Tuesday, September 30, 2008


One of the very first posts that I did on the blog took a look at the current prices versus the traditional average prices. I thought I would take a look back for the benefit of our newer readers and see how close we are now. The data comes from the Nation Association of Realtors.

The first chart shows the median price from 1980 through 2006. As you can see the prices fluctuated a little bit. You can clearly see the early 90's bubble and the mid 90's correction. Compared to this bubble the last one was just a speed bump. I put the red line on the chart, starting in 1980 and continuing through the peak of the last bubble out to today. Using that as a trend line, median prices today would be about $240K. But that trend line is through the peak of the last bubble. A very optimistic trend line. If you were to draw that line through the trough in the mid 90's the median price would only be about $150K. That's probably on the pessimistic side so if we split the middle the median should be around $200K. At the current rate of decline we should hit that in about 6 months. Currently we are at $247k and dropping at about 5% per month.

The second chart shows the ratio of median price to median income. As you can clearly see the ratio of median income to median home price stayed primarily between 2X and 3X, even through the last bubble it just barely broke 3X. But in this bubble it peaked at something like 8X the median income. If my data is correct the median income for Riverside County is currently around $54K. Oh look, we end up at that $150k number again.

I hear a lot of people saying that prices will never fall that low. I don't know why they think that. These ratios have been the same for many many years. Much farther back that these charts show. Has anything changed in the last 10 years? Contrary to Realtor spin, we are not running out of land, you could build millions of homes in the IE on all the vacant land. It sure not the weather. It's not like we live at the beach, half the year it's hotter the hell here. There's not a great job market, the pay sucks out here, which is why 1/2 the population commutes to LA. The air quality is on par with post explosion Chernobyl most of the year. So why would anyone think prices are not going to fall back to traditional ratios. The only thing that is not factored in is the size of the homes. Maybe we should add at least 10% to the median price for the increase in the home sizes over the last few years.

Do you believe that the prices will fall back to traditional levels? If not what is your reasoning?


jennalee ryan said...

the first house that i bought in temecula was off of pala rd. in 1990 i paid $130,000 for it and it was a single story 1950 square feet. i see that my ex next door neighbors house is for sale at 45564 Kimo Street for $239.900. it is 200 square feet larger than mine was.the truth is that i got a good deal at 130...as it was already built and the buyer didnt qualify, the next phase was already selling for $145,000. Soooo...lets assume that my house was worth 145 in 1990...the larger home next door was selling for more of course...say $160. Now, lets say that the house next door takes $210 for their house which isnt unreasonable. add landscaping, sprinklers,patio, drapes and a few upgrades to the purchase price of $160 and youre probably at $175. dont forget the costs to buy and the 8% to sell....thats a profit of maybe $15,000...after almost 20 years. I would say that we are almost back to traditional values if you figure in that the cost of wages and building has gone up in 20 years.

jennalee ryan said...

also bought a condo in palm desert 8 years ago...paid $72,500 for it. they went up to almost $300k at the markets peak. I saw one on the market last month which sold right away for $89,900, and most of the others are sitting at $110. keep in mind that both the house and the condo were purchased at a higher interest rate...7%, so in actuality, the $89,900 condo would have the same payment as mine...once again, a lot of the lower priced homes I believe are close to traditional value,,,the higher priced homes just take longer to drop.

Curious said...

I hope people get it into there heads and let homes fall back to traditional values so we can knock the bottom out of this bubble. I think a lot of people forget that $500K is a lot of money for a home and have been desensitized during the bubble years, lets hope enough people hold out long enough for the housing prices to fall inline with income and inflation and all the usually stuff that it depended on before free credit was the norm and housing mortgage fraud was the 2nd income earner

Laurence said...

I think there are a couple of things you are not taking into consideration (or at least not giving enough weight to). These are all "JMO" of course.

1) You are only comparing outright median prices and are not putting enough weight into the large home factor. I mean if you could find "median sq footage" from 2000 it would probably be sub-2000 sq ft. I have a coworker who was originally looking at houses in the OC and then saw that he could spend less money and get a house with double the sq ft and double the lot size. Given that that particular area of the IE is only maybe 20-30 minutes farther away from OC, the value to him was obvious. The much bigger houses, newer construction and much lower $/sq ft ratios are bringing in buyers who otherwise would not even consider IE.

2) I think a lot more people are spilling over from LA and OC with good paying jobs than was the case 10 years ago. 10 years ago people looking for deals were going to relatively new places like Diamond Bar and Chino Hills. Now that those are saturated the commuting borders have moved out again. Your metrics primarily focus on affordability ratios with IE income and I don't feel this is completely accurate compared to prior history.

Don't get me wrong, I don't think we are at the bottom quite yet but I do think we are closer to the bottom than you think.

I know this much - I have been watching a lot of houses in a particular area I've had my eye on for a year and with the recent price drop which occurred this summer I am seeing multiple offers on any house with what I consider to be a reasonable price (within my price range and what I consider to be a valid $/sq ft ratio) on the first day it is listed. Realtors are stealing keys to prevent additional offers. I am seeing 4-5 offers on houses that I don't even think are that great within 1 day of being listed on MLS.

I think that the next few months will tell whether this is just the summer surge in real estate or an indication we have hit prices low enough that all that pent up demand is showing itself and we've more or less hit bottom.

alex said...

I would say that the countervailing forces to Laurence's arguments are:

1. higher gas prices/increasing congestion means fewer commuters to LA/OC

2. Mello Roos/HOA fees largely absent from historical price calculations should further depress prices


golfer_X said...

Lawrence, The ratios don't change. If people make more they can buy more but the ratios of income to price should remain the same. Whether the people are working in the OC and LA and bringing there paychecks home or working in the IE. It's all factored in when they collect the data.

I don't think anything is different now than 20 years ago as far as why people moved to the IE. Homes are cheaper than LA and OC. But in order to afford them many people still have to work in LA or OC. In most cases wages out here are less, a lot less in many professions. In my profession there are no jobs out here. My wife makes about 20% less working in the IE than she would in LA.

I did make note that the average home has gone up a little in size. Yea, everything built in the last 10 years was much bigger but the remaining 90%, the existing homes, didn't change. So that does not affect the median price much. The median price will not buy one of those big homes (unless you go out to someplace like Hemet). For the nicer areas I figure the median price home will be a 20 year old 1200 sq/ft 3 bedroom. In San Jacinto you can get a 2 year old 3500 sq/ft home for the median price.

Oldtimer said...

It's hard to guess where average prices and ratios will land. Some of the newer areas, with more distress, will likely go below-normal as they transition a high percentage of homes from people that can't afford them to people that can. Some of the more mature and desirable areas will fall more slowly as new buyers buy with sober financing at prices they can afford.

One point I would argue on average house size in the IE is that far more than 10% of the homes there were built in the last ten years. If I had to guess, I'd guess that over 30% of homes in the IE are 10 years old or newer.

golfer_X said...

We were both a little off. The IE has added about 169,000 housing units in the last 10 years. That's an increase of about 20%. Those are the numbers I got from the county center for demographic research or some such outfit.