I don’t think Schiller’s work makes any sense in the world of real estate, especially in coastal areas. If he was talking about Omaha, NE, or Des Moines, IA, areas where there may be hundreds of thousands of acres of vacant buildable land outside of a city, and if construction costs were only going up at 1-2% per year, then his theory of 1% appreciation per year might make sense. But in an area like Del Mar, La Jolla, or Coronado, there is no vacant land to speak of, and there is always going to be strong demand to live in places like that.
I’m not saying that prices in these areas, or in other areas of San Diego won’t decline in the next several years. I think they will, just like they did in the early 1990’s. But I think there is very little chance that prices will be cut in half. I don’t see any way that a $600,000 tract home in Escondido or El Cajon will decline to $300,000, and I don’t see any way that a $2,000,000 home in RSF, Del Mar, or La Jolla will decline to $1,000,000. I’m seeing a lot of areas where prices have dropped 5 to 6% since last summer, but I don’t think that prices will get down below where they were around 2003, even if I factor in a very large increase in the number of REOs. In 2004, it seems to me that speculators took a much larger part of the market, to the point where prices were unsustainable. I’m guessing that prices will not drop by any more than 25%, to the point where last summers’ $600,000 home will decline to $450,000, but it wouldn’t surprise me at all if the decrease was less than that, maybe quite a bit less.
