Houses around $400K?

[jawbone_shack]

Does anyone have a theory or some information how the price correction will hit houses on the lower end of the market, around $400K? Will we see houses for $250K in San Diego in 5 years? Or is this big correction just happening at the top (houses being dropped from a million to $900K, etc…)?

[carlislematthew]

I expect that ALL houses will drop exactly 50%. No more, no less!! Just kidding…

The response you’ll get from this board will mostly be “probably 20-35% in real terms (inflation adjusted) over a few years or more”. Some are predicting a 50% decline though, and these people tend to predict the loudest. 🙂

In my humble opinion, and from what I’ve read, all housing will be hit with *some* variance between high and low-end, but not a massive amount. Perhaps 5-10% difference in decline maybe. I’m just guessing, like everyone else…

[Doofrat]

My opinion:

There are two and only two long term values to a house:

1. It can keep the rain off your head as you sleep at night
2. It can earn money as a rental

Assuming this, there are a couple of ways to determine the value of the house based on the above two values:

1. For the person who want’s to keep the rain off their head, an important ratio is the median home price to income ratio which the professor gives as being over 14 when it is normally less than 9 and as low as 7. I know this is calculated using median house prices, but from what I see on the lower end, it carries over to that market as well, just use Zillow and look at the progression of house prices in Vista or Escondido.

2. for the person who wants to own a place and then rent it, an important ratio is the price to rent ratio. I’m not sure what a good ratio here is, but I remember it being about 15 or so, currently in San Diego, it’s about 25-over 30 depending on the area.

Both of these ratios seem to be way out of wack on the low, middle, and upper middle of the market, as I believe many readers of this board believe: because of the E-Z credit that is available to everyone.

Obviously, other factors will pop up and affect these ratios in the next five years, (inflation or deflation, higher incomes or lower incomes, recession or continued growth), but excluding these factors, it looks like housing has a long way to fall across the board.

Looking at these ratios, I’d say that a $400K house for $250K is a possibility if these ratios moved back to their normal values, and the other factors (inflation, income, no recession) stayed the same over the next five years. Will these other factors stay the same? Hell no, but the ratios are probably a good guide.

I’d say that the only housing market that won’t be affected by a bubble burst is the multimillion dollar market since the buyers in this market are probably not relying on financing as much.

[no_such_reality]

There are two and only two long term values to a house:

Good point, however in our consumer nation, the emphasis is on image, not substance. Hence, housing is about ego and not value.

If the housing market corrects and drives image back out of the equation, then housing will return to a value proposition. Until then, 3500 sq ft. executive homes will be the norm.

[Anonymous]

Obviously the lower end houses are going to be hit HARD. To estimate how far they will drop, just go back to 1999-2001 timeframe and see what they sold for, then adjust for inflation. This is a rough starting point.

The bottom line, any house selling for 400K in San Diego today is either a condo or a single family house in the ghetto. Once inverstors are out of the picture (happening now), and later when the lenders stop offering exotic mortgages (going to happen shortly), there will be nobody willing or able to pay this much to live in a crap hole.

Ultimately prices of lower end properties will have to be based on actual income because there will be no significant investor influence to create false demand. If the median household income is 63K, this qualifies you to pay around 200K more or less.

[sdrealtor]

You have to go further back than that. I was shopping for houses in Mid-1997 and a decent starter house cost $225K or more then. In 1999, I was shopping also. You had to spend at least $325K for anything decent.

[PerryChase]

I’m of the opinion that the dot-com boom of the late 1990s created the beginning of a real estate bubble. Then in 2000, when the Fed lowered interest rates to engineer a recovery, combined with the psychology of fear of 9/11, “investors” flocked to tangible real property.

I would look at 1997-1998 housing prices as realistic for San Diego (it was already very expensive back then).

[Doofrat]

Good point Deadzone. I forgot what you get for $400K nowadays, the lower end will get hit harder.

[FutureSDguy]

Moody’s Economy.com predicts a 8.5% drop bottoming out in mid 2008. Not a very large correction.

http://money.cnn.com/2006/10/05/real_estate/moodys/index.htm

[Peace]

<>

Wow, a 8.5% drop by 2008 – that gives our salaries time to catch up – NOT – maybe they mean 8.5% drop from 98-99 prices.

I’ve always been amazed that $700,000+ tracts of homes were built and sold, like overnight.

But was really surprised me was how many people could afford that kind of money to buy those cookie cutters or the older junk – of course now the cat is coming out of the bag… many, many (maybe most), of the buyers couldn’t afford what they were buying.

[Anonymous]

The 8.5% drop has already happened. Just ask anyone who has sold a place in San Diego in the last month or two.

[kiki]

On May the prediction was that San Diego was going to appreciate 2%. 5 months later the prediction is 8.5% drop. I bet that by the end of the year there will be a crash prediction.

[FutureSDguy]

They probably meant a 8.5% drop relative to the time of publication (today). But they’re probably using some sort of formula and using historical data. I doubt a single economic website has the pulse on every factor of every local market.

[PerryChase]

I think that there’ll be a certain floor for SFH, say $250 – $300k.

But I would not be suprised to see at $1.8 million house fall to $900k. The drop will vary the type of properties, but I don’t believe that the high-end will be insulated. For example a 950sf North Park house that sold for $750k at the peak could easily drop to $350k. Same goes for that bungalow in Encinitas.

[jawbone_shack]

Thank you for everyone’s input, I really appreciate it. I just now had a chance to come back to the computer and read over the responses. I’ve just been really wondering if we could expect to see much of a decline at the lower end or if home prices in San Diego will always just be $400K and up. It’s kind of grueling…I really don’t like the idea of renting for another 2 to 5 years waiting on the sidelines…our place is so small and it’s very difficult to find a rental that would take all of the pets we have (cats & dogs). Then again, even if I could find something affordable budget, I don’t want to be upside down in two years. This stinks. It’s like a titanium bubble. I hear all the talk of it popping, but wow does it take a long time I guess.

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