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Sounds just like “The GIANT Tent Sale at Qualcom Stadium!!!” ads that come on for the car dealers every few months.

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No areas were untouched. The properties in Rancho Santa Fe and La Jolla were still among the most desirable in the county but they still declined some. Just not nearly as much as the less desirable market segments.

In general, the areas that will probably get hurt the worst will be those that are farthest from meaningful employment. “Farthest” in this case being measured by commute times as well as distance. Unlike some people here, I don’t think Carmel Valley is at nearly as much risk as parts of East Carlsbad and San Elijo, ’cause of how easy it is to get to Hwy-56 and points south. Depending on traffic you can make it into Sorrento Valley in 10 minutes and Downtown in 25 minutes. Valley Center and Ramona are vulnerable because it takes 30 minutes just to get to a freeway.

The lower end should be more stable than everything above it except for the extreme upper end where buyers are coming in from out of town with cash. I say “should be” but I note the disproportionate slowdon in the lower end at these prices, possibly because of buyer exhaustion.

I would say that older homes will do worse than newer homes in the same price ranges, but the older homes are generally located in areas that were developed first because they were more proximate to employment.

What’s going to be interesting about the new homes is that the developers have been using the same pricing and sales tactics as car dealers – I think it’s possible that some of those buyers may end up taking a “new car discount” after having driven their homes around for a couple years. The base price of a new home is for a model nobody wants, and the retail markup on the upgrades and options is a separate profit center in itself. It’s been my experience that the difference in upgrades packages between homes may start off at 10% or even 15% of the total, but that spread generally disappears in the market within 5 years. So we’ll see how much of a return a homeowner gets in exchange for their $250,000 landscaping costs that includes the outdoor kitchen and “tropical paradise”. It may end up being as little as 10 cents on the dollar.

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Good question. I notice that a lot of the drivers of the big 4×4 crew cab 1-ton pickups are kids (raltively speaking). I notice a lot of people in the 40+ age groups who aspire to gravitate away from the corporate career path in favor of a more flexible and family-oriented lifestyle, even at the expense of their bottom line.

I know I’ve phrased it this way myself (probably based on my own biases), but it occurs to me those alternate expectations may be better characterized as being “different” rather than “reduced”. All chosen lifestyles involve some level of compromise and hence carry their own stressors resulting from the downsides of that compromise. One is not more virtuous than another by right; it only becomes more or less of a conflict based on the individuals ability and willingness to live with both sides of the paths they choose. A person who struggles to deal with the downside of “settling” for less isn’t necessarily any happier than a person who has to struggle to deal with the downsides of paying to have more.

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All the action occurs in the margins, ya?

Right now, I’d guess that many of the sellers who are settling for less are in the “must-sell” category, either because they’re forced to or because they’re really nervous about the security of their equity. I think it takes some strong motivations for a seller to dial back on their profit expectations.

I don’t have any way of knowing percentages on something like this, but my perception (possibly because I’m concious of it) is that the phrase “motivated seller” or its equivalent is turning up on 10-15% of the listings. A year ago that would have been very rare.

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I agree with the idea that it would represent a huge shift. I think what I’m driving at here is not so much the effect of having another downswing that costs people money, but the possibility that sooner or later an entire generation is going to come to the conclusion that bigger is not necessarily better. And one of the causes of that will probably be an RE market meltdown that hurts a lot of people.

In the last 60 years each generation has been raised to believe that they could do better than their parents. In our own generation some people have done just that, but many have not. I’m wondering if the kids today are being raised in the belief that they can also do better. Sooner or later a generation is going to start out so far behind that they’ll have no real hope of getting to where there parents are. when that happens, how will they reconcile their desire with their reality? And when a generation decides not to compete with their parents, will they change their priorities?

Social Security is in danger of collapsing before the end of the boomer generation. The kids today will have no real expectation of that entitlement. Career stability is not even in their vocabulary. Marriage today means a 66% divorce rate right from the get. There are a lot more blended families now than ever before and that pace is just picking up.

How will they reconcile their desires with their reality? Will they turn away from the consumerism and all the work and stress that go with that – which only results in frustration anyway – or will they choose a more balanced life that measures wealth by how much they spend rather than how much they make?

How big does a house have to be in order to be big enough? At what point will people no longer desire anything bigger than what their parents had? How high can the tree grow before it’s not doing anything for anyone except sucking up resources?

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I’m seeing a larger percentage of sales closing at prices that are below their listing ranges. I’m seeing almost nothing selling any higher than the middle of their ranges. The days of overbids are over. I’m seeing more and more markets where the tramsactions with the highest sales are becoming too dated to use in an appraisal, and where listings are lower than the previous sales. Come July 1, most appraisers will stop using 2005 transactions as comparables, leaving only the sales that have occurred so far this year.

Once the regional market is conclusively proven to be in decline, the lenders will be compelled to switch gears on their underwriting. They can no longer assume that prices will continue to increase, thereby compensating for any errors. Interest rates don’t have to go up much to affect a decision on a mortgage transaction – increased underwriting requirements will kill a lot of deals that would otherwise have been done in years past.

I don’t think it will take very many deals going south because of tightening credit requirements to have an outsized effect on the market psychology.

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Think about it – the average person gets their news on TV. They talk to their friends, relatives and neighbors; of these, 90% of our acquantances will lie to us about their less profitable decisions if given a chance to do so. A person who is reading the Union-Tribune qualifies as having more than the average exposure to the news. People who hang out on internet forums like this one are the tiny minority – we are the geeks everyone else ridicules.

Given these limited sources of information and considering how muted (until the last couple weeks) these sources have been about the potential for losses, why would the average buyer be spooked right now? I think the buyers who have pulled out are those who are more well informed – an example of that are the professional investors. The sheeple remain, and if there are big losses ahead it is those people who are going to get hurt the worst.

Unfortunately – and saying this makes me look heartless – I don’t think we really want those sheeple to come around too quickly. An more orderly retreat over a protracted period of time may have its merits. For one thing, having catastrophic failures among the lenders would affect credit availability. If that happened a sale at the reduced price still isn’t going through for lack of the 30% down payment or because of a 10% interest rate. Beware of unintended consequences.

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I wonder if a meltdown in the RE market would have an effect on the expectations of the following generation? In the current environment, a young wage earner has no expectation of being able to afford the type of houses their parents are buying right now. The point of entry is just too high and other demands are being made on their income that the parents didn’t have to deal with.

The young adults I run into seem to have different priorities. Several of them have commented that they could be perfectly happy with the smaller house so long as they could keep the big truck. I’m sure those priorities will evolve as they rack up more responsibilities, but I wonder if the design trends pushing for high-style in smaller areas might take root, in part as a reaction to the excesses of this decade.

Remember the cars of the 1960s? We started out the decade with big fins and massive grills and by the time 1973 rolled around everyone was trying to jam into a 4-cylinder Japanese car. Some of it was energy costs, but I think some of it was backlash, too. It seems like the masses will follow a trend to it’s extreme and then when it becomes too much they reverse course.

Just musing.

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I find it shocking how many units are in process right now. I guess these builders are too far into the process on these subdivisions to not build them out.

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During the bust of the ’90s, the number of licensed appraisers in California declined from about 16,000 to just under 11,000.

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New Paradigm

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I especially liked the part where Alan Gin thinks we’re in a plateau and that the soft landing has already occurred.

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I think it’s not just the stabilization or reduction in pricing of the new homes that’s affecting the averages, it’s the reduction in the volume of sales, too. New homes have made up a disproportionate share of the total volume when compared to prior years. Their prices were so much more overextended that reductions in that market would definitely impact the local medians.

I just looked at some more sales data in San Elijo (same project as Tara Rd) yesterday and they’re struggling to break even with some of their yr2004 sale prices. A couple of those listings would represent a net loss from the seller’s pocket if they can sell at the bottom of their listings. And that’s not counting the differential between their PITI+MR and the rents they would otherwise have paid during their holding periods. It’s not looking too good over there right now. I surely wouldn’t want to be in the developers’ shoes right now – those guys must be ordering their Maalox by the quart.

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I intend to stroke out in front of my computer while I’m working. Either that or get hit by a shark while I’m sitting out in the line-up. After I get done working that day.

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Neutral corners.

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