Sunday, July 27th, 2008 at 5:36 AM
More Analysis on Pricing
Hey Jim,
I don’t know if you saw this, http://www.imf.org/external/pubs/ft/wp/2008/wp08187.pdf, but count it as one more source predicting 2001 pricing when we reach “equilibrium.” It basically comes to the same conclusion as the two year old National City pricing prediction report (which used a similar but different prediction model). This one is a little more aggressive, since it assumes things in the west coast will bottom out closer to 1999 prices by way of overshooting. Oh well: I’ll be quite happy if I can get the house I want, where I want, at 2001 pricing.
(hat tip to lgs for passing this along!)
Posted on Sunday, July 27th, 2008 at 5:36 AM in Uncategorized | 28 Comments » | 
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Equilibrium didn’t stop prices going up and it won’t want stop them going down. This is a momentum market, and has been since 1997. The trends in momentum markets are stopped by exhaustion. The rise in prices stopped when the supply of buyers was finally exhausted, after scraping the bottom of the subprime barrel. Everybody was in, and then some. The fall in prices will stop when the supply of sellers is exhausted. I don’t know what the circumstances will be when that happens, but it won’t be pretty. Anyone using valuation models or equilibrium models to time the market will get it wrong. The trend is down until it isn’t.
libertas | July 27th, 2008 at 5:01 pmNaw libertas, the trend is down till agents can show potential customers that it is fact cheaper to buy than rent. Not using some hypothetical inflation factor, or the interest deduction red herring, but right now in simple cash out of pocket. 2001 prices are just above that level which is where in nominal dollars I think prices will bottom out. Basically pre-bubble. People always want to buy RE, even in downturns. Its just convincing them that its a good idea is harder and getting financing harder still.
Financing anyone?
Barnaby33 | July 27th, 2008 at 7:27 pmPrices may continue to decline and overshoot their market due to the recession/depression starting in America. I’m still amazed at the number of people trying to catch knives. This is going to be a really wild ride, and I can’t believe people want to buy tickets on it.
Francis | July 28th, 2008 at 4:49 amOn the bright side of things I’m not getting tons of mailers or phone calls trying to get me to refinance.
jason | July 28th, 2008 at 6:11 amJim,
What’s that saying? Oh yeah,
Be careful what you wish for. You just might get it.
Either way, it’s already a wild ride. I see debt people.
Chuck Ponzi
Chuck Ponzi | July 28th, 2008 at 6:49 amIt’s going to take pre-2001 prices for it to be cheaper to buy than rent. I’m in UTC and I was forced out of my previous apartment due to a condo conversion – $430K was the 2002/2003 offer price plus about $100 HOA (Verona in UTC). That apartment rented for $1500 (was originally $1300 in 2001).
So I moved from rental to rental since then, picking up 7% discounts on signup. Every place was both much better and much cheaper than that condo. I’m currently renting for $1700 (discounted from $1840) and adding even more than that in equity in my bank account every year. A condo would lower my living standards and build equity at a snail’s pace, and the tax savings are small compared to my real savings in my savings account.
Of course, I watched that $430K condo rise with the market, and that’s when I knew the market was beyond irrational. $430K was way too much for me to buy that prison, so why would $550K make sense?
As mentioned, equilibrium never stopped that condo or the market from going up, it won’t stop it from going down.
I plan to buy when prices get to pre-2001 prices, because until that happens I’m financially better off renting.
BDiego | July 28th, 2008 at 11:17 amMost people I know who went from being renters to owners paid more to own because they went from being apartment renters (to save money while accumulating down payment) to being house owners. I think most people who have real cash to put down on a home they can actually afford will consider buying when they see that prices for the homes they want to live in have finished being idle at the bottom and have started to inch up again. I don’t know what will drive those who want to buy a house with no money to put down (and how many people are going to be able to get a bank to sign up for this kind of deal anyway?)
GeneK | July 28th, 2008 at 3:06 pmImpressive and surprisingly clear reading from the IMF.
A few points for consideration in San Diego:
1.) Land Constraints (we’re basically out of land).
2.) It’s always cost more to own than rent. Pride of homeownership and the desire for young couples to make homes for growing families will at some point be irresistable.
3.) The report is for the U.S. as a whole. San Diego entered both the boom and bust early.
4.) The range given by the IMF paper says a 14% drop with a range of 8-20%.
5.) The IMF paper also says an overshoot is likely.
Item 4 seems realistic. But it also seems that this year’s increase in sales activity in the lower end will take time to build upward pressure on prices as both investors and first time home buyers enter the market, (if they can get financing). I can’t imagine that many of those who are selling entry level housing are going to trade-up at this point. More than likely they will re-enter the rental market if they haven’t already been displaced by a foreclosure.
As an optimist I see a hard year ahead but I also think 2001 prices may be too low. We will be cratering soon and then overshooting.
Lastly, alot depends on the impact of the increased role of FHA loans in the market. Not much to do but watch and wait and rent at this point. We are close if not already at a point of maximum pessimism.
Mozart | July 28th, 2008 at 5:13 pm1.) False
2.) False
Increased sales of assets don’t necessarily indicate upward pressure on the price those assets; pets.com stocks changed hands multiple times on their way into the dirt.
I agree that 2001 prices in many areas, in nominal terms, may be too low. However, I wouldn’t be surprised to see 1999 prices in a lot of places as well.
Genius | July 28th, 2008 at 5:35 pmGenius- care to back up your claims for 1 & 2 being false?
Mozart | July 28th, 2008 at 5:51 pmI’ll be quite happy if I can get the house I want, where I want, at 2001 pricing too. Remember that’s the norminal price for 2001, the real price (considering inflation) would be -25% lower than 2001…before the housing bubble actually starts! I think the fair value is early 2002 price, but we would overshoot to 2001 price.
I just couldn’t see 1999 price unless with a severe depression. Remember 1999 mortgage interest rate is 1% higher than it is today. So that works out to roughly 8% on price reduction. Plus 30% inflation between now and then. That’s 40% reduction in real price (before real esate bubble) for the last 10-year period. I just feel that’s way too much. If it did happen, that will be the biggest investment opportunity for the life time, I will load up as much as I can.
temecula_guy | July 28th, 2008 at 5:58 pmGenius- care to back up your claims for 1 & 2 being false?
I can for him. Just take a drive around San Diego County and there is lots of open, buildable land.
And second, the floor of the market is the point where properties cash-flow for investors. This number is much lower than what it takes for a homeowner to purchase a house and have it be a little cheaper than rent.
JordanT | July 28th, 2008 at 6:37 pmThe original reason why there was a push to get people into houses, is that it was cheaper than renting. The big problem was qualifying and saving for a downpayment.
1.) Look at a satellite photo. There is a lot of land available in SD. Until you’re as crowded as Los Angeles (and you’re nowhere even close) I don’t want to hear talk about running out of land.
2.) There would be no such thing as investment properties if it were cheaper to rent than own. Have you never heard mention of positive cashflow on RE blogs? I find that hard to believe. There are many rent vs. own charts out there, I’m sure google would find you one.
Genius | July 28th, 2008 at 6:48 pmJordanT types faster than I do.
Genius | July 28th, 2008 at 6:57 pmJim published a "bottom-seeker formula" about 4 months ago. "To sum it up, you can work with the general theory that properties will be at a break-even-cash-flow around 2001 pricing, break-even +10% at 2002 pricing, and break-even +20% in the late-2002/2003 pricing." In fact, in the example that he showed, less desirable areas such as oceanside and vista will have a break-even point at 2002 pricing.
temecula_guy | July 28th, 2008 at 7:17 pmThat’s why I think 2001 pricing would be the target unless we face a severe depression that puts a large percentage of population out of job.
1.) Most cities and the county will build-out in the next 10 years. SANDAG predicts another one million people in San Diego County by 2030. As of 2004 there were fewer than 200,000 residential sites available. Most future development will be multi-unit in redevelopment areas or ranchettes out in back country. Zoning will only get more restrictive.
2.) Young families will buy when they feel that their rent is wasted. This is not always a rational decision. I imagine most families would rather have a SFD than a condo. I believe there is pent-up demand.
Mozart | July 28th, 2008 at 8:25 pmI count about 30 empty parking lots right outside of my rental condo here in downtown San Diego – each one of those is a potential 30 story condo – so if we build up, there is unlimited supply of land. . .thanks for the link to the IMF report over the weekend – sure caused the DOW to tank today according to Bloomberg!!
Mark in San Diego | July 28th, 2008 at 8:35 pmIn April 2000, I paid $140 per sq ft for my new, single family home in Carlsbad (w/ upgrades). Is that where we are heading?
King | July 28th, 2008 at 8:59 pmMozart, I don’t think you’re being intellectually honest. Didn’t you mention some real estate troubles of your own? Something about hoping to sell when the market gets better later this year… I can dig up the post for you if you like.
UnsureBuyer | July 28th, 2008 at 10:01 pmI can only speak for my vicinity around UTC, but we seem to be far from built out. They’re still building a 1000 unit condo complex a few blocks from me, and they’re going to tear down a mall parking lot and build hundreds more.
When I drove to the new development in Del Sur 2 months ago, it’s an oasis in a desert. See for yourself and tell me they won’t still be building at least 10 years from now. A new development just opened two months ago there, and I asked them how long it will take for them to build out just the couple hundred of houses in the development. They said a couple of years, which is optomistic and really means 5+ years. When I look at the development map, there’s room for more developments, and then even more once they zone the surrounding land. Further out east of the 15, there’s decades of land. Just like my apartment in UTC was 20 years ago.
I asked Pardee homes about the farmland sitting next to the elementary school being built, and they own it! They’re leasing it out for however many years, and when they’re done with their current developments and the market recovers they’ll build on that. They have so much land they’re leasing it out as farms for years at a time. I’ll take bets on them still finishing new developments 10 years from now.
Just naming three examples, but I’ve heard we were built out since I came here 7 years ago. That was the first thing I was told when I looked for houses, and in that time I’ve seen thousands of condos go up, live in one of them, and the construction continues.
I can definitely afford a house if I lower my living standards, just like I can save $1000 a month by renting in PB instead of UTC. And I can definitely be net flow positive on an investment house I would never live in but am happy to cram two or three families into. So pride of ownership requires you want to actually live there long-term.
BDiego | July 28th, 2008 at 10:36 pmMozart is saying the exact same things I have seen many homeowners say while trying to convince themselves that home prices will start rising again. No offense intended Mozart, but when I hear people use terms like "pent-up demand" and "running out of land" I immediately notice red flags flying. If you’re trying to sell within the next few years you have my condolences.
Genius | July 28th, 2008 at 10:40 pm"Pent up demand", "Running out of land." Come on Mozart Rich debunked those myths years ago. Don’t you ever take a peek at piggington?
As to running out of land, don’t worry that’ll shift to running out of water long before we run out of land. You can always add more density.
As to your argument, the one about owning being more expensive than renting is dead nuts on false. It’s only been since the inflationary spiral of the 60s/70s that renting was cheaper. Most of the twentieth century renting was more expensive which makes total sense in a non-bubble world. A world I hope to inhabit some day <sniff>.
Barnaby33 | July 28th, 2008 at 11:09 pmWhen I bought in 1998, buying was cheaper than renting. It’s always cheaper to own than rent at market bottoms — that’s what marks a bottom because investors get back in. That’s why you’re seeing the pick-up in buying in the lower-end neighborhoods. You can pick them up for 1999-2001 prices already, and many will provide postive cash flow, as long as rents remain high.
Of course, if rents go down, the fundamentals change again, but that’s the nature of markets.
BTW, if you think we are running out of land, you don’t get out much. Just drive 30-40 minutes from almost any part of coastal SD, and you will see nothing but land…lots and lots and lots of land. There is also plenty of land closer to the coast, but smaller parcels.
CA renter | July 28th, 2008 at 11:23 pmNote that between 2000 and 2005, 77,536 more people left S.D. than came here, according to the census bureau. The only source of an increased demand for housing units then comes from expansion of the local population. In addition to the comments above about whether we are running out of land, I think it’s a hard case to make that land availability is such a big factor when you’re exporting more people than you are importing.
Dwip | July 29th, 2008 at 1:50 amWow- bubbleheads unite. Essentially time will tell.
You can definitely keep going to Temecula and beyond if you like it hot. But to the east of San Diego is National Forest, to the south the border and north is Pendleton. The 15 corridor north and out of here is all that is left unless Horn can rezone the others. Don’t forget the 2020 plan.
Most of San Diego’s future growth will be from live births here in the county. 77,000 may have left but I believe we still had a gain of a couple thousand because of births.
Let’s see who can buy for cheaper than renting right now?
Lastly, unsurebuyer your name says it all. We did refinance that house I mentioned in a previous post with a 6.18%, 30 year loan. I was hoping for below 5% but we did it go get it done. We are renting that same house to a young family for a small profit.
Don.
Mozart | July 29th, 2008 at 3:57 pmQuick clarification, that goal for the loan was below 6%.
Mozart | July 29th, 2008 at 3:59 pmWhen you get indignant you give yourself away. Just a heads up.
Genius | July 29th, 2008 at 7:19 pmRunning out of land? Thanks for the laugh. Clue me in when we run out of vacant homes and condos.
clive | July 30th, 2008 at 2:52 am