Last Downturn

[admin]

I’m trying to get a sense as to when we’ll see prices bottom. To do such, I’ve plotted two sets of data: (1) annuals sales for San Diego resale homes over ’88-’03 (source: index from Robert Campbell’s book, “Timing the Real Estate Market”) against (2) median price for San Diego resale homes from OFHEO.

If I knew how to post graphs, I’d post the graph. What my graph shows is a sharp 49% drop in annual sales volume (moving from a peak of 50K in ’89 to 26K in ’91), with annual sales volumes remaining at ~25K over ’91-’96. Prices peak in ’90, and reach their lowest point in ’94. Prices remain at this low level +/- 1% over ’94-’96. Only in ’97 do prices resume their march upward.

Conclusion — in the last San Diego real estate downturn, only after sales volume reduced from peak levels in ’89 to 50% of such in ’91, and remained at such low levels through ’95, did trough pricing appear over ’94-’96, a lag of 5-7 years from peak sales volume to trough pricing. Only after sales volume picked up for two consecutive years, over ’96-’97, did prices finally began moving up (+5% in ’97). So, if one is a “bottom fisher,” one may have one-to-two years of increasing sales volume as a signal that it’s time to reenter the market. And, based on the last downturn, given that peak sales volume occurred in the first half of ’04, things should get enticing, from a price perspective, in ’09.

What do you think?

[no_such_reality]

It’ll bottom when it bottoms.

If you attempt to time it, if it isn’t like the last downturn, you’ll miss it or hop in on the slide.

If you want to live in the house, find one you like, the price is right, the loan terms are right and the alternative living options make it right in expense and lifestyle.

If you want it as an investment, then run the ROI and when it hits your number, buy.

[bob007]

i think it is foolish to predict the bottom.

Telecom/wireless/broadband/Internet/cable boom powered the 1990s. Southern California was going to benefit sooner or later.

Unless you have something to power the economy you might not see anything to prop up prices in Southern California.

The only givens for So Cal economy
1. San Diego will be a major naval base in the Pacific given the riseof China.

2. LA will be a major port for Asia commerce.

3. lot of low skilled Mexican immigrants

4. Hollywood will be a major player in global entertainment business

[VCJIM]

I think trying to predict when we’re at the bottom is the right thing to do. It doesn’t have to be at the very bottom of the trough, but somewhere “bottomish” makes sense. As he wrote, the two year period in the mid-90s was pretty flat at the bottom, I see no reason that similar indicators won’t exist this time. Of course, I’m biased : ) I’m also trying to predict the bottom.

[powayseller]

jg, I just received my copy of Campbell’s book today, and just a couple chapters into the book, I am a devout fan. I can’t wait to finish it. So far, I think the guy is brilliant.

Anybody who says you can’t time the real estate market, needs to read Campbell’s book first. I don’t blame you for not believing my prior posts, claiming I could time the real estate market, because I have not given you the graphs yet to show my method will work. But Campbell has! I can’t believe I didn’t get his book last year…

jg, could you post your graph. Use the “add image” option below the Comment box. That takes you to a new screen, where you can give the name of your file.

I drew a graph to picture your description, but I am not sure how the price and sales change on the way up, so a more detailed description, or a graph, would be helpful to me.

On the way down, it sounds like prices lag sales by 2 years.

[bob007]

housing is a social need not a financial asset.

trying to predict the bottom is as silly as the folks trying to buy a house because they will be priced out of the market when prices were increasing.

if prices in san diego fall 30% and you can afford a home at the reduced price you should buy. if it falls another 20-30% you are going to have to suck it up.

[PD]

Trying to predict the bottom is not silly. We won’t know for sure when we are at the bottom but we should be able to make a good guess as to when we are near it. Buying in the “bottom range” is a smart thing to aim for.

[lewman]

I appreciate the post and I don’t think the important point here is to time the exact bottom. Rather, there are perhaps signs that one could use to see if we’re getting close to the bottom, or the worst decline is over, or are starting to emerge from the bottom, and therefore hopefully get a better price. Rich has a chart that plots income vs price, and I also think that would be a good set of numbers to look at. And volume, as suggested here, seems to be a good one too.

Looking forward to seeing the chart.

[Anonymous]

PS, we look forward to your thoughts after you read Campbell’s book.

Will do, tomorrow, post the graph of the data.

I will buy a particular property (1) only when the fundamentals make sense (i.e., reasonable relationship between imputed rent and price) and (2) may delay a purchase if it appears that the market is going to overcorrect and I can buy something comparable cheaper, later. Why would I pay more, sooner if I don’t have to and if my rental house is perfectly comfortable during the interim?

And, I will especially use both fundamentals and timing on a purchase of any rental properties (if my gold mining company mutual funds come through big time!).

[SD Realtor]

Very nice post. jg I think that anytime you can present raw data to a speculative subject then I feel you are adding levity and value. While I do agree with the premise that trying to find the exact bottom is tough, I think that your basics are very strong. Waiting for the total number of sales to level off makes sense to all of us. The unknown to all of us (or at least myself) is the lag time for pricing. As far as I know your post is the first one I have seen that attempts to use the hard data.

My non scientific method for purchasing the much needed larger home that my family is pressing me to buy will be as follows:

– wait for total sales to level off and stop decreasing

– wait for inventory to level off and stop increasing

– pray I can hold my family off until then

While I know I may be taking some pricing risk I think the downside will be seriously minimized if the first two factors are in place.

[CAwireman]

You apparently have access to data I don’t have.

Thanks much for the post. I agree with you and am asking my self the same question: When will the market bottom out
so that I don’t feel like I’m paying top dollar for a property (which I did before and don’t want to do again).

I’ll definitely look for the graph.

Thanks again.

[powayseller]

I admire Campbell for being one of the only people to write about selling real estate. You can find hundreds of books about buying RE, but how many are about selling it?

He writes about the cycles of real estate from his own experience, since he lived through 3 cycles himself. Campbell emphasises timing is more important thatn location.

Unfortunately, his index is not quite reliable, for it generates sell/buy signals at wrong times, and did not generate a buy signal for the current bubble until January 2003. He uses what he calls 5 Vital Signs: housing sales, building permits, loan defaults, foreclosures, and interest rates (weakest correlation).

He doesn’t use the metrics I discussed before, and doesn’t even mention them, so I don’t know if he tried them and found them useless or just didn’t have access to them.

He makes a convincing case of real estate’s cyclical nature, and by the time you finish the book, you realize that real estate cycles are as much a fact as night and day, winter and summer, rain and sun. You realize that people do follow the crowd, and that you make money by going against the crowd. Timing, not location, is the most important.

Campbell is certainly a trend setter in a field usually filled with rah-rah cheerleaders.

[sdrealtor]

While timing is very important (maybe most important) dont belittle the value of location. I have a client that unloaded a piece of RE in Summer 2004 which is down at least 10% if not more. He now owns something walking distance to the beach that is up at least 15% (if not 20%) since he bought it in the Summer of 2004. Very few people that bought in 2004 can claim that. He’d say location is pretty darn important also.

With that said, any idiot could have bought any piece of RE in 2000 and made a killing within 4 years. Even a lousy property with a lousy location. Those idiots make a pretty compelling case for timing.

[carlislematthew]

Unfortunately, his index is not quite reliable, for it generates sell/buy signals at wrong times, and did not generate a buy signal for the current bubble until January 2003.

Is this a national “buy signal” or is this for the San Diego market specifically? I ask because I bought a property in Seattle in Sep of 2003 and sold in Sep of 2005. Two years, and price of house went up about 30%. In-laws bought in Dec of 2003 and sold early this year. Their house went up about 40%, although they did spend about 5-10K in upgrades (windows, etc).

[Anonymous]

When I attempt to upload my Excel graph, I get the error message, “Uploaded file is not a valid image.” What to do?

[Author]

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