Housing Prices Will Fall at Least 50%

[Anonymous]

Jeez – would you BOTH please STOP with this back and forth? You’re both acting like children who have to have the last word and you have to be “right”. It’s gotten real old. Do we need to sit you both in opposing corners of the room for a 10 minute “time out”?

You’re both intelligent and articulate. Make your case based on whatever analysis you’ve done and let the readers of the forum make their own decisions as to what they go with.

Pete

[powayseller]

Pete, no need for you to try to douse any flames. I thought sduuude’s last posts were polite and fair. I disagree with your assumptions of his post, or mine. I find your tone unpleasant. Sorry…

[Anonymous]

My dear powayseller, you just proved my point. I’m outta here!

Pete

[sdduuuude]

I agree with you, poway seller 😉

I didn’t like his/her tone or analysis of the situation.

[powayseller]

I posted the link without analyzing it thoroughly, or at all, and if the guy made some mistakes in his assumptions, I appreciate the time you took to figure it out.

As I said, my reason for a 50% correction is simple: all excesses correct and overshoot on the way to the mean. We are several standard deviations removed from the mean, when you compare housing prices to rents, or to incomes.

To return to the mean, as measured by rents or incomes, we need a 50% correction.

A great visual is the chart in the Bubble Primer. Some people think wages will come up to soften the lower home prices. This is a possibility,but based on global wage dependence, pretty unlikely at this point.

House prices are already down 10% in some areas, and we haven’t even got into the 2007 massive ARM resets yet.

Please don’t think that the article I posted was to prove any point. I found it interesting, and its lack of accuracy does not change my prediction.

I appreciate the dialogue on this very much.

[sdrealtor]

The problem with the just getting started argument is that this is not a linear. The last major jump in prices occurred in January 2004 and there was a very significant inflection point. The price trend line looked a lot more reasonable prior to that. So as my barber says “we might just get away with a little off the top”. The truth is I dont know whats going to happen nor does anyone on this board or otherwise.

[Steve Beebo]

I don’t think Schiller’s work makes any sense in the world of real estate, especially in coastal areas. If he was talking about Omaha, NE, or Des Moines, IA, areas where there may be hundreds of thousands of acres of vacant buildable land outside of a city, and if construction costs were only going up at 1-2% per year, then his theory of 1% appreciation per year might make sense. But in an area like Del Mar, La Jolla, or Coronado, there is no vacant land to speak of, and there is always going to be strong demand to live in places like that.

I’m not saying that prices in these areas, or in other areas of San Diego won’t decline in the next several years. I think they will, just like they did in the early 1990’s. But I think there is very little chance that prices will be cut in half. I don’t see any way that a $600,000 tract home in Escondido or El Cajon will decline to $300,000, and I don’t see any way that a $2,000,000 home in RSF, Del Mar, or La Jolla will decline to $1,000,000. I’m seeing a lot of areas where prices have dropped 5 to 6% since last summer, but I don’t think that prices will get down below where they were around 2003, even if I factor in a very large increase in the number of REOs. In 2004, it seems to me that speculators took a much larger part of the market, to the point where prices were unsustainable. I’m guessing that prices will not drop by any more than 25%, to the point where last summers’ $600,000 home will decline to $450,000, but it wouldn’t surprise me at all if the decrease was less than that, maybe quite a bit less.

[powayseller]

Good points. While it is interesting to forecast, we won’t know if we’re right until afterward.

I also don’t know what’s going to happen. I post somethings as a starting point for a discussion. Often I end my posts with “Does someone disagree” or “Any weakness in this argument?”

I am also trying to learn. Please don’t think I have all the answers. I don’t.

I’m in the contrarian and this-must-make-sense-or-I-won’t-do-it camp, along with economists Dean Baker, Robert Shiller, John Talbott, and investors Bill Fleckenstein, Yamamoto. Let’s remember too that not a single economist predicted the 2000-2001 recession in September 2000, when the stock market had already taken a pre-recession hit and all the signs were there. My contrarian and does-this-make-sense view has served me well. It kept me out of tech stocks in 99 and got me out of the housing market in late 05.

I welcome corrections in to my views, and appreciate when someone points out weaknesses and errors in my analysis. I love a good debate, and thank sdr and sduuude for disagreeing with me and being so nice about it at the same time 🙂

[docteur]

Hi PD – I once had a friend who was very caustic in his communications (he died a few years ago and a lot of people said it was because of his attitude). He actually was my best friend for more than 45 years and everyone called him the “dark cloud.”

But I really appreciated this guy because he had the courage to always speak up and take a contrarian position in the face of huge opposition. His tone was often negative but he was always interesting and backed up his opinions with data that was carefully researched and analyzed. He was always giving of himself in a way that most didn’t understand but I knew that his true intentions were – to share himself with others so that they might benefit from his knowledge of a particular situation.

He used to call me pathologically optimistic. He took issue with everything I said and I knew that he constantly tested me because he cared about me as a friend and didn’t want me to make a mistake or put my finances at risk by making a bad decision. We both had our own individual successes but with a totally different perspective on life. Oftentimes his perspective was very helpful to me and impacted my decisions on many important issues in my life thorough the years.

He taught me something very valuable: People express their opinions and beliefs in many different ways and with varying degrees of emotion but the bottom line is this: true communication is the appreciation of differences. We have to weed through all of our pre-determined notions about how something is being said and really “listen” to what is being said.

I honestly did not interpret sdduuuudes tone as snide. I read it as more a challenge to forum readers to test their own beliefs. And regardless of our interpretation of his “tone”, I think his intent was clear: to assist us in making more informed decisions and to remain open to what others have to say. Then, once all our considerations are out of the way, we can come to our own conclusions and take whatever action is necessary, if any at all.

You said we don’t know how far down it (real estate) will go…nor do we know if it will go down at all. The probability is high that we will see a correction, but I am not willing to make a prediction based on what is happening in certain neighborhoods around the county at this point in time.

Just because a highly speculative condo market crashes downtown does not mean that custom homes in a gated community in North County will follow suit. Just because one neighborhood of a certain priced home is seeing 10% price reductions in sales prices does not mean another area in a different price strata will do the same.

Real estate is a local market with many variables impacting value and pricing. People with financial means will opt for those areas that appeal to their own set of particular wants and needs and will not react out of fear or greed.

From my perspective, this bubble will burst when many homes across several price ranges start to sell for less than what they sold for on the last go around.

Just because a home sells for less than a comparable one sold for a month earlier (but both sellers make a profit) does not necessarily mean the bubble is bursting. It means the market is adjusting and a 10% or even a 20% correction is not uncommon in certain markets after a run up like we have seen over the last several years. When people start losing money on a regular basis, then I will look closely at what type of trend is evolving.

So far, in certain neighborhoods in San Diego, I see a slowdown but in my experience, those are also areas where people bought at the top of the market were speculating or took on loan products they probably should have avoided.

In areas where buyers put down lots of equity or even paid cash, where the buyers have secure jobs and strong fallback positions, I see absolutely no erosion in value because the conditions driving those sales are totally different that maybe another area that is experiencing weakness.

For many years, I have been looking for a home in a particular neighborhood, close to where I grew up. Even with the huge increase in prices over the last several years, nobody in that neighborhood ever seems to sell. Families pass on their homes to their children because the location is so desirable and the particular ambiance could never be reproduced again. The neighborhood is older and completely built out and no one seems to be motivated by profit to sell.

When homes sell in this area, they are usually sold quickly and quietly at full price (in some cases, overprice, depending on how well the agent gauged the market) and the sale is usually direct from the agent to a buyer he has already been identified well in advance. Rarely are the homes in this area even listed in the MLS. So that is a market unto itself, not correlated to the real estate market in general. High quality at a fair price will always sell, regardless of external market conditions.

So, looking at the broad real estate market has certain value but not necessarily on an individual, personal level. I think we have to look at exactly where we want to live, how we want to live and then determine if the price someone is asking is worth what we are willing to pay. Waiting for a market to crash so we can get a better deal on a family home is no different than speculating on the way up. Both are dangerous stances to take with your personal residence.

What if we are wrong in our “prediction” of what will happen? We could miss the opportunity of our lifetime by treating our home as an “investment” and not buying our dream home when it comes on the market.

My mentor once told me “If you see something you love, go for it, because that opportunity may never come again.” So many times in my life those words have helped me make certain decisions for the right reasons and I have never regretted acting under those set of circumstances.

To me, a home is a place where you live your life, watch your children grow up, create the memories that define your existence. And I will pay any price to secure the type of life I want, regardless of market conditions. After all, why do we earn money anyway? I believe we earn first to survive and then so that we can create the type of life we want, so we can feel safe and secure and empowered and find meaning in our existence.

Back to the market: My experience at this point in time is that sales are slowing down but prices are holding (at least where I live and also in areas I plan on living in the future). But then I am possibly looking at the elephant from a different perspective than you.

[sdduuuude]

If the value of the dollar falls, your house is worth more dollars. No two ways about it. Your 50% figure doesn’t take into consideration this dollar value reduction because it is a nomial figure. As a wild example, if housing stayed constant and the dollar cut in half, we would see a doubling of prices, right?

Better to estimate the real value drop of housing, then adjust the nominal price depending on inflation or dollar depriciation assumptions. i.e. How much are houses overvalued above what the fundamentals support.

Also consider if the dollar falls, jobs may move back to the US.

Your comment on wages is interesting, but again you quote 5-8% inflation above and 2% inflation below. Which is it? You have lots of thinking / resolving to do to bring your ideas in alighnment with each other. Like I said – you are a good thinker, but you have to connect the dots.

That linear line he drew, which starts in 1986 looks like an extrapolation of data the 4 years proior. It is really the inflation line, but it is nonsensical to say the first 4 years are the norm, but the 20 years after that is a deviation from the norm.

[PD]

If a person sees their dream home and are going to live there for a very long time, then they should buy. My husband and I almost made an offer recently on a house because the supply in that neighborbood with that view is very small (only about 8 houses). However, there were a few negatives with the house. In the end, we took the emotion out of it and did not make an offer because we think the price is going to drop significantly and the property was not perfect.

There is another variable that few people talk about that may affect prices. Are we in for a recession? Everyone talks about how jobs are good in SD. Well, they are good RIGHT NOW. What happens if we slide into a recession because of a steep retreat in spending? What will happen to the job market? The current prices are built on a house of cards. All it will take is a stiff wind.

[PD]

Emotion is a big player in prices. The purchasing of recent years has been a stampede of irrationality. Everybody and his dog were making a ton of money on their house without doing a thing. People went crazy and paid whatever they had to for fear they going to get priced out. When reality begins to sink in, the stampede is going to go the other way.

There has been a lot of irrationality among otherwise smart people. A relative of mine just paid 550K for a condo in the LA area. It was a first time purchase. They had to streeeetch to buy it. Then they put in a top of the line real wood floor and new stainless appliances even though the old ones worked just fine! These are very smart people but I’m worried about what is in store for them.

[powayseller]

Mr. Smith got several critiques on his calculations, and provided an update in which his new calc show a drop of the price of the SF home to only $350K. However, he maintains that overcorrection to the mean will still mean a 50% correction.

Check his blog for the 3/18/06 entry. And he did appreciate sduuude’s comments.

[powayseller]

The value of a house changes as the dollar rises or falls? How? We are not exporting or importing the house.

Inflation is much higher than the gov’t 2% number. If you adjust for inflation (gov’t CPI), wages are flat. If you adjust for the true inflation, wages are falling, as is the value of my CD which is paying only 4.75%. True inflation, to anyone purchasing/living in this country, would involve taking a basket of good we actually purchase, in percentages we actually spend. Why do they make healthcare less than 1% of CPI, when it is $800/mo/family, and about 10% of the median family’s income? Why exclude gas and food, just because they are volatile. And just so everyone knows, retail was up last month mainly because of gas station sales. I hope all the dots are connected with this explanation.

[powayseller]

I disagree that you must own a “home”.

I am renting a “home”.

It is a warm wonderful cozy home, clean and tastefully decorated with my Ethan Allen curtains matching my Ethan Allen dining room set, my baby grand piano, laughing kids inside who adore me, pets, with kids who ride their bikes on the street, parents who walk their kids to the nearby school, interesting neighbors, kids who carpool with me, activities nearby that my kids walk/ride their bikes to, a park where our dog can run, mature trees, next to a creek and mountain trails for me to run, and full of chirping birds (even right now).

I am happier in this home than in the previous home which I owned and built. I gave up my $2500 Miele steam oven (yeah, ever heard of one?), Viking 6 burner range top, and green Iranian granite (so cool!!) for a simple 4 burner gas stove and formica. Small price to pay…I am financially much better off, and my husband is happier too without all those house projects that always weighed on him.

In an era of ridiculous home price inflation, a house cannot be thought of in the traditional sense of the American dream. It is an asset which is quickly losing value and will turn the American Dream into the American Nightmare, as thousands or millions of homeowners enter foreclosure.

(And wait until you get Fannie Mae’s audited books. They’re spending $800 million just on figuring out how bad the problem is…Gov’t bailout of unheard proportions coming soon..)

A house can become a shackle and a way to bankruptcy and foreclosure. We must think of a house as an asset, and not be emotionally attached. Many investors get attached to their stocks, and will not sell and cut their losses. Homeowners are like this, too.

Docteur, you can afford to lose 50% of your home equity. You made millions in your last deal, so you don’t mind losing $1mil in home equity. You deserve this, and for a person in your situation, this is the best decision. Someday, I hope to have a place paid off, where I don’t have to make any monthly payment to anyone.

For the median income American, and for anyone making that darn mortgage payment, losing 50% of equity will be a toughter burden to bear. Anyone with a mortgage or less than 50% equity, cannot afford to be carrying that house right now, because it is a shackle more than a home.

[Author]

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