All the usual metrics used to understand the RE market have flaws in one form or another including Case-Shiller and rent to mortgage parity. Many are lagging indictors and none dictate market direction. Even the laws of supply/demand and affordability rules do not apply at least for the short term, with short term being a few years. How else can one explain a house selling for less than the cost of construction with the land and landscaping thrown in for free, like some current homes in Temecula and parts of sd county. On the bubble side, how can one justify plain starter homes in average neighborhoods sell in excess of 300/400 psf ? Both happen and will continue to happen because fear and greed drive the herd. In short, RE has no intrinsic value much like fine art or classic cars. In my judgment, the only factor that drives home value is CONFIDENCE of the masses. Factors such as interest rates and unemployment have secondary effects, magnified during bear markets and minimized during bull markets. Ask yourself what would happen to the market if unemployment and rates both spiked to 10% in 2004/2005 when homes were appreciating 10-15%/year. Will the market immediately decline precipitously, or will the appreciation rate slightly flatten, or will the appreciation actually increase because the 90% still employed are salivating at the reduced competition.
The unprecedented number of NOD/foreclosures is a new toxic variable with a self perpetuating erosion on confidence. Nevertheless, I am definitely seeing a change in confidence with a lot of sideline money coming back into the market. My suggestion is to do the following. Every month ask 100 people of diverse backgrounds if they think it’s a good time to buy a house. If the answer is 50% positive, we may have turned the corner.
