San Diego Housing Bubble News and Analysis

I believe that we will indeed see continued depreciation in the high end market. The question is how much. My wife and I like Birdrock a lot and back in 02 we toyed with the idea of moving there and regretfully did not.

To be honest I think you are overpaying for the home however you are purchasing smack in the middle of a spring rally. if you are intending on holding for 10 years like you implied I tend to think that you will have an opportunity to not be underwater at some point in that timespan. If financial considerations are the only factor then it is a no brainer, do not buy. Only you can measure the decision of lifestyle verses financials. You already mentioned that your current rent is higher then what this payment will be. Did you include property tax as well?

I will tell you that Birdrock is a great place to live. I will also tell you that other opportunities will arise but you will have to be patient. There are always more homes that come along, however the good ones seem to not come along to often. If you are trying to guess what the bottom will be for la jolla and Birdrock...hard to say...right now it is seeing more demand then in the past year or two but I think another 10 to 20 percent is not impossible iF things really crap out.

The new phase of real estate is the jumbo mortgage group (over $417,000). Jumbo's now are 35% of foreclosures in California and prime loans are now in more volume than subprime. This is accelerating very rapidly due to problems since October in the stock market. In 2001, the stock market decline helped housing; this time it is the opposite.

I just got my offer accepted on a short sale that was being marketed at over $2.5mil in November and my offer was below $1.2. The appliances were removed but this is a substantial decline. It is 4900 sq feet.

No one has a crystal ball, so it's a question of odds. With that, here are my thoughts.

If you want to give yourself the best odds of the best financial outcome, then you should wait. All the negative factors that hit the lower end of the SD market haven't percolated through to the high end yet. (A few people here think they never will but, as I said, it's a question of judging the odds...)

Psychologically, it's a completely different story. Most people who bought houses in the last few years paid with what I will call "Monopoly money". That's why they could bring themselves to write a check for $1 million for a dumpy place. For every 100 people who wrote that check, there were only a few who had actually saved most of that money by spending that much less than their net earnings stripped of capital gains. Most of the others borrowed most of the money, expecting to pay the loans back painlessly from a higher future sale price, or they used prior gains from previous home price appreciation ("equity"). It was therefore easy money, and they spent it more freely.

Based on your comments, I am guessing that you have a large pot of money for this next home purchase, and a lot of that money came for substantial prior home price appreciation. Each $1 of your housing pot didn't come from a $1 saved by scouring the supermarket shelves for good deals, or taking cheap vacations, or some other self-denial. It came from high previous asset price appreciation, which was pretty painless, so it "feels" OK to spend a lot of it without counting the pennies.

With that (cheap, and worth every every penny) psycholgical profile, I'd say that you should just find a place you like, and make sure that a loss of 30% of the price would not exceed your prior gains.

I'm sorry if you're relocating from the big apple to of all places San Diego. But relevant to the first question you need to ask yourself....How likely will you and your wife remain in san diego and not another big city...Seems to me you have to deal with the bigger culture shock of that first...The good weather and the beaches only last for a couple of months.Are you really sure you're going to stay in S.D. when the economy turns around?

The second question you need to ask yourself is how wealthy are you? If the answer is "insanely", who cares what others think or whether RE corrects an additional 20-30%. I don't see how folks use seeing $2million on a two bedroom place in in Manhattan need to even blink on a $1.3-5 million place in LJ...even IF you see things correct another 20-30%. You're in a different league from a good portion of other buyers....There was one person that use to post around here called "raptorduck". He was a high end buyer and made a purchase decision a few months back, and went through a few decision points... probably what you're going through. You could search for his threads title "Tales of a RSF buyer" (Raptorduck, wish you were still here)....

http://piggington.com/tales_of_an_rsf_bu... (click on his username handle, and you can follow his entire saga).

Good luck...

(Psss just don't tell people on this board you use to work for AIG, Goldman, JPM, or any bank especially if you received TARP....unless you want to get a lecture on why you're money is really their money :))

another two cents on the lifestyle issue flu is talking about

Bird Rock is a long way from the freeways which are the primary way to get around San Diego county (lots of canyons so many of the surface streets don't really take you anywhere you want to go - easier to stay on the freeways)

La Jolla has resisted building any roads in their community so, from Bird Rock, you can get to I-5 by driving through La Jolla or through Pacific Beach - take your choice but either way you are looking at 15 minutes or so just to get to the freeway - in work traffic or weekend beach traffic this drive time will obviously be more

maybe this isn't an issue for you but I find it frustrating to be in the Bird Rock area trying to get anywhere in a hurry - when I'm not in a hurry it is a very nice area (except for those traffic circles in front of the new condos - what the F were they thinking!)

Thanks everyone for the feedback. There were a bunch of questions, that I thought I would address.

1. No, I do not work for a firm that received TARP funds. That is a nasty stigma these days, but you must remember 99% of the people in those firms are innocent bystanders who got hurt as well.

2. We currently live on a hill overlooking Birdrock now and really like the area. I work from home, so no commuting issues.

3. After 15 years in NYC, SD is a breath of fresh air. I actually love the small town feel and have no intentions of going back. I do miss my NY Giants games though.

4. I don't know what your definition is of insanely wealthy is, but while I certaintly have no issues affording the home I don't consider myself wealthy enough to blindy throw money away. This is a big decision for us and the difficult part is that it is a financial decision and a lifestyle decision. I am not approaching the home purchase as a personal ATM, which is partly what got the country into this mess in the first place. I would be more than happy with an average annual return of 1-2% over 10 years.

5. My wife wants the home because she believes we will happy there and after seeing 40 plus homes this was one of the only ones we liked. It also happened to be the least expensive. I on the other hand have a hard time in purchasing a depreciating asset, which is the reason for the original post. To be honest this whole dilemma is due to us having to vacate our current rental and our lack of interest in renting again.

6. SD Realtor - you stated that you believe I am overpaying. Is this belief on the current purchase price for a home in that area ($575 psf)or the speculation values will continue to decline? Because if you believe I am overpaying today and will have the furthur hit of a market decline that is a double whammy that will be tough to overcome.

Thanks again as I do value the insight.

I notice you mentioned that you'll have lower costs buying than your current rent.

Are you looking to own long term... In other words, is this a shelter decision?

Or are you looking at this purchase as an investment... where ROI is the bottom line.

I'm in the minority on this board, I think, since I tend to look at home purchases in terms of affordability of shelter. I don't look at owning a house strictly in investment terms. It would be silly to do that if you don't have plans to sell in the forseeable future.

If your plan is to buy, live there, and hold it for the long term... and this house meets your needs and you can afford it. Go for it.

But, if this is a stepping stone home... with plans to buy bigger/better in the future, or if you think the odds are decent you'll be relocating in the future, don't buy now... the prices will be coming down and you'll lose money on the deal.

Wow! If you really will only be happy with selling in the future for more than you paid, then you are essentially saying that you are only happy with the price if you don't really have to pay it, in the end. Sh*$#t, if that were true, I could buy a $5 million house! (My house budget is $300K.)

What happens if, in the future, you must sell, and the house is worth 30% less than you paid? With that scenario, how much would you be comfortable paying? Personally, that's the number I'd be targeting for my budget. Then find the best house for that price.

FWIW - which is exactly what you're paying for it (nothing) - a couple of observations.

One, the low end went nuts first and is shitting the bed first and it will bottom out first. The high end followed the low end during the ascent and it is lagging the low in during the decline. I'd assume another 20% decline from here for $750K+ properties. Just a guesstimate, of course.

Having said that... (a) A lot of folks can live with a 20% decline due to their situation, and (b) rates are so low that if you're going to stay in the place for a LONG time, the lower interest rate will offset a large portion of a 20% decline.

If you really like the place and the potential "loss" is a very small part of your net worth, then why not buy it... Don't get me wrong, I like my money as much as the next person, but sometimes waiting for that last nickel (in relative terms, of course) just isn't worth it to me (personally). Life's too short.

Just my 2 cents.

Your reason #5 is enough to use your wall street smarts to haggle over as much as you can over that house then. Again, provided you're in your budget and expect that future returns may very well be very very very very very very (enough very) future, why not go after that home?

If you find a home you like, and aren't going overboard, why not purchase? Can't comment on the specific LJ home...You should probably wait for a response from the piggington realtors. You and I aren't exactly looking in the same markets :)

Just double checking though...Are you sure you are planning to stay in SD? Some of my relatives were i-bankers from NYC who relocated to SF/Bay Area...And while they love visiting here to tee off, some of they definitely preferred SF/Bay Area...Not sure if you really looked around in CA yet.

goblue my statement about overpaying was not based on any analysis of this particular home. It was more generic in the sense that I think birdrock ppsf will come down over the next two years. Sorry if I misled you on the posting. Right now, once more the local dynamics of many communities are pretty piss poor because of the inventory.

However, since this is a big concern to you, I would advise that you ask your realtor to run very in depth Birdrock comps to see how they look. It may be helpful to look at recent cancelled and expired to see how they compare to the solds.

Let me ask you this, what has your realtor told you and what are his/her thoughts about appreciation/depreciation potential? What about the market in Birdrock in general?

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Anyways I think that if you have patience you will get a better deal. That is the bottom line. You may not get a better home though. I understand it is a tough call to make.

In reading your comments, it appears you and your wife really want this home, but that you are torn between what you want, and what you feel might be practical.

Over the past few years, and after losing several friends who were only in their 40's, as I am, I have learned that life is extremely short, and EVERYTHING is temporary--so it is probably wise to enjoy each and every day.

On that basis, and since you both love the home, and since it appears this decision will bring you no financial hardship, I'd say--go for it!!

Our family made a decision over ten years ago, to move to a home we loved in Rancho Santa Fe, and it has been a dream come true for us. We've lived all over the world, but, for us, this is truly "home."

Go with your heart, and enjoy your wonderful life!!!!

Thanks again for all of the feedback. To address a few comments:

1. UCgal - Yes, this is a long term decision, which to me is 10+ years. We have no children yet, but this home easily works for a family. We have no intention of relocating anytime soon or using it as a stepping stone to a bigger and better home. Part of the problem is you never no what life will throw at you and how decisions affect your future, which is why I posted in the first place.

2. Patientrenter - If I had to sell sooner than I anticipate due to unforseen circumstances and lose 20%-30%, I certainly would not be happy (who would?). However, to answer your question, as I am only in my mid 30's and have an ample net worth, it may slightly change but certainly not crush my retirement plans or my quality of life. I don't think anyone makes a purchase with the intent to lose that kind of money, though. I believe most home buyers expect to make some appreciation over the long term on their homes when they sell. The difference is the metrics changed during the housing boom and incorrectly promised ridiculous returns from previous generations. All my rent vs buy models that I have run have me breaking even in 4.5 years and that is based on 1% annual appreciation. Obviously, if I am down 20% out of the gate, that 1% may not be attainable over a 10 year hold. That is the million dollar variable.

3. Flu - I grew up in NY, but I have lived in different areas of CA and have always liked SD the best. No more haggling on the house as they already accepted my offer and that was a struggle in itself. For us, due to time contraints it is either take this one by tommorow (of course I have 17 days to walk away after start of escrow) or start looking for another rental.

4. SD Realtor - No apologies necessary. Good advice and yes, I have looked at the comps and the recent sales in birdrock average around $700 psf. However, the comps are located closer to the coast by a few blocks. Even with location adjustments, this would imply that I am still getting a pretty good deal at $575 psf for a home that needs no work. What keeps bothering me though is that after all the housing crashes, the owners are still getting 30% return over a 6 year hold. That is driving me crazy. To answer your second question, my broker of course thinks this is a good time to buy in birdrock as he believes it has been a hot area in contrast to past years when birdrock was not so popular. To his credit he states as most of you do, that if this is just a 3-4 year purchase I should not do it. If I am thinking 7+, then we have hit a pocket of price reductions and low interest rates that provide a good opportunity. Additionally, of all the homes in La Jolla that we have seen at <$1.4, this house is by far the best. We saw one at listed $2 million that we liked more, but not at $700k more.

5. Flyer - You are very accurate. My line of work is analyzing financial data, which makes purchasing anything quite difficult. It is my albatross because I crunch numbers on everything and it drives my wife crazy. I am not cheap in any way, but no large decisions escape the spreadsheets. To me the prudent thing to do is to move and keep renting and see what happens whereas my heart says this home works well for us and just live life and don't worry about. We will see who wins. Although, for what it is worth it seems if everyone was in my shoes, the majority would deal with moving/renting again and wait it out.

I appreciate this forum for allowing me to talk this out.

All the data points to this sector of housing to be the next place to take a dive. But your location is highly desireable. So it fights the down draft fairly hard. I would think that 10% to 20% reductions in the next 12 months would not be out of line. Look how long the homes are staying on the market. If you can wait, I would. Things are not getting better any time soon.

I've been closely watching $2M range homes in Rancho Santa Fe & Olivenhain (rural Encinitas)markets for the last 15 months. I'm still seeing mostly price reductions week after week. A number of the properties I've been watching have sold, but so far I haven't had to kicked myself over any missed opportunities. I think the high-end market will drop another 10-20% and it will be AT LEAST 12 months before that happens. At this time, I would be very reluctant to buy anything priced at 2004, or later, levels. My guess is that we will see 2002 prices (not factoring in inflation) by spring of 2011. Keep in mind that if a person buys now with 20% down and prices drop even 10% they have lost 50% of their investment. A previous poster made the point about the huge home equity gains, and easy jumbo loans in the past. These forces are no longer present to drive upgrades to the higher end market and it takes a long time for most people to save up for a down payment (or to make up for a investment loss) if they have to do it the old fashined way of banking their excess dollars & coins the end of the month.

Great Post, it deserves its own thread and discussion. I vote you make a Monopoly money thread.

Well, then it seems like you made up your mind. Welcome to SD...Just check what the appraisal comes in at. If it's lower than what you paid, you might be able to negotiate again at that point. Considering you had some appreciation on your previous home, I don't see a problem if your wife really likes this home. Money is money. I don't check when someone hands me a bill whether it can from 40 hours of work or from capital appreciation personally. It pretty much all looks the same to me.

I would concur with flyer's opinion. Life it too short.. You seem to be in a different league where money isn't a primary "issue".

Save a lot of money? What for? ..So that if you get hit by a bus, you can subsidize GM/Chrysler/AIG/BAC/C or "spread the wealth" back to irresponsible people that overleveraged and clamouring for a financial bailout? Enjoy your home. Might as well enjoy what you earned (sometimes).

Dammit.
I hate when Adam says what I was thinking faster and better than I did.

Also, bear in mind that the product in questions here only has to drop a small amount in asking to create effective demand (as your story illustrates).
This is very different than the areas I focus on where a drop of 40-60% from peak is often required to generate interest.

Even if you have to sell suddenly in the next 2 years, it is not clear to me that you would be looking at such a large loss (relatively speaking). Do bear in mind that these are not interchangeable goods (and therefore not a "perfect" market in an econometric sense). Also, timing the absolute bottom for your particular micro market is the kind of exercise that often ends up leading to a lobotomy.

This is a fancy way of saying that if you like an item and it is affordable and cheap (relative to its market niche), then market timing becomes more of a game than an actual strategy.

My two bits.

This is a fascinating thread. In figuring how much to spend on a home, some people judge how much they could afford to lose on selling it (versus the purchase price), assuming they just had to kiss goodbye to that money forever. Then they assume that this maximum tolerable loss is some conservative % of the price, and that gives the maximum affordable price.

For example, let's suppose I think I could handle losing as much as $100,000 on my home purchase (ignoring for a moment the maintenance costs and property taxes and mortgage interest etc). I then assume that the maximum loss on a house is 30%. That means I can afford a house up to $333K.

Others assume that houses go up forever, with any setback being temporary. So there is no real net cost, except for those monthly expenses. They then just calculate the most they can afford to spend on a monthly basis, and translate that into a purchase price. They don't set aside any serious amount for the possibility of a capital loss. They are so confident that they can time the market, or that the market is so strong over long periods, that they don't budget for a possible significant capital loss.

I'd say that the latter psychology is what has slowly taken root since WW2, and is now thoroughly embedded in the minds of 90% of Americans. Which RE buyer doesn't believe either that:

1. RE goes up forever, and it's just the poor dumb OTHER guy who may have to sell in a temporary future dip in prices

or

2. RE may go up and down, but they can time the market better than the poor OTHER guy who pays more than they will ultimately sell it for.

That, plus all the financial shenanigans politicians had to engage in to sustain this blind belief beyond its due-by date, is what has us in this fix now. I hope Piggs start to assume that if they "pay" $1 million for a home, they may end up actually paying some decent fraction of that $1 million (in spite of us all being market timing geniuses), maybe as much as $200-400K, and they really think through whether they would be comfortable with that. If not, then think about a lower price.

If it comes to that, it won't matter whether you're holding onto cash or purchased a home...It's all going to be toilet paper and everyone is screwed. The economic pecking order paradox.....When the entire economy collapses, it's game over for everyone.

But if you're a "borrower", don't worry ,because at least with this current administration, they'll at least try to throw money will be thrown at you months after month, courtesy of every other still paying tax payer who were savers, draining them to $0 along with you :) Har Har Har...

PR, I like your reasoning and would like to engage you on two points.

1:
The problem with what you are saying PR is that it assumes that you can both effectively discount risk out of a successful purchase and still successfully compete as a buyer.

In my experience, achieving perfection in risk management (especially by discounting) is desirable but not practical.

If one is to drop a price in order to avoid being upside down, then in most purchases there will be another buyer who is marginally more risk tolerant.

2:
The other issue is that if, as history would suggest, home price dynamics reflect household income, then it may be rather safe to assume that values will increase in the long term. I very much agree that the boom was unsustainable but the historical trend tends to oscillate around income oriented coefficients. Those coefficients are relatively constant and those income numbers tend to increase over time. Ergo, housing tends to increase over time. This is not bullishness but an observation of visible data. Most of it has been pointed out by Rich.

WOW! There are a lot of valid statements in these threads. It is a pleasure to see folks sharing such great perspectives. Goblue, you are definitely looking in a micromarket. Birdrock is very desirable for those that like the beach area yet don't want to be in a claustrophobic beach community like PB. A property is always only worth what someone is willing to pay for it. You have already negotiated to what you claimed to be willing to pay. The seller accepted even though they wanted more because they have heard the market speak. Now you have cold feet. That's normal. It is the biggest financial decision most people EVER make. You really need to take your focus off of what the current owner may be coming out of it with. That is completely unfair. They have seen plenty of unrealized equity disappear. Timing a purchase for the bottom can only be confirmed in hindsight. Then it is too late if you didn't act. This only needs to be about you, your wife, and what value you place on the property- financially and emotionally.

FINANCIALLY...I can tell you this- there is a very conservative financial advisor named Dave Ramsey. He runs sessions called "Financial Peace University". Maybe you have heard of him. I have heard he has recently begun encouraging people to buy houses. He completely discourages debt and always suggested you should have substantial down to purchase. For a person of this philosophy to be advising "BUY" if you can...there is something to it. Check it out.

EMOTIONALLY...You have looked at enough places to know it is not so easy to find one you both like. You are tied to this one because you do really like it of what you have seen. You say you can hold out long term if value declines some short term. You will never buy if you are going to analyze it to death. So go with what you can live the most enjoyably. The questions are simple- can you afford it short and long term? Can you keep your stress to a minimum if the values drop? Do you want it? Will you enjoy it? If the answer to all these questions are YES- go for it!

Question of the hour...when is your contingency period up?

ur, I agree that you cannot simply order that the price of a specific property be lowered until it satisfies your own risk comfort level. What I am saying is that most people should be computing that comfort price level first, assuming (for safety) some depreciation, such as 30%.

Then go find the property that you like best for that price. It might be smaller than the home you'd like (if you didn't ever have to actually pay for any of it), but it's what you can really afford.

On the notion that house prices track with incomes over the long haul, I basically agree. However, the assumption that the deviation from the growth in incomes will be benign, or won't last very long, is not reliable. Just as stock prices can go through lousy 20-year periods, so can house prices. We just have seen only the opposite for 20-year periods in our lifetimes, and that means we tend to assume a bad 20-year period is too unlikely to worry about. But take a look at the long Shiller indexes, and you can see that recent home prices were more inflated than at any time in recorded US history. Unwinding that over the next 20 years means it's more likely we'll see unusually bad returns - quite possibly net losses, after inflation.

goblue,

I've struggled with what if any opinion to offer. But you asked....

Rule 1 about La Jolla. Comps can be very deceptive. Very few houses that sell in La Jolla have good comps that are similar. Everything is different street to street, house to house. Ultimately you have to make a decision based on what you are willing to pay and how much you like the house.

With that in mind, I would not pay much attention to price per square foot. In Manhattan, it's probably a good metric to gauge how good a deal you are getting. But in La Jolla, where a huge part of your purchase price is for the land, not the house, you would do as well to consider price for lot size. But even that is a terrible metric, because where that lot is located is tremendously important. (Never forget - Location, Location, Location. And in La Jolla, that changes block to block)

Even in Bird Rock, where most of the streets are quiet and have a tremendous sense of neighborhood, there are a few blocks that have heavy traffic and little sense of neighborhood, and should be discounted significantly because of that.

You mention wanting to see what shakes out in 9-12 months. Let me offer the opinion that not much will shake out in 9-12 months. I could be wrong, maybe this fall a lot will shake out, but my hunch is more likely 2-3 years. If you're going to wait, get comfortable.

Interest rates are definitely the wild card in your plan. If you decide to not buy this place, who knows where interest rates will be in a year or two. I could see them as low, or even lower than they are currently, or I could see them much much higher. Both scenarios seem possible to me. (Although obviously only one will come to pass)

XBoxBoy