July 31, 2006 at 12:09 PM #7053
Here’s another one that’s been rattling around my mind for the last couple weeks. I’ll apologize in advance for the lenght but its an important thing that has been missed. It is a reason those of you waiting for a 50% decline stand a good chance of being sorely disappointed. It’s been said the % decline will differ from area to area but was has been completely overlooked is that the % decline will differ greatly by price range. I went back to Summer 2001 to compare prices then with prices now. Here is what I found in my area. Please bear in mind I did my best to select what would represent the typical home and there are exceptions:
Starter Homes were roughly 300K. These homes now sell for roughly $600K which is an increase of about $300K%. Prices back at this level would be a 50% decline.
Move-up homes built in 1980’s were roughly $450K. These homes now sell for roughly $750K which is also an increase of about $300K. Prices back at this level would be a 40% decline.
Move-up tract homes built in the late 90’s were roughly $550K. These homes now sell for roughly $875K which is also an increase of about $325K. Prices back at this level would be a 37% decline.
High end tract homes built in the late 90’s were roughly $750K. These homes now sell for roughly $1.1M which is also an increase of about $350K. Prices back at this level would be a 32% decline.
High end semi-custom homes were roughly $1.2M. These homes now sell for roughly $1.6M which is also an increase of about $400K. Prices back at this level would be a 25% decline.
What this illustrates is that prices generally have moved in unison by a specific dollar amount or dollar range and have not increased by an across the board percentage.
If you aspire to buy a starter home, a 50% decline would seem within reach. However, if you aspire to buy what is now a million dollar home, you should consider adjusting your expectations on a percentage basis because of the way the market prices of houses work.July 31, 2006 at 12:12 PM #30177lindismithParticipant
Thanks for this sdrealtor.
I wonder if starter homes will take it even harder since they would have been purchased (presumably) by the sub-prime borrower?July 31, 2006 at 12:17 PM #30179
Sorry for the absence but it’s been a great Sunner on all accounts and my mind has been occupied with lots of other things than this board. When I get the time, I try to provide unique information and interpretations that come from my observations of what is happening on the streets not what is happening in the Ivory Towers.July 31, 2006 at 12:38 PM #30184BugsParticipant
I would tend to agree with the different price ranges reacting differently, but would add something else to that train of thought. During our last 2 RE recessions, the averages not only overshot the point of equilibrium, but the different pricing strata compressed. In the mid ’90s, the difference between a $200k home and a $300k home was a lot more than what we would find right now between a $600k home and a $900k home. That’s because (except for the primo areas like RSF and La Jolla) the higher the price range, the greater the decline.
If anything, I’d say the price range most susceptible to the biggest hits are the $800k – $1,500k homes. Think about it: if a $500k home declines back to $250k, the step up from that would be the $325k home that used to be $700k. And the step up from that would be the $400k home that used to be $900,000. The $75k increments may not seem like a lot right now, but in a market that is completely dependent on local wages it would represent a $500/month increase in mortgage payment on an 8% mortgage. That’s almost 10% of the net for an $80,000 annual household income.July 31, 2006 at 12:48 PM #30191
I appreciate your experience in the last 2 RE recessions but respectfully disagree with your examples which seem to come out of thin air and use the logic which I pointed out was flawed based upon the recent history. If you find a flaw with my numbers please point it out. If you have an explanation as to why prices will fall differently than they have increased, I’d like to hear that also. But to change the direction of a well thought out and researched point that I was trying to make with arbitrary numbers does a disservice to us all.July 31, 2006 at 1:22 PM #30200PerryChaseParticipant
I agree with Bugs’ analysis. SDrealtor, I also feel that the summer of 2001 is not a good base year. I think that 1997 or 1998 are more representative of the base.
I don’t have exact numbers. But I’ve looked at homes in some of neighorhoods that I’m interested in, I feel that 50% down from the peak is reasonable. In many neighorhoods, today is not the peak, it’s more like 15-20% off of the peak.
I’ll try to quantify the numbers later, if I have time.July 31, 2006 at 4:59 PM #30236
I dont believe the base year really matters and if I went back a few years more I know the results would be the same. I chose 2001 for a reason as there’s always a method to my madness though I dont always explain it upfront.
In most of SD there was very little new construction between 1990 and 1997. However, that changed dramatically in 1998. The higher priced asset classes (homes currently selling for $800K and up) I wanted to look at were mostly built starting around 1998. I chose 2001 to allow for these homes to start hitting the market after 2 years. If I start earlier, the homes currently over $1M are typically custom homes or beach properties for which it is much more subjective to say what a house sold then would currently sell for. For tract homes, it’s easy!
I dont necessarily disagree with Bugs as I don’t have the historical perspective he does. I just asked for some kind of data/supporting analysis arguing this point not the numbers that he used which appear to arbitrary.
I also dont know of any areas down close to 20% yet from the peak. As a note, I dont consider 1 home selling for $100K higher than anything else the peak. To me the peak is a price level where multiple homes were selling at a given price level not 1 lucky sale (or unlucky in the case of the buyer!).July 31, 2006 at 5:50 PM #30241anParticipant
I don’t think price have gone up the way you describe. The data I’m about to show is from zillow and their 5 year chart which is what they called the Zindex. I’m not sure how they calculate it, but however they did it, it’s the same calculation for their 2001 # as their 2006 #, so that variable can be removed. You can go as far back as 10 years.
Current – $1.02M
2001 ~ $400k
% increase – 150%
$ increase – $602k
Current – $631k
2001 ~ $290k
% increase – 118%
$ increase – $341k
Rancho Santa Fe
Current – $2.47M
2001 ~ $1.1M
% increase – 125%
$ increase – $1.37M
Current – $536k
2001 ~ $235k
% increase – 130%
$ increase – $301k
Current – $668k
2001 ~ $300k
% increase – 122%
$ increase – $368k
Current – $1.17M
2001 ~ $500k
% increase – 153%
$ increase – $617k
Current – $463k
2001 ~ $190k
% increase – 146%
$ increase – $273k
You can go look at other cities as well, but throughout San Diego County, all the cities I looked at had increase between 120-160%. I don’t see any correlation between price and % increase either. So I’m not quite sure where you get those $300k-$400k price increase from. Please tell us how you compute it, it might explain the discrepancies. From what I understand from reading their description, Zillow used data from all home sold. Since they all are >120%, I think 50% drop still would not affect people who bought in 2001 and not refi to take cash out. a 50% drop will still mean 10-30% increase in 5 years. That’s 2-6% appreciation every year for 5 years. We’re not even talking about how people already start calling 2001 price too high back then. If we take a different base, like 1997-1998, that would mean a 50% drop still mean amazing return on investment.July 31, 2006 at 6:31 PM #30247DanielParticipant
I also am somewhat skeptical of the claim that price increases were constant in dollar terms (and therefore decreases would follow the same pattern). But I admit that I don’t have any hard data to back this up; it’s mostly anecdotal.July 31, 2006 at 6:46 PM #30245powaysellerParticipant
A median price drop of 37% – 50% that I project, applies to Rich’s data of historic price/income for ALL resales. I expect SFH to fall 30-45%, condos to fall 45-65%. Attached somewhere inbetween. With SFH already down 10-15% in many places, I am thinking I am too conservative.
Great post, sdrealtor. Can you find out more about how these price segments fared in the last housing bust?
I also wonder why you chose 2001 as your starting point. The housing run-up started in the late 1990’s. Wouldn’t 1998 or 1999 be a more accurate time to start a comparison?
By 2000, prices were 30% higher vs. 1999, in the Poway homes I was checking out, and 25% higher in the Escondido homes, so I wonder how your analysis would run if you started it from the *beginning* of the housing bubble, rather than the point where you think the rise stopped making sense. Because with the way you did it, somebody could easily start with 2003 or 2004, because that’s when that person thinks the runup stopped making sense. So it’s important to backdate to the *beginning* of the run-up.July 31, 2006 at 7:02 PM #30252equalizerParticipant
I’m skeptical as well. It seemed that the higher end homes were skyrocketing in dollar terms, meaning that everything was going up say 50%. The 800K home would go to 1.2M, whereas the 500K went up to 750K. I was looking at Santaluz (OK, just for 5 seconds!) in 2002 and noticed that homes were 2500SF singe story I believe and were going for upper 700, low 800 with a model sold for 924K. I gasped at the 924K, felt a sudden sharp pain as if I had just lost my life savings and 401K. Maybe bugs or sdrealtor can check on the Santaluz properties now. I think they are in the 1.2M range.July 31, 2006 at 7:57 PM #30255
I chose 2001 for a reason which has nothing to do with when prices stopped making sense. it has to do with the availability of data. In most of SD there was very little new construction between 1990 and 1997. However, that changed dramatically in 1998. The higher priced asset classes which most of you would be interested in at some point in the future (i.e. homes currently selling for $800K and up) that I wanted to look at were mostly built starting around 1998. I chose 2001 to allow for these homes to start hitting the market after 2 years. If I start earlier, the homes currently over $1M are typically custom homes or beach properties for which it is much more subjective to say what a house sold then would currently sell for. For tract homes, it’s easy to look in an area you know well at a historical price and come up with a pretty accurate current valueJuly 31, 2006 at 7:58 PM #30256AnonymousGuest
For one thing, the housing run-up started in 1998 so that is a better base to start from. Since 1998, absolutely every area of San Diego, and every type of real estate has gone up well over 100%. The only difference is that higher end areas, especially along the coast, captured most of their gains between 1998 and 2001. Less desirable areas didn’t start to heat up until after 2001.
Regardless, when the dust settles at the end of the crash, every area will suffer brutal losses. Probably the less desirable areas will be the first to fall and things will work their way back in the same sequence.July 31, 2006 at 8:05 PM #30258powaysellerParticipant
This analysis could be modified to start in 1998 for the available data, with the caveat that there were not enough high end homes to draw any conclusions. It simply isn’t accurate to start a trend line after the trend started. Also, if we think about where prices will end up, we have to remember rising wages and adjust accordingly. I don’t think prices could go back to 1998 or 1999 levels, because rising wages will support higher prices. People will jump in and start buying when rents, supported by wages, are cash flow positive from a purchase.
To me, that is the bottom. That is when the bottom feeders and investors will come back in, when rents are cash flow positive, i.e. house price = 8 * annual rent. At whatever level the annual rent falls. That is a return to fundamentals.
BTW, is that what happened in the last bust? Did it stop falling when house prices were a multiple of 8 or 10 times rents?July 31, 2006 at 8:07 PM #30257
Besides the fact that Zillow data is extremely poor, the case you bring up is for differences in the impact of various areas. My point was that there are also substantial differences in the way home prices will be impacted WITHIN a specific area/city on a percentage basis. The $300 to $400K differences come from looking at historical sales in Encinitas/South Carlsbad which i know very well and can easily estimate what a house would sell for today. There is some wiggle room in the numbers (i.e. some in each price range do a little better/worse than average) but these are numbers I am pretty confident in as being representative. The big difference is that while Zillow is looking at averages, I am essentially looking at Same House Sales. I dont disagree with any of your comments about returns being great even at lower prices. I just wanted to point out that there are plenty of flaws in looking at averages when you cant buy an average house, you buy a specific house in a specific neighborhood at a specific price. Furthermore RSF, DM and SB are different than typical neighborhoods and dont behave the same. If you look at the others you see increases of $300 to 400 maybe a little less in a cheaper area like Santee.
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