Requirements for a significant price decline

[werdna]

Mr. Toscano hints at the end of his latest Housing Data Rodeo:

“It seems that months of active inventory is still at a level that implies upward pressure on home prices… but if inventory keeps growing as it has been, and sales weaken further, that could change”

Does this mean if last month’s trend continues absolute prices will level off or perhaps decline modestly? What would cause a significant decline in absolute prices (10% or more)? Is a major slow down in the larger economy a pre-requisite?

[spdrun]

Seasonality. Higher interest rates. Phase of the moon. Investors losing interest and moving on to other things. 10% is nothing in the grand scheme of things.

[bearishgurl]

Here we go again.

There has to be too much on the market for it to happen in SD County. We are far from that happening here. Also, certain urban trendy areas and coastal areas in coastal CA counties are “immune” from large (and fast) price declines. SD would have to successfully be attacked with nuclear weapons for that to happen.

werdna, if you are a prospective buyer, why don’t you just find something in your price range, make an offer, negotiate a price you can live with and be done with it? Most of the all-cash investors have now lost interest in competing with you.

[bearishgurl]

Oh, and a “slow down” in the “larger economy” has nothing to do with property values the best areas of San Diego County or ANY CA coastal counties, for that matter, as most of those owners are “retired” and a good portion of those properties have long been “paid off.”

If you are a prospective buyer, your spare time would be better spent on the street, looking at houses that you can afford with a competent agent by your side helping you to make offers than speculating on a blog as to when the sky will fall, imho.

[werdna]

I’m not much of a astrologer, but if you believe the latest fed dot plot, interest rates are flat this year and increasing one percent next year.

http://money.cnn.com/interactive/news/economy/federal-reserve-dot-plot/index.html?iid=EL

[bearishgurl]

[quote=werdna]I’m not much of a astrologer, but if you believe the latest fed dot plot, interest rates are flat this year and increasing one percent next year.

http://money.cnn.com/interactive/news/economy/federal-reserve-dot-plot/index.html?iid=EL
[/quote]

That’s only relevant in areas where buyers usually borrow a LOT of money, typically outlying tracts where most borrowers use superconforming or “Jumbo” mortgage products for the bulk of their purchase money so they can be indebted for most of the rest of their lives with PITI plus HOA dues (for 1-3 assns) plus MR.

If you’re buying a garden variety, run-on-the-mill, $350K to $550K San Diego County house in an established area and using a std 20% (or more) downpayment, then who gives a rat’s a$$ if fixed interest rates are 5% in 2015? If you’re a prospective buyer, you just need to find ONE house you can afford and successfully purchase it, right?

[spdrun]

Also, certain urban trendy areas and coastal areas in coastal CA counties are “immune” from large (and fast) price declines. SD would have to successfully be attacked with nuclear weapons for that to happen.

Yet we had 2007-2009 and 2011-2012 as periods of decline without any nuclear weapons being involved. 10% decline is nothing, basically noise — no reason why it couldn’t happen.

[bearishgurl]

[quote=spdrun]

Also, certain urban trendy areas and coastal areas in coastal CA counties are “immune” from large (and fast) price declines. SD would have to successfully be attacked with nuclear weapons for that to happen.

Yet we had 2007-2009 and 2011-2012 as periods of decline without any nuclear weapons being involved.[/quote]

I don’t recall any declines in these areas. I recall a VERY few TOTALLY UNINHABITABLE beat-up foreclosure listings which would take at $200 – $300K to become habitable but don’t recall declines of any magnitude in these areas. Example: 92106 and southern 92107 (which were the communities most prone to attack :0).

[moneymaker]

Seems to me that inventory is growing with more price reductions than price increases. This tells me that the state of the real estate market is deflating. I think the bubble has been pricked! Of course Zillow says otherwise at least in my zip code. Perhaps Zillow is a lagging indicator like Case-Shiller.

[SK in CV]

[quote=bearishgurl]Oh, and a “slow down” in the “larger economy” has nothing to do with property values the best areas of San Diego County or ANY CA coastal counties, for that matter, as most of those owners are “retired” and a good portion of those properties have long been “paid off.”

[/quote]

Where are you talking about that “most of those owners are “retired” and a good portion of those properties have long been “paid off.””?

[CA renter]

[quote=bearishgurl][quote=spdrun]

Also, certain urban trendy areas and coastal areas in coastal CA counties are “immune” from large (and fast) price declines. SD would have to successfully be attacked with nuclear weapons for that to happen.

Yet we had 2007-2009 and 2011-2012 as periods of decline without any nuclear weapons being involved.[/quote]

I don’t recall any declines in these areas. I recall a VERY few TOTALLY UNINHABITABLE beat-up foreclosure listings which would take at $200 – $300K to become habitable but don’t recall declines of any magnitude in these areas. Example: 92106 and southern 92107 (which were the communities most prone to attack :0).[/quote]

In our area, which is considered a rather desirable area, prices fell by about 25-30%, on average from 2007-2011. Some individual houses fell by more, some less.

Back in the late 80s/early 90s bust, we were looking at properties on PCH in Malibu that had fallen in price by over 40%.

————-

So, what does it take for a decline of at least 10% in any housing market?

-an increase in supply while demand remains flat or fails to keep up with the increase in supply

-a decrease in demand while supply remains flat or fails to fall with the decreased demand

-money becomes more expensive (interest rates go up)

-other investments become more favorable relative to housing

-the lemmings realize that the top has been hit and they all try to cash out at the same time

-concurrent with the masses stampeding for the exits, investing in housing loses its cachet so demand can decline as dramatically as supply increases

-people think that prices are peaking, so those who still do want to buy will offer lower and lower prices

…

It doesn’t matter how many people own their homes free and clear. The prices are determined by the buyers and sellers who are actively in the market; prices are determined at the margin…always. Wanting a certain price, or insisting that one’s house is worth a certain price, doesn’t make it so.

[The-Shoveler]

A short term 10% drop could happen because it’s Thursday.

I don’t consider that a significant drop.

Get to 20% now were talking.
Don’t see that happening without a major economic disruption.

[Rich Toscano]

[quote=werdna]
Does this mean if last month’s trend continues absolute prices will level off or perhaps decline modestly? [/quote]

I think it’s reasonable to conclude that, yes. Prices are not that far from having leveled off as it is (by which I mean, they’ve been rising, but slowly). A flattening out is just not that different from what we are seeing now, and a modest decline (especially in the weak season) isn’t either, really.

But that’s IF last month’s trend continues… I don’t pretend to know whether that will happen or not.

[quote=werdna]
What would cause a significant decline in absolute prices (10% or more)? Is a major slow down in the larger economy a pre-requisite?[/quote]

An abrupt rise in rates could do it, for sure. We already have a real-world example of this happening. Prices were skyrocketing in the first half of 2013, then a 1% rate increase absolutely stopped that rise in its tracks. Prices flattened and even went a bit negative into the end of the year (see the redfin graph to the right for reference).

During the strong season this year, they’ve risen a bit (as rates have declined, no coincidence in my view) but nothing like last year.

Clearly, a sufficient rate rise could have a negative effect on pricing, as happened already.

Of course, a serious economic downturn could also push prices down. But I see the rate thing as the bigger risk. I think people are greatly underestimating how much artificially low rates have supported various aspects of the economy, including housing… which is all well and good until rates get back to normal. And as we saw last spring, despite widespread belief to the contrary, the Fed is not entirely in control of this process.

Went off on a bit of a tangent there I guess… to directly answer the question, no, I don’t think an economic downturn is a prerequisite. I believe that an abrupt normalization of rates could be sufficient to push down prices on its own.

[Rich Toscano]

FWIW, if home valuations (per http://piggington.com/shambling_towards_affordability_housing_valuations_surpass ) were to fall to their historical median over the course of a year, this would entail roughly a 10-15% decline in nominal prices (depending on what’s going on with incomes/rents at the time). That’s not a prediction; just putting it in perspective of current valuations.

[spdrun]

See 2010 for an example. $8000 homeowner tax credit was evaporated *POOF!*, prices hit the floor for two years.

A 20% rise in interest rates (not “1%”, but 20% to put it into perspective) would actually have MORE of an effect on monthly payments than a $8000 max credit for most houses in SD.

Where am I getting 20%? 4.2%/3.5% is about 1.20 or 120%.

[Author]

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