Isn't it simple? (where's the bottom)

User Forum Topic
Submitted by cvk on September 19, 2008 - 1:21am

I see lots of articles nowadays talking about various arcane approaches to predicting how to detect the bottom of the housing price bubble, especially on this site regarding SD county prices. Isn't it really a very simple thing to work out?

If you assume that the world went mad in 2000 and that prior to that things were fairly realistic, then can't you take the prior 10 years RE price growth rate and project 2000 prices forward by that rate in order to determine a "reasonable" value for property prices today?

A relative of mine bought a property in Carlsbad in 2000 for 300k. Today a virtually identical property next door to him is offered at 750k, which is about a 12% annual yield. Let's say the historical annual yield for real estate in SD county in the 90s was closer to 8%. Can't we just take the 300k starting price and compound it by 8% to arrive at a more realistic price for this property? Doing so would suggest that the price would have to fall another 25% to get back to "normal".

I haven't done the research on historical RE price growth in the previous decade, so the 8% is a total swag, but it seems to me that this approach is reasonable, and much easier to calculate than some of the other models i've seen.

Considering the rate at which the Fed is now printing money, though, it may not be long before inflation normalizes the price where it is now.

‹ Saw news report on Las Vegas Peter Schiff's take on the uber-bailout ›
Bubbles, when they pop,
Submitted by 4plexowner on September 19, 2008 - 3:27am.

Bubbles, when they pop, always (yes, always) fully retrace themselves

You can take my word for this or go read the financial history books for yourself - start with
> Popular Delusions and the Madness of Crowds
> Manias, Panics and Crashes

So, if we accept that real estate was in a bubble and that bubbles always fully retrace themselves, then all we need to do to predict a bottom is decide where the bubble started

I maintain that the bubble started in 1998 and that is where San Diego RE will bottom - other posters on this board pick bubble-start dates in the 2000-2002 range

Another factor that is common to popping bubbles is that they tend to overshoot on the downside - that would suggest that prices might go even lower than 1998 levels

When I say "1998 prices", I mean the price-to-rent and price-to-income levels that existed in 1998 - see Rich's article, "This Just In: San Diego Homes are Overpriced", for the long-term charts showing these factors http://piggington.com/this_just_in_san_d...

~

Here's my prediction: we have capitulation in the local markets in 2012 with an overshoot below 1998 price levels - the market then bumps along the bottom for several years before starting to appreciate again - I'll say 2015 before prices start to rise again

Sorry that I can't support your idea of 2000 being a bottom

I haven't done the research
Submitted by CA renter on September 19, 2008 - 3:43am.

I haven't done the research on historical RE price growth in the previous decade, so the 8% is a total swag...
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You're forgetting the cycles. RE does not go up every year, forever.

IMHO, look at **wage** inflation as a rough estimate of how much higher prices should climb. Personally, I think prices should revert to pre-2001 levels (nominal), and the credit contraction may well bring prices even lower (affordable housing is a GOOD thing). :)

5% is the most commonly
Submitted by temeculaguy on September 19, 2008 - 8:17am.

5% is the most commonly accepted annual rate of return.

1998 was flat as compared to the bottom of 94-95.

2003 was the "normal peak" when toxic financing extended it artificially, creating the bubble. Had 2003 been allowed to be the natural cycle peak, prices would have remained flat until about now and they would begin a slow rise about now.

4 years up, 4 down (actually 0% rise but vs inflation considered down) and 4 flat (staying with inflation), that is the "normal cycle."

We had 4 up and then 4 really up, now we get 4 really down and who knows what beyond that.

2003 prices in 2009 would be "normal" range. T return to 1998 prices would be ten years of not keeping with inflation from a spot at the end of 4 years of no appreciation. It would be great for a buyer, it is entirely possible but it is not a sound way of using history to predict the future.

Of course nothing like this bubble has ever happened in R/E, so any guess is a good one, it just doesn't fit into any models.

OK all you knife catchers out
Submitted by peterb on September 19, 2008 - 11:51am.

OK all you knife catchers out there, unemployment just called and it's 7.7%. Officially! Cant wait for next month!!

How about that bottom now?

Look out

below.....

What about the fact that home
Submitted by nostradamus on September 19, 2008 - 12:33pm.

What about the fact that home builders hoping to profit from rapid RE price increases built and built and built? It's a glut.

Your 8% scheme might work if only the inventory remains constant.

temeculaguy wrote:5% is the
Submitted by vegasrenter on September 19, 2008 - 12:47pm.

temeculaguy wrote:
5% is the most commonly accepted annual rate of return.

1998 was flat as compared to the bottom of 94-95.

2003 was the "normal peak" when toxic financing extended it artificially, creating the bubble. Had 2003 been allowed to be the natural cycle peak, prices would have remained flat until about now and they would begin a slow rise about now.

4 years up, 4 down (actually 0% rise but vs inflation considered down) and 4 flat (staying with inflation), that is the "normal cycle."

We had 4 up and then 4 really up, now we get 4 really down and who knows what beyond that.

2003 prices in 2009 would be "normal" range. T return to 1998 prices would be ten years of not keeping with inflation from a spot at the end of 4 years of no appreciation. It would be great for a buyer, it is entirely possible but it is not a sound way of using history to predict the future.

Of course nothing like this bubble has ever happened in R/E, so any guess is a good one, it just doesn't fit into any models.

Right. Another way of looking at it is take the 94-95 low and add 5% compounded until now, and that's roughly fair market value. Or go by the price/income or price/rent charts and project to the next trough value. Either way, you don't get to 1998 prices.

That said, I'm hoping I'm wrong so I can move back to California & get a nice place in SD on an acre or so.