Perry, you bet, we’ll continue to rent, and have no intention of buying anytime soon (friends of ours rented their La Jolla home for five years, over ’89-’94, before the owner caved and sold to them at a great price after the owner had no success selling at an inflated price for several years). I’m just trying to get a sense, from folks who’ve lived through this before, whether it’s rational to expect home prices to crater 75-80% in select neighborhoods that experienced the most ridiculous run ups (down the street, a modest looking 2,700 sq. ft. home on a 0.20 acre lot just sold for $2.5MM in Jan. ’06; it had traded hands at $510K in ’97 and $615K in ’01). Absolutely, we just continue to save and amass ‘powder’ to buy at the right time and at a reasonable price. I’m just wondering if we should continue to have our our hearts set on buying in La Jolla, because home prices have a long, long, long way to fall before they reach ‘rational’ levels.

I had no idea that a La Jolla address carries such a price premium. Wow! You can get a beautiful Carmel Valley home for that price. Why get that old small La Jolla house for over a million? I don’t get it.

I think prices will go down 50% over the next 5 years. If history is any guide, years 3-5 will see the largest drops. We are in year 1 now, since the yoy median just turned negative.

Some landlords on this forum wrote that a gross rent multiplier of 8-10 should be used for rental property. So the property should cost less than 8 times annual rent. I expect we will return to that level.

Rents and housing prices have a fundamental support in wages.

SDR, as you know, there’s ‘value’ and there’s ‘price.’ As Warren Buffett said, ‘Short-term, markets are voting machines, but long-term, they’re weighing machines.’ I’m a finance guy by education and experience, and it’s good to figure out ‘value,’ then try to get that, or below that, in ‘price.’ But, there are clearly good-sized confidence bounds around estimates of value.

PS, we send our kids to private schools in La Jolla. We used to live in a McMansion (4.5K sq. ft.) in Santa Fe Valley, just west of 4S, but the drive down was a pain, hence, the move to La Jolla.

Perry, our situation is similar: the house is owned by the original owners (over 50 years), is paid off, and has property taxes of $1.2K annually. We won’t be able to buy this house, as it will remain in the family, but we’d like to buy something similar.

Agreed totally jg….

Figuring out the “value” is definitely the key…

Like you guys I am also renting and squirreling away cash and hope to buy a nice home in a good school district… some day….

I think replacement (construction costs) should be factored as well. New home construction can be done quite easily for $100/sq. ft, and $85/ft. if you cut costs.

As an example, I lived in Atlanta for two years where you can still get brand new houses for about $95/ft. And that includes the lot!! We just sold our house there for about $90/ft, and it was a nice house with 3/4 acre, remodeled kitchen, all brick, etc.

These examples show just how insane s. cal land prices are. Even “cheap” areas of SD county are upwards of $300/ft. for a house of middling quality. I have a friend in Clairmont who recently paid about $600/ft, or about 6-7 TIMES what a similar house in Atlanta would be. Really, quite amazing. I mean yeah the weather is good but is it worth an extra 5 $100 bills on each and every square foot of your home?

When I look at houses, I look at the preimium it is selling for over that $100/ft. benchmark. Once you get over $200 (double construction costs) I start to question it.

jg,
I too owned a great home in Birmingham Alabama – 2800 Sqft all brick- bought it for $225 in Jan 02, sold it in May 06 for $275K. Moved to CA -OC for great job with a growing company. The return on homes in the AL market averages about 3 to 5% increase a year. I knew it was going to be hard to swallow -buying a smaller house for twice the price, in CA but I packed up the family and came on out. Well after 30 days of listening to my RE agent tell me that know is the time to buy, I just could not pull the trigger, so I found a nice townhome in Mission Viejo – 1800 Sqft – rents for $2200 and moved in. I put my 50k in short term CD’s and keep adding to the savings everymonth, hoping like you that the return of reasonable housing prices will bring the opportunity for home ownership again. You see I am old school, I have no debt, own my cars, and will put 20% down and do a conventional 30/15 year fixed loan. No ARMs or Interest Only loan games for me. I enjoy sleeping at night, even if it is in a rental for now, as I would rather have money in the bank, and patience, than to be fearful of loosing my home due to rising interest rates and shrinking inflated equity.
So, renting is not so bad, enjoy your position. Watch, read, study every angle so that you are in the drivers seat when the time to buy is presented on your terms, not some RE agent’s idea of ideal markets. Afterall it is our lives and our money.
David

I have been having this fundamental question for some time, and would like to invite the readers to try to give some rational explanations:

Why is there the real estate axiom “location, location, location”?

Why are potential home buyers so keen on exactly where they want to live. I can understand some simple reasons like nearness to job, good schools etc., But what explains the reason that someone would pay millions of $ for a La Jolla house rather than live very well in a large fine estate in, say, Colorado, Idaho, Wyoming, Georgia, Carolinas etc., I won’t accept the argument that all those places are miserable armpits compared to SoCal. If sunny weather is desired, they can always visit Calif. or Florida for a vacation. I am sure a millionaire can get someone to clear the snow etc., Really well to do folks can practically work from anywhere with the modern conveniences. Why isn’t there a (much larger) “outsourcing” of home buyers and jobs to less expensive but good locales? Give me all your thoughts on this seemingly irrational behavior people make when it comes to choosing a place to live.