In Spring 2005 these golf course view homes were selling between the mid 600’s and low 700’s. At today’s prices they have already dropped 15 to 20%. Anyone who thinks prices are falling slowly, need only look at numbers like this to see the descent has been rapid. I would expect a further decline but wonder how quick and how far it will fall. IMHO, there probably is another 10 to 15% drop ahead but you will have to wait at least 2 years more to get there.

When to buy is your decision but I would say you have definitely been rewarded for your patience and this portion of the decline was relatively easy to forsee. What happens next is not so easy to to foretell.

Think again PC! We are 15% below 2004 prices. The 2005 prices and the 2004 prices were pretty much the same.

This is where its gets fuzzy. 2003 prices for these homes were in the low 500’s with the last sale happening in Late Summer. Price jumped about $100K between Sept 2003 and Feb 2004 with very low volume. Jumps like this happened just about everywhere in SD County so very few people actually paid prices between a fairly big range (in this case between the low 500’s and low 600’s). If we get back to the low 500’s in this case we will be about 30% off the peak in nominal terms. Throw in 4 years of inflation and the real decline is a bit more. Waiting for 2000 nominal prices will leave you a renter for life IMHO. I’m not saying jump now but I believe these houses wont see the low 300’s (2000 prices in nominal terms). That would represent a real decline of over 60%.

You are correct in assuming than Jan 2004 was a major inflection point and we are already below that point in most cases. My personal opinion is that you are on the right track. I believe the 500 price is very realistic but am not so sure about the 450. It all comes down to how long it takes to get to 500. If it takes 2 or 3 years to get there, you need to continue the trend line for 2 0r 3 years keeping you close to the 500.

The bottom line is NO ONE knows what will happen. Your novice observations are as likely as anyone’s more educated ones. The best time to buy is when it makes sense for you personally and financially. Not before.

"However, even in a falling market, homes are bought and sold every day. We are selling over 2000 homes every month."

 That goes to show the stupidity of people here….they are really, really stupid. If you choose to live here, you'll have to deal with that type of competition.

PS, let me get this straight… you’re saying that 75% of all mortgages that face a reset in 2007 are ultimately going to default? Figure out a way for me to take the other side of that bet and we can definitely do business – I’ll bet on under 50%. (I’ve asked you to do this before but you didn’t respond.) Weren’t you recently saying that the default rate was going to be 90%? Are you becoming less bearish?

On a separate note, the December SoCal medians are going to be interesting. I wonder if we’ll be down 10% YOY by the end of the year. I hope so.

PS, I love your posts. Very well written. However, your prediction of 75% (or 90%) default rate based on the fact (assumption?) that people have no equity in their home is a stretch. There are many factors that go into a default, but one big one is if the owner is unable to make their monthly payments. To say that 75% of owners are unable to make their monthly payment would require a bit more analysis beyond what you said. I would like to know the answer. But, the current default rate I believe is in the low single digits.

Ok, here’s my reasoning. BTW, remember I didn’t come up with the term “neutron mortgage” – the home is left standing but the buyers are gone.

Buyers qualified at 0% down, 33% – 48% DTI in 2003 – 2005. So they’re spending 33% – 48% of their income on their principal and interest plus more on taxes and insurance. Traditional is 28% for all 4 of those items. They’re already squeezed before the first mortgage payment. Loan resets. Now what? Come up with 50% more in mortgage payments, when you’re already at 33% – 48% DTI? You think about refinancing, but you’ve got some problems that no lender will touch: 1) negative equity, and 2) your income qualified for a loan at the teaser rate you got in 04 or 05, but not at today’s higher rates, 3) you don’t have the equity to pay for the closing costs nor the $10K to pay the prepayment penalty to get out early from under the neutron mortgage. Borrower is f*cked, basically.

So the question we have to ask is this: what is the likelihood that someone who got a 100% loan in 2004 or 2005 at 33% or greater DTI can handle a 50% – 100% jump in payments, or refinance out of the mess? I’d be surprised if more than a few could do so.