How does the price of condos relate to the price of houses? If condos are down x%, then does this also drag the price of entry level houses down y%, which in turn also has an effect on the more expensive houses?

I’m wondering if the condo fallout might have a bigger impact than just condos and that the pain may bleed into the SFR market, adding to the general decline due to overall economic factors.

Off-topic comment here.

One thing I noticed over the years about people and real estate is that they seem to lose perspective about the money. It’s almost as if they see the dollars involved in RE as being equivalent to Monopoly money or some currency other than the same greenbacks we use to buy our groceries.

Many people are incapable of saving $20,000, yet we visualize a $20k loss on a condo as no big deal. I especially see this trivialization of a dollar among appraisers, who often get into treating the values they conclude to in an appraisal as if it were some abstract number with no basis in reality.

Assuming this trend plays out these losses we’re seeing right now will continue to accrue. Once we start reaching and surpassing a 25% decline scenario there will be some people who will be looking for a 15th floor window to jump out of, because their lives will be ruined. The party leading up to this point was a lot of fun but the hangover is going to be a killer. Literally.

To hear this kind of talk from Bugs and Privatebanker sends shivers up my spine.

Bugs, I once read a book about what you describe. People almost have different pockets for money. They spend an hour a week clipping coupons, but then think nothing of buying a new car, or going to the dealer for the car vs private party. One of the most interesting investing ideas of recent times is behavioral finance. It explains why the masses can never beat the market.

Privatebanker, I copied your post to my friend who bought a condo downtown. So far, they only broke ground, and I think he can still get out. But he may be like our friend murray, deeply ingrained in his belief that people will pay anything to live in San Diego, in this case downtown San Diego. None of my data I’ve sent him since December 2005 has made an impact on him. He remains ingrained in his real estate bull beliefs. This is a guy who lived here during the 90’s downturn.

I think Bugs is talking about the people listing below their mortgage price.

I wanted to add one more thing to Bugs’ Jumping out the window comment. The suicide and alcoholism rates will surely jump. Bankruptcy and foreclosure bring people to the ends of their emotional and spiritual rope, and they will either increase church attendance, or drown in the bottle/suicide. Some will just pull themselves together and go on. We’re talking about 50,000 – 100,000 San Diegans who will face foreclosure and bankruptcy in the next 5 years. Millions nationwide. Many will be people who bought their homes in the 1970’s or 1980s, and refinanced to take out cash, thinking it was a new era, and they could keep doing this indefinitely.

The operative phrase in your post relating to condos is that they are “the lower priced alternative”. I agree that condos will get hurt first and hardest, but that doesn’t mean it’s a completely separate market of it’s own and the houses won’t follow suit in order to compete with this alternative.

Water seeks its own level. I think the downtown condos are a fantastic bargain – just not at these prices or anything close to them. If they are actually priced to be the reasonable alternative more people will buy.

Letsee. Market rents for a 2bd condo downtown are in the $2,000 range. Add in a 25% ownership premium to pay for the right to enjoy the tax break and the possibility of eventual profit on resale and we can justify paying up to $2,500/month to cover the mortgage, taxes, HOA dues and other expenses. As a housing expense this is a reasonable payment for a $100,000 household income or a lower household income who is bringing some equity to the table to reduce the mortgage.

Okay, working backward through iteration and assuming a cheap $300/month HOA fee, $100 in average maintenance/reserves expenses; $300/month for property taxes, that leaves about $1,800/month for the mortgage payment. At a 6% fixed rate mortgage that would service a $300,000 loan on a $330,000 purchase, because unlike many recent buyers, our prudent buyer actually has a 10% down payment and can pay their own closing costs. Obviously, the $330,000 purchase price is about 45% less than our current average listing price of $595,000 for 2bd condos of 1200 SqFt or less.

At this price range, every time the interest rate on the loan increases by 1/2% the amount of the mortgage financed by the $1800 mortgage payment gets reduced by $15,000. Presumably that reduction will be translated directly to the sales price.

So yeah, at $325k or so, a lot of our downtown condo renters probably would consider buying their rental unit to be a no-brainer – assuming they weren’t concerned about the prices continuing downward. AND assuming that rents don’t decline.

Condos are taking a beating and yes they have been affected first and will continue to suffer.
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sdrealtor –

Not sure what you have seen but I have seen much more condo depreciation then SFR. Once again it is very dependent on the neighborhood and quality of condo… UTC/UC has been absolutely pounded, take a look at places like Lucera… 2/2’s there are below 2004 pricing when the actual conversion happened. San Carlos condos have been similarly whacked as Mission Valley has been.

The only thing worse would be the downtown condo market.

Interesting comments about the suicide rate. I work in healthcare, and I have notice a huge increase in the suicide attempts, just recently. Now this is just my non-scientific observation, but it is something I have commented on several times in the last few weeks. Of course I’m not typically privy to the circumstances around the attempt, so I don’t know the precipitaing factors.
Typically, we see a large increase in attempts around the holidays, but it is VERY unusual during the summertime. I have wondered to myself if there is a correlation.
It will be interesting to see.