 (up 10%). Now, this is still overvalued as hell, even more so than before. Everybody is scratching their heads, not knowing what will happen next. All analysts agree that the market has to go down, sooner or later, but this year's surge was a complete surprise. Timing that sort of market is a fool's game.

The Henderson (Las Vegas) market rose 50% in the 12 months from July 2003 to June 2004. The market DIED during the last half of 2004, and all the signs were there that we were at the top - rising inventories, falling sales volume, etc. I bought in March 2004 with a 3-month lease-back and sold (panicked, to be honest) in July 2004, glad to get out with enough "profit" to cover my 4% commission and closing costs. Then interest rates went back down and the market rose another 25% in 2005. This mid-2006 top looks exactly like the mid-2004 one - the point is, you can't say for sure until history proves out the timing.

I don't think timing RE is any easier than timing the stock market. Sure stock market moves much faster than the RE market, but that doesn't mean the same "fundamental" for timing are not there. Timing the market is impossible. You might get lucky and get 1 or 2 timing right, but to say you can truly time the market, you have to be able to point out every peak and valley. If you truly believe you can time the RE market, then you should buy 10 houses and rent out 9 and make a killing and retire.

AN - Yes, I will buy 10 houses and rent out 9, at the bottom of the market. Not now.

Daniel and VegasRenter - did you track the months inventory for these cities and times, as well as the multiples of housing prices as rents and wages? We need to look at months inventory, changes in inventory and sales, HAI, and a return to a true values (multiple of wages and rents in line with history) and combine that with the experience of realtors in the field.

What you both provided is interesting, but in the absence of data, does not dispute my method at all. Perhaps the price changes you noted were just statistical noise in monthly home sales.

Check out the historical price/income charts on piggington's Bubble Primer. You can see home prices move in one direction from top to bottom , without rallies or false bottoms/tops as you find in stock charts.

I had not heard of false rallies in housing markets. Do you have any charts? Or are these rallies just monthly noise? I will not buy on monthly noise, or a temporary blip. It doesn't matter to me if prices dip down one month or two. I am looking at the fundamentals: home prices vs. wages and rents, and demand measured by months inventory.

Just curious - when are you planning to buy a house, and how do you plan on making your decision on timing?

Market psychology is an interesting thing. It's one reason why the bubble transcends national boundaries. I think that if SD and other metro areas in the US suffer the big correction, that correction will extend to every other distorted market in the U.S., and may even touch some of the heretofore stable markets. I also think that if the trend for correction overwhelms the U.S., it will also affect all the other bubble markets. It may be that London did the dead-cat bounce because on a global basis there isn't enough panic yet.

Bugs, I would like your input on how you would time the real estate market. These metrics haven't been around too long, but is it possible to do a chart of months inventory going back to the 1970's. Also, how do you explain that the SD price/income chart goes up and down so smoothly, without any intermediate rallies? Is this because real estate is a slow moving ship (using Rich's term)? Once it turns, it moves in one direction only, with some noise here and there?

Well, what can I say? Good luck and more power to you! As for when I'll buy, it is going to be when my favorite metric (present value of future rents divided by future homeowner costs) gets back in line. But I'm not kidding myself that I'll be able to "time the bottom". Once I find an entry point that looks reasonable to me, I will choose buying over renting. If the market continues to go down a while after that (overshooting on the down side), I won't sweat it.

I don't have access to the long term MLS listing data and I doubt that even the boards that comprise the MLS here in SD County have it.

"Timing" the market before it does its thing is not possible, in my opinion. There are too many variables, some of which have nothing to do with "what should be". There are some things we can do to narrow the possibilities down, though: extrapolate past trends into the present and near-term; watch the micro indicators as possible precursors to the macro trend; and try to understand the "why" of what's happening as well as the "what". That's pretty much what we've been doing here.

Beyond that, there will always be some risk due to the X factor of human irrationality. We can manage that risk to a certain extent but I don't think we can avoid it.

As an example, many of us on this forum (and even Rich) were aware that the trends for increases couldn't continue and there was a problem; but nobody could have forecasted in advance exactly when that peak would pass.

Although your own example was about as close as you can get - you guys were questioning that last $20,000 - but it did involve a certain amount of luck, too. Had you stumbled onto the various internet sources a few months earlier or a few months later your timing would probably have been a little different. I don't say that to detract from your success because it took a lot of hair to make the decision you made when you did it- I only mention it to point out that had you come to that decision a year earlier you would have left a little more money on the table, just like a few of our other posters.

Oh, and I anticipate there may be a dead-cat bounce here; possibly as a result of a stabilization of mortgage interest rates.

If I had used months inventory as a metric, I think I would have thought of selling between summer 04 and summer 05. My only problem was that my house was under construction and not complete until 9/05, so I really couldn't sell before. Additionally, I did not have the knowledge I have now. Back then, I didn't even know we were in a housing bubble. I thought prices would stay this high. I didn't know the majority of buyers were getting interest only and neg-AM loans. I was clueless. But I did know enough to not buy any homes during the runup. It seemed too crazy to buy.

I would be happy to buy within 5% of the bottom. I don't think I'll get stuck on any dead cat bounces if I use a knowledgeable realtor plus data. The realtors will be the first to know when activity picks up, long before the data shows it.

I think everyone here will know when the bottom is also. We are all using the same data, and we have very good realtors here who will inform us when activity starts picking up.

There are other factors to watch too: reduced HAI (a NAR quotient combining income, price, and interest rates, where 100% means the median income can afford the median home price and CA was a dismal 14% last December), rising employment, population inflow. So I'm waiting for a turnaround in the economy, before the media gets the word out.

Trust me, if you're watching the market at that time you'll see the trend turn long before the media catches wind of it.

Diego, I agree with you 100%. There's no way someone like me is priced out of the market forever - I mean really, in the long run, who the heck else is going to buy a one-bedroom condo other than someone like me, or an investor who will be expecting cash flow? It's just really sad to see the way that some otherwise intelligent people my age have bought into the "it's now or never" hysteria. And the tax deduction thing is a pet peeve of mine - my friend, a fellow CPA none the less, just bought an extremely overpriced home because they "needed the tax deduction." Obviously, your incremental tax deduction increase due to your mortgage interest should play into your rent vs. buy analysis, but you never spend money just for the sake of a tax deduction.

Sorry this is such a delayed response - I was out enjoying my weekend being a suicide-loan-free kid.

Powayseller,

The problem with timing the market is that you have to combine fundamental analysis with behavior finance. The fundamentals can all be there, but you have to know what the physocology of the buyer is. While the fundamentals may indicate a good time to buy (which is when I want to buy) the public may not know this for a while still. Since aggregate market behavior can be irrational and last longer than you can stay solvent, you cannot really predict the absolute bottom. Even knowing what the realtors know will not be sufficient to know the aggregate market physocology. I think most of us would be happy buying around the trough, but knowing that it may drop a bit more or take a few years to climb out of it.

Shifts in buyer behavior show up in the changes in demand and supply. Thus, the 3 indictors that I mentioned. Realtors will be the first to see the shift in buyer behavior. They are one of the indicators I mentioned. As demand picks up, months inventory will peak and decline.

It is disappointing that none of the real estate experts, Real Estate Centers, or economists have provided real estate cycle forecasting tools. So I have provided a forecasting tool myself, and in the absence of any others out there, is what will have to do. Time will tell if it works.

What you described as a bottom can also occur in a dead cat bounce. People will think it can drop any lower, and now is the time to buy again. Some will start buying and cause the dead cat bounce. This bounce can possibly make you think it finally turn around. In stock market, dead cat bounce can last 1-2 months before it start turning down again. Since RE is much slower, my guess is it can bounce for many months in RE before it turn down again. That's why it's impossible to predict the bottom or top. That's also the reason why many people sold in 2003. They start hearing about the bubble and believe it and sold. So, bottom line is, we all hope and try to time the bottom, but I've been humbled by the market too many times to think I can truly time the market. I would be happy to by when it's makes financial sense to me, i.e. compare to rent, even if it drop some more.

Also, although good realtor will know more about the movement of the market than the average person, they still can't have a feel of the whole market. They might know about 200-300 houses personally and know the sentiment of the buyers and sellers of those houses, that's still only about 10% of the market. There's a possibility that 10% of the market move in the wrong direction of the market and cause the dead cat bounce scenario.

2003 was not a dead cat bounce. Those people acted on fears, not data. Nothing you have said so far disproves my theory.

Disproving or proving my theory would require data of months inventory from the last cycle. Without that, only time will tell.

I was told that real estate is a slow moving ship. It moves in one direction, and takes many months to peak and turn. This time, the market softened in 2004, and it wasn't until TWO YEARS later, in summer 2006, that the median went down. But months inventory changed already in 2004. It has not done any dead cat bounce since then. Inventory has been climbing steadily from 3,000 in march 04 to 6,000 in June 04 to 12,000 in Sept 04 to 23,000 today.

Perhaps you could find an example of where the inventory dipped and rose again since 2004. Then if you find that, we can check the sales and go further with this test.

Real estate moves very slow. It is not like stocks at all. No dead cat bounce.

You can have variations in new housing starts, permits, and all the stuff that manufacturers do to vary their work flows. But consumer demand and supply seems to be a very slow sticky type of thing.

Of course, if I am wrong, I want to be corrected, but all the things that people have written above, is not disproving my theory at all. Saying that I can't possibly be right is not proof of anything.

Similarly, I cannot prove my theory without the data. So we are on even ground.

All I can say is that I will use this model to time my purchase.

Here's data of median price from the last and current cycle. I'm not sure if you have this link or not, but here it is: http://www.housingbubblebust.com/92SoCal.... According to the data, the highest negative y-o-y decrease is around 1994. The rate of negative y-o-y median price start decreasing and it turn positive in last Q 1995 and 1st Q 1996. That's 6 months of data in the + y-o-y after a 5 year - y-o-y, would you call that a good time to buy? after all, things are turning positive again. Well, if you say yes, the next year would be quite hard for you, it turn back down again and the house you would have bought probably doesn't break even until 2 years later. That to me is a dead cat bounce.

Now, lets look at this up cycle. It's not as obvious but if you keep too close of an eye on things, you might get trigger happy. Here's one example. Using that same site you see that rate of appreciation increase every Q since 1996 until end of 2000. Around that time is when I remember first start reading about housing being over priced in SD from SD UT. Rate of appreciation start decreasing after 4th Q 2000 from 15% y-o-y to 4th Q of 2001 or 1st Q of 2002 @ 11%. I don't know about you but seeing appreciation slow and fundamental is already out of whack and people talking about bubble, that might be a signal to sell, right? Well, we all know what happened after that. It would probably continue to go down from that point if Sept. 11 didn't happen. But since it did and the Fed start slashing rates, that's why we're here today.

So there's a possibility that the next time you see price start turning back up again and you think it's safe to buy, there might be another economic shock that will drive it down further, such as major oil shortage or a war that will drive oil through the roof and cause inflation to go rampant, which will cause the fed to raise rates. Those and many factors that will affect the RE market although it has nothing to do w/ RE.

Asianautica, thank you for taking the time to post this. The OFHEO median you showed is the accurate median, the one everyone should be using. (But NAR's median, the one reported in the media, is plagued with problems. ) In the first cycle, I see that you have to wait for the median to be in a new direction for 2 consecutive quarters, if you check the quarter-over-quarter median. In this cycle, the median has been increasing every year; I don't see a change around 2000; it keeps going up. We need to see not a slowing in rate of increase, but an actual decline. Anyway, I did not consider using median but I should add this to the model: 2 consecutive months of changed direction in the OFHEO median. Thanks for giving me this information.

The 3 indicators in my model are months inventory, realtor experience, and a change in HAI. Do you know if those 3 combined would have given a false signal at those 2 times you mentioned?

If you find evidence that my model does not work, then I will reconsider my strategy, definitely. Until then, from how I understand real estate, this is the best I've got.

As far as real estate responding to geopolitical shocks and high oil prices, do you have any examples from history that there were any "dead cat bounces" in real estate from such things? Real estate prices are historically linked to employment. Only during recessions have real estate prices fallen. Whenever people are employed, they can make their mortgage payment. Housing rises with inflation. It is not like a stock.

This article includes a charts of listings and sales in Phoenix since January 2002. This is the type of data I plan to use. I guess I better start charting, so I have a history, and can see a change in trend.

In the graph, we can see inventory is falling, until January 2005. In April 2005, the inventory leaps up, and keeps rising. Nowhere do we see a "dead cat bounce", i.e. inventory reversing trend, and then resuming its previous course.

Has anyone seens a chart like this for San Diego?

There's no way I can give you data of the last bounce in 1994 for all 3 of your indicator. However, if you take a look at Rich graph in the bubble primer, you see that 1994 is well under the longer term average, so my guess is the HAI is pretty good at that point. Also, do you noticed some of the realtor who are ahead of the curve call the top of this cycle at least 1 year before it show up in the OFHEO median? So can it also apply on the way up from the bottom? Could it be possible that they might call the bottom 1 year before it turn positive for the first time? Which is 1994 by the way. The HAI can be shown with graph from Rich but the realtor sentiment is only my guess since I did not talk to any realtor back then. I don't think I can find inventory data back then since the data is not widely available on the Internet like it is now.

I also showed that an event like 9/11 can change a cycle. W/out 9/11, there were on their way back down. But if you're still strongly believe you can time the bottom and top, good luck to you. The school of life has very expensive, make sure you're prepare to pay. I sure paid my share.