I think that we are at 2004 prices right now – or possibly lower….
Here is a real world example and some ramblings (it happened to me!)
I sold my home in 2006 (Dec) for 50K more than I bought it for in 2004 (July). $2,000,000 purchase, $2,050,000 sale. After my negociated commissions, I only lost 30-40K on the house – which was fine for me, was glad to get out. My fear of where the market is going told me that things would get progressively worse and that my ability to sell would get much worse. I had a 1.5 Million dollar mortgage (10 year arm at a very nice 5.5 percent) and had put 500K down. (This wasn’t a subprime deal!). My mortgage, taxes, water (2 acres), gardening and other utilities came to over $12,000 / month. A buyer came in with an offer and I jumped on it. My neighbors thought I sold too cheaply, but the 2 other houses which sat on the market for 6 extra months (and the roughly 12K / month burn rate) one sold for 50K more than mine (was worth 50K more than mine based on comps), and the other is still languishing and will probably sell at my price or lower.
A neighbor of mine sold a larger house (5,100 vs. 4,700) with a slightly better view and a sport court for over 2,500,000 a year earlier. His house would have comped at about 90,000 more than mine which would have put him at 2,140,000. But he got out before the media started (rightfully so) on the housing crisis.
While these blogs are full of data, much usefull, some not, the mainstream news still is lagging with info and people are in the ‘denial’ stage. No one sees a bubble when they are in it, almost no one sees a bubble when it is bursting. In the recent tech stock bubble, people were still buying on the way down (just as we will see mini-bubbles), but housing is somewhat different. We are not really seeing the housing bubble yet, we are only looking at selling prices on actual homes that sold! Inventories are huge and carrying charges are high. Homes can’t be unloaded like stocks. Thus if you look at the whole picture, you need to discount the current selling prices by the factor of future holding times and of expected trends based on the psychology of the buyers and economic data.
I am not on the fence about buying a house anymore – I am renting. I will absolutely not buy a house right now. Here is an example of the media and the market not trying to get at the current truth in the housing slump… And it is about the war in Iraq… (please bear with me!!! – I’m not expressing my political opinions, just my real estate expectations!):
I had a guy working for me from Iran (actually Germany, but his family had real estate in Iran and extensive business in the middle east). When we as a nation were debating the Iraq war, I was pretty gung ho about us taking down Saddam and making it a better place for it’s citizens. I’m a liberal, but felt that if we can go in and defeat the dictator, we would bring democracy to Iraq. He told me that I was crazy. He told me that as soon as we went in there, the Sunnis and the Shiites would start killing each other. He told me that they hate each other and that the people don’t understand democracy, they would start struggling for power, etc. He told me that while Saddam was a brutal guy, that the people were used to strong leaders who handed out patronage, and thats the middle east. He told me that while Iranians and Iraqis hate america (the party line), the actual individual citizens LOVE americans and america and look at us as the promised land! He told me that they would start to hate us if we invaded, even if we did it with the most noble intentions.
Whats the moral of this story? Our goverment didn’t ask the experts (anyone from the middle east), brought their own agenda to the party and currently is refusing to look at the data on how the war is going…. This has a great parallel to the sellers, the homeowners, the goverment and the realtors in today’s market.
This is what is happening in the housing market… We are measuring consumer confidence, we are measuring current selling prices, we are measuring inventory… but we aren’t asking the people who are in a position to buy! Where is the fallacy in the current approach? Most consumers either own a home (and/or investment properties), or can’t afford a home. If you own a home, you will be in denial, especially if you either need to sell now, eventually, or have your wealth tied up in a home and/or have tapped credit lines. The sellers own the asset, but they can’t force buyers to purchase other than to dramatically drop their price for the buyers who do exist. It’s the buyers who matter and they are getting progressively worried about taking the plunge.
Homes are NOT selling now. The buyers are not going to show up – it was a joke to expect them to. Buyers will NOT show up because prices are way too high due to mass psychology (everyone kept buying despite record high prices because prices kept going up), and now the herd will stop buying until prices go to normal (where the inflation curve should take us)…. This will NOT be 2004 prices, it won’t be 2001 prices….
I really want the stability of home ownership, but I can rent a 3,500 sq ft house in La Jolla, for about 1/3rd – 1/2 of what my nut would be if I owned it. And with prices falling for the next few years (dramatically I think based on my own analysis), it’s impossible for me to buy – it would be foolhardy.
While the more expensive areas are somewhat different than the rest of california (there are more wealthier people than ever before thanks to GW and his band of pirates and there is still price competition for good houses (not the vast majority!), houses far from the beach, no view, small lots, needs updating, are being hammered in the wealthier communities.
La Jolla is near Carmel Valley (San Diego), and I think that the 3-4+K Square foot crapboxes which sell for 800K – 2.5 Million will fall dramatically over the next 4-6 years. These houses were built as cheaply as possible and are on 5-8K square foot lots. You are 6 feet from your neighbors house (on both sides of you!) and have been hugely upgraded with home equity money. Anyone who bought within 4-6 years will end up upside down based on the equity money that was pulled out for landscaping, extras, kitchens, and vacations / toys!
Will probably buy in La Jolla in the next 4 years, the deals will start coming…
