Thanks for this sdrealtor.

I wonder if starter homes will take it even harder since they would have been purchased (presumably) by the sub-prime borrower?

I would tend to agree with the different price ranges reacting differently, but would add something else to that train of thought. During our last 2 RE recessions, the averages not only overshot the point of equilibrium, but the different pricing strata compressed. In the mid ’90s, the difference between a $200k home and a $300k home was a lot more than what we would find right now between a $600k home and a $900k home. That’s because (except for the primo areas like RSF and La Jolla) the higher the price range, the greater the decline.

If anything, I’d say the price range most susceptible to the biggest hits are the $800k – $1,500k homes. Think about it: if a $500k home declines back to $250k, the step up from that would be the $325k home that used to be $700k. And the step up from that would be the $400k home that used to be $900,000. The $75k increments may not seem like a lot right now, but in a market that is completely dependent on local wages it would represent a $500/month increase in mortgage payment on an 8% mortgage. That’s almost 10% of the net for an $80,000 annual household income.

I agree with Bugs’ analysis. SDrealtor, I also feel that the summer of 2001 is not a good base year. I think that 1997 or 1998 are more representative of the base.

I don’t have exact numbers. But I’ve looked at homes in some of neighorhoods that I’m interested in, I feel that 50% down from the peak is reasonable. In many neighorhoods, today is not the peak, it’s more like 15-20% off of the peak.

I’ll try to quantify the numbers later, if I have time.

I don’t think price have gone up the way you describe. The data I’m about to show is from zillow and their 5 year chart which is what they called the Zindex. I’m not sure how they calculate it, but however they did it, it’s the same calculation for their 2001 # as their 2006 #, so that variable can be removed. You can go as far back as 10 years.
Solana Beach
Current – $1.02M
2001 ~ $400k
% increase – 150%
$ increase – $602k

Poway
Current – $631k
2001 ~ $290k
% increase – 118%
$ increase – $341k

Rancho Santa Fe
Current – $2.47M
2001 ~ $1.1M
% increase – 125%
$ increase – $1.37M

San Marcos
Current – $536k
2001 ~ $235k
% increase – 130%
$ increase – $301k

Carlsbad
Current – $668k
2001 ~ $300k
% increase – 122%
$ increase – $368k

Del Mar
Current – $1.17M
2001 ~ $500k
% increase – 153%
$ increase – $617k

Santee
Current – $463k
2001 ~ $190k
% increase – 146%
$ increase – $273k

You can go look at other cities as well, but throughout San Diego County, all the cities I looked at had increase between 120-160%. I don’t see any correlation between price and % increase either. So I’m not quite sure where you get those $300k-$400k price increase from. Please tell us how you compute it, it might explain the discrepancies. From what I understand from reading their description, Zillow used data from all home sold. Since they all are >120%, I think 50% drop still would not affect people who bought in 2001 and not refi to take cash out. a 50% drop will still mean 10-30% increase in 5 years. That’s 2-6% appreciation every year for 5 years. We’re not even talking about how people already start calling 2001 price too high back then. If we take a different base, like 1997-1998, that would mean a 50% drop still mean amazing return on investment.

A median price drop of 37% – 50% that I project, applies to Rich’s data of historic price/income for ALL resales. I expect SFH to fall 30-45%, condos to fall 45-65%. Attached somewhere inbetween. With SFH already down 10-15% in many places, I am thinking I am too conservative.

Great post, sdrealtor. Can you find out more about how these price segments fared in the last housing bust?

I also wonder why you chose 2001 as your starting point. The housing run-up started in the late 1990’s. Wouldn’t 1998 or 1999 be a more accurate time to start a comparison?

By 2000, prices were 30% higher vs. 1999, in the Poway homes I was checking out, and 25% higher in the Escondido homes, so I wonder how your analysis would run if you started it from the *beginning* of the housing bubble, rather than the point where you think the rise stopped making sense. Because with the way you did it, somebody could easily start with 2003 or 2004, because that’s when that person thinks the runup stopped making sense. So it’s important to backdate to the *beginning* of the run-up.

This analysis could be modified to start in 1998 for the available data, with the caveat that there were not enough high end homes to draw any conclusions. It simply isn’t accurate to start a trend line after the trend started. Also, if we think about where prices will end up, we have to remember rising wages and adjust accordingly. I don’t think prices could go back to 1998 or 1999 levels, because rising wages will support higher prices. People will jump in and start buying when rents, supported by wages, are cash flow positive from a purchase.

To me, that is the bottom. That is when the bottom feeders and investors will come back in, when rents are cash flow positive, i.e. house price = 8 * annual rent. At whatever level the annual rent falls. That is a return to fundamentals.

BTW, is that what happened in the last bust? Did it stop falling when house prices were a multiple of 8 or 10 times rents?