Applying Case-Shiller Data to Price Predictions

[equalizer]

sdr answered those questions for his hood. Can we get some data for Clairemont, Chula Vista, etc?

[Anonymous]

I view charts like these, and say to myself, ‘This is why it’s going to be different this time.’

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No wherewithal to pay: too much debt and greatly reduced cash savings. Just wait until those ARMs reset this year and next.

Unprecedented levels of debt and negative savings. Actually, there is a precedent: great levels of debt in the ’20s and negative savings during the depths of the Great Depression.

This downturn will be different from the one we saw in the early ’90s: much worse.

[equalizer]

I’m in the middle bear camp. We have to look at all the factors
1) jobs
2) loans
3) interest rates
4) inflation, etc

One factor that is being ignored is the Walmart vs Nordstrom dichotomy. JWN stock is up 300% in 5 years, while the WMT is down 10% in 5 years!!! The beach crowd has gotten richer while the blue collar crowd as gotten a major ass whoppin from inflation [For the no-inflation crowd (the guys at the Fed, for one), I’ll send a note to my friend Alberto who will give a fancy water-boarding treatment at your favorite spa.]

So what does the story of the beautiful people tell us? They are less likely to be in financial dire straits. Thus, homes in fancier areas will experience 15-20% decline, while the “starter” areas will be hot 30-40%.

[sdrealtor]

Somewhere on this board is a thread between SDcellar and myself looking at tenure of home ownership. In addition to my area we looked at a typical street in Clairemont and the average tenure appeared to be well over 10 years. I think my example above will hold for most areas except new construction built in the last 2 to 3 years.

[Chris Scoreboard Johnston]

Chris Johnston

Thanks sdr, we are thrilled to be in it. I just broke the new weed eater this weekend, they have industrial strength weeds at Green Acres(my name for this ranch that my wife hates) LOL!

[(former)FormerSanDiegan]

I find it funny that a contributor who is estimating a 19-30% nominal decline in prices is considered bullish.

About a year ago I penciled out some projections based on reverting to the point where monthly rents and mortgage expenses were roughly equal, assuming 5-10% down and ignoring opportunity costs of the down payment. This is where the market was at the last bottom in 1996-1997.

This required some assumptions: interest rates, rent changes, etc. When I assumed rents increasing at inflation of about 3% and interest rates at 6.5 – 7% I came up with about a 19- 26% nominal decline for Central San Diego, depending on the parameters. This probably coincides with a 25-40% real decline depending on the inflation assumption and duration of the cycle.

Sure, there are a lot of variables that affect this: interest rates, inflation, local job distribution, etc.

Of course it didn’t factor in either : a) runaway inflation, b) spiraling deflation, or c) the fall of Western Civilization.

R.O. – I don’t think you are that far off. Just my opinion.

[renterclint]

Thanks for the info SDR!

And I appologize if I called your & Chris’s neighborhood “hoity toity”, afterall I am just a bitter renter. I personally think this is the best area of SD (I grew up in Escondido, so I know how less-desirable a lot areas can be…) The schools here flat out rock! I kind of feel like I’m just pretending though because as your data points out, the decline will not likely hit this area as hard, and I probably can’t even afford a condo. I’ve already started trying to sell my wife on the natural beauty of Texas…LOL!

Hipmatt, you said earlier…

“Some have assumed, that buyers in a tight spot will magically “figure out a budget” to allow them to afford ballooning payments. While if this was possible in theory, which it is not…”

I honestly hope your right (well I only sort of do, because this really means trouble for a lot of families which is sad – even if they made the stupid decisions in the first place), but this point of yours kind of speaks to the beginning topic that RottedOak was addressing. You are ASSUMING that these people do not have the ability to make it – no hard evidence to quantify how many & to what degree (because many of them could find a way). For example, maybe a good portion of these troubled borrowers are young families currently operating on a single income. IF (not necessarily when) they can not refi the problem down the road, maybe the non-working spouse can go back to work. I do not have any data to back that up, but I do not think you have evidence of the contrary. Maybe I am reaching a little too far here, but it is so common that posters will throw out a general point or two and then they finish with “it’s really going to get ugly” or whatever as if what they say has proven anything, which in many cases it has not.

[Bugs]

I strongly agree that some segments of the market and some individual properties will do better than others. I strongly disagree that there is any safe haven anywhere in the market that will be isolated from the regional trends.

Although these different segments do march to different tempos, ultimately they are all connected. If the bottom end of the market does fall out it absolutely will affect the middle which in turn will undermine the upper ends of the market. You will not see $130,000 beaters in Barrio Logan and $2,000,000 tract homes in Carlsbad.

No matter what anyone says, we have a lot more poor and moderate income folks in this region than we do wealthy business owners and trust fund kids.

It also doesn’t matter how many people in La Costa can stay put if the number of must-sell transactions climbs beyond a token level. It’s the ratio of must-sell transactions to total volume that will determine the pace and extent of decline. Remember, must-sell transactions include other factors besides financing; like probate, divorce, relocations, employment, and retirement.

Our volume for 2007 so far looks to be significantly lower than 2006 was, and 2006 was a lot lower than any year between 1998-2006. If 2007 keeps on its present pace we may be on track for a total volume equal to that of 1996. This, despite the fact that we’ve added a ton of inventory during this upleg – with more in the pipeline – whilst adding very few to our population. All this means that the must-sell transactions will have an outsized effect on the trends.

[PerryChase]

“It’s the ratio of must-sell transactions to total volume that will determine the pace and extent of decline.”

I remember this very well from the last downturn. Houses in Fairbanks and Olivenheim we going begging. At that time La Costa Valley wasn’t even on the map yet. La Costa Spa was a failed Japanese investment and the Four-Seasons was a steel shell/eyesore on the horizon.

[partypup]

Couldn’t agree with you more. What we’re looking at here is completely unprecedented in the modern financial world. I lived through the housing downturn in SoCal in the early 90s — it took me 6 years to regain my equity, and that was when there were only 30 year, fixed loans, before we had creative financing, before illegal immigrants could getno doc loans. I’m also flabbergasted that the author thinks that a return to 2001 prices is out of the question. 2001 is when the bubble began in California (don’t know about other regions). But prior to 2001, we had seen steady 5 – 7% appreciation. It is insane to think that prices won’t return to their historical norm.

But there are other reasons to believe that what is coming is without precedent.

There is a perfect storm of macroeconomic variables that could absolutely crush the U.S. economy and the world economy — starting with housing: an unwinding yen carry trade that is already causing volatility in the global stock markets; an impending war with Iran that will drive oil prices through the roof; and a dollar that is taking a serious dumpster dive. Gauging the impact of the coming housing crash based on past downturns will be of no use this time.

It is foolish to focus on housing as if it were some distinct, independent part of the global economy. The post-70s Western global financial market structure is teetering on the brink of collapse. That wasn’t the case in the early 90s. We are in for the wildest ride the world — not just the country — has seen in the last 100 years. Fasten your seatbelts, familiarize yourself with history and use a little common sense.

[sdrealtor]

I agree that the must sell transactions will determine the market. Where it gets fuzzy for me is whether people will be able to find nice homes in nice areas for sale at those prices. I currently believe the vast majority of owners will sit tight and while prices will be much lower it will be increasingly difficult to find a real gem to live in. My house might drop to $400,000 but it doesnt matter to me because it wont be for sale. If it did and there was a home I wanted to move up to for $600,000 I would keep my old one and with a fixed cost of about $2500/month could easily cover my carrying costs.

Also while 2007 volume looks significantly lower than 2006 countywide, it is relatively flat in the North County Coastal market. If you throw out all the builder sales that were in the MLS in 2006 but not this year, resales could even be up this year.

[hipmatt]

JG.. nice charts and I agree with you.. there are plenty of reasons and fundamentals that prove that this correction is going to much more severe than the 1990s.

[sdrealtor]

RenterClint,
No apology necessary (BTW, it’s neither mine nor Chris’s neighborhood) and there’s no reason why you couldnt stay where you are as a renter. If you love it stay there and raise your family there as a renter. I know of several original owners that kept their homes as rentals with very low fixed carrying costs and no intention of selling anytime soon. Save your money and eventually you can move somewhere cheaper to retire.

As for this being the best area of SD, I’ll go a step further. I’ve lived and traveled the entire country. I grew up in a town across the country that most people in the US have heard of with some of the best schools in the nation. I am a firm believer that where I live is the best area in the US (at least for what I like) and thats why I choose to live here.

Lastly, I am starting to see my friends inherit wealth from their parents. How the wealth transfer from our parents generation to ours impacts things is another great unknown.

[schizo2buyORnot]

All RE is local . . . . areas hit the worst are the worst areas . . . .

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In search of a crystal ball . . . .

[PerryChase]

Foreclosure is one way to look at data.

If you look at median prices, the stats are mixed.
http://realestate.signonsandiego.com/area_homesales/pastyears.php

[Author]

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