At last night’s panel discussion the question was asked,
“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?”
The lower end seems to be off 60-70% in parts of az.There are some awesome buys out there now in some areas.
I’m in sacramento right now and parts of s. sac are a mess.Stockton is a disaster.I’m in rocklin and prices have come down but not as bad as the less desirable areas.Seems like lots of so called investors invaded the lower priced spectrum.If it wasn’t for cali, az, nevada and florida things might not be that bad.I think california and az have close to 42 million people or 12% of the total us population.
Did that first bet ever get paid off?
Anyway. Your C-S projection is pretty good. I’m not going to bet against it again.
I don’t see how these cookie-cutters survive. Every day I get updates of another couple La Costa Oaks/Greens/Ridge/Valley/Mesa/Plateau homes with no yards and high fees that are destined to sit on the MLS forever. Same way in Carmel Valley. Are any of these things moving?
I understand the arguments in favor of the higher-end more established neighborhoods holding up better, but I believe they are going to get pounded badly. There are countless scenarios under which homes in these neighborhoods will ultimately be sold, distressed homeowners or not. As prices in perfectly nice surrounding areas continue to come down, it is going to be harder and harder for many to justify paying a very steep premium for entry into certain neighborhoods. Everything is connected.
Right now in La Jolla by my count there are 322 $1 million-plus properties for sale, and in the first four months of this year only 47 $1 million-plus properties have sold. Sure, sales may pick up as we enter the so-called “buying season”, but, um, so will listings. Prices in La Jolla are going to be coming way down over the next few years.
You can look at other higher-end areas and see the same thing going on: Del Mar has 136 $1 million-plus listings with only 17 closed this year. Coronado has 193 $1 million-plus listings with only 18 closed this year. Mission Hills has 63 $1 million-plus listings with only 4 closed this year.
If you are trying to sell in a higher-end area you have lots of company and relatively speaking, not much is moving. As Jim correctly states, it ain’t nothing price can’t fix. I predict there are going to be alot of folks in these neighborhoods who are going to get force-fed a basic education in economics over the next 2-3-4 years.
Hey Jim, what did that Dixon house finally go for?
That was the one you had four Padre tickets for the right guess. It was listed for $314,900 with like 40 offers as I remember.
Props for noting that CS has its limits and its an aggregrate. I’m so tied of hearing people make statements like “My house is worth 40% less according to this index.” Then you find out their house is in a close in, desirable high-end suburbs and the comps are down 10% at most.
Jim–The You Tube clip looks like a “Dasani” Water ad–You should be getting a kick-back–they do in Hollywood!!! Nice information!
The reality check in Oceanside is people were not able to afford $200K-$400K homes. I know people in other areas might make more, but it’s not like $400K-$600K is what typical homeowners in SD can support. And yet we see a lot of modest areas where they try.
As the bubble peaked in slow motion I couldn’t figure out how people were planning to pay for their house. All appreciation could do is give them an exit strategy if they failed. Turns out, a lot of people really didn’t have a plan, and their exit strategy was essentially their best case scenario and even that has disappeared.
If the math didn’t work out, I saw friends and family buy *anyways* because otherwise they’d be “priced out forever”. It’s like watching them play the lotto or a long-shot gamble. Yet now we see these same people fear “If I don’t sell now, I’ll be *priced-in* forever.” And those are the lucky ones who have a choice.
There’s an awful lot of listings in high end areas. Someone must want to sell.
Well, I would have to agree that the mid-high tiers have a ways to go. At least on the high end, there are always wealthy people who are willing to buy premium properties like in Del Mar/La Jolla. But the newly built mid-tier, where the main buyers are dual income households, is going to suffer more.
Like in 4S Ranch or Del Sur, how many homebuyers are willing the pay the asking prices plus 1.5-1.9% tax and the $400/month HOA. At least in 4S, you can walk to some stores, but what’s in Del Sur?
Oh, and the highlight of the forum last night was when Jim pulled the December 2011 and 25% number after Rich’s “White House Press Secretary-esque” response. Especially after Rich told Jim that he didn’t have to answer the question. (I like Rich and his responses, but that was definitely the safer route.)
You just looked down into that powerful Steve Jobs toy called iphone you held in your hand and the 25% in 2011 just came to you! Must be the new CSI software you downloaded just before the meeting the robdawg sent you!
Jim must have the CSI App on his iPhone.
Maybe there should be a JtR app?
I’m not specifically familiar with the SD area, but on average, how much would C-S have to decline such that average house prices are 3.5x annual household income? Cause that’s about where I’d place my bet, if I were a betting man. I’m also guessing around end of 2011, so I think your guess is pretty good… but so much depends on the government and its random blunders and misguided initiatives, so who knows.
BTW, Jim, I wrote a blog entry today about how I’d prevent housing bubbles; I’d be curious on your thoughts on how it would affect the housing market in general (ie: good, bad, indifferent, etc.)… if you’re bored. 🙂
IMHO you’re half right. My call for years now is a minimum 50% off the CS, putting us back at mid ’90s prices.
There’s any number of factors weighing on this, but the biggest one out there lurking is rates.
The best part about Jim’s call was the delivery… I gave a detailed explanation about how it’s so hard to know because there are too many crosscurrents, (stimulus vs. foreclosures vs. unemployment vs. inflation etc etc etc), then I finally wrap it up and Jim leans into the mic and says, with no preamble:
“25%, December 2011.”
FWIW, I don’t agree with the “white house press secretary” characterization. I wasn’t purposefully obfuscating as a politician would… I was just being honest about why I didn’t think I could make a reliable forecast on that question.
Rich, that *does* sound pretty funny. 🙂
Out here in Riverside, the older properties have gone down just as much, if not more, than the newer ones, and there are plenty of sales of such. Then again, there are a LOT of older houses in Riverside proper (as opposed to Corona or San Jacinto or Moreno Valley). I would say about 25% of houses in Riverside are from the 1950’s (mostly tract homes), 25% older than that, then 10% every decade after that.
Of course, a large percentage of what is actually selling (REOs) was last purchased before being repoed in the bubble of 2005 and 2006, but people were buying everything then.
Obfuscating? Must have something to do with skating in OB.
Ha! Housing bloggers gone wild! As you can see from the photo, the after-party was decidedly tamer than whatever boldness serum JtR ingested before engaging in that bottom-calling.
I’ve noticed the edge of La Jolla starting to crumble. Homes that were asking $1.4mil a month or two ago are now under or around $1mil. Unless I can find a wife who makes as much as I do (or a rich relative I didn’t know about passes away) that’s still too much, but it’s a start.
Good job having the balls to make a prediction Jim. The worst that can happen is that you’re wrong.
Eh… my attempt to illustrate the dramatic differences in responses didn’t quite work as I expected.
Rich, I wasn’t try implying that you were obfuscating, but merely that original answer never got answered directly.
I guess I won’t be anyone’s speechwriter anytime soon…
“Rich, I wasn’t try implying that you were obfuscating, but merely that original answer never got answered directly.”
Well, in that case, I certainly can’t disagree with that interpretation! 😉
The first coffee bet was the best I ever made. Not only did I come out slightly ahead, but Robert delivered some of the tastiest coffee ever – in person, just 156 miles down the road from his house.
Thank you Robert!
I’ll never forget as long as I live the riddle he laid on me at the time of the bet.
If I won, the cup of coffee would cost $4, but if he won, it would only cost $3. Why?
I read your post, and like it.
But I’ll do one better, and very simple:
Make all loans fixed-rate only, and the entire agreement must fit on one page, that way it might get read.
The more I think about last night’s outburst, 25% off today’s index isn’t that big of a deal.
We’ve already endured almost 3x that much.
102.09/139.15 = 73%
That economist sitting between you and rich was pretty long winded and the speaker form the Voice of San diego needs to stop using the term ” we’re going to jump right in.” He said it about 9 times in a 2 minutes
Just making loans fixed-rate doesn’t really solve the problem, though: you could just get a fixed rate loan with some of the payment amount initially deferred (eg: “pick-a-payment”), and you have the same problem. Moreover, it doesn’t address the CDO business practices which created the residual “insurance policy” bonds (ie: “toxic assets”), or prevent bonds derived from idiotic loans from being bought in packages by “safe” funds. The loan agreement thing might be helpful, but I’m sure they’d just figure out how to make the type small enough, or the page large enough, to get everything in there anyway.
Besides, I don’t think the fact that loan agreements were hard to understand was a root, or even very significant, cause of the bubble. Most people knew what they were doing: trying to get rich quick on the can’t-lose scheme of the decade. Most banks knew what they were doing too: make a lot of money for our executives taking huge risks which will eventually collapse, but not before we get rich and get out. The people really hurt by the bubble were people who bought houses they couldn’t really afford because they were deceived by people they trusted (eg: RE agents) into thinking that the market wasn’t ever going to go down, so they only way they could afford a house was to over-extend themselves and hope for appreciation to bail them out. There will always be people trying to get rich quick and by taking excessive risk; my proposal/plan would only ensure that future bubbles were minimal, to help responsible people be able to afford a house.
I think you nailed it, Jim.
Everyone can get wealthy investing on Jim’s prediction in the futures market.
The current bid on the Nov2011 Case Shiller CME future index for San Diego is 134.75.
All the readers could use their down payment savings to sell that short today and collect the large profit when it hits 111 and then use the proceeds to move up the property ladder.
You don’t have to put up the full amount to trade that contract so you could make a large percentage gain if the index did indeed drop 25% by end of 2011.
The value of a single contract is $250 times the contract amount (250 x 134.75) which is $33,750 for the Nov2011 contract.
You only have to put up 20% of that amount (to make the trade – $6750 (and maintain the 20% equity throughout the holding period).
So you could make about 88% return on cash if the index dropped to 111 ((134.75-111)x$250) if you short it today and Jim’s prediction comes to fruition.
FWIW the bubble could’ve been avoided had all appraisals been set using rent multiplier comps instead of sales comps. Although rents increased during the boom as a result of the artificially stimulated economy they never disconnected from reality the way prices did.
Toxic mortgages were not a factor until well after the bubble was underway. That said, I totally agree that *all* mortgage loans should always meet the “traditional” requirements.
Hmmm… after looking at some of the data, I’m starting to think that Jim’s guess is really not that far off.
But just to make things more interesting, I’ll go along with this coffee bet.
So what’s the criteria? +/- 1 month, +/- 2.5 on S.D. Case-Shiller?
I’m going to make my guess at late summer, say August 2011 and 25% too.
My call for years now is a minimum 50% off the CS, putting us back at mid ’90s prices.
Upon reflection my statement sounds odd. What I meant to say that for years now I’ve expected a return to mid ’90’s prices, which is 50% off the current CS… and about 70% off the peak CS.
Sounds like a fun time! 🙂 Wish I could have been there.
Thanks for getting the info out there.
Link to Kelly’s story on it:
An audience member referred to the Case-Shiller home price index and asked the panelists for predictions on how much further the index had to fall and when the bottom would be. Toscano, Ratcliff and I more or less weaseled out of the question.
But Klinge dropped this prediction like he’d been thinking of it forever, without any introduction:
“25 percent, December 2011.”
will the high end stay higher? i see charts “proving” that all markets move in sync, so La Jolla won’t drop any less percentage-wise than the whole of SD. It sounds like the well-to-do are holding onto their properties for now… but will that change?
Curious for various thoughts?