San Diego Housing Bubble News and Analysis

I've given a lot of thought to the topic "how low will prices go".

I think we have to be more specific about housing type and area of town before we can start picking numbers for a decline.

One of the most important questions, IMO, is "what will an entry level house cost at the bottom?"

Will the 1100 SQFT 3/1 house in Clairemont be selling for $350K (27% decline from 490K) or will it be more like $225K (54% decline) or 161K (67%)?

Once we decide what the entry level house might cost we can then talk about the upper end of the market.

Personally, I'm expecting a 40-60% decline with the Clairemont 3/1 going for about $225K.

If I can buy entry level for 225K I'm not likely to pay 600K for today's 800K house.

What will the price be for homes to get them back to the historical average in San Diego of 9 times earnings?

Wikipedia estimates 2005 household incomes to be around $64k, so if you were willing to say that the Clairemont demographics of people moving into starter homes have an average household income of around $40k, then the starter house in that area would revert to roughly $360K, so that matches your first estimate of nearly a 27% drop.

The other question is how long will it take them to get there?

Ha Ha! I ran across that same article and used it to point out the excessive greed and corruption in this market, in the forum topic "Why Not TODAY?". The post made a few people a little grumpy, but realtors and sellers/homeowners really prefer to ignore these types of statistics...

The Mackey sales team analysis writes that the greatest price drops are in these vulnerable products: land, multifamily, condos, areas w/ high non-owner occupancy, luxury/high end, large sq footage homes.

Chris from Mackey/Prudential is the guy to go to. He helps investors 1031 out of CA properties (bec. they are going to depreciate 25%), and move to another state, where prices are not going to drop as much. In 2010, or when CA prices have hit bottom, they can move back to CA.

History of Bubbles

Another way to consider how far prices will retrace is to look at other financial bubbles in history and what has happened to them. {If you choose to deny history and that San Diego real estate is currently in a bubble, you can stop reading now.}

ALL financial bubbles have been fully retraced. Not some bubbles, not most bubbles - ALL bubbles. Pick your bubble and it was fully retraced: Tulip Mania in Holland; Mississippi Company in France; South Sea Company in England; Florida real estate in the 1920's; US stocks in 1929; etc, etc, etc.

That tells me that the San Diego real estate bubble will be fully retraced as well.

So the next question becomes "when did the bubble start in San Diego?"

Since real estate historically rises at the same rate as inflation, I would maintain that the bubble started when housing prices began to increase faster than inflation. I believe this was in the 1997 - 1998 timeframe. (Perhaps Rich can chime in with a more exact date.)

If I go to www.zillow.com and pick a typical house in Clairemont (92111), the 10 year chart of prices shows me that it was 2000 or 2001 before prices rose above 200K.

Based on my bubble-retracement analysis, I might expect that the 3/1 in Clairemont would retrace to its 1997/98 price of 170-180K.

I'm not expecting that big a drop. I will stick with my 225k target.

I would say 15% to 20% +- above the 1997/98 prices.

The Mackey sales team appears to be yet another team of one. At least he's actually sold a few properties in his 3 year career, a total of 7 as best as I can tell. PS it amazes me that you keep falling for these hungry inexperienced agents that slip you a business card.

Base on a 3% appreciation a year, i.e. inflation, the bottom I would think should be between 30-35% above 1997-98 price. So your 225k target is very reasonable and I think that's within 10% of the absolute bottom. But all this is just guess work. Only time will tell how this whole thing will play out. Like the graph Rich had w/ price/income ratio. It will reach equilibrium some day.

But if inflation is raging, wouldn't wages come up significantly, assuming the deflation takes 5 to 7 years?

If you base your "reverting back to 1999" on the home-price-to income ratio and not just home price, you'd have to adjust that for inflationary effects on wages, which would suggest less of a % drop.

If inflation is raging, interest rates would also be sky high. If rates is sky high, housing price has to be lower to keep payment the same. So it doesn't really matter I don't think. Also, that's the chances of our income rising drastically anytime soon? With the pressure from out sourcing, we'd be lucky to have a steady 3-4% raise.

The factor of 9 is an average for the entire city, and includes move-up buyers with tons of equity, and people who've lived in a house a long time and accumulated equity. So we can't use the 9 multiple for figuring out how much people will borrow for a mortgage. That figure is much lower.

The loan amount used to be 3-3.5 x your income. By that analysis, the $40K income would afford a $120-$150K house. That would be the viable price of a starter house in San Diego.

Rich's charts use per capita income, not household income. If household income is $64K in SD, then per capita income is ?

Inflation has been raging everywhere, except in wages, as I keep noting :). That's why people are stretched so thin. Employers are actually paying more for each employee, but are sliding it toward exponentially rising health insurance and other costs, and thus not able to put it in wages. Corporations are using their cash for share buybacks and mergers, instead of paying employees. Wages will be flat as long as we have low-wage competition in underdeveloped countries. Sorry, wages won't save this gig!

What you'll find on these forums is 2 major groups of people: housing bulls (realtors, homeowners, home investors) and housing bears (renters by choice or necessity). Sometimes exchanges get a little heated between between these groups. I found the best tactic is ignoring posts which are unprofessional. I call it the "tone of a gentleman" litmus test, and only respond to posts which pass this test.

Monetary debasement (also referred to as inflation), makes all financial analysis very difficult.

When we assume a constant-value US dollar we are kidding ourselves but trying to account for a steadily declining dollar is very complicated.

And besides that, we don't even know the rate at which the dollar is being debased because the US Federal Reserve stopped publishing the M-3 money aggregates in March of this year.

Inflation adjusted wages have been declining steadily for several years now. I don't see anything on the horizon to change this trend.

I would modify your statement "If inflation is raging, interest rates would also be sky high." to "If inflation is raging, interest rates SHOULD also be sky high."

Paul Volker (Fed Chairman from 1979-87) raised interest rates into the 20% range to control the inflation raging at the time.

Raising interest rates enough to contain inflation today would cause the housing bubble to collapse worldwide.

So, take your pick, do you continue printing the US dollar and let inflation rage (while driving the value of the dollar to zero) or do you reign in the monetary debasement and raise interest rates to where they should be (in an attempt to save the dollar) and then watch the world's economy collapse? Not a great choice is it? Coming soon to a theatre near you ...

4plexowner, how long do you think it will take for the dollar to lose all its value? And are you primarily in gold now? Physical gold, I think you said before.

Prices actually don't seem to rise with inflation, at least here in San Diego. They seem to rise faster than inflation, then deflate. This boom bust cycle has been much more pronounced throughout the 21st century in So Cal than most other places. Price increases may average out to the rise in inflation, but nobody buys at an average. They buy at a specific point in time.

Josh

There was a significant drop in price for a 3B/2.5B 1741sf condo located on Romeria Street in Carlsbad, 92009. This is a non-scientific study performed by a neighbor who lives in the area. About a month ago, the price was $700K. Today it is listed for $550K-$580K.

Timing is a tough question.

I have looked at some of the economic cycles for hints as to the timing of the collapse.

There are several cycle theories of interest to me: Elliott wave theory, Kondratieff theory, Kress 60 & 120 year cycles, etc.

A number of these cycle theories point to significant bottoms in the 2010-2012 timeframe.

In conjunction with these cycles I also like to consider timing factors in the US. Of particular interest, IMO, is when the baby boomers start to retire.

The leading edge of the boomers are eligible for early retirement bennies in 2008. Since there is not a "social security trust fund", all of the money for the boomer retirement will come straight off the printing presses.

I believe this increased debasement of the money supply will help to drive the dollar to the point of universal rejection somewhere in the 2010-2012 timeframe (assuming it doesn't happen before then!).

Yes, I am your traditional goldbug (although silver bug would be a better description). If it isn't physical metal in a place where you can easily access it, you don't own it (IMO). I store mine between my .45 and my 12 ga (LOL!). My one exception to this policy is the Perth Mint Certificate Program (Google search it). I hold some silver via the Perth Mint program.

I have a small portfolio of Canadian exploration and junior resource company stocks - mostly silver and gold but a few base metals and energy companies too. I don't trade this portfolio - in fact, my accountant gets the statements so usually I don't know what level the account is at. I happened to see the Feb statement and my 30K account had become a 50K acct in the last two months - then in Mar it was 64K and now it is 84K. That is tremendous leverage to the rising price of the metals and energy but it comes with the risk of all paper investments (as compared to physical metal in my possession).

Thanks for the info. Good news for people like me who want to buy, but I think I will continue to wait for a while.

The only thing significant is how confused the neighbor is (The MLS listing shows an original asking price of $600K).

I'm going to disagree with you and Powayseller on this one. Seems to me that expecting housing bubble to fully reset back to 1999 prices without considering inflation is not a solid analysis.

Expecting it to fully reset isn't unreasonable, but expecting it to reset to the nominal prices is not - especially since you are so dead set on pointing out the effects of inflation when it comes to gold investing and the crash of the dollar.

Furthermore, if real inflation is even higher than government-reported inflation, as you and PS so often tell us, the real inflation figures should be used.

The famous Tuip market reset in a matter of months. The effects of inflation are negligible in that case. The housing market could take 12 to 15 years to reset - from 1999 to 2011 or 2014 (based on estimates in this forum of an upcoming 5-7 year down cycle).

Assuming 3% inflation for 12 years, this means real prices could be expected to increase by 42.5% - or that $280,000 house in 1999 "should" be worth $399,000 in 2011.

So, a "full reset" tells me the same house selling for 480,000 today that was once 280,000 in 1999 may only reset to 399,000 in 2012. This is a reduction of 16.8%.

My instinct tells me it could be 25% down, though.

Maybe Rich could pull out one of his really old graphs that shows housing prices NOT adjusted for inflation. You'll see the last big crash is not visually impressive when you ignore inflation. A 25% down cycle would be devastating, compared to the last one, which if i recall was only 10% down or so.

Trying to incorporate the effects of monetary debasement into financial discussions becomes mind-numbingly complicated.

When I say a 3/1 house in Clairemont will bottom at $225K I am talking about today's dollar.

Who knows what that number will be in 5 or 7 years or if we will still be using today's dollar at all.

America is on at least its third fiat currency already. I can't say that we won't be using an entirely different currency before housing bottoms. It actually wouldn't surprise me if we were!

And if the government were still publishing the honest numbers for inflation perhaps I would use them. {I would get up on my soapbox and talk about hedonic adjustments and the substitution effect in the inflation calculations but it's friday night and I'm not going to go there!}

Yeah - it's a swag. In fact, cuz its a swag I'm going to make it a range and go back to that 16% number. 15% - 20% nominal or %35-40% real.

Here - lets practice with the future monitary standard:

A $500,000 house today is worth 714 oz of gold (assume $700/oz). In 2012, How many oz of gold?

Inflation-adjusted housing is relevant only if wages go up with inflation. It really comes down to what people can afford to buy. Usually you can get a hosue for 3.5 x your wages.

The more accurate indicator to me is a reversal to the mean of per capita income/median housing price. This would give us a 50% correction at today's wages. I don't see wages rising much, so I stand by that forecast. Even if wages rise 5%, remember that all excesses overshoot before going to equilibrium.

Good analysis on that inflation stuff though. Housing has gone up 2-3% annually, and people say "with inflation" bec. that's what inflation was always published to be. Assume the true inflation is 8%, whereas the gov't says 2%. You could just as easily say that housing has lagged inflation by 6%. So I'm explaining why the inflation correlation to housing prices is not relevant at all. I hope this makes sense.

I think people need to reevaluate their desires to own ANYTHING especially as expensive as a house. the question is "why" ?

The tax savings are ridiculous,theres no reason to own for tax benefits. Spend 3 to save 1 dollar?, not a very wise investment in my mind.

Because you just want to "own" ? ..What is the logic of that? its not logical, its emotional and stems from decades of programming that people feel this way. You can literally ONLY own what you can physically defend in wary times, and homes are usually not one of them. Unless you possess an army or at least a well manned well stocked arsenal.

When SD real estate, and all of SoCal for that matter start their slide into oblivion, then all bets are off on how low they will go. Whether you subscribe to "Keynesian" or "Von Mises" (Austrian) economics, the "Race to the Bottom" will be the key as both disciplines describe it. It could and I believe, WILL go very, very low.
Im 80% certain that we will experience a "unveiled" world wide depression soon, in fact we are already in it, and have been since 2003 or so. Its been hidden from view for 2-3 years now by tricks of the Fed and the Govt's "plunge protection team"

Iam not an alarmist, but this is decidely an "Alarmists" point of view. When people started filling the lifeboats on the Titanic, even then the most optimistic "rose colored glasses" passengers and crew could no longer Poo-Poo the idea that they were sinking and ignoring those few overreactionary, doom and gloom people as only "Alarmists", no! Not anymore, now these so called "alarmists" were called "Realists" and some of the very few ones that survived, were then called "Survivalists"

The coming economic times will be no different. Dollar/currency collapses, wars, runaway inflation or deflation, oil shortages, multi national corporations, crooked book keeping, corruption, unbridled greed, it all adds up to dire straits for not only the USA, but the world at large, to believe otherwise would be sillyness while wearing those rose colored glasses. Cognitive dissonance reigns supreme, people dont listen to bad news. These times will be no different than 1929, and it will be worse this time.

So to answer the question: "How low will it go for SD real estate prices?" It will go so low low you wont believe it, when it starts its slide, it will be QUICK....Im referred to as the "Prince of Darkness" in my friendly group, but I will NOT be one of the MANY who will be caught with my pants down in the coming times. Common sense will go a LOT further than graphs, speculation, comparisons etc.

Now I must put my aluminum foil hat back on, the aliens are trying to communicate with me again and I dont want to hear it ! lol hahaaaa !

Google up Mogambo Guru fror more info on this "alarming" forecast, if you can handle the truth.

I believe Rich hasn't sold any houses and I've fallen for him too. What about you?

Me too!

Somehow when the Mogambo says we are all doomed I don't get as depressed as when you say it, LookoutBelow.

Maybe you should try adding some acronyms!

On a serious note, I wish I could disagree with anything you posted.

Rich is a skilled analyst with insight. You once again touted another realtor on this board by name w/o knowing anything about him. I'm just surprised you are so gullible to fall for someone just because they say what you want to believe.

That 50% nominal or real?

i.e. a $500,000 house now will actually cost $250,000 at the bottom of the market

or

$250,000 x ((1 + inflation) ^ #years)
at the bottom of the market?