Wednesday, January 30, 2008

Let's look at those charts again

I took a couple of charts from a NAR report for Riverside. Using their median price chart and drawing a line from the start (1980) through the top of the last peak and out to today we come up with a median price of approx $225k. Since this line is through the top of the last peak it's probably on the optimistic side (After all that was the peak of the last bubble). Taking another line and going through the low in 1995 (after the bubble popped) the median drops to about $150k. We can see, had there been no super-bubble the median price of a home would probably have been between $150k and $225k today.

Looking at another NAR chart on Price to Income ratio's we can see that this ratio stays between 2 and 3 from 1980 all the way through late 2002. After 2003 the ratio goes parabolic, jumping to nearly 6x by late 2005. I believe it's closer to 7 or 8 now! If we go back and use this traditional measure of what a home should cost we once again come up with a number close to $150k. Riverside currently has a median price of about $360k putting it about 240% above the $150k number I keep coming up with. Even if I use the higher $225k number, prices are still 160% overpriced. In other words, to fall back to traditional values homes would need to decline 60% to hit the $150k number or 40% to get to the higher $225k number

And if it's not clear enough yet that home prices are WAY out of whack, take a look at the last graph.

Don't think the prices will fall that far? I'm not convinced myself that we will ever see the median under $200k again. However, some of the Northern California counties have already fallen into the mid $200s The difference between us and them? The price declines started in Late 2005 in Northern California. They have over a year head start, but we are catching up fast! Riverside's median has fallen nearly 20% in only 6 months (

1 comment:

oldtimer said...

A couple of tweeks to your analysis would make it look a little less dire, but still directionally correct. First, I'd substitute debt service to income for debt to income. Debt to income can be misleading if prevailing interest rates change alot, as they have from 1980 to today. Second, I'd suggest an adjustment for average home size/quality. The average home in Riverside County in 1980 was alot smaller, and I'd guess the construction quality was lower too. Quality is subjective, but I'd have trouble believing it hasn't improved alot in the last 30 years, just due to better building codes and materials (if you think recent vintage houses are poorly constructed, look at what they were slapping together in the early 1980s, aluminum wiring and all).

As for prices, trends create their own momentum. The falling prices will beget lower comps, which will cause buyers to fall out or retrade their offers. Riverside's high proportion of distressed sales will cause prices to continue falling until the overhang is worked through. But my guess is that it will not be as bad as the central valley. Riverside Co. has decent weather, better employment prospects, and less overbuilding.