How Low Will Home Prices Go in San Diego? (real estate, 2011)

[justsomeguy]

My prediction: Median Home Price Troughs in mid-2009 - around $370k

There seems to be some debate here about the housing market here in San Diego. We can all agree it is in decline, or at least stagnant, but how much further it can fall and when home prices will appreciate again seems to be up for debate.

Personally, I think the people saying home prices are done declining or will decline by only 5% or 10% more or wrong. They use examples from previous housing boom/busts cycles to say that housing won't fall further than 10% or 20% and most of that decline has already happened.

These people aren't looking at all the facts though. It is wrong to extrapolate from a few historical examples as a sign of what will happen without looking at the "big picture" and putting things in context.

My argument is that in the previous boom/bust cycles, while home prices were high, they weren't so far out of whack with median incomes as they were in the boom of the last 5 years. Because prices are so far removed from incomes and affordability, the % decline will be much further than in the previous cycles.

There are also other issues to consider - the lending industry is tightening standards and the risky credit that was available that allowed these homes to keep being built and sold to people who couldn't really afford them will soon be drying up. Did this happen in the other boom/bust cycles? I didn't live here then so I don't know. But I do know the prices of goods and services operate on a very fundamental principle - the law of supply and demand. With credit tightening, and homes still being too expensive for an estimated 90% of San Diegans, expect demand to slack off. Furthermore, supply should continue to increase because so many people were buying houses they couldn't afford in the first place, many of these homes will likely be foreclosed on, putting even more homes than are necessary onto the market. In addition, San Diego has seen net population decrease the last few years and should continue to see this trend continue, because of the near impossibility of affording a home here. This will further depress housing demand, and further depress home prices.

But wait, there's more. The slowdown in home building and real estate and home depreciation will lead to fewer jobs and a higher unemployment rate here and less cash from home equity to finance spending. Fewer jobs=Fewer Income Dollars=Fewer Goods and Services Purchased=RECESSION. Yes, folks, San Diego could quite possibly head towards recession in the coming years ahead. What will recession do for home prices? You guessed it, further deflate their value (in addition to lowering incomes, which will even FURTHER erode housing prices). All one big snowball effect.

One wildcard in all of this is long-term interest rates, which increasingly have less to do with the Fed's decisions to cut or raise short-term rates, and more to do with the willingness of foreign countries such as China and Japan to buy our debt. If our federal deficits continue to balloon, one might expect some of these foreign buyers of our debt to get a little spooked. I know I might get a little antsy if the guy I kept loaning money to was making no effort to fix his spending habit and kept wanting to borrow money from me. The result? If demand for U.S. debt (T-bills) drops, expect long-term interest rates to possibly rise, FURTHER decreasing affordability of SoCal housing for the average citizen. However - they might also stay low or drop lower, which should increase housing demand and soften any further price depreciation. Like I said - a wild card.

Here are my predictions:
Median Home Price Troughs in mid-2009 - around $370k
San Diego (and probably National) Recession Begins - March 2008


Let the debate begin.

(Welcome discussion, as I hope this thread will be informative and educational for everyone, myself included.)

[VeronikaW]

I hope they stay low through 2011, when my husband and I can move back to CA.

V. =)

[hgclyde]

Prices will go lower however, most of the job losses are in Real Estate, construction,and finance mostly sub prime lenders such Quick Loan Funding going out of business, some retail mostly home improvement and home decor ;so jobs not much of factor this time around. Back in the early 1990's most of the job losses were in manufacturing in particular automobile and aerospace. Very early 2000 Dot com crash also affected the state mostly The Bay Area. California is not job friendly state. Companies relocated to Texas,Arizona,Nevada; Colorado,Florida and the Carolinas taking good wages with them. In addition, Many military base closings happened here in the mid 1990's including the Naval training Center in the Midway area and the conversion of the Miramar Naval Air Station to the Marine Corp. Most of job loses are in the automobile industry again.

There may be a national recession in the future but right now the US economy is sound. Some believe there will be a rate cut by the federal reserve. Discount rate count yesterday allows banks and other financial institutions to borrow money at a lower rate. And congress will try to push Fannie Mae and Freddie Mac towards a bailout of homeowners (the President most likely veto it) Also congress will push most people to borrow from FHA and VA loans.

The outflow people leaving California will be staunched by influx of immigrants especially illegal immigrants.

[achtungpv]

I read the other day that EVERY previous California housing crash resulted in a 1:1 ratio of CA median price to US median price. If that's accurate, I can't wait to buy at that bottom.

In Realtor (TM) spin, But, it's different here. We're special.

In Reality (TM) speak, Historically, no, you're not.

Should be fun to watch.

EDIT: Last week the rate for 30-year fixed jumbo loans (loans over $417K) jumped up to over 8%. The example I saw was that if you were looking at a house priced at $800K w/20% down and a 6.75% interest rate, you would have a P&I monthly payment of $4,151.03. To get a similar monthly payment at an 8.25% rate, the house would have to be priced at $690K...a difference of -$110K and a loss in buying power of 14%. Buyers aren't going to feel that pain, sellers are.

[dvflyer]

Home prices fall, interest rates go up. Net result = zero. The people who couldn't afford the "boom" prices are going to sit around and wait for the prices to fall only to watch the interest rates rise keeping that, now cheaper house, out of range once again.

[tigerclaws]

Originally Posted by dvflyer

Home prices fall, interest rates go up. Net result = zero. The people who couldn't afford the "boom" prices are going to sit around and wait for the prices to fall only to watch the interest rates rise keeping that, now cheaper house, out of range once again.

Very simplistically explained but while people are waiting they are saving as well so the next time around they have more down payment and less to borrow thereby getting slightly better rates.

[Luke9686]

Entry level homes will fall far and fast over the next few years. The mid to high level of any market isn't as subjected to rate increases. Reason being is people who buy those house have good credit with good jobs.

Now on the other hand, people who buy entry level homes have less income and generally worse credit. Now that all the crazy loans are done away with, these people can't afford a home especially now that rates are rising.

Result=prices fall

Not to mention the millions of sub-prime loans that are going to adjust within the next few years. How are they going to refinance a home that is worth less than what they paid??

They arent. That means more foreclosures. Then the banks will sit on them, much like they are doing now. Only difference is by then, they may (big MAY) finally realize that they need to discount the homes they took back bigtime for people to buy them.

My prediction=prices will decline through 2010. Entry level homes will be around $250,000. Entry level condo's will be almost worthless.

[dvflyer]

Originally Posted by tigerclaws

Very simplistically explained but while people are waiting they are saving as well so the next time around they have more down payment and less to borrow thereby getting slightly better rates.

Saving how or what? Most of the stories I've heard are people who are mortgaged to the hilt having refinanced a few times where they started with a nice cozy $1000/mo mortgage that is now $2800 or just barely made it into the house thanks to creative financing and low intro rates.

The current foreclosure rate speaks for itself. People haven't saved or they could use that savings to "save" their house.

[justsomeguy]

Originally Posted by Luke9686

My prediction=prices will decline through 2010. Entry level homes will be around $250,000. Entry level condo's will be almost worthless.

What's an entry level home cost now? Isn't it like close to $500,000? I don't think it will drop 50%. I know this gets said a lot, but it's true, people do always want to live in Southern California, so home prices will always be high, by 2010 standards $250,000 won't be that high.

[Luke9686]

I doubt entry level homes cost $500K. Just a quick search brought up several under $450,000. And those arent even fixers. The lower end of the market people tend to buy fixers in the not so nice areas.

In a market like this, you can either be way right or way wrong.