Dr Beede commented:

Jim, I’ve heard a lot of talk that the bottom end always leads during a housing pullback, the top end goes last and recovers first. In other words, a lot of people like to say that what’s happening now is exactly what always happens in a regular cycle, ho hum, nothing to see here. However, I’ve been told by some seasoned pros that it’s the upper end that usually falls first, people trying to move up a rung on the ladder who didn’t get a firm grasp, while the bottom end is usually relatively stable since that’s where people are slipping down to.

Indeed, when I bought my first house in 1992, right after a serious pullback, you could get a lot more house for just a little more money, indicating weakness at the upper end. If the long-term pros are right, this big crash in low-end properties last year was very unusual and is now seemingly over, while the pending correction in high-end is more what you’d expect to see in a normal economic cycle as people lose jobs, need to cutback expenses, etc. What do you think?

Forget the first example, this isn’t your standard run-of-the-mill downturn.  If it was, it would have started in 2001-2002, and we’d be on our way back up by now.  Anybody who tries to soft-peddle this collapse as a normal event isn’t an expert, they are a shill.

I agree with your second example, and it’s the job losses and cutbacks of expenses in personal and business that worries me the most – they lead to a worsening economy overall.

For those who want to buy a house today, consider what one client is doing (mentioned here before). 

We can’t find ANY high-end sellers who are realistic in his area, so he has focused on cheaper investment properties.  He had purchased a number of low-end condos in the 1980s and 1990s as rentals that he sold in 2004-2005, and is stocking up again.  In that search we happened to find one that would work for a few years as his residence, so he moved in.

Today’s buyers should do the same thing – search in the lowest-priced end of their desired markets. 

Here’s an example.  Check out the street named Caminito Vistana in 92130.  Eleven of the 103 houses on the street are for sale, and all of them are looking for at least $2 million. 

In the last six months there has been ONE sale, at $2,300,000.  If you were thinking of buying one on the street for more than $2 million, you are doing so at great risk.  Eleven for sale, and one closed in the last six months is a scary combo, especially at $400 to $500/sf.

But if you can find a quality house in 92130 at, or around $300/sf, you’ll see them fly off the market, because they’re selling like hotcakes – that is the lower-end of the Carmel Valley market.  

The other angle to having the prices come down is buying more house later, for the same money.  If you are a candidate for a move-up purchase in a few years, you might consider buying a quality CV house at $300/sf today, and get a bigger & better one for $300/sf to $350/sf in a few years.  Many will say just don’t buy, period, but for the folks who are renting (and tired of it) and have the desire to buy now, you could make sense of it – if you wanted to keep the old one as a rental.  You’d want to use a big down payment now to keep the payments lower, but as we’ve seen, most are doing just that.

Is there any chance that we won’t have massive price reductions in the high-end market?  About the only scenario I can imagine is a wicked combination of full government intervention in the mortgage markets, combined with a heavy dose of inflation.  But that seems like the path we’re on.

If you are buying today, make sure the house will suit your needs forever, just in case. 


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