Coffee Bet 2
“When will the Case-Shiller index hit bottom?”
Other panelists politely side-stepped the question, so I took the plunge. My last prediction was the infamous coffee bet from September, 2006, where I guessed that superior properties would hold up better, sliding only 10% in value, and inferior properties would get hammered 40% to 50% in value. The jury is still out on how far off that prediction will be.
Last night I said that the Case-Shiller index would bottom in December, 2011, and be 25% lower than it is today.
Today’s index is 148.25, about what it was in August, 2002.
Knock 25% off and it’ll be 111.19, or about what it was in February, 2001.
The highest reading was 250.34 in November, 2005, so the 111.19 reflects a 56% decline.
I don’t like making formal predictions, let alone ones off-the-cuff. What was going through my head in the 2-3 minutes preceding my statement?
Oceanside is the test case. The market has worked perfectly in Oceanside, and properties in any condition, and in any location, that are priced at 50% to 60% off are flying off the shelf.
Will the rest of San Diego County need to hit 50% off to reach bottom?
I don’t think so, but we’re talking about the Case-Shiller index.
If Oceanside is the example of what to expect elsewhere, then we’ll see a marketplace dominated by bank-involved sales. Instead of ’giving their house away’, individual homeowners who are comfortable will find other alternative to selling, and the vast majority of the homes selling will be those that the homeowners can’t afford anymore.
It could cause sales to shrink in older neighborhoods, which could have a stabilizing affect on pricing. The neighborhoods I mentioned in the coffee bet are holding fairly well, though Davidson’s La Costa Oaks has a couple of short sales in the works.
The index measures the decline between the last two sales prices of the same house.
If the older neighborhoods have fewer sales, then the number of REO and short sales of homes built in 2004-2006 will probably be the determining factor of the Case-Shiller index. The newer McMansions loaded with HOA fees and Mello-Roos are in everybody cross-hairs, and it’s likely that we’ll see further price erosion for the next couple of years.
But the banks are squeezing the REOs out little by little, dragging out the inevitable. That’ll continue for another 3-4 years at least, but, just like in Oceanside today, there should be over-shoot, so by December 2011 the index might hit bottom.
There are enough buyers patiently waiting for the higher-end homes to drop, and the second half of equasion is how much lower will prices have to go to get them to step up. I think there is enough enthusiasm, plus the tempting low rates, that many buyers would be buy a home today if they could just find decent ones at 5% to 10% off. Because the Case-Shiller will be loaded up with bank-involved properties that were purchased in 2004-2006, I think it’ll read worse than it is, but that might be too optimistic.
That’s my justification of a wild guess last night, but who knows?
The Case-Shiller index has been going down 4-5 points per month lately. It only has to drop 37 points to be 25% less than it is today, so conceivably at this rate we could have a 25% decline in the index by early next year.
I’ll stick with the 25%, when it happens…..?
Here is a youtube of Rich answering the question, “What indicators do you watch?”
And a photo of the after-party, where voiceofsandiego.org staffers carried on all night – what a bunch of partiers!