1. Use Rich’s 2005 analysis to show that prices were as high as double the last two nulls, so a 50% real correction is in order. Assume that a correction takes about 7 years with 3-5% inflation. Inflation takes (roughly, not compounding here for illustrative purposes) 21-35%. That leaves a nominal price correction of ~ 15-29%. I am guessing inflation in the 3.5-4% range, giving me a correction in the mid-20% range. If it happens faster it will go lower. If it takes longer it will not go as low.
2. Think like a first-time buyer, not an economist.
In 1996 at the last RE bottom I bought my first house in San Diego – Clairemont. The premium I paid for buying versus renting (after accounting for taxes) was roughly the equivalent of a car payment ($250 at that time, Mazda Sedan, not a BMW). At the time I put 5% down and didn’t consider the opportunity cost of the down payment. Using the same logic, compare monthly costs to purchase versus renting in a place like Clairemont.
The last time I ran these numbers, I came up with about a 25% nominal price decline from the peak. I assumed 3% annual increases in rent.
The problem with this one, is that it is impossible to agree on projected interest rates and rent rate increases, and even the impact of taxes. But it is good for determining at any given point in time, what the purchase/rent premium is, when you are fishing for the bottom.
3. Think like an investor.
Compute the cash flow as if you were a landlord. When the mix of rents, purchase prices, and mortgage rates converge to the point where you can get break-even cash flow on a SFR with 10% down in San Diego, that would be consistent with the last bottom.
If 2 of these three indicators tell me to buy, then that’s when I would call the bottom.
Disclosure – These methods are colored by my own experiences in Central and central coastal San Diego and may not apply to the areas that have been built out since the last bottom (or since about 1980 for that matter).
