Housing Prices Will Fall at Least 50%

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Submitted by powayseller on May 16, 2006 - 8:10pm

The other threads were getting too long, so I thought whenever a thread becomes wieldy, we could post replies on a new thread. This is a continuation of my assertion that housing prices in SD will fall 50%.

Per Shiller's research as explained on OfTwoMinds.com, San Francisco prices must correct by 56%, from $715K to $315K. Expect the same for San Diego.

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Submitted by PD on May 17, 2006 - 9:24am.

Could it be more than that?
When there is a downturn, the prices often go below the historical mean.

When housing crashed in LA in the late 80s, I knew a person who paid 850,000 (they had a lot of $) and when it was all over, the house sold for 400,000.

BTW, Powayseller, maybe we ARE twins.

Submitted by Chris J on May 17, 2006 - 10:27am.

The book Sell Now has some interesting points in it. I am reading it right now. He focuses on inflation adjusting in everything. When doing this, it makes things even more out of whack than they appear on the surface.

I have thought about a 30% drop would occur. The info in this book makes me consider that it might be more than that.

Submitted by PD on May 17, 2006 - 10:51am.

I think there could easily be some markets that drop 50% and others that may only drop 20%. Some areas were much hotter than others in SD. The highs also took place at different times. I had a house in Ramona. It looks like the peak there might have been late spring 2005. We have friends in Rancho Bernardo and their house peaked in late spring and has fallen from 650k to 590K already. Prices in Coronado peaked August/September while it looks like prices in Imperial Beach peaked later than that.

I know of a guy in Coronado who is trying to sell his house for 2.6M. I know for a fact that he had an offer in August that was only 20K away from his asking price. He walked away. His house has been empty since last summer and he has had to pay mortgage and prop taxes for an additional 9 months because of 20K difference. His house has been for sale for a year.
I know of another house that has been for sale since at least Jan 2005. They started out asking 3.2M. Then they raised it it to 3.4M. Then they raised it to 3.6m - 4.2M. Yesterday there was an addition to to the for sale sign - REDUCED.
How low are these houses going to go? How many people can afford 2.5M for a house? Not many. The smaller your pool of buyers, the riskier it gets.

Submitted by LIHomeOwner on May 17, 2006 - 10:53am.

Slightly off topic - I am planning on adding an extension to my house next year. Given all the reports of the housing slowdown (forget the imminent crash we are discussing here) and talk of layoffs in the construction/building business, do you think it makes sense to put off the work another year or two? Even though we are planning on the work being done in a year, we need to start getting bids soon (of course, given how *busy* all these guys claim they are now).

Submitted by PD on May 17, 2006 - 11:07am.

I would probably wait a year. Construction materials are very expensive right now because of all the building. Those prices might come down with a reduction in demand. Plus, I think there are going to be a lot of construction people frantic for work in a year.

Submitted by powayseller on May 17, 2006 - 11:16am.

PD, from now on, I will just write "yes, what PD said", because I agree with everything you say. All excesses overcorrect on the way down, and the chart on the Bubble Primer shows this. We will overshoot to 50% correction before we come back up to the baseline. That's my prediction.

Submitted by powayseller on May 17, 2006 - 11:18am.

John Talbott has extreme views, for sure. I e-mailed him, and we conversed a couple times. I disagree with his take on inflation. He believes the CPI figures are accurate, and I don't. He believes inflation has been burned out of the system, and many of his assumptions are made on that premise. He did not respond to my last e-mail in which I argued why inflation is higher than the 2% government reported figure. Maybe he thought I was right and was speechless, maybe he thought I was clueless and didn't want to waste his time with me, who knows?

Submitted by an on May 17, 2006 - 11:19am.

Wow, that's much more than I imagined. I know people in the low range in SD that drop from 160k to 120k. I guess the high end tend to drop more?

Submitted by powayseller on May 17, 2006 - 11:20am.

That's what I was going to say, too.

I swear, PD is not a pseudonym for powayseller...

Submitted by PD on May 17, 2006 - 11:50am.

Powayseller, maybe we are twins and were switched at birth... are you 5'3" too?
My dad had a Ph.d. in Bionuclear Physics. I've heard that an unknown Bionuclear physicist donated many of times to a sperm bank. Maybe it was my dad and you are a long lost sibling...? :)

Submitted by speaker on May 17, 2006 - 12:24pm.

If home vales dropped 50% in the SF By Area, I am quite certain there would be a meltdown of nuclear (nuk-klar) proportions.

There are Democrats and there are liberals, but the people of SF (especially Marin) are borderline anarchists.

I had to leave the SF Bay area in the middle of the night after I made some off the cuff positive comment about the Prez.


"End of line."

Submitted by PD on May 17, 2006 - 12:32pm.

Are you talking rioting in the streets? I'm now having visions of high heeled she-men rolling over police cars.

Submitted by powayseller on May 17, 2006 - 12:48pm.

5'3", yup. Dad is a doctor, doing research. Born in Germany...

Submitted by PD on May 17, 2006 - 1:45pm.

I just received my Coronado paper. There are a lot of "Reduced" notices splashed across real estate adds. Additionally, there is an area called the Cays with homes on the water. I have not seen one of those houses listed for under 1.79M in the last 16 months. One of those houses just listed for an even 1.7M. There are also a lot of notices of empty lots for sale with plans and approvals for a new home. The builders are spooked.

Submitted by 4plexowner on May 17, 2006 - 2:05pm.

"Builders being spooked"

Check out the recent action in their stocks and it is easy to see why they would be spooked.

Look at these homebuilder stocks: CTX, DHI, TOL, KBH, PHM

Submitted by sdduuuude on May 17, 2006 - 9:37pm.

Powayseller, while you are a good thinker and regularly provide excellent qualitative analysis, I don't think you have "connected the dots" on how the current situation is 5 times worse than the last bubble. This article doesn't help your position at all.

This article draws a random line and says "here is the trend." The trend line takes 4 years of data, and extrapolates it out 20 years !!!!

I also think you have an inconsistency between your thinking that inflation is raging worse than the numbers show, but won't affect housing or wages at all. Because if this, I'll use a variety of inflation rates in my analysis below.

Lastly, the author needs to learn how to calculate growth based on a percentage.

The writer uses an inflation figure of 78% over 20 years, which is the same as 2.9% per year.
1.029 ^ 20 =~ 0.78%
He then incorrectly adds 20% because he assumes housing grows at 1% per year for 20 years (call it a "housing bonus") over and above inflation.

To do it properly, you assume housing grows at 3.9% and multiply it by itself 20 times.
1.039 ^ 20 = 2.15
or up 115%, not 98%. This shows a reduction of 52%, not 56%.

Just getting started.

Now, using larger inflation figures - 5% (plus 1%) shows housing will only reduce by 30%. Using 7% inflation (with no 1% "bonus") shows housing will actually increase by 4%. So, that government inflation figure, which is suspect, is very very important.

Oh - but wait. That is only in 2006
The author assumes an immediate reduction to the mean!! Idiotic! If it takes 7 years for the prices to adjust, the target price will grow. I get this for the year 2013:

2.9% inflation + 1% housing bonus => 36% reduction
4% inflation + 1% housing bonus => 16 % reduction
5% inflation + 1% housing bonus => 9% increase
7% inflation + with no housing bonus => 40% increase

Be careful seeking out articles that support beliefs you already hold. You can get badly tricked that way.

For the rest of you - don't mistake powayseller's excellent research, confidence or zillions posts for good or thorough analysis. Do your own.

Submitted by sdduuuude on May 17, 2006 - 9:54pm.

Another way to look at it: Your 50% "guess", combined with the logic of this article puts inflation at 2% for the next 7 years - assuming a 7 year reduction to the 2% inflation + 1% housing bonus trend line.

Are you comfortable with that?
Sure you wanna buy gold?
I guess the dollar isn't devaluing as much as you thought? Either that or housing isn't.

Submitted by docteur on May 17, 2006 - 10:16pm.

sdduuuude. Both Posts are right on.

Submitted by PD on May 17, 2006 - 10:17pm.

Sdduuuude, I think everybody has a tendancy to focus on articles or figures that support their beliefs, including yourself.
One cannot argue with history, however. Every time there has been a significant runnup in housing prices to earnings, it has corrected to the mean.
I'm sure there were a lot of people in Japan who were saying the same thing you are, just before a very painful slide. Their propery values are now what they were 23 years ago.
You have the unpleasant tone of a person invested in real estate and unwilling to hear anything that would threaten your assets. Are you a realtor? Perhaps a deeply mortgaged homeowner?

Submitted by sdduuuude on May 17, 2006 - 10:21pm.

I am a long-time Piggington reader.
Believer in the bubble.
Expecting nominal price drops of 15 to 20%

Sold a rental property in August 2005 out of fear and made $150,000 in two years for doing nothing.
Keeping my home, with a 50% Loan-to-value ratio.

If you had, perhaps, focused on my analysis and not my tone, you would not have made the error in judgement.

Submitted by docteur on May 17, 2006 - 10:53pm.

HI PD. I'm not a realtor, nor I am a deeply mortgaged homeowner (I paid my mortgage off last Monday).

I think sdduuuude is pointing out that inflation is a huge variable we must consider when trying to get to a reasonable prediction (that might be an oxymoron) of what could happen next in our economy, especially in the housing sector.

And if no one really knows the value of that variable, there are a multitude of outcomes that could be realized over the next several years. I believe he was simply pointing that out.

Powayseller asked what we could do to bring some civility to these forums. My suggestion is to perceive whatever is posted as being in support of all of us becoming more aware of what may happen next. Instead of interpreting a post as hostile or mean spirited, what would happen if we saw it as simply another contribution to our knowledge of this most complex situation.

No one, absolutely no one knows what will happen next. So, I try to base my beliefs on what is useful.

My opinion, my belief, is that the best thing to do is wait for an obvious trend to emerge and then follow it. Acting on predictions is a very dangerous way to operate. I try to run through as many scenarios as possible in my mind, (no matter how ridiculous they may seem) and then if one manifests itself, I will at least be prepared to deal with it and take action based on how accurately I analyzed that particular possibility.

Sometimes the best response is none at all. I try to observe and then simply follow the trend (react to what is happening around me). If no direction is clear, I simply step away and wait for one to emerge.

sdduuuudes post gave me a whole new perspective to operate from and helped create another level of awareness realting to the possible outcomes of this housing market.

Right now, no one knows what is going to happen. No one. But I keep coming to this website because I like to read your posts, powayseller's, sdduuuude's and anyone else who cares to state thier opinion or beliefs here.

This is not Japan and it is not 23 years ago. That was then, this is now and this is brand new territory for all of us. So let's keep sharing our ideas, our opinions and our beliefs and keep the personal slights out of the forums.

Let's just see where it all takes us and by discussing all the possibilities, different points of view, opinions and beliefs, we will be better prepared for whatever happens next. We will all benefit together through our willingness to participate in this forum. How exciting is that?

Submitted by sdrealtor on May 17, 2006 - 11:50pm.

Thank you! You have a better way with words than myself and I agree with everything you say. Comments like "prices WILL drop (fill-in the blank)% are utter nonsense. No one knows what is going to happen. I for one am constantly amazed by the market and how long/how well it has held up. Like everyone else here I am a housing bear who just happens to have a front row seat. I will not let what I hope will happen get in the way of my analyzing what is happening and encourage those that are letting their hopes guide their opinions to open up their minds to competing theories.

Submitted by powayseller on May 18, 2006 - 6:33am.

I will e-mail your analysis to Mr. Smith.

However, I disagree with your assertion that inflation must show up in higher wages.

As I wrote before, historically, before the global labor market, price inflation led to wage inflation. People used to say that houses rose with inflation. Inflation has been higher than the gov't statistics, so housing has been rising less than inflation for many years. People just said it rose with inflation, bec. they believed inflation was 2-3%, and housing rose 2-3%.

I would say that housing price increases have lagged inflation by 1-3%.

Wages are no longer rising as quickly as they did, in the global labor market.

I would not expect housing prices to rise with inflation, whether the 2% CPI or the 5-8% actual figure which includes housing/food/energy/tuition/health care and all the other stuff which is either left out or minimized. (For example, while health care takes up about 5% of a family's budget, it only makes up 1/10% of the CPI, or something like that...)

Submitted by PD on May 18, 2006 - 7:07am.

Sdduuuude's comments about inflation were very interesting and a good addition to the forum. I took exception to his snide tone.
The truth is that we don't know for certain how far down it will go. However, there are already some neighborhoods in San Diego that have seen over a 10% drop from the high already and it is just getting started.
I've posted before about a friend in Rancho Bernado. A very comparable house to theirs sold at the high for $650,000. Another comparable house went into escrow in February for $590,000.
Another friend in Rancho Bernado has their townhouse for sale at a good discount from the high and they don't even have any nibbles. They say their street is awash in for sale signs. This is not going to stop at 15% for them. Their faces were quite grim when they told us about their situation. They are military and are moving in one month. How long will sit empty before they start slashing the price?

Submitted by powayseller on May 18, 2006 - 9:05am.

sduuude, from the previous page, I don't follow the point you are making. I don't see what any of this has to do with the value of the dollar, which is falling due to our huge budget and trade deficits. I also think gold will rise long term because our price inflation is 5-8% now.

What do you mean with he followed a 4 year line? His line goes back to 1986 to establish a trend.

Do you have any analysis of Shiller's work? Just curious...

However wage inflation is much less. Adjusted for 2% inflation, wages are flat over that last few years.

I'm also not going to defend the article. It sounds like the author made some incorrect calculations, which offset his estimate by a few percent. I'm betting that he will appreciate you pointing this out, as I did as well.

Regardless of the article, by extrapolating Rich's chart on income/median house price, I stand by my 50% fall prediction.

Submitted by powayseller on May 18, 2006 - 9:18am.

PD, I've been through the snide tones before. I also found that whenever a lady takes exception to the snide tone, the guys tell the lady to have thick skin or ignore the comment, etc., but no guy comes forward and tells the other guy to knock it off and act like a man. You saw this happen above as well. I ignored the tone, you noted it, and the guys chided you for not liking the tone, instead of addressing the person who offended you. A bunch of woosies (sp?), I tell ya. But that's how this group operates. Just so you know....

I've been called names on this forum many times, just for stating an opinion. Reach my post Sell Now from a month or so ago. Within hours, the name calling against me started, but it was done on other threads active at that time. It was surprising, but I've figured out who the offenders were. The people who get mad and defensive are the homeowners who will not sell because they are counting on a small drop. Any post which suggests more than that is perceived as threatening and can result in a negative tone.

However, in defense of everyone, the tone around here has been more civil and professional in the last week.

Submitted by sdduuuude on May 18, 2006 - 9:41am.

I'm not really saying inflation should show up in higher wages.

One of the many reasons why I posted that is this - if you don't think housing prices will rise with inflation, don't post an article which uses that assumption to support your case.

Now, I hope you understand I'm not bagging on you as a person, but I am going to come down pretty hard on your analysis. Like my tone or hate it, I feel people need to understand your 50% number is nothing but a guess.

Again - you add a good perspective and lots of interesting links to this forum, but what you don't add is good analysis to support your assertions.

Your 50% number is, in my opinion, completely unsupported. I'm not saying it is unsupporatble, I'm just saying you have not done the analysis, complete with a list of assumptions, that generates the number "50%".

I know you haven't done the analysis because you are "100% confident." When one does a good analysis, they make assumptions, do the calculations, then take their assumptions and ask "what if this doesn't happen the way I think." Note how I changed the inflation figure, just to get an understanding of how much risk there was in the analysis. If I change the inflation figure dramatically and the end result doesn't change much, I know there isn't much risk there.

If you had done an analysis you would say "I think it is 50%, but the risks are x, y, and z." But you don't, you just claim 50% with full confidence. With a +/_ factor of 10 percentage points, you are saying 40-60% nominal or nearly 75% drop with respect to inflation. 75%? Its just too much, with no supporting analysis.

Your irreverence for the difficulty of macro economic anlysis is somewhat shocking. The best minds in the world have difficulty with it, but you read a few articles, and bam - you know with 100% confidence exactly what the market will do.

If I can do anything to reduce people's confidence in that number, I'll do it.

Keep in mind, I think you'll do fine with selling your house and renting, then buying low. I did the same thing with an extra property. I'm just not a believer in massive risk-free gains or 100% certainty in ultra-complicated markets that rely on variables as disparate as people's psychology, the price of gold, and the Bank of Japan.

Submitted by sdduuuude on May 18, 2006 - 9:57am.

"Any post which suggests more than that is perceived as threatening and can result in a negative tone."

Change that to:

"Any post which sugggest more than that , but hasn't been backed by a good analysis can result in a negative tone."

I feel it is my responsibility to convince people not to make difficult and large financial decisions based on your fairly random guesses. You have gained alot of respect on this forum because you post interesting posts very very often. But regular posts are not a substitute for good analysis and people need to take your advice with many, many grains of salt.

Finally, you guys complaining about my tone isn't going to change my tone. In fact, I'll assume that you couldn't find any flaws in the analysis to complain about and and I'll take it as a compliment.

Submitted by ph90802 on May 18, 2006 - 10:11am.

Jeez - would you BOTH please STOP with this back and forth? You're both acting like children who have to have the last word and you have to be "right". It's gotten real old. Do we need to sit you both in opposing corners of the room for a 10 minute "time out"?

You're both intelligent and articulate. Make your case based on whatever analysis you've done and let the readers of the forum make their own decisions as to what they go with.


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