70% Correction in San Diego

[powayseller]

The previous 2 corrections in the graph took us to a bottom, before settling at median.

I expect this correction to be the same way, in terms of settling at the bottom.

We may overshoot bottom because we have 2 new factors this time around: borrowers loaded up on adjustable mortgages at a time of historic low interest rates and will be forced to sell when those loans adjust, and our economy is much more dependent on real estate. Let’s also consider the global liquidity bubble. It made this RE bubble much worse. OTOH, can it save its decline?

[powayseller]

Last October, when we listed our house, I thought prices would drop 20-30%. After reading Talbott’s Sell Now, I upped my prediction to 40-50%. Then lately, just to be provocative, I went with the 50% number. If I had to make a bet, I’d go with the 40-50% number. (Do that range thing, like the realtors…)

[davelj]

Agree completely. You have to distinguish between nominal and real prices when discussing these things. But absent a distinction, most people talk in terms of nominal prices when discussing potential declines. I’m talking nominal prices above, but of course the only thing that matters in the real world are “real” prices. Consequently, the decline could ultimately be 50% in real terms.

[davelj]

Yeah, they’d buy up portfolios in bulk from banks. They’d also contract out work to locals who would specialize in bulk buying in certain areas. There are many ways for institutions (if they so desire) to get into the residential market in a big way if prices were to drop significantly given the technology available.

Where do the jobs come from? Where do they always come from? Out of the blue. It’s as yet unknowable. The only thing we know is that they get created in places we didn’t anticipate. The problem with being a bear – and believe me, I know a lot about it – is that we tend to overestimate our level of certainty regarding things we think we’re sure about and underestimate the potential impact of exogenous surprises – things we don’t know about.

To use a recent example, many tech analysts thought the chip companies were going to die an ugly death once the PC market got saturated (which it is), but what happened? Ipods, HDTVs, and other products that use chips that were unanticipated. That’s how a dynamic economy works.

We know far less than we think we know. One way or another, innovation and resilience tend to mute the effects of “inevitable downturns”. Having said that, I still think we’re in for a doozy, just not as much of a doozy as purely “logical” analysis might suggest.

[PD]

I think 40 – 50% is a good number. Cycles typically last 7 to 10 years from peak to peak. If we hit the bottom 3 to 5 years from now, inflation is not going to soften the blow that much. It would be strange if prices did not start rising until 2016 (down for 5 and flat for 5), as a previous poster suggested.
I think the correction to mean will be much swifter than that.

[davelj]

I read Talbott’s book – it’s a good one. But he doesn’t really bring up any new facts, at least nothing that other housing bears like Shiller have already discussed at length. I’d be wary of making decisions on the basis of just about anything that shows up in the popular press. I suspect that when the dust settles, both the super bulls and super bears will both be wrong. But the super bulls will look more stupid, that’s almost guaranteed.

[Author]

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