Well, I’m pretty sick to my stomach!

[(former)FormerSanDiegan]

Other ways to get to a similar conclusion.

1. Use Rich’s 2005 analysis to show that prices were as high as double the last two nulls, so a 50% real correction is in order. Assume that a correction takes about 7 years with 3-5% inflation. Inflation takes (roughly, not compounding here for illustrative purposes) 21-35%. That leaves a nominal price correction of ~ 15-29%. I am guessing inflation in the 3.5-4% range, giving me a correction in the mid-20% range. If it happens faster it will go lower. If it takes longer it will not go as low.

2. Think like a first-time buyer, not an economist.
In 1996 at the last RE bottom I bought my first house in San Diego – Clairemont. The premium I paid for buying versus renting (after accounting for taxes) was roughly the equivalent of a car payment ($250 at that time, Mazda Sedan, not a BMW). At the time I put 5% down and didn’t consider the opportunity cost of the down payment. Using the same logic, compare monthly costs to purchase versus renting in a place like Clairemont.
The last time I ran these numbers, I came up with about a 25% nominal price decline from the peak. I assumed 3% annual increases in rent.

The problem with this one, is that it is impossible to agree on projected interest rates and rent rate increases, and even the impact of taxes. But it is good for determining at any given point in time, what the purchase/rent premium is, when you are fishing for the bottom.

3. Think like an investor.
Compute the cash flow as if you were a landlord. When the mix of rents, purchase prices, and mortgage rates converge to the point where you can get break-even cash flow on a SFR with 10% down in San Diego, that would be consistent with the last bottom.

If 2 of these three indicators tell me to buy, then that’s when I would call the bottom.

Disclosure – These methods are colored by my own experiences in Central and central coastal San Diego and may not apply to the areas that have been built out since the last bottom (or since about 1980 for that matter).

[NotCranky]

Thanks for your time Former..I am relatively new here so you wouldn’t know that I have had issues #2&#3 figured out for a couple of decades.I will look at those to see if the “affordibility” question is answered for me.I have come up with affordabilty at a lower point using these two methods.

Issue #1 is where the clarifications are helpful.I don’t think the down turn will be a slave to traditonal rates of appreciation for support. Let me put it stronger I believe the downturn will ignore completely traditional rates of appreciation for support.Just an opinion of course.

BTW I am happy either way although I feel there is more Justice in prices coming way down.In the self serving dept., near term I have equal opportunity either way in fact maybe more if prices stay higher and rates stay relatively low . I like to use my real estate license to help people make good investments so I kind of miss that. It’s a mixed bag.

[NotCranky]

Thanks for your time Former..I am relatively new here so you wouldn’t know that I have had issues #2&#3 figured out for a couple of decades.I will look at those to see if the “affordibility” question is answered for me.I have come up with affordabilty at a lower point using these two methods.

Issue #1 is where the clarifications are helpful.I don’t think the down turn will be a slave to traditonal rates of appreciation for support. Let me put it stronger I believe the downturn will ignore completely traditional rates of appreciation for support.Just an opinion of course.

BTW I am happy either way although I feel there is more Justice in prices coming way down.In the self serving dept., near term I have equal opportunity either way in fact maybe more if prices stay higher and rates stay relatively low . I like to use my real estate license to help people make good investments so I kind of miss that. It’s a mixed bag.

[(former)FormerSanDiegan]

Rustico –
The traditional rates of appreciation as support are more a proxy for inflation and/or wage growth than anything else, especially at 4%. The “normal” rate of appreciation line of thinking was spurred by the original post.

Regardless of if you use that line of thinking, macro-economic affordability metrics, or micro-economic affordability metrics (#2 and #3) I think the answers are all quite similar.
Personally I like the #2 and #3 scenarios, since this is how (reasonable) potential buyers think.

In the end the market doesn’t care about justice in pricing, or historical precedent, it will be affordability that determines the market bottom.

[(former)FormerSanDiegan]

Rustico –
The traditional rates of appreciation as support are more a proxy for inflation and/or wage growth than anything else, especially at 4%. The “normal” rate of appreciation line of thinking was spurred by the original post.

Regardless of if you use that line of thinking, macro-economic affordability metrics, or micro-economic affordability metrics (#2 and #3) I think the answers are all quite similar.
Personally I like the #2 and #3 scenarios, since this is how (reasonable) potential buyers think.

In the end the market doesn’t care about justice in pricing, or historical precedent, it will be affordability that determines the market bottom.

[NotCranky]

“In the end the market doesn’t care about justice in pricing, or historical precedent, it will be affordability that determines the market bottom.”

Absolutely agreed. I was merely expressing a sentiment. Its based on a wish for average younger people and conservative lower paid working class to get a fair shot…Yeah nothings fair and they will be alright.

[NotCranky]

“In the end the market doesn’t care about justice in pricing, or historical precedent, it will be affordability that determines the market bottom.”

Absolutely agreed. I was merely expressing a sentiment. Its based on a wish for average younger people and conservative lower paid working class to get a fair shot…Yeah nothings fair and they will be alright.

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