Admittedly, this prediction and about four bucks will get you a cup of coffee today. However, if in a few years we look back and I was right, I’ll be happy to take the credit.
From a logical standpoint, there is no way these prices can be sustained – let’s face it, if you want to buy a decent house today you have to spend a million dollars – how many people can REALLY afford that?
But there are intangibles that are hard to assess. Let’s look at what they are and attempt to assign a value to them, because if we can, we can predict the future.
Let’s use santa monica’s number of 33%. In the last downturn, most everywhere in Southern California saw prices roll back about 33% between 1990 and 1995.
What about over-shoot? Aren’t buyers going to be so scared that prices will have to actually go down a little extra, before they have the guts to jump back in?
On June 9th we talked about ‘The Big Split – the Flight to Quality’ (see journal archives). We’ve seen it happen all year, and I don’t think it’s going to change – that the inferior properties are taking a bath, but the high-quality houses in great locations do a lot better.
Combine the Big Split with over-shoot, and it looks like this:
Inferior properties go down 40% to 50%
Superior properties go down 5% to 10%
Blended rate of decline of median sales price from peak = 33%.
This is where the real estate industrial complex is going to shoot ourselves in the foot – the median sales price will be submarined by the inferior properties. Where the MSP has been holding artificially high the last 12 months due to fewer sales in general, once the bottom falls out of the inferior homes, the MSP will drop like a rock.
The foreclosures are pouring in right now, and the bulk of them are the inferior properties on the low-end. The ones that were bought in the last 1-2 years with 100% financing are most susceptible – those homeowners have no skin in the game and are the least likely to find a way to save the house.
If you are a waiter or landscaper, the only way you can handle an additional pop in your monthly payment is if your parents help out, you add a lot of roommates, or you hit the lotto. True, there will be plenty on the upper-end in trouble too, but they are more likely to find a way out. People with more affluence have more resources available to them, and if they have a high-quality home, there are more buyers.
It’s all relative, but if this year is a snapshot of things to come, the low-end is going to be hit harder. That’s in direct contrast to my previous article on Feb 8th called ‘the big squish-down’. I thought for sure that the million-dollar market would cause all the trouble, but that hasn’t happened so far.
Three general reasons the high-quality properties will do better:
1. They’re older houses, owned by older people, with less debt
2. They have it so good, there’s no better place to go
3. Buyers are holding out for the good stuff.
Because of these three reasons, the supply-and-demand curve is much more healthy in the high-quality-home market.
A. If there are serious, meaningful changes in loan underwriting and/or elimination of currently available loan programs, then knock off another 10%. Not very likely in my opinion, but I’m probably in the minority of those reading this.
B. Major terrorist attack or earthquake, knock off a temporary 10%, but it’ll come back within 1-2 years. We were back in business within 3-6 months after 9/11.
C. Complete failure of pension/retirement systems, and healthcare cost. Even if you have your house paid off, if those two categories go nuts, you could run out of dough and have to sell your house to live. God help us all if it gets to this point. It is possible though, so it’s on the board.
Those are the big three negative intangibles, now for the positive:
A. Interest rates under 6% would help a lot, and I think they’re coming back. The recent boom was the hottest when rates were the lowest. It’s both a financial and a psychological benefit that helps get buyers off the fence.
B. Sales over the next 1-2 years will be determined by buyers who care more about buying the right house than the bubble. Whether they are ignorant about the bubble, or just don’t care about the bubble, it doesn’t matter. If the bubble talk doesn’t bother you, then you probably won’t insist on waiting, or driving the price down another 5-10%, before you buy. Because people need to live somewhere, there are reasons to buy that can supersede money.
C. Lower prices should help those who rent to be able to buy – both the first-timers and the bubble-sitters. Especially the bubble-sitters. I don’t think there are any previous homeowners that don’t want to own, they just don’t want to buy at these prices.
D. The OpenMLS would help alot. If it were easier to find good deals, we’d have more sales. If there were one centralized, super-duper website open to everyone, not only would it be easier to find deals, the novelty alone would spur activity. Realtor.com is an embarassment, and the realtor community deserves to be left behind if we can’t do better than that.
Those four intangibles could greatly temper any steep decline.
But who cares, all that matters is how you can take advantage, right?
ADVICE FOR SELLERS
1. If you know you’re moving in the next couple of years, see if you can move your plans up a bit.
2. You can’t move your house, but see if you can get it into a higher-quality bracket. Fix it up nice, that’s what buyers want.
3. Be more attached to getting out, than getting your price.
ADVICE FOR BUYERS
1. Set your goal at getting a high-quality house at 33% under peak prices. Who are they, and where do I find them?
A. Distressed sellers with both high loan balances and equity
B. Long-time owners who still think a half-million is a lot of money
C. Dumb listing agents you can take advantage of
2. Stay educated on the market, especially on recent sales. That education gives you confidence that you’re doing the right thing when making offers.
3. Be persistent, but patient. Be prepared to make 100 offers, and hopefully you’ll only have to make 5-10.
4. Know what you’re looking for, and keep looking! A good agent can help.
That’s what I think, what do you think?