Thursday, September 14th, 2006 at 12:52 PM
Where’s the bottom?
Nobody knows where the bottom is, but I’ll take a stab at it.
I’ll propose that the bottom is at 2003 prices. At least for now.
Here’s a couple of check points.
Generally-speaking, prices are still flat since 2004. Calculating all the recent same-house sales (last three months) in the ‘Appreciation rate’ category (in the right column), there is an average $14,000 loss per sale. I think that’s understating the current market psychology, but it goes to show you that the factual evidence so far isn’t showing huge losses.
I’ll assert that the best way to properly measure market sentiment is with an auction, with no reserve price.
Recently we saw a guy pepper every street corner and freeway off-ramp with ‘dumpingcondos.com’ signs. He was publicizing a pure auction of a condo in La Costa, with a starting bid of $225,780, less than half of appraised value. Now on that website he’s reporting that it sold for $380,000.
For the two sellers who are actively trying to sell their identical model for $500,000 and $542,000, that’s not a good thing.
But if a pure auction that is well-publicized is the best way to gauge the market, then let’s look at the history of sales of this model and see how far back we go in time:
4/06 $589,500
4/06 $545,000
4/05 $550,555
3/05 $495,000
2/05 $485,000
4/04 $431,000
1/04 $379,000
7/03 $330,000
6/03 $344,000
4/03 $378,000
In this test case, it looks like a pure sale at "what the market will bear" is around the same price as they were selling for in 2003. Yes, I’m sure each of these had different upgrades, blah, blah, so there’s a +/- 5% on price. But when you’re comparing identical models in the same condo complex, it’s as close as you can get for an example like this.
We’ll see if the new owners will try to flip this. They could at least undercut the other actives and come on at $450,000 and try to make a few bucks.
This condo complex is old and less-desirable, so I’ll assert that this is the real bottom, for now. If it was newer and really desirable, they may have gotten more.
The bottom of the price range is where the inferior, ugly properties find a buyer.
We have another test case brewing further north in Carlsbad. The houses on Sierra Morena, specifically the ones at the bottom of the hill that are two-story and either 1,471sf or 1,578sf, and back to the power lines, have always been the cheapest houses in Carlsbad.
One just sold on August 31 for $410,000, and it wasn’t on the open market. The flipper put it back on for $487,000, the cheapest of five active listings on that side of the street (the others are $499,500 to $530,000).
Sales History on east side of street:
2/06 $525,000
12/05 $465,000
8/05 $535,000
7/05 $550,000
9/04 $489,000
3/04 $425,000
3/04 $395,000
11/03 $440,000
9/03 $400,000
8/03 $380,000
Mr. Flip bought at 2003 prices, and he is his own comp – there has only been one other sale this year and it was way back in February, an appraiser can’t even use that for a comp because it’s older than six months.
Using these two examples for evidence, the gauge for ‘what the market will bear’ for the inferior properties are prices from the year 2003. It’s all relative, obviouly if your house is substantially better than those on Sierra Morena, then you’d sell for more money.
But if you’re wondering how low you’d have to go, right now, to guarantee a sale, use the 2003 value of your home for a marker.
Posted on Thursday, September 14th, 2006 at 12:52 PM in Thinking of Selling? | 15 Comments » | 
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Just a few quick observations.
• 2003 prices could be called a correction. 2001 a reversion to mean. If interest rates stay historically low then 2003 seemsmore reasonable.
• Inflation, even the laughable CPI erodes 2007 dollars vice 2003 dollars. Same price 4 years later are 15% or more cheaper in constant dollars.
• Reversion to mean without an overshoot would be highly unusual. That said timing the bottom is impossible so it shouldn’t affect individual buying decisions.
Great posts, thanks for your efforts.
Robert Coté | September 14th, 2006 at 4:13 pmI dont believe reversion to the mean will be 2001, between inflation and lower interest rates I think 2003 could be a reasonable benchmark to hit (I would even claim, with inflation, it is the overshoot).
Jim, you might be interested to hear the data presented by Tom Lawler (economist) at the Credit Suisse conference this week. He was looking at the data in 2003 and was asking if there was a bubble… He said that the data did not support that notion. But in 2005, when they looked again, absolutely. (I would ask "Which part of 2003, because early 2003 is much different than late 2003)
If you are interested in hearing his presentation, go here:
http://www.csfb.com/conferences/homebuildingsymp/client/wc_agenda.shtml
You may have to signup, but they dont check any info you give it just goes to the conference page. The Webcast agenda link on the right is the place to be.
Cal | September 14th, 2006 at 8:38 pmJim, all I can say is that you’re an optimist.
Greenlander | September 14th, 2006 at 8:48 pmCalifornia Dreamin’………..
I agree, 2003 prices are overly optimistic. Someone please tell sellers, the party’s really really over.
In my research it appears prices are not being reduced that much yet. Buyers will not be attracted to $10k off of a $500k asking price for a generic Oceanside or San Marcos older tract house that should be about $425k in this market. It looks like most sellers still have their "dream price", which is 5% or 10% above summer 2005. This is completely unrealistic. I also love when they say they are "not going to give it away". Good luck with that. Keep dreaming while you make yet another mortgage payment! I rent and will continue waiting to buy again.
The looming foreclosures will establish new, much lower comps. that will make today’s sellers still on the market in 2007 wish they had reduced their price sooner, or had sold in 2005.
Stan Rogers | September 15th, 2006 at 12:36 amI recently moved to Carlsbad and I followed the signs and waited for the auction. I attended the auction and saw this guy win this condo.
My opinion? I think he over-bid on the price.
He didn’t even do anything to the unit, except move the remaining furniture out. I searched active listing regularly being that we just moved here. Within two weeks he tried to sell it for $440,000! I am not sure if the condo sold.
KE | September 15th, 2006 at 4:15 amKE,
The tax rolls show that it hasn’t closed escrow yet from the first $380,000 sale, and I don’t see it anywhere on the MLS.
This condo complex is probably the ugliest in La Costa, and there are quite a few to choose from. I wouldn’t give you $380,000, let alone $500-something.
But I wanted to show examples of the ugliest, in order to hopefully demonstrate the bottom of the PRICE RANGE for each property type too.
In other words, a 1,900sf condo in La Costa should go for at least $380,000 – at least for today.
(Currently there are 4 listed in the high-$400,000s, the rest are even higher)
Tomorrow is anyone’s guess. If you ask me, you should be able to buy 1,900sf condos in la Costa in the $300,000s right now, but incredibly nobody wants to lower their price. There are 16 for sale between $459,000 and $845,000 for 1,800sf to 2,200sf. Two are pending, one listed at $475,000 and one at $499,999.
Greenlander, thanks for the optimist label, some have called me doom-and-gloom, so I guess that puts me right in the middle!
Jim the Realtor | September 15th, 2006 at 4:33 amI found it! Sorry for all of the carets I wanted to show I had to cut it directly from my email my wife sent me! She said "I’ll give what the other guy gave for the similiar condo." I told her it was the same guy! Funny to us. Can you guess where we found this listing?
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A flipper from Riverside County. Incredible.
Those two floor safes ought to grab somebody. Maybe somebody in the mafia from the early days of La Costa?
They haven’t closed escrow yet, if they don’t find a buyer I wonder if they will close? They only have a $5,000 deposit.
P.S. How did you like my prognostication of $450,000?
Jim the Realtor | September 15th, 2006 at 5:04 amJim, I don’t think 2003 is the bottom, but I think a lot of folks will be pulling the trigger at 2003 prices.
2003 prices would put a lot of SFR in decent areas down to $500,000. Factoring in taxes and HOA, you’ll be looking at a little over $3000/month for monthly housing cost.
for folks in the 33% and above tax bracket, a purchase of a home at that price may get them 1/3, or $1000/month back in tax savings. (if there’s a cpa out there to varify or correct, please do) that drops the cost of the home to the low $2000/month. What is the rental cost of a decent home in SD these days? around the low $2000/month range.
but these folks biting will be high paying folks that really need the tax savings. they are not going to save the day for the entire county. The foreclosures will continue to grow and ultimately I think we maybe looking at 2001 prices as the true bottom.
ocrenter | September 15th, 2006 at 2:45 pmJim :
I agree with your thinking and conclusions. However the results of this auction are not indicative of the market price because the buyer is not an "end-user". When they have a auction where the buyer is the final owner-occupier, the price can be deemed market price.
enron_by_the_sea | September 15th, 2006 at 2:51 pmI think you’re right so far on all the prices. It’s incredible how accurate your predicition is, can you predict when it will be $225,000 for the condo we have been discussing? One other thing I found out about that condo when I went to the auction, the HOA fees were $475/mo! that prevented me from bidding.
KE | September 15th, 2006 at 3:02 pmEnron,
I guess you’re right – I called, and the flipper said she has accepted an offer. I figured she might end up being an eventual end-user when it didn’t sell.
So I guess my 2003-prices-as-a-bottom hasn’t happened yet, apprarently today’s bottom is still higher (based on this example).
Jim the Realtor | September 15th, 2006 at 3:32 pmI’ll throw in my $.02 on the Irvine condo market.
Early 2003 prices are still too high. This would put your standard issue 1000sq ft $500k stucco-box condo down to about $300k. I think the fundamentals might support $260-290k.
OTOH, 3x the Irvine median household income is about $260k. If we assume that the median-sized home should be $260k, that 1k sq ft condo should be well under $200k.
Also keep in mind that we entered 2003 with RE appreciating over 10% per year for several years already. One could argue that speculative appreciation was already taking place. Personally, I was a contract IT worker in 2002. A condo that year would’ve "earned" more in appreciation than I earned working that year.
In fact, I remember reading the OC Register in late 1999 and seeing an appreciation trend that looked unsustainable. Of course, this might have been the market correcting back to the mean…
oc_fliptrack | September 15th, 2006 at 7:34 pmI think looking at longer time periods in the past makes for better future predictions.
As I posted on ocfliptrack a few minutes ago, I think we should also look at the following as a yeardstick: assume the market was fairly valued in 1996, apply a 5% compounded annual growth rate i.e. (1.05)^10, or 1.63x median price from 1996.
The 5% CAGR assumption is somewhat arbitrary but I think it takes into account and smoothes over periods of abnormally high GDP/population/inflation/wage growth rates as we had in the the late 90′s and lower growth rates more recently.
This is by no means a predictor in and of itself, but thrown in together with other valuation methods may be a ‘valuable’ tool.
Crucial-Taunt | September 15th, 2006 at 11:25 pmvw7dg04h61joxrfe
Jeremiah Holmes | November 12th, 2008 at 5:18 pm