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expecting 90% decline in CA home prices


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#11 skyymaster

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Posted 21 December 2006 - 02:56 PM

It is based on a typical house in bay area, although I saw similar ratios of numbers in many other houses all around Northern and Southern California.

The place I was renting last year had rent of $1650 for each part of the duplex. Total rent was $3300. The price for which the house sold this May was 1.2Million.

Price to rent ratio = 363.

Fair value of price to rent ratio = 120 (10 times yearly rent, this is what the real estate people use in normal markets)

Price to rent is out-of-whack by 3 times.


After the market corrects, I expect prices to correct equally in the other direction before stabilizing. The reasons are (i) when prices reach fair value, people will still be reluctant to buy because of previous history of decline, (ii) people will not have enough cash to buy and borrowing will be no-no at that time.

So, I expect price to rent to go to 40 at the bottom. For the mentioned house, price will be 132000.

Therefore, there will be 90% decline.

If all houses decline by 90% in prices around the state, and there is no civil war, I will be very surprised.

Expected time-frame of the decline - 8-10 years. Peak was in 2005. So, I expect the bottom around 2014-16.



Please sign me up for several condos and couple of houses near a beach. If this happens. I will pay good in commission.

Edited by skyymaster, 21 December 2006 - 02:57 PM.

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#12 Net

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Posted 21 December 2006 - 03:07 PM

People do not like me forecasting real estate prices. So, let me stick to Qs.

I am seeing a pattern. It can take Qs to 36.5 in 15-16 days (counting trading days, not holidays). Last part of the decline will be sharp and after new year.

I do not have as much confidence in this call as the forecast of California real estate prices (at least 70% drop).


As a guess, how about 50% to 60% correction? I remember reading something prior to the summer price peak, that the ratio of yearly income vs. average house price was at about a 10 to 1 ratio on the two coasts (i.e., $50K average income vs. $500K average house price) whereas the norm and current ratio in other parts of the country remained around 4 to 1 (50K average income vs. $200 average house price). Correcting 60% returns housing on the coasts back to the same ratio considered normal for the rest of the country. Caviets: Read this information quite a few months back, the housing and income numbers, at best, are guesstimates, and I don't remember the source, but thought this might be interesting to add to the debate.

Some numbers:

A house costing $175K in Y2K which subsequently increased in value to $525K in 06 (Southern CA) saw a 300% increase in value in 6 years. A 60% correction of the house value brings prices back to $210K, still a $35K gain, or about a 20% increase in value over 6 years.

As for the fib analysis (175K low and $525K high):

Here are the retracements (hitting and holding fib support implies the housing rally in tact):

38.2% = $391.3K (25% correction in value)
50.0% = $350.0K (33% correction in value)
61.8% = $308.7K (41% correction in value)
and
76.4% = $257.6K (51% correction in value)

So, a correction of 33% to 40% of the home value falls nicely within the range of fib targets (33% decline in value matches 50% retracement of the move up) for which prices can rally to new highs. If if the prices were truly a bubble and fib support does not hold, then the 60% correction only brings prices to near the starting point, but not quite. A 70% correction returns prices to just below the starting point.

#13 arbman

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Posted 21 December 2006 - 03:34 PM

The gap in between the rich and the poor will continue to widen during the economically stagnant period. It is stagnant because the stock markets are still trading below their 2000 highs except for the richest Dow stocks. If the wages continue to grow with the inflation around 3-4%, the most likely outcome is the wages will grow for the rich around 5-6%, overall the wages will be growing from 20-30% over the next 5 yrs. If the home prices correct 30%, then the demand will be meeting the supply at a mid point, instead of a deflationary 90% collapse with the wages. The only way the outcome that Greenie is predicting can happen if the inflation turns into a complete deflation over the next 5 yrs. Bush is talking about raising the minimum wage by $2, that's some 25-30% increase!!! They would not be looking to do this unless they also see the upward inflation pressure. All of the wages should adjust upward. Of course, if the central banks will shift the policy toward increasing the unemployment than the inflation, then they can crash the markets and no adjustments will be necessary, only the rates will come down. - kisa

Edited by kisacik, 21 December 2006 - 03:39 PM.


#14 OEXCHAOS

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Posted 21 December 2006 - 05:50 PM

The gap in between the rich and the poor will continue to widen during the economically stagnant period. It is stagnant because the stock markets are still trading below their 2000 highs except for the richest Dow stocks. If the wages continue to grow with the inflation around 3-4%, the most likely outcome is the wages will grow for the rich around 5-6%, overall the wages will be growing from 20-30% over the next 5 yrs. If the home prices correct 30%, then the demand will be meeting the supply at a mid point, instead of a deflationary 90% collapse with the wages.
- kisa





That's exactly the point I was trying to make. You can't just look at a price relationship and assume correction to the mean without anything else changing as you go. People react. Businesses react. Demand shifts. Rich Chinese business people open offices in SF. Whatever. Economies are chaotic systems. You can't use simplistic linear relationships to project outcomes with any confidence.



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#15 humble1

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Posted 22 December 2006 - 02:18 PM

the numbers don't work on real estate just about all over. when i was building my portfolio i always used 100 times monthy rent and found plenty of properties to choose from. i am now totally OUT of real estate. and now insurance and property taxes have surged. yes, i sold too soon - way too soon. my last properties were sold two years ago, before the megaspike. i am not sure about the 90% but i could easily see a 50% plunge. as far as time goes: it will take years, for sure. i am looking to late in 2010 for a bottom of some kind, though i think it will take several more years to clear the clutter and the foreclosures.