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A case in point. Earlier this month a bank repo came on the market and the agent managed to convince the bank to put it on at $145K. The house is easily worth 200K and I would have made an offer on it except that we had 2 clients who also made full price offers. Another agency also had an offer in and my 2 clients didn't want to engage in a bidding situation.
So while I could spout statistics about the market in general, at least 4 people wanted this house at that price. Should they have waited to see if the bottom had been reached? I'm thinking they got instant equity because if I had bought it, I would have invested $1000 in repairs and put it back on the market at $200K, which would still be a good buy. The right price is now and will always be a subjective judgment based on what is happening at the moment, not a statistical exercise.
Distinquishing between price versus value.
If the market is always right, then the market was right in pricing a home in 2000 for 130k, in 2005 for 392k and pricing it today for 195k. The problem with that belief is that if you bought it in 2005, you're upside on your home almost 200k three years later. So apparently the market was wrong then.
Warren Buffet made his billions by buying stocks when they were cheaper than what he called their intrinsic value. He argues that the market is irrational in the short term, but rational over the long term. I am not as smart as Warren Buffet. I can't tell you what the intrinsic value of Coca-cola should be. But in real estate you don't need to be as smart as Warren Buffet.
In real estate, you can figure out the real price of housing which as far as I am concerned is the same thing as the intrinsic value of housing. Heck other people even it do it for you. Look at how cheap housing prices were in 1996 to 1998. If you bought then, you did really well. It also keeps you invested in safer investments when the real estate market isn't doing very well. Between 1990 and 1996, you probably did better if you just invested in treasury bonds rather than being invested in the real estate market.
Sacramento, California inflation-adjusted housing prices (http://mysite.verizon.net/vodkajim/housingbubble/sacramento.html - broken link)
In real estate, you can figure out the real price of housing which as far as I am concerned is the same thing as the intrinsic value of housing. Heck other people even it do it for you. Look at how cheap housing prices were in 1996 to 1998. If you bought then, you did really well. It also keeps you invested in safer investments when the real estate market isn't doing very well. Between 1990 and 1996, you probably did better if you just invested in treasury bonds rather than being invested in the real estate market.
Sacramento, California inflation-adjusted housing prices (http://mysite.verizon.net/vodkajim/housingbubble/sacramento.html - broken link)
Your first link, showing normalized home value, doesn't appear to take into account the evolving difference in market mix through time, meaning it seems to exclude factors for larger home sizes and more amenities.
Let us say that according to the national association of realtors median price of a home has shot up from 100k to 125k in Sacramento. There are two reasonable explanations for this price increase. One is that housing price levels have up 25%, the other is that housing prices have held steady, but housing sizes have gone up 25%, that too should push the median up 25% or some combination of those two factors.
If you are a researcher, that means that mls data from the National Association of Realtors isn't a very high quality database for analyzing changes in housing price levels because you can't tell how much housing prices are changing because of changing price levels and how much housing prices are changing because of a change in the composition of homes sold during a specific period.
What Karl Case and Robert Shiller came up with, was to look at repeat sales of the same homes in a given community. If you know that a condo sold in 2000 for 100k and that same condo sold for 125K in 2002, you now know that housing price levels have gone up by 25% during that period. Then to make sure that the condo wasn't a data outliner, you do that with a bunch of houses in a local community. This is why the OFHEO data is presented as an index. By looking at repeat sales of the same homes over time and doing that with a lot of homes, you have a very good idea of how much housing prices levels are changing over time in that community. Then they formed a corporation called CaseShillerWeiss which does this for a lot of communities and sold it to S&P.
As part of their need to regulate Freddie Mac and Fannie Mae, the feds have access to all of the loans that are insured by either of those organizations. Basically OFHEO uses the same methodology that Case Shiller did but they are collecting the data themselves. By looking at changes in housing prices levels over time of the same homes, you create a constant quality index. You know precisely how much housing price levels have changed in that period. OFHEO data is published for free but they take longer to release the data. If you want more timely data, you can buy it from CaseShillerWeiss.
What Vodkajim is doing is methodologically sound. He is taking the most recent releases from the NAR and he is discounting that price backwards into the past. What that tells you is what a home of the size of the most recent mls median priced home would have sold for in the past. By multiplying the median priced home by the OFHEO HPI index factor, you are showing what that house would have sold for a different times in the past assuming that its price level changed like housing prices did in the area. Lets say that the most recent median priced home would be a 1500 sq ft home that sells for 200k in the 3 quarter of 08. If you wanted to know what that should have sold for in the 1 quarter of 00. What you would do is multiply 200k times 229.97/378.85 which is 200k times the ofheo index number for Sac for the 1qt of 00 divided by the ofheo index number of Sac for the 3Q of 08. Meaning a home like that of that size should have sold for 121,404.25. He also makes an adjustment as part of figuring out the inflation adjusted value, but I think I have made this explanation to complicated as it is.
"The chart on this page estimates the market value of today's median-priced house over a 30-year period. The trailing nominal prices are derived by taking the recent median house price reported by the National Association of Realtors and discounting it by the OFHEO House Price Index. The OFHEO HPI is a "constant quality" index, so even though houses are built larger today than they were 30 years ago, this graph automatically adjusts for this variation. The trailing real prices are then derived by adjusting the nominal prices by the CPI - All items less shelter."
To my earlier point, sure you are always in danger of being upside down on the home as no one can ever predict the economy 10+ years from now. My main point is this, home prices have corrected themselves this past year from the outrageous levels they were in 2004 and 2005. May prices drop some more this next year - good possibility - but if you find the right house for your current family and any future insight to plans with your family, buy the house you want now. There never are any guarantees in life.
Here's the way I looked at it before buying. . . I was currently renting a 4BR single family house in San Jose. I have enough money down and credit to get a $650,000 home and still have enough left over to do any upgrades or fixes. What I can get for $650k in San Jose isn't looking too great for what I can get in Lincoln. If I was to wait another 6 months hoping the market would go down, how much would it really drop? $10,000? $30,000? Six months of renting would have been $15k I would have paid towards the mortgage on a house that's mine. And even if it did drop $30,000 more, that averages out to about $150-200 more on my 30-year fixed? So hypothetically, instead of paying $2600 a month now, I should wait six months to pay $2400? I don't see the market dropping that much more dramatically to wait.
I don't know about the less expensive homes, but the current house we bought was our fifth house offer. We got outbidded on every single one and we offered $20,000 over the listing price to make sure we got this property.
I don't know about the less expensive homes, but the current house we bought was our fifth house offer. We got outbidded on every single one and we offered $20,000 over the listing price to make sure we got this property.
What was your price point? I find the higher priced houses on a regular sale being in bidding wars because no one is desperate to get out of their house
I find anything under 350K getting multiple offers too
Here's the way I looked at it before buying. . . I was currently renting a 4BR single family house in San Jose. I have enough money down and credit to get a $650,000 home and still have enough left over to do any upgrades or fixes. What I can get for $650k in San Jose isn't looking too great for what I can get in Lincoln. If I was to wait another 6 months hoping the market would go down, how much would it really drop? $10,000? $30,000? Six months of renting would have been $15k I would have paid towards the mortgage on a house that's mine. And even if it did drop $30,000 more, that averages out to about $150-200 more on my 30-year fixed? So hypothetically, instead of paying $2600 a month now, I should wait six months to pay $2400? I don't see the market dropping that much more dramatically to wait.
I don't know about the less expensive homes, but the current house we bought was our fifth house offer. We got outbidded on every single one and we offered $20,000 over the listing price to make sure we got this property.
Right now you are assuming that prices in Lincoln will drop 1.5% to 4.6% at worst (10/650=1.5%, 30/650=4.6%).
You are basically assuming that prices right now are pretty close to bottom.
In the past 12 months prices have dropped in Lincoln 39.4% on a per sq ft basis.
What has been forcing housing prices down in the region is the backlog of foreclosed homes. But the banks are foreclosing right now faster than they can unload the homes. More significantly the backlog of foreclosed homes is still growing. As long as that is the case, it is going to be putting pressure on the banks to keep slashing prices to keep the inventory moving. Lincoln is like Anatolia, its one of the areas where there was a lot of building during the boom and its one of the areas that is being especially hard hit by foreclosures.
Second look at the local economy. Lincoln is not San Jose. In San Joes when the local economy gets weak the unemployed can't afford to stay in the region, they move away and as a result the unemployment rate stays low. So generally its easy to get a job in San Jose as long as you can afford to live there. There is also a much higher density of jobs paying 100k a year in San Jose, so it is easier to finding lots of buyers to sustain high housing prices.
In the past 2 years the local unemployment rate has shot up by almost 3%. When people are losing there jobs or are afraid that they might lose there jobs, they aren't in a position to outbid you for the right to buy a home. If you look at the trend lines in employment its pretty clear, things here are still getting worse.
Its that combination of a very weak local economy, of continued increase in the backlog of foreclosures and the fact that on a historical basis, housing prices in the region are still high even after the most recent drops, that makes me say that it still makes sense to hold off buying here right now.
I think its quite possible that this time next year, your 650k house in Lincoln will be going for 520k or less. Prices dropped almost 40% this past year, I think drops of another 20% this year is quite possible. When prices are dropping 40% a year, it pays to wait another 6 months or even a year to see if prices have finally settled.
On pg 1 of this attachment are historic prices for Placer County from 1986 to 2008. What you will notice is that when we are near bottom, we go through a long period where prices aren't moving very much one way or the other. A drop of almost 40% isn't anything like that period from 1995 to 1997 where prices were changing less than 1% a year.
What was your price point? I find the higher priced houses on a regular sale being in bidding wars because no one is desperate to get out of their house
I find anything under 350K getting multiple offers too
I am not sure how much longer that is going to be the case. First lending standards for jumbo loans are tightening. Second even though overall the fed has been pushing interest rates down, the rates on Jumbo loans have gone up by about 2% in the past year.
Also look at the current spread now between a 30 year fixed rate and a 30 year fixed rate jumbo. These much higher interest rates are taking away a lot of these buyer's buying power.
When you have fewer buyers qualifying for these loans and they can borrow less, its going to effect prices.
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