Liberty Station

[PerryChase]

I’m only an observer of San Diego real estate. Bugs’ postings reflect my recollection of the SD market since the late 1980s.

[(former)FormerSanDiegan]

Actually SD prices in 1998 were still below the long-term trend. They were 20% above their absolute low in 1995.
So, let’s compare from the prior low. Prices in 1998 were 20% above the prior low. If we return to 1998 prices in 2008, that would imply a 20% return over 10 years for an equivalent compounded annual rate of return of 1.84%.

Assume about 3.25 to 3.5% inflation, that’s negative 1.5% or so compared to inflation … COMPOUNDED ANNUALLLY.
Over 10-13 years, that would be about 15-20% cumulative negative return relative to inflation.

So, when you say that prices will return to 1998 levels, what you are saying is that housing prices will deflate by 15% in real terms BELOW the prices observed in 1995 at the previous cycle bottom .

[PerryChase]

Actually, housing moving at or below inflation makes perfect economic sense to me. Remember that the structures depreciate and have to be maintained and eventually rebuilt. Only the land should appreciate.

[4plexowner]

I’ve stopped trying to account for inflation in my analysis. There are too many variables and my poor brain starts to overheat.

If we are going to account for inflation do we use the 3% lie that the government wants us to believe or do we use 9-10% which is closer to reality?

If housing only drops 15% but bread goes to $12 a loaf what does that mean?

If we are dealing with the US dollar how do we account for the introduction of the Amero when it happens? (Google on ‘Amero’ if you don’t know what it is)

Instead of trying to figure out some possible price in US dollars I prefer to think in terms of trends as Bugs and PerryChase are saying.

Two trends are applicable to real estate: sales price to earned income and sales price to rental income. San Diego real estate is several orders of magnitude away from the trend lines in both of these areas.

IMO, reversion-to-the-mean is one of the few absolutes in investing.

Bottom line is that we are a long way from a bottom.

[Anonymous]

PS, I refer you to my earlier post in which I laid out my methodology for San Diego price-to-rent:

http://piggington.com/has_price_to_annualized_rent_ever_been_normal_in_san_diego

My findings: "The price-to-annualized rent ratio reached its trough in 1995, at 9.7. As of June '06, the ratio stands at 20.3. So, for substantial periods of time ('88-'00) in recent history, San Diego's price-to-annualized rent ratio has been reasonable (10-12). I expect prices to return to a reasonable/defensible multiple of rent (8-12X) during the upcoming recession/depression."

To arrive at 13, maybe you're using public school/liberal/progressive arithmetic.

[powayseller]

jg, the problem is figuring out which median and which rent price to use. I used average rent, which is $2066 today, and you used average rent of 3 bedroom and 4 bedroom residences, coming up with $2322 in rent. Are you assuming the median home is 3.5 bedrooms? I think either assumption could be made, although for my purposes, the average rent is better. I want to show the fundamentals that are supported by our wages, by the average rent, not what some higher-end renters are paying. I want to capture the average renter, the average wage earner.

[(former)FormerSanDiegan]

4plex – The inflation in my example is largely already in the books. I am comparing 1995 to 2008. You only have to guess a couple years in that scenario. Not really stretching that far into the future.

[(former)FormerSanDiegan]

Actually, housing moving at or below inflation makes perfect economic sense to me. Remember that the structures depreciate and have to be maintained and eventually rebuilt. Only the land should appreciate.

Perry – OK, so where do I find a house without the land ? Used mobile homes are the only example I can come up with. So, yes I agree with you that used mobile homes should depreciate. Otherwise, I don’t buy that houses should deflate from trough-to-trough or peak-to-peak in RE cycles.

I have to say that the likelihood of hitting 1998 prices, which correspond to a 15% real decline from previous null (1995 prices) is less likely than the NAR predictions of being correct.

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