Slow decline or is a big chunk about to be ripped out?

[sdrealtor]

On a couple threads there has been some back and forth about what is coming in the next few months. Admitting I am in the long and painful decline camp with SD R and a few others. On the other side we have those that believe a large chunk of pricing (10% or more) is about to be taken out of the market quickly (LS2008, Rustico etc.). I’m not married to my opinion but beleive what I do based upon what I see in the markets I generally follow. Here’s my case:

Closed sales figures for the 1st 5 months of 2007 vs. prior years for Coastal SD from Point Loma through Carlsbad show that volume is not declining there.

2004-1489
2005-1432
2006-1218
2007-1241 (still more late reporters coming)

Here is the averages represented by these sales (i.e. average size, selling price and price/sq ft).

2004 2,684 sq ft $1,072,428 ($400/sq ft)
2005 2,624 sq ft $1,176,811 ($448/sq ft)
2006 2,703 sq ft $1,252,146 ($463/sq ft)
2007 2,696 sq ft $1,199,774 ($445/sq ft)

I only have inventory for a couple ZIP that I follow closely but it is way down vs. last year in these areas.

My problem stems from my inability to see how a pricing collapse would happen administratively. I just dont see people with equity dropping their acceptable prices form 850K to 750K or from 600K to 500K. I dont see the lenders doing it either with inventory levels where they are. I’m not saying it’s can’t happen, I would just like to here some theories as to how it could play out over the next 6 months so we can all kick them around.

[Bugs]

We’re patiently waiting for the end of the 3rd quarter this year, because by then the media will be harping on the effects of: the looming spike in ARM resets; the skyrocketing foreclosure rates; the reality that this has been a really horrible year for volumes and prices; and the normal downturn that occurs after the end of the summer.

I think the public’s recognition of all those factors is going to converge at about the same time. When that happens, if there’s any remaining doubt that now is NOT a great time to buy real estate, the tone of the reporting will be alarming enough to cause that tipping point that will push the market psychology firmly and decisively into negative territory. At that point the correction will take on a life of its own and nothing will stop that correction from playing out – not lowering interest rates, not bringing back free money, not even price reductions.

And don’t kid yourself about the builders not cutting pricing. There’s little difference between the builders’ positions in Riverside County and San Diego County, except that in SD County they actually have more margin between costs and sales prices.

[Bugs]

We’re patiently waiting for the end of the 3rd quarter this year, because by then the media will be harping on the effects of: the looming spike in ARM resets; the skyrocketing foreclosure rates; the reality that this has been a really horrible year for volumes and prices; and the normal downturn that occurs after the end of the summer.

I think the public’s recognition of all those factors is going to converge at about the same time. When that happens, if there’s any remaining doubt that now is NOT a great time to buy real estate, the tone of the reporting will be alarming enough to cause that tipping point that will push the market psychology firmly and decisively into negative territory. At that point the correction will take on a life of its own and nothing will stop that correction from playing out – not lowering interest rates, not bringing back free money, not even price reductions.

And don’t kid yourself about the builders not cutting pricing. There’s little difference between the builders’ positions in Riverside County and San Diego County, except that in SD County they actually have more margin between costs and sales prices.

[JWM in SD]

Hear, Hear. This is what I have been saying for over a year now. Once the MSM gets it’s teeth into the story, then they will not let it go…like a pit bull. It will make for too good a story and they won’t be able to ignore it anymore. It’s at that point that J6Pack will finally get it and start to really panic.

[JWM in SD]

Hear, Hear. This is what I have been saying for over a year now. Once the MSM gets it’s teeth into the story, then they will not let it go…like a pit bull. It will make for too good a story and they won’t be able to ignore it anymore. It’s at that point that J6Pack will finally get it and start to really panic.

[sdrealtor]

Bugs,
Sounds like The Perfect Storm of bad sales data, rising foreclosures and negative media heading into seasonal slowness. All a very realistic scenario. My difficulty, which SD R no doubt shares, is seeing homesellers actually radically adjust their expectations so quickly. People hate change and resist it at all costs. Would that perfect Storm be enough to get them to do so? I just cant see it.

As for the homebuilders, they would definitely be the first to jump ship!

[sdrealtor]

Bugs,
Sounds like The Perfect Storm of bad sales data, rising foreclosures and negative media heading into seasonal slowness. All a very realistic scenario. My difficulty, which SD R no doubt shares, is seeing homesellers actually radically adjust their expectations so quickly. People hate change and resist it at all costs. Would that perfect Storm be enough to get them to do so? I just cant see it.

As for the homebuilders, they would definitely be the first to jump ship!

[(former)FormerSanDiegan]

I believe that the seasonal strength remaining in some areas this Spring will be a faint memory by September.
I anticipate that for SD county the bulk of the price drops in the area-wide numbers (e.g. median and Case-Shiller) will take place in 2007 and 2008. Looking back to the last downturn, the largest price declines were a couple years after the peak. We are entering that period now in San Diego.

It will look like a sharp decline in terms of the numbers, but as many here have noted, the changes in median price in this cycle has lagged the changes in similar house comparisons. I view the next 2 years as the reports finally catching up.

[(former)FormerSanDiegan]

I believe that the seasonal strength remaining in some areas this Spring will be a faint memory by September.
I anticipate that for SD county the bulk of the price drops in the area-wide numbers (e.g. median and Case-Shiller) will take place in 2007 and 2008. Looking back to the last downturn, the largest price declines were a couple years after the peak. We are entering that period now in San Diego.

It will look like a sharp decline in terms of the numbers, but as many here have noted, the changes in median price in this cycle has lagged the changes in similar house comparisons. I view the next 2 years as the reports finally catching up.

[an]

As for the homebuilders, they would definitely be the first to jump ship!

The question then would be, if the homebuilders jump ship, how long can the private seller hold out. If a person can buy new @ 20% less than resale, why wouldn’t they? The seller who do not have to sell probably will not adjust price fast enough to make a sell. I think it’s the marginal sellers and builders who will affect the prices.

[an]

As for the homebuilders, they would definitely be the first to jump ship!

The question then would be, if the homebuilders jump ship, how long can the private seller hold out. If a person can buy new @ 20% less than resale, why wouldn’t they? The seller who do not have to sell probably will not adjust price fast enough to make a sell. I think it’s the marginal sellers and builders who will affect the prices.

[HereWeGo]

Coastal SD will likely remain solid for a while. The outlying areas are taking a beating, though. Worse yet, the definition of “outlying” appears to be expanding.

[HereWeGo]

Coastal SD will likely remain solid for a while. The outlying areas are taking a beating, though. Worse yet, the definition of “outlying” appears to be expanding.

[Troubled Loner]

Too many people will not have the luxury of waiting this cycle out, as homeowners did in the early nineties. We are going to see a growing number of banks and homeowners that will have to sell, adding more to inventory, forcing prices downward, and spooking out potential buyers.

My opinion is that we see an accelerated downturn in prices towards the end of this year, bottoming out (getting to rational fundamental prices) by the end of 2008, and then hanging out on that bottom for 5 or 6 years. I don’t think we will see todays prices for at least 10 years, unless wages and inflation rise significantly.

It hasn’t gotten bad yet, there are still people who think that homes are really worth what they’re selling for in SD. There are people who think now is a good time to buy before prices start going up again. The psychology hasn’t shifted yet, when it does, it will be ugly. How many of us remember what it was like in the early-mid 90’s? The last thing anyone wanted to do then was buy a home.

[Troubled Loner]

Too many people will not have the luxury of waiting this cycle out, as homeowners did in the early nineties. We are going to see a growing number of banks and homeowners that will have to sell, adding more to inventory, forcing prices downward, and spooking out potential buyers.

My opinion is that we see an accelerated downturn in prices towards the end of this year, bottoming out (getting to rational fundamental prices) by the end of 2008, and then hanging out on that bottom for 5 or 6 years. I don’t think we will see todays prices for at least 10 years, unless wages and inflation rise significantly.

It hasn’t gotten bad yet, there are still people who think that homes are really worth what they’re selling for in SD. There are people who think now is a good time to buy before prices start going up again. The psychology hasn’t shifted yet, when it does, it will be ugly. How many of us remember what it was like in the early-mid 90’s? The last thing anyone wanted to do then was buy a home.

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