Steve Doyle’s Blog

Expert opinions … Everyone has one!

So when is the housing debacle going to end? It seems everyone has an opinion on that subject. Let’s look at a recent sampling of these thoughts.

“U.S. Housing Slump Has ‘Just Begun,’ Says Forecaster, Talbott”, as reported by Bloomberg.com on February 5th. While pitching his new book, John R. Talbott makes the bold prediction that the housing slump has just started and we should expect another 5 years of pricing decline. In Talbott’s mind the price of a house should return to 1997 levels, adjusted for inflation. He blames “the greed bug” for “… the heady, crazy days from 1997 to 2006 in which banks were lending large amounts of money under poor supervision and aggressive terms.”

“Housing market may hit bottom in 2009, Zandi says.” The San Diego Daily Transcript reported this new economic prediction on Monday, February 9, 2009. Economy.com, the home of Moody’s Chief Economist, Mark Zandi, has been following the country’s economic plight and the housing industry specifically. Mr. Zandi predicts the housing market slide will stabilize by the end of 2009. He sites the Case-Shiller house price index and “…strong action by policy makers to help support the economy and the housing market …”. Mr. Zandi believes the total “peak to floor” fall in house prices will average about 36% for the country, with some areas seeing more than a 50% decrease in price.

“Home sales up year over year, but down from December” reported the San Diego Daily Transcript on Wednesday, February 11th. According to Mark Goldman, professor of real estate at San Diego State University, “… the sales are picking up, but does that mean the bottom of values? No, but it means people are coming into the market now because the cost of living is lower than it was.” San Diego Association of Realtors (SDAR) President, Eric Weichlet notes, “We’re seeing a good trend.”

What does this all mean. Well, keep in mind Bloomberg and Moody’s are speaking from a National average perspective. The state of the real estate industry across the country is not homogeneous. Parts of the country saw much greater price appreciation during the early 2000’s than the average. Likewise, these same parts of the country have seen greater price recoil in the last three to four years. Therefore, the local dynamics of the real estate market may vary dramatically.

Let’s take a look at San Diego County. Even within the County of San Diego we see a wide variety of pricing impacts. The coastal areas of San Diego have seen very modest price reductions. The high growth, high inventory parts of the county have experienced greater price reductions. What does that mean overall? Let’s look at a couple of examples.

In May of 2006, SDAR reported the average price for a resale detached home in San Diego County peaked at $574,000. Today, SDAR announced the average price of a resale home in San Diego County for January of 2009 was $327,000. That is a 43% drop in price. For resale attached homes, the May 2006 average price peaked at $400,000 and in January 2009 it was $190,000. That is a 52.5% prop in price.

The average price of a resale detached home was $178,000 in 1997. The average attached home in 1997 sold for $138,000. At an average inflation rate of 3.5%, the average price of a single family and attached home would be $269,000 and $209,000, respectively. This calculation shows that San Diego has already reached Mr. Talbott’s projection of the “bottoming out” price for the attached home. But, we still have another 17% drop to go for single family home pricing.

My experience with single family home pricing in San Diego is a bit different. We have traditionally looked for single family homes to appreciate at 1.5 – 2.0% over the inflation factor. We use this rule of thumb because of the limited supply of single family homes in San Diego County and the very high attraction factor of San Diego County. With a 5.0% appreciation factor, the “bottoming out” price , according to Mr. Talbot would be $320,000, less than 2% off of today’s average price.

The measuring stick proposed by Mr. Zandi was a 36% reduction from the peak pricing, according to the Case-Shiller price index. As noted above, the average price for a single family detached home has already fallen 43% and the attached home average price has fallen 52.5%. Say again, that San Diego is one of the most challenged pricing markets, then Mr. Zandi says the Case-Shiller index would have to fall 50% to reach bottom. Okay, single family detached pricing might fall another 7%, but we have already over shot the price reduction on attached homes!

There is a reason that home sales are going up. Buyers know a good deal when they see it. I submit that attached home prices have already found their bottom and if single family homes haven’t found bottom they are very close to it. In my December 12, 2008 posting about San Diego Real Estate in 2009, I stated that San Diego home prices would stabilize in 2009 and that absorptions would increase. I believe we are quickly approaching that point. And, I would argue, no matter which expert you believe, when you strip down their national perspective to a local perspective, they are saying the same thing.

Are you ready San Diego? The residential real estate pricing nightmare is ending!

But, I’m just another expert, with another opinion. What’s yours?