This is somewhat related so I’ll post a real world example here.
I just completed several appraisals on a bulk holding of homes in western Riverside County, near the I-15/Hwy-91 junction. Yes, it’s in Riverside County, but we’re talking 30 miles or less to employment, not 60 as is the case for Riverside/Murrieta.
Anyways, I researched the entire sales history for all the homes in this subdivision, which consists of homes ranging from about 2,500 – 5,000 SqFt from the same builder, arrayed in several overlapping “communities”. The bottom end homes peaked in 2006 at about $650,OOO, and the upper end homes peaked at $1,000,000. Really, it corresponded in many respects to the San Elijo Hills area in San Marcos.
I performed a rental survey and found a couple examples of these homes renting at $2,200 – $2,500 per month. The highest as $3,000/month.
Anyways, I came across lots of NODs and some foreclosures, including some recent pendings and closed sales of REOs. Many of the original subdivision sales involved 80/20 loans and other obvious no-down financing.
What I found was that as late as late-2007 the pricing was holding out okay. But as of 12/2007 the pricing started dropping really dramatically. I now see an REO listing there on a 4,000 SqFt model that had previously sold in 2006 for $950+k is now listed for $700,000, and several examples of homes that are relisted at 25% – 30% less than their respective peaks in 2007. I even saw an early 2007 sale at $650,000 being relisted as an REO sale in the mid $400k ranges.
Most of the price movement has occurred within the last 4 months and it seems to be picking up steam. BTW, at these prices we’re already at $130 – $140 per SqFt, and none of these homes are even 3 years old yet. I even saw one closed sale at $122/SqFt.
TGs pain train has pulled into n/western Riverside County and the next stop is the OC. These banks will be getting more of these properties in foreclosure and they are competing with each other to sell them. When banks compete – you win.
As far as I can see it looks like we are headed for an overcorrection, and there’s nothing in front of us that will stop it. People may decide to jump into the market and purchase when pricing reached parity with their rents and they probably won’t get burned for that; but there’s no saying that the current rental structure is going to hold either. There’s certainly no fundamental reason why it has to.