Sunday, May 20, 2007 at 05:32AM
Future Values
Reader southswell remarked:
"But do the math, prices today reflect 6% annual gains since early 1990s...don't look at only limited sample of last 5-6 yrs to come to conclusion that prices have sky rocketed....it is always a better indicator if you are able to take the largest number of years to see where prices should be....if you even look back over 20 yrs you will see that prices today stay in line with 6%/yr trajectory."
Let's check it out. There were a few Carlsbad houses on the tax rolls that are still owned by the 1987 purchasers, so their sales prices were available:
1987 Sales Price 6% for 20 years Today's value Variance
$181,000 $580,491 $800,000 +38%
$160,000 $513,141 $675,000 +32%
$159,000 $509,934 $675,000 +32%
$133,000 $426,548 $550,000 +29%
$165,000 $529,177 $675,000 +28%
$170,000 $545,212 $700,000 +28%
$186,000 $596,527 $700,000 +17%
$221,000 $708,776 $725,000 +2%
$293,500 $941,294 $800,000 -15%
Obviously there are a lot of variables, but generally it looks like most properties are still well above their 20-year, 6% trajectory.
Southswell also mentioned that he/she just sold their house, and doesn't mind watching from the sidelines as the market goes through its gyrations, though "I currently don't see prices dropping at all. Instead, I see prices rising in my neighborhood...which does not make me happy. However, so far prices are holding and the longer it holds...we'll likely see a prices flat lining not crashing."
The data is likely to be scattered, but to generalize I think the pricing is going to have a seasonal impact around the end of the year for the next few years. There is enough hesitation by the buyers that they'll likely want to take the fourth quarter off, due to school starting and the holidays. With fewer buyers in the game, the sellers who need to sell in the fourth quarter will have to make their offering very attractive. That could lead to seasonal pricing, where the dips in values happen in the fourth quarter each year. This chart illustrates what could happen the next few years:
When buyers come back after the first of the year, they'll be pleasantly surprised to see lower comps, and be more motivated to buy a house, and stabilize the pricing for the buying season.
If a flurry of activity takes place during the buying season that carries prices higher for a few months, that could minimize the impact of a fourth quarter decline.
I think you'll see the gap between the 6% trajectory and current value get closer and closer each year, but when you see a fourth quarter that doesn't take a hit on pricing that could be a sign of bottoming.
What do you think?
Jim the Realtor
in Thinking of Buying?, Thinking of Selling?
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Reader Comments (19)
Looks like the average variance is ~ +21%. I think southswell has a good point, but his numbers were off significantly. If we could drop every home's price 21% immediately to reflect the 6% growth assumption and I think you'd see a return to a healthy market.
i think 6% is a bit too high, i don't think we've seen that kind of wage growth over the same period. home price appreciation can only outpace incomes for so long...
Not the DO THE MATH one again. Below was my reply a few months ago to someone using that same 6-7% appreciation theory as to why prices won’t go down. These guys need to go back to school and take some math courses higher then beginning Algebra.
Your appreciation argument doesn’t hold up. Using my parents home in Encinitas as a baseline, bought in 1978 for 110K(I will use 6% yearly, weather wasn’t as good back then and I think 7% a yr is a little high), the house should be worth 562 today. Same model home that they have was selling for close to 900K at the peak in 2005. So using your formula that would be 38% over priced, right?
Let’s look at zip code 92009. Median price 1998 230K, 7% annually for 8 yrs should have had the median at 378K in 2006, not close to 700K or, 53% over priced using your formula.
SMC's numbers are very much in line with what I see.
Incomes & real wealth (not HELOCs masquerading as wealth) are all that matters. Until we get that critical mass of $250K+/yr earners, we will see prices continue to drop from current levels.
I'll say it again...where would prices be if we never got the "100%+ LTV, no-doc/stated-doc, sub-700 FICO, neg-am, I/O" NINJA ARMs & other exotic financing?
Wherever that is, that's where you'll find your "fundamental value". Strangely enough, it's also probably close to where PITI payments and monthly rents are roughly equivalent, given a 20% down payment. The difference between a "renter" and an "owner/mortgage debtor" is the down payment, good credit and qualifying income requirements.
Jim,
Thanks for digging up old home sales prices. You may also notice that if we used compound 7% over the 20 yr period, the prices today are exactly what the 6-7% trajectory would be. I realize that some markets do go up at higher rate than others...ie why home prices in LA, SD or OC may be higher than Lincoln Nebraska...also price appreciation is different within the same county due to varying apprecation rates (duh).
Having said that, is there a significant seasonality to home prices quarter to quarter? Like I've stated before, we just sold our house (much faster and easier than i expected) and I am looking for a new home...but the prices and inventory seems very tight regardless of what the housing market news seems to say about so cal.
I'm currently renting (6 mo lease agreement) and will buy this coming Oot/Nov/Dec if the right house (one floor, 4 bdrooms, flat yard, quiet street, about 3800 sq) comes along.
I've been reading thru many different housing blogs since 2003, and feel that a lot of people did lose money by holding off buying a home since 2003 because of what many (shiller, UCLA) predicted was a pedning housing crash. I used to warn people not to buy a home bc I also thought the market was over valued...but those who heeded my advice have lost so far....my sister who ignored my advice in seattle, did great by purchasing home back in 2003...her home has almost doubled since then. Today, when home price discussion takes place among friends, I usually just say you never can predict the housing market ...thats the safest way to go...if anyone is certain of the housing market direct...they can make MILLIONS by putting their money where their mouth is by betting on the case shiller index...most posters I don't think are that confident of their position...neither am I.
I like to know since which year most readers on this site have held off buying a home due to the housing bubble talk...2002, 2003, 2004....and would they buy now if the prices returned to the levels prevalent during the year that they decided to not buy and wait.
bought in OC in late 2003
sold in OC in mid 2005
waiting to buy in SD
More personal attacks from your friend Scharzard
http://www.californiahousingforecast.com/commentary/2007/5/19/ocean-front-homes-crashed-in-the-mid-90s-1-million-helocs-common.html
These 20 and 30 year appreciation arguments are very complicated (too much to be useful here). The relevant measures should be housing appreciation relative to inflation or wage growth which have fluctuated drastically over this period (especially going back to 1978). And San Diego is hardly the same city it was 20 years ago - wireless and biotech hardly existed and a lot of higher income people buying/bought in north county are employed in these industries.
The only major change during this bubble was the huge increase in the use of ARM and exotic loans to purchase properties. The “power” of the monthly payment caused an increase in home prices. Back in the late 90’s a $1500 a month payment on a 30yr fixed mortgage would get you about a 200K loan and house prices in SD county had a median under 200K. Then along came the Negative Am and interest only loans with a low initial payment and that same $1500 would get you a 500K mortgage, and guess what, prices went up to that 500K range.
Well what many of us believed, a good majority of the people buying these homes could not afford them, is now being proven right by the record number of foreclosures our county is seeing. This is where the math gets real simple, someone making 60K a year with no down payment, can not afford a 500K home. Actually, even someone making 150K a year with no down couldn’t afford that home.
Fundamentals will prevail as they always do and house prices will be back on their historic track. Whatever “adjustment” that needs to take place for that to happen will.
Amen, SMC!
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Additionally, while there were no/few "wireless & biotech" companies 20+ years ago, there were quite a few well-paying engineering jobs here. It's really not that different here today than it was 20 years ago. Same sunshine, same ocean...just lots and lots more traffic and general congestion today. :)
To answer southswell's question:
We bought a house in early 1998.
Sold it mid-2004 & have rented ever since.
Would we buy again if "prices dropped to the mid-2004 levels"? (rephrasing your question) Well...prices in our old neighborhood are quite a bit below the levels when we sold if one were to price "marked to market". We are nowhere near willing to buy at these price levels.
BTW, while prices in our old (starter) area moved up since we sold (and back down, again)...prices in our much nicer, rental area haven't budged much since mid-2004 (some seasonal movement, but still in the same range all along).
IOW, selling to rent is the very best decision we've made, and we have absolutely no regrets! :)
Let's not confuse disagreement with personal attack.
Jim is on my homepage as one of 3 realtors that I recommend. That doesn't mean I agree with everything that the bloggers on my Links page say.
My only disagreement to date with Jim is the severity of the downturn, and his statement that superior properties are somehow immune to the price drops.
People have told me, and my research has corroborated, that in the last downturn, homes fell 30 - 35%. The best properties in Poway were sold at discounts. Some were boarded up, I was told, but could not verify. Homes on the water fell even more, and there were short sales. I'm talking about anyone who bought in the late 80's and sold in the mid-90's.
However, I am willing to be shown wrong. I think this would make an interesting topic for this blog. How low did prices go on superior properties?
I bought in 1989 for $230k, it was near the beach and was worth $190k in 1995. I sold it for $430k in 2003 only to see them at ~$600 today. I always hated it as it was a 1979 tri-level townhouse.
...then I bought out of state and have since doubled that + ... No I dont rent, but I have no debt except a tiny mortgage. I will buy again in 2009 when those RTC-like deals come back. Maybe SD, maybe Aspen?
I see LakesideSeller has returned. Is it boring hanging out by yourself over at your site?
Thanks Woodrow - I'll get to her soon.
Interesting how she completely revised the post on her blog adding (he's one of my recommended Realtors) and pulling out all the nasty things she said about Jim. She has alot of nerve showing her face around her. If I were Jim, I'd ban her from my site.
I didn't see the previous version - you don't have a copy do you?
Or give me the gist of it.
The gist of it was Jim is flat out wrong about superior homes. Jim is just a salesman trying to convince people to buy homes and is not trustworthy. I am the only place that is not self interested and the only person you should trust. She specifically called out Realtors (you) and Financial Planning Firms (Rich Toscano of Piggington fame) in a thinly veiled attack. She basically called the rest of the world Charlatans. It was pretty pathetic.
Thanks, I'll address it a little later.