How low will it go? Quick survey

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Submitted by trex on August 12, 2007 - 10:45pm

Quick survey - what percentage decline do you expect for San Diego County over the next five years?

I'm betting about 30% in nominal terms. Inflation will kick in at some point.

I ask, however, because we are thinking about moving out of state to start a family, because we don't aspire to a crappy run down subdivision, though that's all we can afford. We probably need close to a 50% decline to make it work here.

Submitted by bsrsharma on August 12, 2007 - 11:09pm.

No simple answer. It is a function of both location & price range. Good locations are likely to decline some what less while the bottom will fall out of the lowest fifth or so (in desirability).

In terms of price, the Jumbo kind in the 500K - 800K will get hit hardest. Practically that market has gone away overnight due to near non-availability of reasonable mortgage.

If you integrate all transaction over next 5 years, my guess is a 50% decline in today's prices. Of course, if inflation is severe, the nominal decline may be much less. In case of hyper inflation, there may not even be a nominal decline (or may be there will be a net increase, nominally). If that happens, you can of course see the impact on exchange value of $ and also purchasing power decline.

Submitted by trex on August 13, 2007 - 6:21am.

Thanks for the thoughts. I agree with your jumbo comments. We've got some decisions to make...

Submitted by Bugs on August 13, 2007 - 6:39am.

Right now we're in the equivalent of Round 2 of 12 scheduled round of exciting ARM Reset action. The champ (interest rates) has already gotten a bloody nose in the first round (foreclosures doubled) and a nasty cut over the right eye in the second round (hedgies being revalued). We still have 10 more rounds to go and the interest rates cannot be saved by the bell.

Just based on what I think will happen with financing, I'm thinking the projections for the 50% correction off peak will eventually prove out to be overly conservative. I think this downcycle will overcorrect as has all its predecessors.

Submitted by Ex-SD on August 13, 2007 - 7:01am.

IMHO: It's going to take 3-5 years to get to the bottom and then prices will sit there for a while............and I believe that prices could drop 50% in some areas. The median price will NOW have to adjust to the loans that borrowers can qualify for. Everything will adjust around that one, simple factor. If prices stayed where they have been, everybody who presently owns a home would have to stay in them for the rest of their lives and a tiny number of people would ever be able to qualify for a loan to buy one that was for sale. You can either stay in CA and rent for 3-5 years until you can see the true bottom or move out of state for a few years and watch what happens. (That's what we did).
CA is a great place to live but anyone who didn't see this coming had to be an ostrich with their head in the sand.
Good luck with your decision.

Submitted by JES on August 13, 2007 - 7:21am.

Where are you considering moving to?

Submitted by trex on August 13, 2007 - 7:31am.

Tucson. My wife's family is there. And if we compare San Diego and Tucson homes in the 600-700k range, there's no comparison!

I know, it's HOT!

Submitted by trex on August 13, 2007 - 7:34am.

Thanks for the comments. We are currently renting, and life here is fantastic. It's just that the 40th birthday is closing in, the 2 bedroom rented condo + kids is getting tight, and you wonder whether you'll every achieve the basics that your parents had.

Submitted by lindismith on August 13, 2007 - 7:52am.

Just based on what I think will happen with financing, I'm thinking the projections for the 50% correction off peak will eventually prove out to be overly conservative.

Seriously, Bugs?

I think this is the first time I've seen you put a number on this whole debacle.

Everything you've said has come true over the last two years.

YIKES!

Submitted by Ex-SD on August 13, 2007 - 8:01am.

If you have some cash and you wait patiently............you'll be able to buy a nice, single family residence in SD for $270k and up, depending on the area/size/etc.

Submitted by bsrsharma on August 13, 2007 - 8:07am.

basics that your parents had.

I share the same sentiment. My recommendation is to try to move to one of the "Red" (inland) states. Nothing political; those have affordable family friendly housing costs. Atlanta, Dallas/Ft.Worth/Austin/Charlotte/Nashville etc., look good if your job skills are geographically portable and you are not tied down by inseparable family bonds.

Submitted by one_muggle on August 13, 2007 - 8:24am.

BTW: Money.com lists the best salary/cost-of-living every year or so and keeps putting Raleigh NC, and recently Charlotte NC on the list. I love Raleigh, not too fond of Charlotte.

Also, I spent some time in Tucson, back in the early 90's, near the university. Fun place, great people--there is (or was) a bagel place next to a pizza place both run by two Long Islanders, which has the best bagels and pizza in the world, so it's pretty good.
On the con side, I couldn't take the total lack of water. My bro loves it there though.

Ever check out the pacific northwest? I am looking at it as an escape route if the decent 3/2 homes in my neck of the woods don't drop a good chunk below their not-quite-seven figure mark, though that is looking less and less likely every day.

-one muggle

Submitted by mixxalot on August 13, 2007 - 8:25am.

Red states and real estate

I agree- I can buy a brand spanking Lennar home in Texas for under 200k. I have to make some trips next year to visit the area and see if I would be happy living there.

Submitted by kev374 on August 13, 2007 - 8:43am.

In the early 90s my cousins condo in Torrance bought at the peak in 1989 came down by 30% at the bottom in 1995 so i'm expecting at least a 50% decline this time around since conditions are much more severe.

Submitted by bsrsharma on August 13, 2007 - 8:48am.

nice, single family residence in SD for $270K

 I agree this is highly probable.

 

Submitted by PerryChase on August 13, 2007 - 9:09am.

I say 2000/2001 nominal prices. That's about 50% off peak, I think.

When bugs talks, I listen.

Submitted by FormerSanDiegan on August 13, 2007 - 9:09am.

I will stick with the same response I had to this question about a year ago. Based on the median price for Central San Diego I am guessing 19-26% nominal price decline over a 5-year period. (At 3% inflation for 5 years thats a total of 34-41% real price decline).
Other areas : East County, South Bay, Temecula/, Riverside County will fare worse.

Submitted by PerryChase on August 13, 2007 - 9:43am.

I still don't see how certain areas would be immune (or drop less percentage wise) to the downturn.

I looked at histories of individual houses and Carlsbad dropped just as much as Tierrasanta or Mira Mesa during the 1990s. Areas that appreciated and held up better were central areas such as Hillcrest, Mission Hills and Bay Park.

The Del Mar (the real one of popuplation of just 5000) even dropped. Houses weren't moving there and people had more staying power so there were few sales.

Submitted by FormerSanDiegan on August 13, 2007 - 10:04am.

Perry, I don't understand.

Sentence 1: "I still don't see how certain areas would be immune (or drop less percentage wise) to the downturn."

Sentence 3: "Areas that appreciated and held up better were central areas such as Hillcrest, Mission Hills and Bay Park."

So, these central areas held up better in the 1990's. Right ?

It could happen again, right ?

Submitted by sdnativeson on August 13, 2007 - 10:17am.

I think last time around (90's) the high end markets got clobbered the hardest (La Jolla, Del Mar, Fairbanks, Rancho Santa Fe etc.)I saw prices drop UP to 50% or close to that number in those areas. The "middle"(upper and lower) class neighborhoods held their value "better" Clairemont, La Mesa, University City (homes not condos), the areas around SDSU, etc. depending upon individual circumstances drops in the 20 - 30 % range. That is my recollection at least.

This time I think the high end will hold out somewhat better, I think the pain will be felt predominantly in the "middle" class neighborhoods I mention above which are now priced in the (mostly 600-800k) range for anything somewhat decent. IMHO, these areas have the potential of up to eventually 50% or more drop in value. I think (hope)2010 at best, as much as I'd like to see it happen sooner.

Submitted by SD Realtor on August 13, 2007 - 10:21am.

I believe the bottom to be in the 2010-2011 timeframe and I think the damage will vary by housing type and location.

Perry I am not declaring immunity for any given zip code. I am just saying the damage will vary. I base this statement on the following:

1 - demand for that particular zip code or map code

2 - quality of the buyer. I think different areas attract different buyers with respect to demograhics, financial assets and employment types.

3 - distress in that area. I do not believe the foreclosure rate will be the same in every area. I think it will vary and in some cases that variance will be substantial.

4 - equity/mindset of the sellers. I believe that the profiles of sellers of different regions will alter each one. Sellers with high equity stakes AND emotional attachments will more likely leg it out and pass the home on to the kids, rent it out, or die in it.

Perry, don't get me wrong. Again I am not declaring immunity for anyone however I do sincerely believe there will be different rates of decline and different bottoms. Areas that had high speculation ratios, risky financing vehicles, or homeowners that stretched and are now realizing it is not happening will indeed get hit harder then peer areas that do not. It doesn't mean there will not be foreclosures in Del Mar, or La Jolla or RSF but I don't believe there will be enough to cause major distress in these areas when compared to say downtown or Eastlake. Could these premium places see 20-30% hits? Perhaps they could indeed. Will those hits match counterparts in outlying areas or heavier run up areas or areas with widespread foreclosures? In my opinion no.

SD Realtor

Submitted by PerryChase on August 13, 2007 - 10:26am.

Yes, formersandiegan, it could happen again. I understand what you mean now.

Some people here (not you) seem to think that Del Sur, 4S, Carlsbad and Carmel Valley will hold up better because they are new and "nice." I think that the new tract homes areas will be hit hardest regardless of income because they are comprised mostly of buyers with little equity.

sdnativeson, I observed the same thing you did in the 1990s. You might be right this time about the middle class neighborhoods. In the 1990s the speculation was on the higher end with S&L loans. This time, the middle class speculated just as much or more.

Submitted by NotCranky on August 13, 2007 - 10:29am.

It will go down until Rustico buys and then it will go back up. That's easy.

Submitted by stansd on August 13, 2007 - 10:33am.

I think most of the feedback here reflects the bias of this board. I'm a big housing bear, but I just can't see 50% declines. That would put the house I am in at 250K versus a peak value of 550K (currently worth 500K).

Lets talk fundamentals...Lot of focus around on the median income...There are a lot of DINK's and wealthy individuals in this city. I don't recall the percentages of owners or renters in the area, but lets say it's 50% and median income is 50K...that would imply that the median income of a housing owner in SD is probably nearing 100K. I live in RB where 90% are owners and median income is near 100K(median excluding renters is probably 120K).

At 100K, you can easily support the mortgage on a 350K house. I don't see the decline going beyond 30% from today, and I think 20% is more likely.

If it hits 50%, unemployment will be above 10%, and we'll all have big issues to worry about....yes, that's only '02 or '03 prices.

Stan

Submitted by FormerSanDiegan on August 13, 2007 - 10:33am.

Perry -

I agree with you 100% regarding the new tract home areas being more susceptible. There is no history in the early 1990's downturn for some of these areas.

Submitted by SD Realtor on August 13, 2007 - 10:42am.

I agree that the "new and nice" tract home settings are susceptible to bigger falls due to the fact that there was a high degree of aggressive financing in these homes. Also these places will get superwhacked if the employment picture changes dramatically.

SD Realtor

Submitted by HereWeGo on August 13, 2007 - 11:01am.

I suspect we see some price stability at 417K or maybe 417K + 10%. In the less or even modestly desirable areas, though, I can't see how prices will bottom until that line is crossed.

Submitted by Rockemsock on August 13, 2007 - 11:28am.

"At 100K, you can easily support the mortgage on a 350K house. I don't see the decline going beyond 30% from today, and I think 20% is more likely."

In 2002, we were first time buyers of a 320k home, and we were making around the median. It wasn't easy to support the mortgage even thought we had a small amount of debt. The only reason we jumped on the bus was because the rates were low and it seemed like we just had to get on board.

What if rates don't come down as much...will it not force the prices down even further. In 2-3 years, my bet is that the average joe will look at home ownership as a risky proposition...in 2002 the opposite was true.

So if you are talking about fundamentals, I would say that negative sentiment and higher rates would make a 350k home much more difficult of a purchase for someone making 100k.

Submitted by trex on August 13, 2007 - 3:46pm.

Here are survey results. Forgive me if I misrepresent you. My initial question was vague (real versus nominal, timeframe, overall median versus specific areas), so I've taken some poetic license to try and place everyone on the same scale. There seems to be a pretty solid consensus on the 50% point, with some more optimistic.

Me: 30% nominal, 50% real
bsrshaw: 50%
bugs: 50%
Exsd: 50%
kev374 50%+
PerryChase: 50%
FormerSanDiegan: 34-41%
sdnatve: x less than 50%
stansd: 20%
herewego: 25%

Ambiguous:
sdrealtor
rustico (btw, tell us when you buy...)

Submitted by SD Realtor on August 13, 2007 - 3:59pm.

Hi Trex -

Go ahead and put me down for 20-30 in some neighborhoods and 35-50 in others.

SD Realtor (not sdr as he has not posted on this yet)

Submitted by PerryChase on August 13, 2007 - 4:08pm.

Another thing. I think that housing will track Iraq.

Whatever the percentage housing decline is, we won't see a bottom until we're out of iraq.

Also, there won't be a bottom until we experience a recession. We're now due for a recession, and I don't believe that the Fed will, want to, or are capable, of engineering a safe landing of the general economy.

I'm not buying until:
1) recession hits (job losses will kill the new areas),
2) some Iraq resolution is worked out (so energy costs and risks are stabilized).

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