Why I predict a 55% nominal price drop in North County

[powayseller]

This post is in response to DaCounselor and appraiser Steve Beebo saying this won’t be as bad as everyone thinks. I say it will be much much much much worse.

Downturns and bubble busts are always worse than anybody expects. That’s why I’m betting on a 50% price drop. We’ve already lost 10-15% on North County homes.

According to Jim Klinge at bubbleinfo.com, North County homes are back at 2004 pricing.

In the last cycle, the highest percentage decreases came in years 3-5 (per Calculated Risk’s post yesterday)so the highest drops are yet to come.

If we are already down 10% in North County in Year 1, and another 10% in Year 2, and 20% in years 3-5, that is 80% in 5 years. Nominal drop.

This time, the intensity will be greater due to exotic loans and our economy’s reliance on construction and real estate.

50% might be too optimistic, while 80% seems a stretch. Maybe a 55% nominal drop will do it.

[barnaby33]

I actually had a constructive thought for once. I have said alot of times that RE is just the most interesting facet of the global credit glut. In times past when one part of our country was in recession people would move to another part. That is excepting the great depression, the last worldwide recession, people move to escape the effects of recession to areas that are more economically stable.

If this phenomenon is global, then the reaction will be global. People running from CA to say Amarillo will be no better off, despite having taken a chunk of equity with them. Then still be in a recession and most likely unable to get a job. How many people actually made enough on their house to buy another house free and clear, and stuck money away for a rainy day.

That makes the coming fall seem all the worse, because in the 90’s people were cutting out of SD and going other places. This time where will they run?

Random 3rd party: I do say ol chap, you sound just a tad to apocalyptic, can’t you lighten up?
Me: Why no sir. Ever since I lost my job and my insurance run out, I can’t afford the psychotropic meds that keep me stable, I’m forced to read piggington instead.
Random 3rd party: Dear lord! You mean to say that piggington is a substitute for proper medication, what is this world coming to?
Me: Dunno, but let me chew on your leg for a bit, while I think about it!

Josh

[powayseller]

Josh, I was thinking the same thing. When your neighbor loses his construction job or lending job or real estate attorney job, where will she/he go? This housing market bust is nationwide, and I am glad that people here are finally seeing it. SD is the worst, but it is natinowide, it is global.

[FormerOwner]

I agree; there’s a global housing price bubble and credit bubble. Monthly payments on all that debt are NOT going to be made – people won’t have enough income/savings to make the payments. That’s why I’ve started trying to learn more about the Federal Reserve and the global financial system. I want to know how governments will respond and what the consequences will be.

I also agree that some areas are much more overpriced than others and that it makes sense to stay in a stable job (if you have one), sell your house and rent nearby. To me, it’s clear that housing will crash and that we’ll enter a pretty serious recession. What’s not clear is what will happen to the value of the dollar, inflation, etc. I think the entire financial system is going to be shaken but I’m not sure yet how to best position myself except to keep my stable job and put my money in short-term CD’s and (possibly) commodities. I wonder if the recession could turn into a depression. I really can’t think of one part of the economy or one area of the country that will be safe from this downturn, except maybe healthcare and commodities – things we all need to live our lives.

[powayseller]

Even healthcare is outsourced. I read a story last week, that doctors/hospitals in India and other places are putting together travel packages for elective surgeries: heart bypass, plastic surgery, and other very expensive procedures. These hospitals are the best in the world. You can get a quadruple b ypass in India for 1/10 or less of the US price.

So only emergency and office visit stuff is safe. More people will go to India and china and Mexico for dental work and elecetive surgery.

What about euros, oil, water (shrinking supply of clean water while demand keeps rising), precious metals? Diversify, since it is not possible to know which sector is safe.

Eurobank is FDIC insured, and you can buy euros and toher currencies.

[FormerOwner]

I’m going to be giving some serious thoughts to diversifying into some of the things you’ve mentioned over the next couple of months. Basically, they’re all ways to preserve your net worth and maybe do a little better than inflation. I think that’s better than most people will end up doing when it’s all said and done. Of course, some commodities may skyrocket and make you a lot of profit but it’s a little hard to predict. Water does sound intrigueing.

I just heard on the news that people are stealing flower pot urns from cemetaries (90-100 in one cemetary) for the value of the metal they’re made of. How low can you go?

[DaCounselor]

There are certainly an awful lot of factors that may have an impact on what happens to the valuation of SD real estate in the future. I really don’t know what precise path interest rates will take. I’m not sure how the SD economy will perform or how everyone’s personal financial situation will unfold in the coming years. I don’t know if Hezbolloh is going to blow up the Convention Center (but I hope not!). What I do know is that for the SD real estate market to implode 50-80% we will have to have years and years of vast amounts of sellers (not fishers, but those who really must sell) and a relatively miniscule number of buyers. Unlike 1990-95, I think the economy is strong enough to support buyers, who will in turn support pricing well before a 50-80% deflation. Just a guess, like what is set forth by everyone else on this forum.

[FormerOwner]

DC,

I would have to say that I don’t think the economy is ACTUALLY very strong, either locally or nationally and that there aren’t enough people that will be willing or able to buy real estate at anywhere near current prices. Real estate values are set by comps so, in any given neighborhood, if most of the sales are happening at lower values, pretty soon ALL of the sales will happen at lower values. The market tends to keep going in the direction it’s going both up (ad it did) and down (as I think it’s just started to do). Rents would have to more than double to equal the cost of owning – that’s not going to happen due to the lack of high paying jobs.

[sdduuuude]

Who says we are already down 10% in north county?
What data supports this?

[Bugs]

Rich,

It would probably be pretty interesting to keep track of any correction using adjusted dollars. That way we can keep track of how much of the correction is from price changes and how much due to inflation.

What bothers me about devaluating the dollar to avoid the nominal price correction is that everyone ends up paying for the mistakes of the foolish/greedy, and encourages and enables them to do it again. They made their mistakes, why should the rest of us have to pay for it?

[powayseller]

sduude, realtor Jim Klinge on bubbleinfo.com. Check out his story on how to price your home Your Value Minus 20% , shows we are down 20% in North County.

Rich, how many asset bubbles can the Fed blow before the dollar becomes really devalued? How can they lower rates with commodity prices on a multi-year run according to Jim Rogers? Ben Bernanke slipped at his testimony the other day, and I caught it. He said, “Inflation is going to moderate over the NEXT COUPLE YEARS”. He realizes it’s a long term problem.

He was blasted by questions from senators concerned about rising interest rates and he defended his position, saying he had to stop inflation now, because if he didn’t, he would have to raise rates much more later.

A recession is necessary to cleanse the excesses. Circumventing it will cause problems elsewhere in the economy.

So maybe we won’t get the 80% drop, but if we don’t, we need to be careful what other asset bubbles or excesses are created in an attempt to avoid the true correction.

Again, to get a big drop, we don’t need that many desperate sellers. 30,000 annual sales set the price for all 1 million homes in San Diego. And only a few of those set the price for all the listings.

Again, SD North County is down 20%, and in the last correction, Calculated Risk shows the largest drops came in years 3-5 (20% each of those years).

Rich, why didn’t the Fed stop the bubble pop in the 90’s housing bust? We had S&Ls that had to be saved. They let housing drop for 5 years. Why won’t they let it go down for 5% this time?

The Fed allowed the stock market to lose $ 7 trillion in value.

They will let the housing market go too. Why not?

[FormerOwner]

So what will the financial picture look like if the government runs the printing presses 24×7, the dollar loses value, and we have high inflation (due to each dollar having a lower value since there are more dollars)?

I think it will lead to stagflation – wages won’t increase much due to global competition, asset prices may stay the same (in nominal dollars) and commodity prices will likely hyperinflate. Am I right about this? Is that why gold prices are so high? A lot of people are expecting hyperinflation.

By the way, I read somewhere that the govt has stopped publishing some money supply (M3) figures. It makes you wonder WHY?

[sdduuuude]

I must say, not only am I underwhelmed by your analysis, I am truly apalled at your misuse of data. In fact, it isn’t really data at all.

You have stated someone’s predictions as fact, and didn’t even provide the source in your original post. In fact, the guy never really says “we are down 10% in the first year.” anywhere. His prediction about the future of the market is a guess, not a data point, and they may not come true for another year, which further throws off your “analysis” which assumes prices have been coming down for a year.

Then, you based your guess on his guess by filling in numbers to match what you already believe, and then reduced his 20% number to 10%. A total, complete mess.

You also assume prices have been dropping for two years ?!?!?! Where does that one come from?

The only thing price-related in that article which is close to a fact is this comment “It’s been noted that in North SD County, prices have been flat since the middle of 2004”

Huh. I’m missing the “down 10%” part in that one.

The closest thing I have seen to facts about the North County prices is the Case-Schiller SFR Home price chart here (even though it is county wide):
Housing Market.

This shows prices are down about 2% from a peak that occurred in Nov, not a year ago. Not two years ago.

It isn’t a guess, it is data. So, maybe you should start your analysis over with 2% or 3% down in the first year and see what happens.

Your analysis is no more robust than those who have been saying “housing never goes down.” Please don’t ruin this site, which was founded on the use of good, solid data by playing off other people’s opinions as fact, and rewording their numbers to match yours.

If you have some facts on the true price reductions in North County, lets see it. Otherwise, your post is worthless.

[Anonymous]

Well said Rich. Thanks for being the voice of reason, so far I’ve agreed with your analysis 100%.

-re analyst

[powayseller]

sduude, I have posted my data on this forum before, multiple times, so those who like to skim threads, don’t expect me to rewrite it. You are free to search for it. Why are you so angry? Do you own a house?

If you can’t find my posts, check Jim Klinge and Bob Casagrand’s sites; they write clearly that prices stopped rising in 2004, that we are back to 2004 prices in many neighborhoods, and that to me shows a 10% decline. If not, what would you call a reversion to 2004 prices? That part was a guess, so you’d have to correct me: if prices are back to 2004 levels in certain neighborhoods, how much of a drop is that?

The median might show we are down 2%, but the median is a lagging indicator. Lagging by 2 years I am finding out. The Case-Shiller index you present starts in 2004, so it doesn’t give us much historical data. If you look at the price of each individual home, it is back to 2004 prices in many cases. It is the shift in distribution of homes sold that is causing the median to rise. I’ve explained this many times.

So each individual home is worth most likely the 2004 value. I still predict a 50% minimum nominal drop, and I would be wrong if the Fed lowers interest rates. But who will buy the new mortgages at at time when investors are scared to death of real estate? I suspect in 5 years the banks will want 20% down and proof of income, which will eliminate the possiblity of prices higher than 7 x wages. We have a long way to drop, and I stand by my 50% drop.

I can see you are angry; probably you have a lot to lose if my prediction comes true. But please try to keep your temper in check. I’m just presenting the data and my vision for the future, not causing this bubble to be created.

In all of history, every asset bubble reverted to its prebubble price. Every single one. Instead of yelling at me, prepare yourself. Sell your house and rent.

[Author]

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