Housing Prices Will Fall at Least 50%

[docteur]

That’s encouraging. Thanks.

[docteur]

Hi Powayseller – Right now if renting works for you, I think that’s wonderful. However, I don’t see coastal values falling 50% over the next five years and don’t know if I would base my entire real estate strategy on that notion.

Certain areas may see that kind of correction but in my opinion, values along the coast will not correct to that extent, if at all. And if it doesn’t matter to you if you eventually end up on the coast or not, well then the choices you have made are fine.

I see coastal California values (especially in San Diego) staying flat or even increasing a bit over the next several years. The west coast is the edge of America and there is a lot of wealth chasing a very limited amount of livable land near the coast (especially in th prime coastal areas), not to mention the tremendous pressure by environmentalists to limit development in the coastal zones, which will continue to exert upward pressure on values.

I’ve lived on the coast my entire life (58 years) and I have never seen a correction that even comes close to 50%. To the contrary, I have seen values steadily increase, albeit very slowly in some years and dramatically in others but overall, a steady increase.

Secondly, at this point in his life, my son plans on attending UCSD (my alma mater) for his undergraduate studies as well as medical school. He is just 16 but has traveled extensively around the world, visiting many beautiful places and he has come to his own conclusion that he wants to live in San Diego, where most of his extended family also resides (several dozen realatives).

Both my parents were native San Diegans and my wife’s parents have lived here for more than 35 years. So he has a lot of history in San Diego as well.

I honestly believe he will marry a local woman and be blissfully happy here. If he decides he wants to live someplace else, I will totally support him in that decision.

I have always taught him to think for himself and be an independent spirit and he is very mature for his age. But I honestly think he would be hard pressed to find a nicer area to raise a family than San Diego, all factors considered.

About five years ago, after returning from an extensive summer cruise abroad he told me that he was convinced that he lived in the best city in the best state in the best country in the world. He hasn’t waivered from that belief since making that statement and is excited by the prospect of raising a family here.

Also, all the things that are important to him as recreation (swimming, sailing and surfing) are available right here in his hometown (he is also a San Diego native). His is pretty engrained in the San Diego (California) outdoor lifestyle. He has spent a lot of time traveling in Florida and on the east coast in general but the humidity is not something that agrees with him (or me).

I feel confident that he will create his life so that he can live where he chooses to and a job will be secondary to his choice of domicile. Could that change? Sure. And if it does, well, I guess I’ll just change with it.

[docteur]

Hi PD – Funny, you and I are very similar. I also have no debt, pay cash for my cars (although I do buy new and hold them for a long time), am very frugal (it’s my Scotch heritage at work) and I also do my best to purchase stocks low (I am mostly a value investor) and also like to sell high (which I have found is difficult at best).

The main difference between you and I is I do not observe the current real estate market in quite the same way as you do and because of that, I operate in quite a different way. My perspective is one of curiosity and awe at where we have arrived in the property markets. It’s completely new territory and I am excited by the possibilities.

I believe there are many outcomes to a particular set of circumstances and history is a valuable guide but not a predictor of what those outcomes can/will be. Again, I simply observe and follow but never try to base my actions on what I think is going to happen, because I have never been correct operating from that position.

But both of us can achieve our objectives (home ownership), we simply are taking different paths because we have have different considerations driving our choices. You want to make the right financial moves and right now, home ownership doesn’t look like a good one. The way I operate is I can’t make the right financial moves unless I feel secure and stable and that equates to owning my own home.

Different strokes for different folks. And that is what makes this life so interesting!

[rankandfile]

I am not nearly as well versed in the countless financial variables that affect home prices. I think it is quite clear that rapid increases in home prices, gas/energy prices, and the general costs of living have outpaced most people’s ability to increase their earnings. It’s that simple. Why else would banks become so lenient in lending their money? Because most people couldn’t qualify under normal lending conditions.

The pissing contest between sdduuuude and powayseller is just that. No matter how many statistics they throw at us, they are really no more in the know than people like me. It’s like the stock portfolio managers who bragged that they could predict what would happen to the market back during the dot com boom. I recall an experiment that was done where a chimpanzee was given the chance to select stocks during that period and it actually beat many fund managers! It just goes to show you how effective all those stats and charts were.

Yes, making an informed decision based on sound data is a better bet than just guessing. But there is also such a thing known as paralysis by analysis.

[docteur]

Amen brother.

[powayseller]

I love that dart throwing contest, and it is the reason I switched to index funds back in the early 90’s. The WSJ had a weekly column where the chimpanzees beat the pros most of the time.

The thread about the future of housing prices was an entertaining debate. I don’t know for sure it will go down 50%, but I am sure enough of a big drop that I sold my house. Only time will tell if my move was good. More important, how I spend my earnings determines if my decision was good.

Docteur, thanks for your lovely post about your family, and your dreams for your son. In a mobile society, stories of permanence such as yours are inspiring. While I cannot give my kids the family house (since I have more than 1), and cannot afford it anyway, I find your story sweet. Unfortunately, many Americans are counting on the sale of their home to fund their retirement. If more people lived within their means, we would hear more stories like yours. I hope your son’s job keeps him in San Diego, so he can live close to his parents and the city he loves.

[LookoutBelow]

I would like to chime in here also and make a few statements too:
first off Doc, you said you’ve lived here for 50 something years and NEVER saw a “Coastal Living Correction of 50%” or anywhere near that high, well, good news for you!.. you shouldnt feel like you missed it then, because it has NEVER happened, in fact, this current economic climate and govt strategies have never been seen before either. The closest was wayyyyy back in 1929, and whatever the heck the govt has planned, we havent a clue and it might be possible that they dont either! They might just be “reacting” daily. It kinda looks that way from here. The world changes VERY fast now.

As far as home ownership goes, you and SDrealtor have far different “Midwestern American” idea’s than my generation (45 yrs. old) and including the generations behind me too.

I did NOT want to live in my parents house anymore than I wanted to wear my Dad’s old shoes, I want what I want, not be satisfied with what HE wanted or thinks I want. I was and still am capable of deciding what it is that I want for myself.

Is your child not capable of finding his own way ? Is your confidence in him already so low that you think the only way he’ll ever own a home and amount to anything is if YOU give it to him ?
Are you going to saddle him or brain wash your 16 yr old child into thinking he will inherit the “best house in all the world” from your good fortune and or benevolence ?
Im sure you guys will try to use it as leverage with statements like, “Do you want a free house ?” well maybe “IF” you get good grades? Then are going to be picking his future wife for him, telling him what color car he “should” have ? Well…SURPRISE ! ..He wont want it, his cohorts will tell hm how lame that idea of yours is and he will learn to hate that house that YOU’VE grown so attached to.

At what point do you turn him loose in the world and see how far in life and how successful his own good judgement takes him ? Apparently for you and SDRealtor, that point will never get reached for your children.

Your plan of him “raising his family” there needs revision also, I think he’ll be changing diapers in the very same room you did, except he’ll be changing YOURS this time around not his baby’s !

Is that your secret plan ?

My father tried that similar type crap on me too and it backfired, I left at 17 yrs old, I paid for my own college, got started in a completely different career path, got extremely lucky, (but was prepared to recognize the opportunity) and very comfortably retired in my mid to late 30’s. Hell, I retired BEFORE he did and spent more on taxes in each year for the last 8 years than he has EVER seen. I retired from my profession and sold 2 very successful small companies that I started plus sold all of my real estate 2 years ago because my common sense told me it was topped out and get out NOW.

I am digressing…my apologies.

Are you trying to “rationalize” your real estate purchase by citing all of these fantasies of “giving” your home to your son ?
A person can be inundated by too much superfulous data, at some point he’s going to have to use his own good judgement (if possessed) and make a move, win, lose or draw. Nothing worse than paralysis from analysis, or brain cramps.

Why do you visit this site ? It seems pretty rosy in your world, this must seem all doom and gloom….

If you believe SD/SoCal real estate will experience no more than a 10% decline over the next couple of years, despite all the data, history and trends, well, I believe thats being blinded by what Greenspan calls “Irrational Exuberance” and my opinion counts for exactly nothing. But I felt it needed to be said.

I have absolutely NO intentions of insult or snideness, if it at all it appears that way, my apologies now, it was NOT ever intended.

[Anonymous]

I would just add be careful what you ask for. If we do get a 50% drop, we will be in the middle of the biggest depression in history. Many people with normal jobs will lose them. There is 20 Trillion (that’s right) worth of dollars in US real estate. If half of that were to go away, it would be equivalent to the stock market going to zero. Total value there is less than 10 Trillion.

The Feds would have to bail things out way before things got that out of hand.

So the moral of the story is, be careful what you ask for, you may get it. BTW, I just finished the book Sell Now. Even as someone who thinks prices are coming in some, I find this book a tad “out there.” He makes alot of assertions that are not factually based.

As many have said, all we have is our opinions, and nobody knows better than anyone else what lies ahead. I would just urge people not to plan for extremes. Just as in the bell curve models, 99% of all activity occurs in the middle.

I do think we have an ugly period at hand, but I seriously doubt we will get a 50% drop.

[Bugs]

Serious consideration of a 50% correction does not represent an extreme. An extreme would be referring to a downswing that overshoots the trendline in proportion to the excess of the upswing. During every cycle so far the market has corrected to the trendline then overcorrected a little more.

If we look at the trendline in terms of statistics and numbers, without any of the emotional baggage, there is an extreme scenario that most people haven’t given serious consideration to. If the trendline includes markets that are overvalued and undervalued, and if we extrapolate that trendline to continue forward as it has in the past, the 50% correction wouldn’t really represent a correction. It would be a break from the old trendline and would establish a new trendline of its own. It could be argued that a correction of only 50% would represent a version of the New Paradigm, albeit not the extreme version NAR has been pushing.

Just to get to the trendline would take a correction of 60% or more, depending on whose numbers are being used and whether inflation is factored in. Add in even a nominal overcorrection of 10% and that adds up to a 70% downswing. Now THERE’s an extreme!!

It’s strange that as a society we seem to be able to comprehend the 300% increase ($200,000 home increases to $600,000 current price), but we can’t wrap our minds around a 60% correction ($600,000 decreases to $240,000). That we think that 6% interest rates can co-exist indefinitely with our current rate of spending and consumption. I think it has something to do with a widespread sense of entitlement. I don’t know about anyone else, but as time goes on I’m feeling more and more like a Roman.

BTW, I’m don’t trust that “the government won’t let it happen”. As far as I’m concerned, the government not only did allow the current upswing to happen – they encouraged it and relied upon it to provide a short term fix to their economic problems.

Then again, I’m an extremist.

[PD]

If there is a 50% correction in the US as a whole, then it will cause a financial meltdown. I don’t think the correction will turn out to be that deep, as an average. However, I do think it will be that bad here and in some other markets. It also seems possible if not probable that there will be resulting recession but not a depression. Bird flu could be the wild card factor. Think what would happen if bird flu strikes and causes major mortality and chaos.

Bugs, I’m also feeling more and more like a Roman. Excess is very rarely allowed to go unchecked.

[Anonymous]

A 50% drop nationally is probably not realistic, because nationally real estate is not 50% overvalued. In San Diego, however, a 50% drop is entirely reasonable. In fact, that level of drop would only bring prices back to around 2001 levels. In 2001 a lot of areas of San Diego were already over priced compared to median earnings.

So why would prices retreating to the level of 5 years ago cause a depression? Really all the gains of the last 5 years were bogus because demand was fabricated. The primary reason for the increased demand was the enrormous level of overseas investments in our mortgage backed securities. This caused so much money to be available that mortgages were handed out like candy to anyone regardless of FICO score. The secondary reason was speculation, again purely fabricated demand.

So basically all of the real estage gains of the last 5 years have been caused by short term events that are not sustainable. Like any market, a natural correction is in order. If the increase in prices over the last 5 years were of such atypical magnitude and not based on real economic fundamentals, why is it so difficult for people to believe that the market can go down just as far?

[PD]

A 50% correction NATIONWIDE would cause a depression as this would be a correction to WAY below the national mean. That won’t happen unless there is some very strange event (like Bird Flu?).

A 50% drop here and in other places would not be strange and could be a key component in triggering a recession.

[powayseller]

Your comment is courageous and fair. I can certainly see your side. If my parents gave me their house, I would sell it, and buy the house I want. Their kids may also. But lookoutbelow, do you think in some parts of the world people do pass on their homes to their kids, as part of a family connectedness? It is unusual for our mobile society, but it’s a sweet idea, isn’t it? What made you not want any part of it?

[powayseller]

I think we’ll have a return to post-bubble prices. In SD, that’s 50%. In Omaha, NE, that’s 0%. If a recession, depression, etc. results, then it does.

The logic, “It can’t happen because then we would be in a depression” is a joke. Do you think it won’t happen because we don’t want it to?

[PD]

Powayseller, will you go into more detail? I’m not sure that I’m reading you right.

[Author]

Posts