there are buyers who have the money to buy an expensive house without needing to sell first. But, these buyers are in the minority. Most transactions are either “entry-level” or “near entry-level” or upgrades. SD Reator & sdrealtor, am I right ?
I don’t think there’s much vertical movement in the RE market. For sure there is some. But people don’t move up often and don’t move up by much. To move up, you need a lot of savings, equity, or appreciation. All that takes very long time to build up.
Most of resale dynamics is more or less sideways (getting a new job in a different part of town, moving from 3br to 4br in the same neighborhood). In most areas prices are set by new buyers rather than move-up buyers. For example, Carmel Valley market is more of a market for new homebuyer engineers from Sorrento area biotech companies, than a market for 40-something teachers from Clairemont with lots of equity.
Contagion will work its way upward but for a different reason.
Suppose that equilibrium prices in Carmel Valley are 50% higher (per square foot) than in Mira Mesa. On the way up, if MM appreciates and it brings MM-CV price differential down to 20%, people in the right income bracket for Mira Mesa will start stretching their finances and entering competition for CV houses. Conversely, on the way down, as the supply of lower-income borrowers in MM dries up, price differential will increase. At some point a new homebuyer, who in 2005 would’ve bought a house in CV without hesitation, will look across the canyon and decide that he sees very attractive prices, that he could always use some savings, and that MM isn’t that bad after all. He’ll go ahead and buy a house in north Mira Mesa and spend some of the savings on a two-week trip to Tahiti. Some homeseller in CV will be left without a buyer and he will have to wait (inventory up) and eventually cut prices.
During the boom we had a good deal of “compression” of home prices. The ratio I used as an example (Carmel Valley to Mira Mesa) went down 20%. Right now we seeing massive unwinding of this compression. CV-MM price differential is ALREADY back to 2000 levels. From this point on further low-end declines will probably translate into a drag on higher-end markets.
