San Diego Housing Market = Dead Zone, 67% overpriced !!!

[seniormoment]

WOW!

Check this out:

http://money.cnn.com/2006/05/03/news/economy/realestateguide_fortune/index.htm

67% overpriced?

Ok, let’s be reasonable, say, drop 20-27% to make a
40% overpriced, per Fortune’s category, San Diego is still in the Danger Zone.

I don’t think 50% drop from here is feasible, but a 25% drop from today’s asking price of $800k = $600k, it looks achievable in 2 year? So, why rush to buy a
piece of property today?

What is your takes?

[4plexowner]

I’ve given a lot of thought to the topic “how low will prices go”.

I think we have to be more specific about housing type and area of town before we can start picking numbers for a decline.

One of the most important questions, IMO, is “what will an entry level house cost at the bottom?”

Will the 1100 SQFT 3/1 house in Clairemont be selling for $350K (27% decline from 490K) or will it be more like $225K (54% decline) or 161K (67%)?

Once we decide what the entry level house might cost we can then talk about the upper end of the market.

Personally, I’m expecting a 40-60% decline with the Clairemont 3/1 going for about $225K.

If I can buy entry level for 225K I’m not likely to pay 600K for today’s 800K house.

[superfly19]

What will the price be for homes to get them back to the historical average in San Diego of 9 times earnings?

Wikipedia estimates 2005 household incomes to be around $64k, so if you were willing to say that the Clairemont demographics of people moving into starter homes have an average household income of around $40k, then the starter house in that area would revert to roughly $360K, so that matches your first estimate of nearly a 27% drop.

The other question is how long will it take them to get there?

[jawbone_shack]

Ha Ha! I ran across that same article and used it to point out the excessive greed and corruption in this market, in the forum topic “Why Not TODAY?”. The post made a few people a little grumpy, but realtors and sellers/homeowners really prefer to ignore these types of statistics…

[powayseller]

The Mackey sales team analysis writes that the greatest price drops are in these vulnerable products: land, multifamily, condos, areas w/ high non-owner occupancy, luxury/high end, large sq footage homes.

Chris from Mackey/Prudential is the guy to go to. He helps investors 1031 out of CA properties (bec. they are going to depreciate 25%), and move to another state, where prices are not going to drop as much. In 2010, or when CA prices have hit bottom, they can move back to CA.

[4plexowner]

History of Bubbles

Another way to consider how far prices will retrace is to look at other financial bubbles in history and what has happened to them. {If you choose to deny history and that San Diego real estate is currently in a bubble, you can stop reading now.}

ALL financial bubbles have been fully retraced. Not some bubbles, not most bubbles – ALL bubbles. Pick your bubble and it was fully retraced: Tulip Mania in Holland; Mississippi Company in France; South Sea Company in England; Florida real estate in the 1920’s; US stocks in 1929; etc, etc, etc.

That tells me that the San Diego real estate bubble will be fully retraced as well.

So the next question becomes “when did the bubble start in San Diego?”

Since real estate historically rises at the same rate as inflation, I would maintain that the bubble started when housing prices began to increase faster than inflation. I believe this was in the 1997 – 1998 timeframe. (Perhaps Rich can chime in with a more exact date.)

If I go to http://www.zillow.com and pick a typical house in Clairemont (92111), the 10 year chart of prices shows me that it was 2000 or 2001 before prices rose above 200K.

Based on my bubble-retracement analysis, I might expect that the 3/1 in Clairemont would retrace to its 1997/98 price of 170-180K.

I’m not expecting that big a drop. I will stick with my 225k target.

[Anonymous]

I would say 15% to 20% +- above the 1997/98 prices.

[sdrealtor]

The Mackey sales team appears to be yet another team of one. At least he’s actually sold a few properties in his 3 year career, a total of 7 as best as I can tell. PS it amazes me that you keep falling for these hungry inexperienced agents that slip you a business card.

[an]

Base on a 3% appreciation a year, i.e. inflation, the bottom I would think should be between 30-35% above 1997-98 price. So your 225k target is very reasonable and I think that’s within 10% of the absolute bottom. But all this is just guess work. Only time will tell how this whole thing will play out. Like the graph Rich had w/ price/income ratio. It will reach equilibrium some day.

[sdduuuude]

But if inflation is raging, wouldn’t wages come up significantly, assuming the deflation takes 5 to 7 years?

If you base your “reverting back to 1999” on the home-price-to income ratio and not just home price, you’d have to adjust that for inflationary effects on wages, which would suggest less of a % drop.

[an]

If inflation is raging, interest rates would also be sky high. If rates is sky high, housing price has to be lower to keep payment the same. So it doesn’t really matter I don’t think. Also, that’s the chances of our income rising drastically anytime soon? With the pressure from out sourcing, we’d be lucky to have a steady 3-4% raise.

[powayseller]

The factor of 9 is an average for the entire city, and includes move-up buyers with tons of equity, and people who’ve lived in a house a long time and accumulated equity. So we can’t use the 9 multiple for figuring out how much people will borrow for a mortgage. That figure is much lower.

The loan amount used to be 3-3.5 x your income. By that analysis, the $40K income would afford a $120-$150K house. That would be the viable price of a starter house in San Diego.

Rich’s charts use per capita income, not household income. If household income is $64K in SD, then per capita income is ?

[powayseller]

Inflation has been raging everywhere, except in wages, as I keep noting :). That’s why people are stretched so thin. Employers are actually paying more for each employee, but are sliding it toward exponentially rising health insurance and other costs, and thus not able to put it in wages. Corporations are using their cash for share buybacks and mergers, instead of paying employees. Wages will be flat as long as we have low-wage competition in underdeveloped countries. Sorry, wages won’t save this gig!

[powayseller]

What you’ll find on these forums is 2 major groups of people: housing bulls (realtors, homeowners, home investors) and housing bears (renters by choice or necessity). Sometimes exchanges get a little heated between between these groups. I found the best tactic is ignoring posts which are unprofessional. I call it the “tone of a gentleman” litmus test, and only respond to posts which pass this test.

[4plexowner]

Monetary debasement (also referred to as inflation), makes all financial analysis very difficult.

When we assume a constant-value US dollar we are kidding ourselves but trying to account for a steadily declining dollar is very complicated.

And besides that, we don’t even know the rate at which the dollar is being debased because the US Federal Reserve stopped publishing the M-3 money aggregates in March of this year.

Inflation adjusted wages have been declining steadily for several years now. I don’t see anything on the horizon to change this trend.

I would modify your statement “If inflation is raging, interest rates would also be sky high.” to “If inflation is raging, interest rates SHOULD also be sky high.”

Paul Volker (Fed Chairman from 1979-87) raised interest rates into the 20% range to control the inflation raging at the time.

Raising interest rates enough to contain inflation today would cause the housing bubble to collapse worldwide.

So, take your pick, do you continue printing the US dollar and let inflation rage (while driving the value of the dollar to zero) or do you reign in the monetary debasement and raise interest rates to where they should be (in an attempt to save the dollar) and then watch the world’s economy collapse? Not a great choice is it? Coming soon to a theatre near you …

[Author]

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