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"I've mentioned my theory about superior homes holding up better than the junkers, and so far that's been true, generally-speaking. I said there would still be declines for the nice ones, just not as much."

I would agree there is some logic to this theory, but how true this is remains to be seen. We have to look at the ratio of home prices to income in this new world of financing where the appetite for risk is almost nonexistent. Home prices may have doubled in the past 4 or 5 years in these nice areas, but incomes certainly did not. It's still a long way to the bottom - 2010 or 2011 if I had to guess.

I agree with you completely.

With that being said.. Could you find a home like that and track it? And could you pick one that is beyond superior ie with all you described above and 1/4 acre and backing on to a golf course etc. Just to prove your point.

I think it would be very educational for people.

I agree as well. My parents are retired, sold their home in 2004(at my insistence) and are now looking for exactly the type of home you describe in orange county. They can buy with cash, and haven't seen prices drop much for these "premium" homes. I do think they will eventually drop a little, but not more than 10-15%. We shall see.

Judicious1,

I know it's common for people to play the "incomes not rising" card when talking about affordability, but the superior homes are such a select group, I don't need everyone to buy one, just a few folks. The typical buyer, retired or close to it, for the home described has the horsepower to get what they want.

I'm in a hurry today, (Sunday's a busy day for me) but I will offer some examples later, and we'll track them as time goes on.

Last down, first up.

How far down is hard to say. Maybe a little, maybe not, even for superior properties. Everything you mention is true, but substitution still applies and a some point.

Is the premium $50,000 over a one gap? $100,000 over? $200,000? who knows. It partly depends on how hard money is to get, partly on supply and demand.

Good list. I'd add "Stable zoning." Nothing like having the City Council decode that empty lot on your street zoned R-4 would make an excellent high density affordable housing project.

rtlguru said: "...They can buy with cash, and haven't seen prices drop much for these "premium" homes. I do think they will eventually drop a little, but not more than 10-15%. We shall see."

I strongly disagree if you're talking about an area like San Diego, Los Angeles or San Francisco. 10-15% off the peak for "premium" houses? Unlikely, as this downturn is just getting started. In my opinion we have 3 or 4 more years to the bottom and the "move-up" buyers will have a hard time unloading their house for what they think it's worth. These decreased values will flow uphill to the more expensive, desirable homes. Homes that increased in value by 100% or more in a fairly short period of time have a lot more to lose than 10 or 15% by the time this is over. But I agree with you on your other point; we shall see.

Certain locations and features always sell at a premium, in any market. The question to ask is not whether this will be true in the declining market of today (and tomorrow), but whether there is any reason to expect that these premiums will get larger.

I suspect that "premium" homes will decline about as much as everything else. The decline will be later --- since it is predicated on other, less desirable properties declining first. But it will happen. Remember that the premium for these "premium" properties was ALREADY built into the market BEFORE the end of the boom. Del Mar was pricier in the 1990's than Encinitas, and so on. To argue that it is good to buy a premium property now, one must believe that pre-existing price differentials (in an inflated market) were not sufficient, that in relative terms these properties are actually going to inflate in value. I think that is difficult to argue, or at least there is a strong prima facie case to be made that the evaporating tide will eventually lower all prices, everywhere.

Ask yourself a simple question: Most people prefer a luxury mansion in a beautiful location to a shack in Ramona. Why doesn't everyone buy the mansion? Eventually, with prices declining in other places, the difference in the cost of living in Del Mar, say, and Ramona leads people to prefer non-premium. This is what happened in the boom. People found themselves buying in places where most would have never considered because of high prices. Now you are starting to see outlying areas hammered hard. As they become cheap, it becomes harder and harder to prefer "premium" when you can buy at a discount elsewhere. Eventually, "premium" sellers will have to lower their prices to entice people back to premium areas, just as raising prices in the boom pushed buyers away. This will take time, and as always the ignorant and impatient will be punished.

One interesting thing about the timing of the decline in "premium" house prices is that it stands to create a second housing implosion. If buyers are still paying 2005 prices for premium properties, when more modest properties have already begun to deflate, then it is relatively wiser to buy non-premium properties. You only lose your shirt on a $500k place in Escondido when prices drop in 2008, etc, but will loose all the garments (and probably face some unpleasant bodily probing) by buying that lovely home in La Jolla that is about to follow everything else into the abyss (not referring here to anything on Solidad Mountain, necessarily).

The rich have more cushion and can wait out a short-term decline. But eventually even wealthy people will have to respond to market forces. If you believe that the current decline is just a temporary hickup (I have a bridge to sell you...), then buy "premium" and save 2% off of 2005. If instead you are more bearish (as, say, even the NRA/CAR folks are now becomming --- wow! does this say something), then buying that premium home now is the quintessence of knife catching.

Remember that roughly 50% of home purchases in recent years have been made on stated income. Do you really believe it was only the poor who were exaggerating their ability to pay?

Rational expectations

Rational: bravo...bravo...

Second that, "bravo!"

Two things affect the price of high-end properties:

1. The money move-up sellers bring with them (obviously affected by market distress at the bottom) will force prices up or down.

2. The premium/substitution effect.

I'll use ourselves as an example. We'd really like to live in south Carlsbad, Encinitas or surrounding areas -- better location and close to work. However, I'll show you some of the things we are seeing...

Here is a house in Escondido -- 4/2.5 2,433 sf, on 1.3 acres in an decent (working/middle-class) part of town. It's priced at $749.9K.

http://homes.realtor.com/search/listingdetail.aspx?mlslid=071082595&ml=3&typ=7&sid=7f1379914792493b81701730ab62b42b&lid=1090848385&lsn=1&srcnt=1#Photo

Here's a house in La Costa, priced exactly the same:

http://homes.realtor.com/search/listingdetail.aspx?zp=92009&ml=3&mnp=35&mxp=35&typ=1&sid=d888ae6030a04b44b8deb2d956e8af06&pg=2&lid=1088469500&lsn=11&srcnt=24#Detail

It's a 4/3, 2,581 sf house on a 7350 sf lot. Not bad. I'm pretty sure it has an HOA (not sure about Mello-Roos), and a much smaller lot, but the location might make these two a wash. This is not a premium area of La Costa & I believe students go attend the San Marcos SD here.

Let's assume the LC house remains the same, but the Escondido house drops to $400K or $350K. I can assure you that while we'd prefer to stay in LC, the price difference would make us seriously consider moving to Esc. While some people might insist on paying a significant premium to live in a better area, the question is whether or not there are enough of those people to prop up housing prices in the "better" areas.

Didn't preview. Sorry for errors!

Ack! There are THREE things affecting prices of higher-end homes. The third (and most important) is incomes. Didn't list that because it was addressed above.

Sorry for too many posts! :(

Just curious about analogies between houses and equities and if it possible to draw parallels with stock market and differentiate between types of properties just like there are stock categories: blue chip stocks like GE and highly cyclical boom/bust stocks like homebuilders.

I'm curious if superior properties in general appreciated less percentage wise than say shittiest locations. I don't have access to data so I can't check it out myself. But it would be interesting to measure price volatility in various zip codes (I think average $ per sq ft is probably best measuring stick as median may not be very reliable) and see if (lack of) volatility correlates with superiority.

Is it possible to check if blue chip properties have lower volatility than pink sheet ones ? If it is may be what Jim says could be explained that way.

I was visiting my Uncle this weekend in Tucson. His house isn't going to go down in price either, his neighbor hood is "different".

Jim,

I have a problem placing my capital at risk when I'm convinved values will continue to decline.

I would rather rent and wait until the fall of 2009 or spring of 2010 to re-enter as a buyer.

JMHO that we could see another 20% decline (even in desirable areas with good schools etc).

I know your a realtor and in business to buy and sell homes, but I must abstain from buying in this overpriced market.

Perhaps a different example. In a old neighborhood of mine, there was a rather unique house. One of the few homes with character in the neighborhood and not a stucco box crammed on the lot. It's a middle of the road neighborhood on east side Costa Mesa. The house was sold in 1994. It's finally for sale again in 2007. 13 years...

Around the corner, overlooking the Newport back bay, there's a few really nice houses I like. Great lots, nice views, good exterior architecture. I've seen a lot of for sale signs over there, but on the few great lots I really like? I've never seen a for sale sign in 15 years...

Jim

You described the exact property that I'm looking for and I'm not close to retirement age. These single level ranch style homes are hard to find in the coastal areas. I've seen two homes come up in the last 3 months...all sold within a week with multiple bids.

Even as many markets begin to cool, I've seen hardly any price declines in southbay -manhattan beach, hermosa areas. I'm hoping for huge declines but I doubt much price declines in these neighborhoods.

Just wait southswell. Prices in MB have already started to fall. Be patient.

MB Realist

Got any samples of price declines. I'm not talking about people who list their homes a million dollars over similar priced homes and reduce by 100K after initial listing date.

While othe markets have noticeably declined, santa monica, mb, hermosa and pv have been increasing in price from what I've seen.

In addition, if you've seen foreclosure listings for these areas, you may get one foreclosure every 10 months or so...which puts no pressure on the other home prices.