The media barrage begins….

[sdrealtor]

In tommorrow’s Voice of SD is a report about condos falling $20K.

While the news that home prices finally went negative year-on-year last month grabbed plenty of attention this week, a new report shows that the price dip has been even more exaggerated for condos and townhomes.

When compared with June 2005, median prices dropped $20,000 in the county last month for single-family attached homes, a category that includes condos, condo-conversions and townhomes. That’s a 5.2 percent drop over the year. The prices also decreased by 2.4 percent from May to June and 5.7 percent from the beginning of the year, according to HomeDex, a resource compiled by Dr. Robert Brown, professor of economics at California State University, San Marcos.

Do you think this is going to make it easier or tougher to get my two unsold listngs in escrow? Let the fun begin…..

[carlislematthew]

How does the price of condos relate to the price of houses? If condos are down x%, then does this also drag the price of entry level houses down y%, which in turn also has an effect on the more expensive houses?

I’m wondering if the condo fallout might have a bigger impact than just condos and that the pain may bleed into the SFR market, adding to the general decline due to overall economic factors.

[powayseller]

I think any listings you have or will get, will sell, as long as they are priced right. We still have lots of buyers out there. The lower end has to take a much bigger mark=down than the higher end though. You seem to deal more with the higher end homes, so you are okay for now.

Based on the discussions here, the low end if off a lot, and must be priced 30% below last summer. The higher end maybe is priced 10% below last summer. Any comments?

[Bugs]

Off-topic comment here.

One thing I noticed over the years about people and real estate is that they seem to lose perspective about the money. It’s almost as if they see the dollars involved in RE as being equivalent to Monopoly money or some currency other than the same greenbacks we use to buy our groceries.

Many people are incapable of saving $20,000, yet we visualize a $20k loss on a condo as no big deal. I especially see this trivialization of a dollar among appraisers, who often get into treating the values they conclude to in an appraisal as if it were some abstract number with no basis in reality.

Assuming this trend plays out these losses we’re seeing right now will continue to accrue. Once we start reaching and surpassing a 25% decline scenario there will be some people who will be looking for a 15th floor window to jump out of, because their lives will be ruined. The party leading up to this point was a lot of fun but the hangover is going to be a killer. Literally.

[privatebanker]

Bugs,

I think you are absolutely right. I’ve always been amazed how people have thrown caution to the wind with regards to RE dollars.

To comment on this post, the downtown situation is going to get really bad. Just look at all the cranes, this will definitely be a sign of the times. I’ve been approached by several builders over the past year proposing new developments downtown and the Hillcrest area for financing. I’ve told them no because my bank has stopped these deals well over a year ago and we view these projects as sure money losers. I’ve noticed some buildings reverting back to full blown apartment rentals. People let me tell you, this is going to get ugly, ugly, ugly!

[powayseller]

To hear this kind of talk from Bugs and Privatebanker sends shivers up my spine.

Bugs, I once read a book about what you describe. People almost have different pockets for money. They spend an hour a week clipping coupons, but then think nothing of buying a new car, or going to the dealer for the car vs private party. One of the most interesting investing ideas of recent times is behavioral finance. It explains why the masses can never beat the market.

Privatebanker, I copied your post to my friend who bought a condo downtown. So far, they only broke ground, and I think he can still get out. But he may be like our friend murray, deeply ingrained in his belief that people will pay anything to live in San Diego, in this case downtown San Diego. None of my data I’ve sent him since December 2005 has made an impact on him. He remains ingrained in his real estate bull beliefs. This is a guy who lived here during the 90’s downturn.

[Peace]

Bugs, any unrealized $$$ above what was paid is Monopoly money. The only REAL money is the lost $$$ when the property is sold for less than what was paid for it, or the cash the seller walks out with at closing. That’s how I have always looked at it.

[powayseller]

I think Bugs is talking about the people listing below their mortgage price.

I wanted to add one more thing to Bugs’ Jumping out the window comment. The suicide and alcoholism rates will surely jump. Bankruptcy and foreclosure bring people to the ends of their emotional and spiritual rope, and they will either increase church attendance, or drown in the bottle/suicide. Some will just pull themselves together and go on. We’re talking about 50,000 – 100,000 San Diegans who will face foreclosure and bankruptcy in the next 5 years. Millions nationwide. Many will be people who bought their homes in the 1970’s or 1980s, and refinanced to take out cash, thinking it was a new era, and they could keep doing this indefinitely.

[Doofrat]

carlislematthew,

Obviously both are affected by the market, but I don’t think one affects the other since the buyers of each have different reasons for buying.

I see a SFR as desireable to a couple that has kids. If they feel that they are going to be priced out, they will jump into the market thinking that they need space for their family and they don’t want to lose the chance at getting their “nest”. I think they will hold on longer for the kids than someone who has a condo.

A condo is different because in San Diego, they are the lower priced alternative. I think this has led to alot of speculators buying them, but it also has led to alot of people buying these because it’s the only thing they qualify for, and this has caused the “price/what you get” ratio in condos to soar.

When the market sours, condos are going to get hit first and the hardest because of this, but I don’t think it’ll directly affect the SFR market, rather they’ll both be affected by the market on their own.

[Bugs]

The operative phrase in your post relating to condos is that they are “the lower priced alternative”. I agree that condos will get hurt first and hardest, but that doesn’t mean it’s a completely separate market of it’s own and the houses won’t follow suit in order to compete with this alternative.

Water seeks its own level. I think the downtown condos are a fantastic bargain – just not at these prices or anything close to them. If they are actually priced to be the reasonable alternative more people will buy.

Letsee. Market rents for a 2bd condo downtown are in the $2,000 range. Add in a 25% ownership premium to pay for the right to enjoy the tax break and the possibility of eventual profit on resale and we can justify paying up to $2,500/month to cover the mortgage, taxes, HOA dues and other expenses. As a housing expense this is a reasonable payment for a $100,000 household income or a lower household income who is bringing some equity to the table to reduce the mortgage.

Okay, working backward through iteration and assuming a cheap $300/month HOA fee, $100 in average maintenance/reserves expenses; $300/month for property taxes, that leaves about $1,800/month for the mortgage payment. At a 6% fixed rate mortgage that would service a $300,000 loan on a $330,000 purchase, because unlike many recent buyers, our prudent buyer actually has a 10% down payment and can pay their own closing costs. Obviously, the $330,000 purchase price is about 45% less than our current average listing price of $595,000 for 2bd condos of 1200 SqFt or less.

At this price range, every time the interest rate on the loan increases by 1/2% the amount of the mortgage financed by the $1800 mortgage payment gets reduced by $15,000. Presumably that reduction will be translated directly to the sales price.

So yeah, at $325k or so, a lot of our downtown condo renters probably would consider buying their rental unit to be a no-brainer – assuming they weren’t concerned about the prices continuing downward. AND assuming that rents don’t decline.

[Doofrat]

I said:

When the market sours, condos are going to get hit first and the hardest because of this, but I don’t think it’ll directly affect the SFR market, rather they’ll both be affected by the market on their own.

What I should have said was I don’t think the condo downturn will directly affect the SFR market.

I think they’ll both get hit, but I don’t think that condos going down in price will affect SFR prices directly.

[SD Realtor]

Condos are taking a beating and yes they have been affected first and will continue to suffer.
–

sdrealtor –

Not sure what you have seen but I have seen much more condo depreciation then SFR. Once again it is very dependent on the neighborhood and quality of condo… UTC/UC has been absolutely pounded, take a look at places like Lucera… 2/2’s there are below 2004 pricing when the actual conversion happened. San Carlos condos have been similarly whacked as Mission Valley has been.

The only thing worse would be the downtown condo market.

[powayseller]

I sent ocrenter’s Lies Lies and More Lies link to Roger Showley at the U-T, and here is his response.

As you can imagine, we leave a lot of the realtors’ comments on the cutting room floor and balance their assertions with those of the less rose-colored variety. We do ask them tough questions and most of the time, they don’t know a thing. They know marketing but not necessarily economics. And when they say something is certain and forever, we try to counter with comments from somebody else who doesn’t necessarily agree. So don’t give us a bad time and do give us some credit for critical thinking.
– roger

[novice1027]

Interesting comments about the suicide rate. I work in healthcare, and I have notice a huge increase in the suicide attempts, just recently. Now this is just my non-scientific observation, but it is something I have commented on several times in the last few weeks. Of course I’m not typically privy to the circumstances around the attempt, so I don’t know the precipitaing factors.
Typically, we see a large increase in attempts around the holidays, but it is VERY unusual during the summertime. I have wondered to myself if there is a correlation.
It will be interesting to see.

[powayseller]

Can you find out the precipitating factors? Or ask your colleagues to what they attribute the rise, so we can get a general idea without knowing any one person’s personal business.

[Author]

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