Biggest Drops in 2007 and 2008; housing will fall 50% nominal terms

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Submitted by powayseller on August 27, 2006 - 9:48am

If anybody thinks the worst drops are here, and it will level off, you are way wrong!

In the last downturn in California, per Calculated Risk, prices dropped the most in years 3-5. I wish I could find the link.

This thing is just getting started.

I am anxiously awaiting the biggest drops, which will occur in 2008 and 2009, as $1.8 trillion of loans nationwide reset, unemployment rises as housing and retail related jobs shrivel up, and buyer psychology turns to fear. Making it worse, lending standards could return, making it impossible for today's San Diego wage earner to qualify for a median pricedhome even he wants to. Imagine the plight of the home industry if you can only borrow up to 3.5x income.

By 2008, the median loan will be 3.5x the median family income of $70K, so $184K. The median priced home in San Diego will be $184K, purely due to lender's underwriting guidelines. That will put a lot of downward pressure on prices.

We probably saw a 5-10% drop in the past year. In 2008 and 2009, we will definitely see 15-20% drops. After that, we will probably level off.

Anyone wanting to sell, needs to do so before the FDIC gets those new underwriting guidelines in place, and before investors stop buying up MBS packaged with 0% down loans. Because even if the buyer is willing to spend $400K for your house, it won't matter if he can't get the loan to do it.

Schahrzad Berkland

Submitted by LABen on August 27, 2006 - 11:32am.

I agree that the worst drops are yet to come. Investor psychology is slow to change and will require a much longer period of time to manifest itself than in the stock market. However, I think the amount of leverage, new exotic mortgage products and level of speculation will increase the speed at which this bubble deflates relative to the early 1990s. Blogs and websites like this improve the transparency of the market and will increase the speed at which prices change.

I have a question regarding the FDIC guidelines. I think this is probably one of the most important variables that will determine how rapidly this cycle plays out, but I always have difficulty finding reseach on the topic. Does anyone have a website that is tracking this piece of regulation? I am curious to hear a lenders candid assessment of what this will do to their business. I know several "professional" MBS/ABS/CMBS investors who know almost nothing about these guidelines. Kind of scary when people responsible for a multi-billion $ portfolio of MBS don't have this on their radar screen. It's not suprising then when you look at MBS spreads and realize they are trading near multi-year tights. Granted vol is low, but the MBS market as a whole does not seem concerned about a deterioration in credit quality.

Submitted by sdrealtor on August 27, 2006 - 11:39am.

"If anybody thinks the worst drops are here, and it will level off, you are way wrong!In the last downturn in California, per Calculated Risk, prices dropped the most in years 3-5. I wish I could find the link. This thing is just getting started."

But it's different this time;)

Submitted by Stu949 on August 27, 2006 - 11:40am.

I also agree that the worst is yet to come; however, I've been surprised at how quickly things have changed just recently. Quotes from the CEOs of Countrywide, DR Horton, Toll Brothers, etc. have surprised me. The fact that these guys are making references to "this is worst I've seen it in 30+ years", should make people step back and think. Part of me thinks this may accelerate down more quickly than the last downturn. Do I know for sure? Nope, but we just witnessed probably the biggest world wide real estate bubble ever! This time it is different - however, I think the fallout will be quicker and more painful.

The Fed will try to do something to stop this, but I don't know what rabbit they'll pull out of there hat. They may be able to stall it, in which case I will be wrong, but they will just make the coming correction that much worse!

Submitted by carlislematthew on August 27, 2006 - 11:46am.

But it's different this time;)

Exactly! It's different, in that it's the same and not different - this time. Reversion to the mean!

Submitted by sdrealtor on August 27, 2006 - 11:58am.

BTW, I dont think we are close to done either. I just belive the declines will be more front loaded this time around. I could be wrong but that is my sense of things right now from what I see on the streets.

Submitted by Larry J. on August 27, 2006 - 11:58am.

I too have been taken back by how many references I have seen by (big) builders and (big) lenders about how quickly things have turned and how extensively they have turned and their overall concern moving forward.

The exotic loan programs could be affected in one hour's time simply by the rating agencies making or announcing a change in the way they rate the cdo's and such that so many of the loans end up in. The other thing that can and has already started to impact some of the exotics are the repurchases some of the aggregators of these loans are running into.

Submitted by L_Thek_onomics on August 27, 2006 - 11:59am.

I'm not really familiar with the San Diego market, I live on the coast of Long Beach and work in commercial construction. I'm sure there is lots of similarity between the two markets, so my observations may make sense. Including the 1999 - 2004 acceleration of home appreciations the median home value in California gained 339% between 1980 and 2004. This is slightly under 7% per year. If I substitute the unprecedented recent gains with the acceptable 7%, the median home price in Long Beach should be around $292,000 by mid 2007. (The median price was $485,500 in May 2006 after a 6.3% drop from April.) If we see a moderate average drop of 3% per month, the long Beach median home price will meet with the $292.000 acceptable median by the end of next year. It can happen without crash landing, without creating a major recession with high unemployment and many other negative consequences.

L Thek

Submitted by no_such_reality on August 27, 2006 - 1:25pm.


7% is an unrealistic high average gain for housing. I'd guess that the extraordinary gains of 2000-2005 have distorted your average.

Second item, a 3% monthly loss would be absolutely devastating, that's a 30% annual loss. Which is abolutely unprecedented. In previous downtowns, the revision to mean typically as zero to 4% loss during which inflation over-run the price driving the "real" price down.

We're in uncharted territory. Real estate has not seen nominal losses in double digits, that are obvious to everybody. When the median starts to buckle and the median starts reporting 5% below last year, people will worry. When it goes month after month reporting 5% or more annual loss, people will really worry. If, and that's a big if, annual median lost starts to show the kinds of dramatic price cutting that is showing up in CV, and the median shows 10% or more annual losses, buyers and investors will flee.

Simple question for all of use on the board, we may say will buy, but what will be our trigger? If the market enters freefall, what will you buy with? Is your money parked in cash? Will the local encomony belly up on the loss of RE jobs?

Submitted by OCbubblewatcher on August 27, 2006 - 1:47pm.


Here's the proposed regulation:

It doesn't appear to be finalized yet. Sorry about the bad link job. Although a long-time lurker on this forum, I just signed-up so I could get you this FDIC website.


Submitted by socalarm on August 27, 2006 - 2:50pm.

powayseller, i really appreciate posts like these. i firmly believe so many lenders will be in a pickle next year. keep it up.
if i had a choice we would've sold in may 06 (peak in LA). as a current seller i'm glad i managed to convince my wife to do this slightly late but infinitely better than waiting it out. it took a few months of convincing but she was really happy to see the solid data and basis everyone here has used to forming the argument.
i like your polemical approach. "If anybody thinks the worst drops are here, and it will level off, you are way wrong!" lol. makes you think.
i just hope i don't get caught in the vortex as i sell. i will be honest about the situation as it unfolds. just for the record, i never doubted the bubble, i just had to wait patiently to make a joint goes wish me luck

Submitted by Shawny on August 27, 2006 - 4:16pm.

Access and Rates are the keys

PS, I think you're dead-on right! Folks talk all day about rates, but I think with the scary number of foreclosures that are going to happen with the coming rate resets, we're definitely going to see some serious federal legislation or rulemakings by the FDIC that will significantly restrict or even eliminate most "exotic" mortgage products. Once those restrictions take effect, lowering rates won't be nearly as effective, because the specuvestors and low-FICO folks just simply won't be able to get financing.

Submitted by SD Realtor on August 27, 2006 - 5:41pm.

PS I would have to agree with you as well. I think 07 and 08 will see equivalent or more drops then we have seen here in 06.

However I am still somewhat bothered by the fact that at "some point" prior to the 50% drop, there will be a positive cash flow potential for investors due to higher rental costs. Doesn't it seem logical to think that? Say there is a home that is 500k but can return 7% assuming you put 20% down once it gets to 320k. Assume this rate also was valid after your property tax and other fees to maintain the property. Wouldn't an astute person start to buy properties at that point? Even with the bottom still not reached, you still have shook out more of the risk and now have more upside so while most people would say I am gonna wait, some will not and they will park the money and take the 7%. Yes they will experience some depreciation but the lionshare will have been digested already.

So again, I think some zip codes could have maybe even MORE then 50% depreciation but others will not.

Also I do believe some zips this year have already seen as much as 20% depending on location and housing type.

Not a bad start.

Submitted by sdjdguy on August 27, 2006 - 6:18pm.

SD Realtor,

I have followed your posts on this site as a lurker for quite a while and am a great admirer of your market knowledge and your candor.

I am primarily a business litigation attorney, but am also a licensed real estate broker with a small real estate business and I therefore have MLS access. Because real estate is my main hobby I tend to spend a lot of time (probably way too much) analyzing trends, price changes, etc., and I agree with you that some neighborhoods have already seen as much as 20% depreciation. In particular, the less desirable condos such as those in Mission Valley built in the 1970s, and those in outlying areas (as opposed to Hillcrest/Mission Hills, which seems to be down but not as much) have really plummeted like rocks. For some reason, Kensington/Normal Heights (92116) single-family houses seem to have declined a bit, with really long market times, but for the most part, I think the big drops in SFR prices have only just begun.

Given what you are describing and what I am seeing myself, and given that the monthly median price statistics we get from DataQuick and NAR lag by several months, where do you see the year-to-year median by the end of this year? From what I can tell, this market is slowing dramatically NOW both in terms of sales numbers and price. We didn't have the huge sales spike in the summer that usually happens, and now we're headed into the fall with huge and growing inventory levels. I wouldn't be surprised to see year-over-year median price declines well above 5% overall, and in some areas around 10%, by early 2007, with the pace picking up fast from there. Do you agree?

Submitted by SD Realtor on August 27, 2006 - 6:46pm.

Sdjd I do agree with what you are saying. Will post later tonite... number 1 toddler is fed and number 2 infant is just waking up... Mom is giving me the look so I have to shut off the laptop... darn....

Submitted by Carlsbadliving on August 27, 2006 - 7:30pm.

However I am still somewhat bothered by the fact that at "some point" prior to the 50% drop, there will be a positive cash flow potential for investors due to higher rental costs.

SD Realtor,

I've thought about this as well. However, isn't it a possiblity that housing prices could drop enough to overshoot current rental rates and actually drive rental prices down? This would keep investors at bay making it harder to make a positive cash flow.

Submitted by powayseller on August 27, 2006 - 7:51pm.

"I just belive the declines will be more front loaded this time around. I could be wrong but that is my sense of things right now from what I see on the streets.". We've got to keep you off the streets, sdr, this could be dangerous to your forecasting abilities.

Your comment is somewhat odd. What indicator do you have that the price drop is front end loaded? We haven't even started the 2008 and 2009 $1.8 trillion ARM resets yet. We haven't started the MEW-related or construction layoffs, which will result in tens of thousands of San Diegans out of work. Our unemployment rate will go up to 10%, brought down only by a further exodus of these unemployed people to other cities.

To be truly front end loaded, the majority of homeowners who would face foreclosure due to a resetting ARM or unemployment, would have their home listed for sale today, pushing up their MLS listing from 2009 to 2006. Is that what you are seeing? I seriously doubt it. I've seen houses ready to be auctioned off, that aren't even on the MLS yet.

Schahrzad Berkland

Submitted by powayseller on August 27, 2006 - 8:22pm.

I don't think we'll have a bunch of investors scooping up properties in freefall, especially when rental rates are falling as tens of thousands of San Diegans are leaving town or added to the unemployment rolls. Rental prices will stay flat or go down in 2007 and 2008.

Besides, how many people have got 100K to put down on a house? The opportunity cost of that money has to be considered too. You can't just think that the cost of the $500K house is only $400K, bec. you took a $400K mortgage. You've got to think that the entire $500K is costing you 6%, and is the tenant going to cover that?

Who would want to buy rental property when the media is full of median price dropping 10-20% year over year? When rental rates are falling? When the only people who would rent are those evicted from their homes in foreclosure, and stories of non-paying tenants get more common? How many high FICO, stable job types of tenants would remain in 2008?

Once the market is desireable to investors, wouldn't it also be desireable to first time buyers, and bubble sitters? They would buy, so where is the rental pool?

And let's remember buyer psychology. There will be fear of further price drops.

Another consideration is the number of investors out there. How many homes will be bought by people who want to live in them, vs. people who want to rent them out. Is it typical to have so many rental homes, as we had in this last cycle? If the usual stock of rental homes is 5% of homes, and we were at 35% of homes due to speculator frenzy, then we have a big oversupply of homes that needs to be absorbed and not as many investors as needed to make significant price movements.

Your idea does merit further discussion. Perhaps you could lay out the plan how someone would earn 7% on a $320K house. If that were a guranteed rate, after taxes and maintenance and costs of having the place empty between tenants, that could be a draw for some people.

I was told that a house should cost 8x annual rent, to be cash flow positive. The $320K house in your example should provide you with an annual rent of $40K, or $3,333/month. That seem like a high payment for a $320K house, since we tenants are used to paying about half of the mortgage value. For example, the house we rented last year in my favorite neighborhood, Green Valley in Poway, cost $2500/month. At 8x rent stream, the landlord should have paid $240K, but she bought it for $650K. (It was underpriced, not listed on MLS yet, so she got a good deal. It was worth a $800K at least in the summer of 04 when she bought it).

Anyway, if she gets $2500/mo rental income from the tenant, which includes gardener, pool, and insurance, she gets net only $2200. Add taxes and maintenance. So, how much should that house be worth for her to break even? How much should she pay for that house to make the 7% you mention?

I'd love the input of the landlords on this forum, and how they decided to buy in the last downturn.

Submitted by bob007 on August 27, 2006 - 8:47pm.

I agree that the worst drops are yet to come. But to say price drops will overshoot the price of rentals is ridiculous. It will happen only if there is a severe credit crunch. I doubt that foreign countries and Fed will allow that.

Submitted by SD Realtor on August 27, 2006 - 9:42pm.

Okay PS so here goes nothing. I cannot refute your points to well with regards to the availability of renters but the raw numbers I can at least play with. So okay here we go...

We had a 500k home that has depreciated to 320k. So it is on the shy side of 40% depreciated. Now if you put down a 100k and finance the rest. Now lets say we get a 10 year 7%interest only loan that converts to a libor. (not a great loan but you do enjoy 10 years of fixed rate) Your payment would be 1283 a month. Now throw in 3500 a year property tax and 500 bucks for insurance. Throw in another 50 bucks a month for maintenance. So we are at 4600 a year or about 380 a month for other costs. So that is 1660 a month to maintain the home. So I need to haul in 2260 to make a positive cash flow of 7200 a year or 7.2% on my 100k correct?

Now some people are luckier then others with vacancy. I guess I have been lucky. That is mostly due to the tenants I have been blessed with. Those that have left gave me plenty of noticed and my vacancy time was measure in days not weeks as I advertised and showed my homes long before my tenants left. I would agree with you that this is not the norm. However savy landlords know that the key to rentals is the quality of tenant you get. That is another story for another post.

Now I know this is a stretch but I am just trying to illustrate a point that it could happen. I think that more prudent investors are much more insightful then to be swayed by the mass psychology out there. This is actually what seperates successful people from the pack wouldn't you say? Also I would not classify speculators and savy investors in the same bundle. I think that the savy investors left real estate a few years ago but once the numbers work out, they will be back. Same with the bubble sitters. Personally I hope to hit the bottom but realistically it probably will not happen. If I can get within 10-15% I will be thrilled though. However my purchase will be made because it will be a primary residence.

As for how many people have 100k to put down on a place. Well I actually believe there is tremendous wealth out there although it is concentrated in fewer people then it used to be. However I have known several people who bought homes for investment as a small group, maybe 2 or 3 of them. Your point is correct though that 100k is more then the usual downpayment. My point is however, that this is not an investment John Do will make. Nor is it for Jo firsttime buyer. This is for Freda seasoned investor who is a smart prudent investor.

Finally the crux is the rental rates. This is uncharted ground for me. It is somewhat of a paradox is it not? If people are not buying then more people are renting right? If rental demand is up won't that prop rental rates up? Okay if they do not rent then they buy correct? I guess to me, the only thing that decreases rents is a drop in rental demand.

So I know my numbers are approximate but again, my point is to illustrate that at some point, the cash flow can be found. It WILL vary with LOCATION and it WILL be affected by rental rates. I am not saying it will stop the downturn but I think once smart money starts to jump in, that will be a very important point to note. People will start to make money. I cannot quantify when that will be...but when it happens I will post!

Submitted by powayseller on August 27, 2006 - 9:55pm.

bob007, it is certainly possible that rental prices will drop, as rental demand decreases, so that the price drops wil overshoot the value of today's rental prices. You betcha! If today's $2500 rental becomes a $2100 rental, then the 10x mutliplier means todays' fair market value of $250k would turn into $210K.

Furthermore, a severe credit crunch is exactly what I and others predict. By 2007, there will be no more I/O loans, 100% financing. The FDIC guidelines are going into effect sometime next year, most likely.

The Fed had no role in encouraging I/O loans, stated income, etc. They allowed it, but they didn't create rules to make it. Thus, they cannot interfere to bring those rules back, since it is independent investors who buy those loans.

Your comment, hoping that the foreign central banks and Fed won't allow a credit crunch, sound like the hopes of a homeowner. Are you not a renter? The Fed has no control over what the private investors do, and their aversion to stated income loans. If they increase liquidity from the government side, vs. the private side, inflation is going into the double digits, and the recession will be even worse. We desperately need a credit crunch to cleanse the excesses from our banking system, or the ultimate recession we get will be much worse than the Great Depression.

Remember too, that this is the first time since the Great Depression that national median housing prices have fallen year over year!!!! Every area fell, except the South. If you include the South, the gain for the country was .9% for resale, .3% for new homes. BUT, those figures do not include the incentives, which range from 3-8% (Roubini's blog). If you include the seller incentives, such as move-in allowance, or closing costs, and the builder allowance, even the South is down.

We are heading into a serious recession, which could end up like a Great Depression. Remember, we have never had a median year over year housing drop since the Great Depression. The fact that we have it now, is a scary scary situation. Bank failures are next, just watch. It is happening very quickly. Also, did you know that GMAC has been saving GM? Wait until next year, when GMAC cannot save GM anymore, and see what happens to our economy when one of the most highly traded bonds (GM) default?

Schahrzad Berkland

Submitted by powayseller on August 27, 2006 - 10:09pm.

In your example, the landlord makes a negative return if the home's value drops by more than 7% per year, which this home is likely to do. So why would anyone buy rental property now, when the value of their asset will keep falling?

Also, could you really get $2260/month for a $320K house? When we rented that Green Valley house, we paid $2200 (+$300 for gardner, poolman, and insurance = $2500), but that house was valued at $850K at the top, not $500K. Are you renting that house now for $2260?

How many investors are ready to buy in San Diego this year, even the $320K house? First, they will wait until prices stop falling, second they will be reluctant as they see vacancies rising and get concerned about finding a reliable tenant because the good ones left town or own a house, and third, they won't want to buy a depreciating asset.

By 2009 - 2010, when homes are depreciating only 5% per year, so the main correction is behind us, the credit crunch will be pretty severe, and fewer people will qualify. They will need money down, stable jobs, proof of income, high FICO. Many of today's landlords would not qualify for a loan in 2010. However, perhaps the type of people you describe would have the credit rating to obtain a rental loan. Then there is the question of credit availability, but I'm sure that banks will still be making some loans. Hopefully they will not be scared of real estate entirely. Can you imagine some banks making a moratorium on mortgages?

There is no paradox in rental rates. Remember in the year ending 6/05, 44K people left San Diego. I expect this rate is picking up momentum, so the second derivative is growing. The people not owning and not renting have left San Diego. This problem of declining population, rising unemployment, and rising vacancies makes owning rental property even less desireable.

Would you rent your house to a construction worker? The cashier at Home Depot? The mortgage officer at Option One? As a landlord, you'll start wondering where you could even find a tenant with a stable job. If these are your options, you would rething wanting to be a landlord.

But mostly, a savvy investor will not want to buy a depreciating asset. So what that you earn 7% on your $100K downpayment, or $7K/year, when you are losing $30K per year in depreciation as the market keeps going down?

This downturn will feed on itself, and the smart money will not come in until it's smart to do so: when their asset is safe from further depreciation, the job market ensures they can find a good tenant, and they can obtain financing. In my opinion, this puts us into 2010 - 2015.

Schahrzad Berkland

Submitted by sdduuuude on August 27, 2006 - 11:01pm.

Another post from Powayseller saying the same thing she has been saying for the last 6 months, with little more insight than any other post. Doesn't anyone else get tired of hearing the exact same thing from her? I do.

The best thing about this post is it brought out a nice litttle analysis by SD Realtor on the lower bounds of house pricing, based on the rental market, which by the way is not in a bubble condition and thus not prone to collapse.

Powayseller said "Besides, how many people have got 100K to put down on a house?" Well, lets see.

- Everyone who sold in the last two years. Even those who moved out of the state.

- Thousands of people who are ready to buy, can afford to buy, and are waiting for the market to fall. I know several personally.

- Seasoned investors and alot of institutional money waiting to pounce, per SD Realtor's post.

While many think we are early in the bubble deflation cycle, it may be possible that we are actually well into the third year and have already experienced the first-year flatness AND the subtle price reductios of the second year. This could mean - we ARE IN the free-fall right now, which makes sdrealtor's observations less surprising. Something to think about.

This and 2007 maybe the big drop years (all those resets coming), with slowing depreciation in 2008 and little depreciation in 2009 and bottomed out flatness in 2010.

Submitted by powayseller on August 27, 2006 - 11:11pm.

sdude, you have such a charming way with words. If you are tired of me, why do you read my posts? I find it interesting that you read someone of whom you tire, or perhaps it is so tiring, you read my posts to help you fall asleep. Of course, then you post a reply that gets your brain going again, negating the sleepy effect. Now I am truly baffled.

Anyway, the discussion was about investors, not people who cashed out and are waiting to buy. How many people have $100K laying around for the purpose of buying rental properties? I know of nobody with such intentions, but perhaps you do. Of those people, who would buy a depreciating asset?

Institutional investors buy apartment buildings, REITS, not single family homes.

The thousands of people waiting for the market to fall? Are you referring to the few who cashed out, waiting for a bottom, or those who are priced out and cannot buy anything over $150K?

The data from CR's site is about the median price. this is the first year the median price is negative. So this is just beginning.

Have you read Dr. Roubini? He will shatter all your Delusional Dreams, sdude.

This post has some new ideas, but you will have to wake up from your tired state to find them all.

Submitted by SD Realtor on August 27, 2006 - 11:45pm.

PS your points are well taken but again there is a variance right. I rent right now, pay 2400 a month, AND I pay for the gardner. Things vary right? I guess my base point will be that we agree to disagree.

Okay so a negative return is not realized until the asset is released correct? So the person purchasing the rental doesn't lose anything until the home is sold correct? As a prudent investor that person would also have built in the assumption that the market would continue to depreciate. Again this wasn't a purchase made by a first time landlord, or someone jumping in for a quick hit. This is someone who wanted to enjoy the tax benefits of a rental property owner who wanted to get a positive cash flow.

To me the correlation of rent to purchase price doesn't make sense today because the price of housing makes no sense. Surely rental rate increases have not come close to matching home appreciation rates correct? So I personally don't see a crash in the rental market that you are forecasting. Maybe it will happen, who knows?

My tenants are a military physicians assistant, a software engineer, and a nurse. Anyways I still feel that even with the continuing depreciation of the market, that personally the stock of potential tenants will be okay.

Anyways like I said, I agree to disagree. Your points are well taken and I guess we will see what will happen. I do believe the market will have a good ways to go before all of this happens.

Submitted by theplayers on August 28, 2006 - 12:06am.

Of course, none of us can predict with certainty how this whole thing will occur.

Saying that, I now offer my useless predictions:

One, I believe we'll ultimately see about a 50% decrease, adjusted for inflation. Some areas and types of homes/condos will see less, some more. I base this 50% drop primarily on rental rates and their relation to home prices. Rental rates are one of the most powerful and true reflections of the supply and demand dynamic within a market, taking into account factors such as income, migration patterns, housing inventory, economic conditions, etc.

Two, I think we'll see prices drop quicker than many of us believe, and quicker when compared to the decrease in SD in the early-mid 90's. This is mostly due to the massive amounts of loans that are going to start resetting. Too many people will simply not have the luxury to sit and wait this out, they'll have to sell quickly, all heading to the exit at the same time, competing with builders who will soon be dropping prices dramatically (once the incentives stop working), and eventually competing with banks who need to get rid of repossessed homes quick. They'll also be competing with people who will be losing jobs, and people who got in over their heads with HELOCs. The trend of people leaving SD will increase (like it did in the mid-90's), adding even more homes to inventory. Add to this the fact that lending standards will tighten up, leaving fewer and fewer qualified buyers. Worst of all, even those who are qualifed will be in no hurry to buy, as they can just wait on the sidelines until it's safe to get in again.

And three, when will it be safe to buy again? I agree strongly that rents will play a big part in the market eventually recovering. We will reach a time when one can buy a rental property in SD with 20% down and a 30yr fixed, and achieve decent positive cash flow. When that happens, the smart money investors will start to buy in SD again, creating demand and fueling a recovery, and thus signaling to the average homebuyer that it is OK to get in again.

Psychology created this housing bubble, and psychology will ultimately bring it down. Remember how intense the desire was for so many to buy a house when the bubble was peaking? We'll eventually see that same level of intensity, but this time the desire will be to get out and stay away! Even though most of us here believe we're going to see significant price corrections, I think many of us will be shocked at how badly people will feel about real estate. Many who are waiting on the sidelines will be too fearful to buy at the bottom.

Just like it was the worst time to buy when everyone wanted to buy, the best time will to buy will be when no one wants to buy, and I do mean no one.

So there are some of my simple predictions, now displayed in print for all to see, written evidence that can eventually be used to show how wrong I probably am!

Submitted by powayseller on August 28, 2006 - 5:28am.

theplayers, I agree with every point you made, and I have said the same things. I also think that some people on this forum could be afraid to buy at the bottom, esp. when every 5th house is listed for sale, and you know of people who haven't had a showing in over a year. You start to think, "This house is cheap, but I'll never be able to sell it if I need to...maybe this will be like Japan and we'll go down for 20 years."

Investors will buy when they can be cash flow positive, but if prices are still falling, and rental rates are falling and good tenants are hard to find, even they may wait a bit longer.

sdrealtor, what do you mean with a gardener and varying? In any case, you have some bullish leanings, if nothing else due to your job and owning rental property, and I have none. We will never agree on everything because I don't have those bullish leanings; I'm a total gloom and doom bear. If it's not raining yet, it soon enough will be :)

Submitted by sdrealtor on August 28, 2006 - 9:15am.

All the points you make relate to the sellers distress rather than the buyer's willingness to buy. I am looking at things from the buyer's side which your comments ignored. The last 2 weeks I have been astounded at Open House attendance by people that are looking to buy. They are not buying but most have a price they are waiting for to be able to get the house they want and its not all that far off.

The indicator I am looking at and seeing anecdotally is that this looks like it's starting to play out exactly as it happened but in reverse. I didnt see this trend before but have seen it recently with great regularity. If you look at appreciation graphs the huge gains happened at the end of the boom and not evenly throughout. I am seeing these huge gains that occurred between Late 2003 and Early 2004 evaporate very, very quickly. Once these gains evaporate there will be alot of folks that can once again afford the homes they want. Will the buy them? I don't know. But I suspect the declines will be slower after a big initial drop. I think the median could easily be down 10% or more by late 2006/Early 2007 and down 15 to 20% by this time next year.

I could very easily be wrong but this is my instinct. I am not attached to being right. I could pay my mortgage working as a Wal Mart Greeter. I have learned how to create wealth in my career many ways. Real estate is but one of them. I currently have business opportunities in development that may lead me away from RE. I work in RE mostly because I enjoy it, I am able to help people by providing them better representation than I have see most of them recieve elsewhere and I can spend lots of time with my kids. If I stop enjoying it, I can and will do something else that would be far more lucrative. My life will go on without fear either way with adjustments to whatever comes down the pike.

Submitted by sdduuuude on August 28, 2006 - 9:34am.

"why do you read my posts?"
To counter them so others don't mindlessly believe everything you say just because you post more than anyone else.

"He will shatter all your Delusional Dreams"
My Delusional Dreams of 25% reduction are only 5 percentage points off from yours, now that you are touting a %30 - %50 drop instead of a 50% - 60% drop.

Also, in my "tired" state, I sold before you did in 2005. So, who's sleepier.

Submitted by sdrealtor on August 28, 2006 - 9:36am.


Submitted by woodrow on August 28, 2006 - 9:42am.

PS - I thought that you believed the median price was a lagging indicator that was at the very least a year behind? Now you're using the fact that the median has only recently gone negative to support an argument that "this is just the beginning"?

IMO, we should be able to pinpoint the beginning of this slowdown/downturn when monthly listings began to dramatically overshadow sales. My guess is that began in the spring/summer of '05, and we're now just getting to the free fall period. The ARM resets in '07 and '08 will lengthen the fall, and by '09 San Diego will return to a market with a semblence of normalcy. If I had to take a guess, I'd put the over/under at a 35% fall from November 2005's high before we reach the bottom in fall/winter of '08.

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