Monday, July 14, 2008

Getting closer but more declines needed

This was the 3rd post I wrote on this blog nearly a year ago. Back then the median price was still in the stratosphere. A lot has changed since then but these charts and graphs still show there is a way to go if we are to return to traditional values.


(Post from Sept 2007)
Just for kicks I took a chart from a NAR report for Riverside. Using their 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. If you took that line and went through 1995 the median drops to about $150k. I personally think that the $225k number is closer to where is should be (because most newer homes are larger now and interest rates are much lower). However 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 $420k putting it about 170% above the $150k number I keep coming up with. Even if I use the higher $225k number, prices are still 85% overpriced. In other words, to fall back to traditional values homes would need to decline 65% to hit the $150k number or 45% 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.



7 comments:

Rob Dawg said...

My long term Case-Shiller graph modified for true inflation and hedonic:

http://bp1.blogger.com/_zqzPMzXNGso/RuYjXzNGflI/AAAAAAAAA3E/MVx3S3zUoEA/s1600-h/shiller_graph-hedonic.png

Lest hope we don't see 25 years like 1894-1920.

Paige said...

OK, so I have to say that we made an offer on a home. We offered $20,000 less plus 6% concessions. They accepted!

This is the first home we made an offer on where there was no bidding war and to where we could offer less than asking.

However, tonight we wonder (we haven't responded to the bank yet), if there will be better deals down the road. For now, the homes that are offered at lower prices are being bid up much higher. That's why I thought we'd tried looking at a more expensive (to us) home where no one was making an offer and try going low. It worked, but I still think we're over paying.

Do you think there will be bidding wars in the fall and winter? At what point will the investors jump in?

We want to buy in Orangecrest and a friend of mine thinks the homes right near JFK Elementary will go down to $300,000. IF they were ever offered at that price, they certainly would go for $50,000 more. Right?

Stressed.

golfer_X said...

Well, we are all just guessing at this point. What prices do is effected by so many variables its very difficult so say for sure whats gonna happen. But judging by the last few days I have a pretty good feeling where they are going. Personally, I don't think anything is anywhere near the bottom with the exception of maybe Moval, Perris, San Jacinto and a few other areas where the prices are already down 50%+. Those areas I think will see another 10% to 20%. Everywhere else still has miles to go. Most Riverside and Corona homes are still 30% too high in my opinion.

You need to ask your self a few questions.

Are you going to be sick if your house falls in value below what you paid? If yes, then wait.

Are you planning on staying in it for 10 years or more? If the answer is no are you will and able to sell at a loss if you have to in 5 years?

Can you EASILY afford it? Now is not the time to "just squeak in".


My opinion hasn't changed. I don't think buying right now is very smart. BUT if I found the home I wanted at a smokin price I'de buy. Because at that price I would easily be able to afford it AND I plan on dying in my next house or living in it till I retire at the very least.

Paige said...

Thanks so much for your response. We are buying it for $10,000 more than it sold for in 2002. Is that not a good deal?

golfer_X said...

It might be a good deal today. it sounds like you are worried about if it going to be a good deal a year from now.

I've always thought that prices wil go back to 2000/2001 levels. There are a lot of other blogheads saying 1998 (and a few nutjobs saying 1935). I'm seeing nothing to indicate the prices will stop falling soon. With the meltdown of the banks this last week it's getting worse not better. The bottom should be when we hit rental price parity. Once homes become cheap enough to buy and rent at a prifit then real investors will start stepping up and that should stop the price declines. We are a long way from that point in most of the IE.

Paige said...

I don't believe the competition we've had so far has been from investors. I'm wondering if there will be just as much competition, if not more, once prices fall further (from regular buyers and investors).

golfer_X said...

Right now you have everyone bidding on the same dozen or so low priced homes. Your right there are few investors especially for the larger homes. When the rest of the market capitulates and the other 40,000 homes get priced correctly there will be very few bidding wars. Most real investors will stay away from the bigger homes. They don't want those. They will be looking for 1000 to 1500 sq/ft homes.