San Diego Housing Bubble News and Analysis

James,

Those are some great questions. I personally haven't heard the answers as of yet.

On a side note, have you noticed the overall tone of the threads of this website are turning a little less bearish lately? Maybe it's just me. Sometimes I miss the over-the-top super-bear commentary of Powayseller. I found the content from a couple months ago to be more encouraging for us wannabe homeowners.

I personally am slowly coming to the conclusion that maybe the "downturn" is beginning to turn in the direction of flat prices for many years until incomes catch up a little. For my own situation, I would need houses to come down a good 30% before I can afford one. I'm really beginning to doubt that is going to happen (even with the increased short sales SD Realtor has been posting).

I say all this understanding that the real estate market is a sluggish animal, and the price declines we've experienced so far developed very quickly relatively speaking.

I look forward to the January data as well.

Thank you!

I too am looking for the doom and gloom posts, they were what I came to this website for! :)

I really hope that the decline isn't slowing down. I still think it's early to really see if the slop is really going to hit the fan. I hope this summer has very large increases in inventory and it's all over the media.

I can't help but think the media covering the market tanking would only help, since it'll put more people on the fence. I too need a nice decline in prices so I don't have to end up taking an exotic loan. That would probably never happen, I would just rent for a few more years, then move.. :(

Like I've said in many posts before, it's hard to believe my wife and I are even having this problem sometimes. We make a pretty good income.

Patience, grasshopper!

You'll get your 30% drop (and then some, IMO) but you may have to wait until 2009 - 2011.

I don't do as much gloom and doom posting as I used to because it all seems so obvious to me that it has become boring. I figure the people who can't see it for themselves aren't going to be swayed in their opinion and they will get what they deserve.

~

2007-08 will be hard on San Diego's market because of interest rates resetting on over $1 trillion in ARM mortgages nationally (very high % of local mtgs are ARMs) and 3000 condos coming online downtown in an already saturated market. Maybe another 8-15% drop in prices each year due to supply exceeding demand?

On top of declining prices we will have over 10% monetary debasement each year (current rate is 11.5%) so real purchasing power (ie, inflation adjusted value) of real estate could drop on the order of 30-50% before we get into 2009.

Is that gloomy and doomy enough for you?

feeling the same..

Yeah, I am not sure what is going on, but there is a different feel in the air. I still think Condo's in SD are done. Way over priced. My sister works for a major lender in So Cal. I asked her yesterday how things looked. She simply responded with this... "One word", "SCARY". IN other discussions with her, she explained to me that her company will not provide lending to folks trying to purchase a condo in Downtown SD, otherwise known as the Red Zone, unless they have 20% down and have excellent credit (700+ FICO).

On a side note, however, she did mention that San Diego SFH is a little more stable, but not much.

I used to be on the same page where I thought everything was going to fold. Now I believe that some areas are going to get slammed, while other areas come out of it okay. Just be careful where you buy and what you buy. It's going back to a normal market where good sells and bad sits.

Yep! I hear what you're saying about your income (& exotic loan or move options).

I'm a professional & make a fair amount over the SD median income. I grew up here, moved away, and now I'm back (w/wife & kids in tow) with a decent career & a little $$ from selling my out-of-state home for a decent gain. Yet I still can't touch anything in the areas I want to live with conventional financing.

I ran into a nice, seemingly intelligent woman at my younger son's preschool a few months ago. We started talking about housing, and she gradually divulged that she & her husband are in a neg-am & can only afford the minimum pmt each month. They have some equity (bought 3yrs ago), and looked into selling only to be surprised by a $25,000 "pre-payment" penalty they would have to pay not only if they refinanced, but if the SOLD THE HOUSE! This isn't some weird fly-by-night mtg broker, but Downey Savings. So they are basically forced to keep their house & suicide loan, and slowly burn up their equity praying things will turn out okay somehow.

Now - whenever a get the urge to jump into the market w/ an exotic loan, I think of this poor woman.

To be honest, I am bitter. The bankers w/ all their cheap $$ have ruined my hometown's housing market. In two years, if things don't look different, I'll be moving as well.

If you're waiting for an opportunity to buy, you'll feel like it's water torture.

Put any thought of buying out of your mind for 5 years. In the mean time, rent, watch the market and enjoy yourself.

The previous peak in SD was 1989. It was a slow downward and sideways then slow upward correction (back to 1989 prices) until 1997. Expect this current correction to last at least that long.

People are not going to "give away" their over-priced houses without some resistance. You need a least 5-years for the vagaries of life to "wear-out" the sellers. Builders will continue to sell houses at "market prices" and that will put downward pressure on the resale market. Just got an email from Casero in Del Sur. Prices there are now down to the high $500k, down $100k from previous phases.

You need a lot of patience. Try to get rid of the emotional need to own a house. Watch and enjoy people stress out and slave away to pay for their homes. Take a nice vacation every year and feel thankful that you're not slaving away to pay for a stucco albatross.

4plexowner is right.

Whatever you do, don't get sucked into believing that the market has stabilized and that now is the time to buy.

Thanks guys,

I love hearing the stats, and as stated before, I wouldn't buy, I would move. It's nice to come here though and really get a nice nudge once in a while that you aren't crazy, and all the people around you that keep talking about housing like it's a gold mine are in fact the ones that are crazy. My wife are enjoying the rate our savings is growing though.

I guess it's because I'm having problems with my current rental, the furnace keeps shutting off and we wake up and it's 50 degrees in the house. Even when it's working it only heats half of the house due to no duct work and crappy insulation. (cute old little house) It is going to be worked on again..

Time to invest in some small electric heaters, but my utility bill was 140 last month which is a big increase :( Any suggestions on good efficient elec. heaters? Or another alternative? Wood burning stove next to the couch? (not sure if landlord would appreciate that) ;)

And yes... I AM a cheapskate!!

PC,

I really think you're right, but 5yrs is a long time to be a renter. I personally can not break free of the home-owner psychology. I guess it's the whole watching your kids grow up in the same stable environment thing. Our landlord has just decided to put our very nice North Cty Coastal rental on the market, so guess who gets to move in a couple weeks. My wife is less than thrilled. Very fortunately, we found another rental in the same school district. Rentals in this district do not pop up very often, so I feel blessed at timing!

Anyway, eventually we'll choose home-ownership over sunshine, and it is very unlikely that we will hold out 5 years. Especially if we're forced to move out of the next rental too.

But I love the "Stucco Albatross" comment!!

Most of the movement in prices will come during relatively brief periods at different times of the year; not at a steady and constant rate throughout the year. There will be these brief 6 and 8 week periods during different times of the year, like before and after the spring selling season and maybe just prior to the holidays. The rest of the time the pricing will appear to be stable, even if the pricing is lower than the previous plateau.

These periods of movement are so brief and the volumes involved include so much diversity among the housing stock that it's hard to track the movement in real time.

Think of it this way; if an area or market segment loses a total of 10% of its value during a single year, the majority of the movement probably happened in 3% or 4% chunks during different times of the year. Taken by themselves they aren't much, but over time they add up.

You guys just need to be patient - time is definitely on your side, and when that changes you'll be among the first to see it because you'll be looking for it.

Doom & Gloom. I see everybody is trying to manage their expectations for when the “right” time to buy will be. But frankly, I think you’re all overly pessimistic on it.

I think buying opportunities that are competitive against renting will materialize in as little as 18-24 months. I expect the January/February months to be ball-busters for sellers. Owning is about living expense, not only gross capital purchase.

The deals are made at the margins. The “right” buying time for just the people in this thread will be spread over 36 months or more. The short sales and REO properties are already showing up in MLS and done deals which are quickly blowing holes in the comps.

Many will be trapped in their homes because they can afford the payment but can’t forward the capital loss. Still, in SD, OC & LA, even more have been comfortably in their homes for years and while refinancing has tapped cash out for many, in 2005, only 1 in 9 refinances withdrew money. I'd wager many are serial refi-ers which account for the bulk of earlier cash-outs. Evidence of this are articles like the LA-Times piece on guy in the IE with a exotic and no job finally getting forced to move.

The relative lack of refi-ers compared to owners means there will be plenty of willing sellers. Those sellers will be able to afford selling, still make a profit and move up when a better home for them becomes available at an acceptable price.

I’m seeing more and more REO’s like in this thread. Not only is it taking a 15-20+% hit on the peak buy, but that’s at MLS list price which is looking like a pipe dream. As these types of property transactions accelerate and grow, REOs will go lower and lower. That will drive comps lower and lower.

Will pricing go lower after that? Maybe, probably, but time is money. Money is money. What you need to know is few key things:

What are purchase prices where you want to live (or accept living)?

What are comparable rents for where you want to live (or accept living)?

What expense for housing are you comfortable with having?

What is your tolerance for keeping a property as a rental?

I say (or accept living) because I find it rather odd that people will tolerate renting in hell but only buying in prime RE and vice versa. Similarly, this may be that you want to live down on Coronado but will accept North Coast.

Where they intersect is your buying point. Sure, maybe you could wait 5 years and get it 10% less nominal and 15% less real over two years from now, but maybe you’ll also be three years into having it paid off with essentially the same payment and already moving out into a better place with renters taking over this one covering the payment for you. Maybe not.

If you wait for absolute bottom only, you’ll wait a long time.

I personally can not break free of the home-owner psychology. I guess it's the whole watching your kids grow up in the same stable environment thing.

The stable environment comes from the parents, not the box that the parents live in. You should be able to stay in the same neighborhood while your kids are in school even if you have to rent some different places. It could even be fun for your family if you have a positive outlook.

The "renters are losers" meme is designed to program you to be a good little mortgage/property-tax paying, Home Depot/Lowe's purchasing consumatron. Most of these "homeowners" aren't going to own their homes when they kick the bucket anyway, they'll die owing a balance.

It's just like Pahluniak wrote in "Fight Club"; you are not your house. You are not your car.

Home equity loans are the new credit cards and Duh-mericans are hooked. Don't expect that to change anytime soon...

housing cachet

I agree that home is where you live, not what you have, but there is a historical reason why Americans have that respect of home ownership. Home ownership has always been synonymous with freedom and success. Real estate (properly used) has historically been the best avenue to financial success.

America's use of home ownership and land ownership was one of its reasons for being the successful nation it has become. A person who owns real estate had a bigger stake in it and therefore took care of it accordingly. So there is a reason why there is respect for home-ownership.

disclaimer: no i am not saying to buy in san diego.

Meeeeoooowww
Boing
Wheeeeeeeeeeeeeeeeeeee

If it's mewing, it's not dead...

A person who owns real estate had a bigger stake in it and therefore took care of it accordingly. So there is a reason why there is respect for home-ownership.

Let's see what kind of respect all of these Duh-merican "homeowners" with 100% financing have for their property when their payments double as their neg-am pick-a-pay loans reset.

Don't worry what others think about your renting.

Two and a half years ago, our good friends told us not to buy, that prices in La Jolla were too high.

They rented their home for five years before buying. He's a cardiologist.

Their friends, whom they introduced us to that night, rented for three (or seven) years before buying. He's a dentist.

The informal BBQ was on the beach at the La Jolla Beach and Tennis Club.

Lesson -- don't buy when it's too high; rent, instead, and spend your savings later.

The "renters are losers" meme is designed to program you to be a good little mortgage/property-tax paying, Home Depot/Lowe's purchasing consumatron.

Well said!

Of course things are slow!
Remember the last boom? It ended in 1989-90 (analogous to 2005-06 today), and prices dropped for many years until 1996. If you wanted to buy at the bottom then, you had to be patient, as in six-years-patient! Prices dropped very slowly in the early 90s, even though we lost many jobs in the aerospace and related industries.

No one knows how long the decline will last this time. It could be only two years, or 10 years, or more. Also bear in mind that a lot of the housing depreciation will be in real (inflation-adjusted) dollars.

Prices are very sticky on the way down, and I'm convinced that houses will remain overpriced for years. It think it's smart to rent for at least the next couple of years. Rent is cheaper than you think. As an example: my wife and I almost bought a $900K house in 2005 after a job relocation. A house with an identical floorplan is for sale today, listed at $845K after many reductions, and still doesn't sell! And this house for sale now has much better upgrades (flooring, landscaping, etc.) than the one we almost bought.

I figure, the $50K+ I would have paid (lost) for the "pride of homeownership" will pay for almost 2 years of my rent. It's as if I'm renting for free. Besides, I'm convinced that that house can easily lose another $50K within the next 12 months. The way I see it, more free rent for me!

The stable environment comes from the parents, not the box that the parents live in...

CONCHO, I whole-heartedly agree with that.  When I said "same stable environment", I should probably have put an emphasis on "same".   We were quite content with our current rental, but now through no control of our own, we must move.  Rentals are thin in my kids school district, and now we're moving into a much smaller (albeit cheaper) rental 4 houses down the street.  And this new rental is a long-time rental property... very out-dated.  I don't care much, but my stay-at-home wife has to live in it all day long.  Truth is, we're lucky it came up when it did.  If it did not, we would be moving school districts.  A lot of people don't mind moving their kids around a lot ,"kids are resilient" they say.  Different strokes... I personally do mind and I do not think my view of that is particularly unique.  In addition to the "paint & improve the way you want" thing about home ownership, it is especially nice to know if you want your family to stay put, they can. 

All the points people have made here about the advantages of renting are valid.  I especially like Diego Mamani's example of 2 years of free rent - very good.  I also do not buy into the "renters are losers meme".  I'm not even sure what a "meme" is:) 

I would just like to point out (maybe the obvious) that there are some nice advantages to owning the "box" you live in beside the tangible financial reasons.  Unfortunately at this time in San Diego, those ownership advantages clearly come at a very high price.

Chris Johnston

I find this whole mention of inflation adjusted dollars a little odd. It is a valid economic discussion, but not of much use on real life applications. I live my life in dollars today. I cannot to burger king and offer them $3.50 for a whopper because the $4.50 price is nominal dollars and I want to pay in real dollars. I think that whole school of thought was brought to the forefront by economists who never made any money off of their predictions, but needed to sound smart.

There are people in here, 4plex to name one of the top of my head, that seem to have a very good handle on the inflationary nature of this economic cycle. However, for the average person, I do not feel any real dollar decline in RE would mean anything, they need nominal declines to afford housing. Of course if we got spiraling wage inflation, it might make sense, but we are far from that.

It is almost impossible to set up assets in a perfect way to take into account the effect of inflation on the dollars value. Real estate is in nominal dollars. It will not help anyone one bit if the real value of RE drops, and there wages stay flat, which is generally what is happening now. The afforadability issue will still be the same.

One further thought on this. The studies that I have done comparing real rates to housing historically, would suggest that housing prices will not drop based on their current relationship to real rates, they actually would rise if they do what they have historically done. It is almost impossible for me to believe that could happen, but it is what my research has told me. Of course that is based on the CPI, which seems to be a joke as far as what it tells us inflation is currently.

I like your post Concho, it's hard to get past that mentality though. It is a great feeling to have a place done just the way you like it. The tree in the front yard you planted etc. etc.

I laugh because as I say this, I am renting and the amount of liquid cash in my bank account continues to grow, and I'm in a forum complaining.

Perhaps shock therapy for me and the Mrs?

inflation vs. housing price

One further thought on this. The studies that I have done comparing real rates to housing historically, would suggest that housing prices will not drop based on their current relationship to real rates, they actually would rise if they do what they have historically done. It is almost impossible for me to believe that could happen, but it is what my research has told me. Of course that is based on the CPI, which seems to be a joke as far as what it tells us inflation is currently.

I have thought that same exact thing and I thought it strange that while there is a general consensus on this board that inflation will rise, gold will rise, but yet many believe that housing prices will go down 50%. It has been pointed out many times that housing prices track inflation, but inflation has been going up, not down (especially when you consider the amount of money being printed by the feds).

In my calculations, when I apply a rate of inflation towards housing prices and calculate a 50% drop over six years, housing prices will hold up at least moderately well (my test case $400k house lost 20k over 6 years, which is not a whole lot). I'm probably missing something in my calculations, but it seemed like an interesting case to see how the years pan out and how that calculation fares.

But who knows what will happen in the future...

I find this whole mention of inflation adjusted dollars a little odd.

Okay, let's put it in perspective.

In 1990, if you told you're neighbors you owed $400,000 on your house, they understood how big that was.

Today, if you told you're neighbors you owed $400,000 on your house, they think you're damn lucky.

Chris, very well put.

I am also skeptical of the practical impact of a real $$ decline in housing. It does not seem terribly helpful. When it came time for the annual salary/raise negotiation with my employers, I do not ever recall them putting my % wage increase in inflation-adjusted terms! I do believe inflation has an impact on wage increases, but that is an in-direct, delayed impact at best - IMO - but I'm no economist.

-C

When it came time for the annual salary/raise negotiation with my employers, I do not ever recall them putting my % wage increase in inflation-adjusted terms!

For good reason, the vast majority of the work force got a raise that was on par with inflation or maybe 1% over inflation.

"I live my life in dollars today. I cannot to burger king and offer them $3.50 for a whopper because the $4.50 price is nominal dollars and I want to pay in real dollars."

Real dollars make sense when making intertemporal comparisons. Today, $4.50 nominal dollars are exactly the same thing as $4.50 real (2007) dollars. Therefore, it makes no sense to distinguish one from the other if all I care about is the present.

OTOH, suppose that back in 1980 Burger King offered to give you a free burger a day for life, but in reality they gave you $0.99 coupons. If a burger cost $0.99 in 1980, that's fine then, but what would happen as time passes by and burgers become more "expensive" in nominal terms? By 2007 the $0.99 coupon would cover less than a quarter of the cost of a $4.50 burger. Won't you feel ripped off if the original offer had been a free burger for life?

To compare 1980 to 2007 we need real, or constant, dollars. Otherwise, we are comparing apples to oranges. If inflation is, say, 3% annual, after five years that's 15.9% (compounded). Therefore, if a house was $900K in 2005, and still is $900K in 2010, then we say that the house in 2010 is actually 16% cheaper in real terms, even if the nominal price is the same.

Why? Because $900K can buy 15% less burgers (or shirts, cars, movie tickets, etc) in 2010 than in 2005. As we saw in the previous bubble burst, price drops will be in both nominal and real terms, the latter being of course a larger drop.

The point to remember is that money itself is not what maters. If we doubled all prices and all wages, etc., from one day to the next, nothing would change, right? Of course not. What matters is what I can buy with that money, not the dollar amount itself.

Why high inflation = low housing prices.

High inflation requires high discount rates by the Federal Reserve to tamp down inflation. When that happens, few/no loans are made: banks have to pay 15-20% to depositors, but how many individuals can afford to take out a loan at 20-25%, especially when many of them had a foreclosure during the '07-'10 housing crash?

Thus, demand for homes drops off a cliff. Eventually, that results in lower prices.

High inflation is certainly compatible with low asset prices; just look at the Dow or S&P 500 performance and P/Es in the '70s and early '80s.

jg -

Longer-term changes in rates do not move inversely to prices. Look at Rich's analysis. Rates dropped precipitously during the early 90's as housing prices also dropped. Not the opposite.
http://voiceofsandiego.org/articles/2006...

Also, ask the previous generation what happened to home prices when rates increased from the 6% range in the 60's to the high teens in the early 80's.

Any negative correlation of rates and home prices appears to be a short-term phenomenon. This is easy to explain because your payment is higher when rates go up, causing you to be able to spend fewer $ on a house. However, the longer term effect of inflation reducing the purchasing power of a $ appears to overwhelm the short-term effect over longer (5-10 year) time periods. This is a bit harder to grasp but appears to be what has happened historically.

Is class in session? Very good, clear explanations of the impact of inflation on the value of assets. But one of the points made was regarding impact of inflation on near-term affordability.

Back to Burger King…

If you make $1 day, and a Whopper is $1.85. You’re not having a burger today. Five years later, BK still sells the Whopper for $1.85. Inflation was 3% during that five years, so in real terms the dollar is now $1.56.

Now let’s say that your wage grew 5% annually during the 5 yrs (a fairly typical annual wage increase), now your making $1.22.

You still aren’t buying a burger!

$1 per day wage may sound ridiculous, but we aren't really talking about burgers. Median income in SD is about $62k and median home is 9x that!

Who wants to lend me some $$ for a burger? Fixed rate only please...