Well, this about says it all. While taking pictures of a new listing yesterday, I was chatting with the window washer who was simultaneously doing his thing in preparation of our coming out party. He is an intelligent, hard-working entrepreneur who I have known for years. Of course, we have “homes” in common, and he asked me how business was. I said the usual – A lot of listings, a lot of activity, but homes are much slower and more challenging to sell. The conversation shifted to the insane price appreciation we have seen over the past five years.
I told Window Washing Man that if he has been thinking of making a purchase, this might not be a bad time to move forward. Interest rates remain low, prices in our area are down, and there are many very attractive opportunities out there right now. His response: “I am waiting for these homes to drop to $200,000″. WAIT A MINUTE! These homes, priced in the high $600,000’s to low $700,000’s today sold new for the mid-$400,000’s five years ago. Does he really think that prices are going to plummet by 60 to 70 percent? Maybe it is a case of too many dirty windows and an obscured view, or maybe this is an (extreme) example of the pervasive buyer mentality today.
Then it occurred to me; we are not just dealing with unrealistic sellers, but with a distorted outlook on the part of the buyers. “We are waiting for prices to come down” has been a common mantra. We hear it daily. I just assumed “down”, in the minds of buyers, was “5 to 10 percent” reduction in price, not a rollback to 1980 pricing. Buyers and sellers alike have been bombarded with doomsday messages but are failing to read the fine print. It may be time for myopic buyers to check their vision, or at least clean their windows. You just might enjoy the view.
ABOUT THE AUTHOR Kris Berg is Co-Owner and Designated Broker of San Diego Castles Realty. If not-so static web sites are your thing, go here at once where you will find loads of real estate information including homes for sale, market trends, floor plans and more. Kris's hobbies include fencing and spot welding. She likes kittens. 
on 
on 
on 
on 
on 
on 
on 
{ 1 trackback }
{ 21 comments… read them below or add one }
Kris, you hit the jackpot with this one. How many real estate related topics has the media so screwed up for so long the public thinks they’re right? Take interest rates. For five years they’ve made themselves the national town cryer screaming like Johnny One Note that interest rates are about the go way up and the RE market will crash as a result.
The bubbleheads are no different. Well, they’re a little different, as I lump them in with the UFO folks, at least marginally. They are singing their favorite dirge, Bursting Bubble, even as they watch terrible markets like ours in San Diego resist bursting.
Guys like your window man drink whatever Kool-Aid is offered as flavor of the month, as long as it ends in disaster for others, and something cool for them. My favorite media scam so far has been global warming. The two most quoted ’scientists’ they use to prove their case are the same duo who 30 years ago wrote a best seller, (promoted like crazy by the same media) that warned of the coming new………get ready, here it comes……………new ice age.
My dad had a great poster in his office when I was in high school. It had a picture of a very old man leaning on his cane. His beard was down to his belt. The caption?
Portrait of a young man waiting for real estate prices to fall.
Kris – I see this type of reasoning here in NYC. Its true the sellers are striving to get the highest price – still. But its the buyers that have more of the dellusions.
Christine (and Jeff) – I have to say I’m a little embarrassed that I am just getting it! I have known that buyers were resisting, taking their time, being cautious and concerned about paying “too much”. It didn’t hit me though until this conversation just how, as you put it, dellusional many are! This was the first person I have talked to who actually quantified his expectations, and I was floored. Steve keeps saying we are going to see the flood gates opening when all of the sidelined buyers decide it is time to get in the game. I am starting to think he may be right.
your example of someone waiting for homes to drop 70% is akin to an example of a homeowner seeking 20% appreciation yearly for the next 30 years. you are not going to make a good point by citing extreme examples.
buyers are not just concerned about “paying too much,” buyers are concerned about their ability to feed themselves after the mortgage payment and the mello roos.
goes back to the basic question: can you afford the house you live in if you are asked to pay today’s prices for it?
Jack,
I hear you, but I am starting to quesion whether or not this is an extreme example. That’s all.
And the answer to your question: Barely. (But then, I am always the optimist).
but you asked a window washer!
my patient that’s a janitor just bought a $700,000 home and is trying to rent out his other $500,000 home.
this is like asking the shoe shine boy for stock tips!
Not really, Jack. I didn’t ask him anything – He volunteered his perspective. Secondly, he is part of the buyer pool – Maybe not in the high-end market, but a part of the whole nonetheless. And the lower end buyers drive the market by buying the home of the first time move-ups, allowing them to buy the home of the bigger fish and so forth. So this little fish (if he is indeed a little fish – I’m not sure I am ready to jump to that conclusion) wields a lot of power. Just like the condo conversion or new home buyers who break the real estate food chain, if the window washer doesn’t buy, it has an affect on all price points. I call it the trickle up theory.
Your janitor, by the way, is either very well paid, insanely savvy, or in very deep doo-doo.
I don’t wish to stray to far from the subject of home affordability, but none of us should forget why there is a “Rental Market”. While the price of homes (and home ownership) has been the talk of this town for decades, there is a rental market for good reasons. Lack of sufficient income, job instability or just the desire not to be tied to a mortgage (good or bad) are but a few of the many reasons people make the decision to rent vs. own. Kris and I have a long time friend here who happens to be a successful real estate agent for the past 25 years. He has always rented a place at the beach and is totally satisfied with this arrangement. When we asked him why, his answer was simply that he did not want the commitment. Nothing wrong with that. If you don’t feel comfortable with home prices, there are 3 alternatives: 1.) Rent; 2.) Move to another city; or 3.) Lower your home purchase expectations. If you want to own, you may have to buy a property that is smaller and less expensive than your ultimate dream home. Kris and I owned and lived together in a 600 sq.ft. 1BR “shoe box” for years before we could afford to move up to the next property. It was not our dream home (far from it) but it was what we could afford and we wanted to own.
We are not automatically entitled to home ownership or affordable home ownership. If our window washer really wants to own a property, say for $200,000, he can. It may not be his dream home, but that’s his choice. Despite all of our complaining, “The Market” (supply and demand) determines what you may get for $200k. The window washer has made his choice of career (at least for the moment) and the income that may be derived from it. I can find him many great condo properties in San Diego for around $200k, just not the size or in the development Kris referred to. And before Jack attacks me, I will acknowledge that $200k still does not get you much in San Diego compared to other areas of the country, but we have always (at least as long as I can remember) had a premiuim priced into San Diego real estate and there always will be. That’s what an average annual temperature of 71 degrees, beaches, mountains, etc. does to a market. It creates demand and always will.
If a buyer thinks prices are coming down for the forseeable future, great! Sit back and rent until prices reach your target. But don’t forget to place a “value” on each day you could have owned during that period (liveablility value, tax benefit value, equity building value, etc.) . The dirty little secret is that prices have already dropped 5-10% over the past year in many San Diego communities. On an average $700,000 home if we were to squeeze another 5% ($35,000), the difference on your 30-year mortgage would be a whopping $200 per month.
At this point did you save the tree, while the forest burned down around you??
Bravo! Now brace yourself for Jack’s rebuttal…
Of course there’s a premium to San Diego housing prices. But remember, this bubble is bigger than just San Diego. Bakersfield also saw a 100% price increase in the last 5 years. Now you can’t tell me there’s a sudden premium to Bakersfield living, can you? Even Watts in LA saw this 100% price increase. There’s a premium to living in drive-by-shooting central?
Fact is the fed in order to avoid a recession dropped the interest rate to extreme lows in 2001. Fact is also the lending practices and financial checks went completely out the door from 2002 to now. And that’s why 70% of the loans out there these days are neg amorization or stated income or adjustable mortgages. If you mess with the demand, you will get a shortage of supply! How do you mess with the demand? By allowing janitors to qualify for $700,000 homes. Are you doing him a favor? no! because you can already see a year down the road what is going to happen. But mortgage brokers needed the fees and the commissions, so they gave him the loans anyway.
There’s an article in SD UT the other day regarding how ’suddenly’ Hispanics are all acheiving the American dream of buying homes. Are the Hispanics generally doing that much better in this short 5 year timeline? Or did the lax lending suddenly artificially create a new group of folks that can now qualify for home purchases?
When you artificially create demand, you got to make sure these folks can really hold on to the property. Income has not grown. Job growth are in the lower paid service sector or in real estate dependent fields. When the artificially increased demand lead to artificially high foreclosures, a large part of the artificial price increase will just as easily desolve.
Real estate does always go up. Long term. in steady increments. What we saw in the last 5 years are a product of manipulation of interest rate and loose credit. That’s not real. And it will be difficult to maintain such artificially driven price gains.
and that’s my two cents
Jack,
For the record, we always appreciate your two cent’s worth (really!), even if you do tend to be a little more “spirited” on the bubble subject. Your comments are always intelligent and well-researched, and I say that even though we clearly don’t always agree on all points.
Now – Wish me a Happy Birthday!
Jack – Since it’s Kris’ 47th B-day (I’m certain she will appreciate me telling you this)please go easy on her (just for today). Your comments, as always are interesting. I would only suggest (gently) that we should try to avoid stereotyping any particular segment of our community. Yes, the SD Union did have an article, and yes, there are buyers who have bought into exotic mortgages, but it is not unique to any one segment of population. All I know is that I have many friends and clients who are of many different races and ethnicities and most of them have higher incomes and nicer homes than me. Maybe I should be considering a different career.
first: a very happy birthday to Kris. and I do appreciate her efforts and a place to sound off.
certainly there are many successful members of the Hispanic community. The key with the UT article and my point is has there TRULY been a drastic demographic change within the Hispanic community to account for a sudden improvement in living standards and ability to afford homes within the last 5 years? What changed? Why are the Hispanic population so much better off in 2006 as opposed to 2001? Is there a sudden dramatic increase in % of college graduates in that segment of the population? Did the % of Hispanic professionals within that population show a significant increase? Certainly if that’s the situation we can say the gains in housing may not be so artificial and be solely 2ndary to loose credit as I previously suspected. I would love to see some of these evidences.
I have not seen any stat’s breakdown on the UT article, but yes, a certain percentage (even a high percentage) of buyers in EVERY demographic segment that has purchased a home in the past 5 years may have used an exotic mortgage vehicle. Many may actually have understood what they where agreeing to and the potential downside. Many didn’t or were in denial. Obviously some number of these are not working out, but many are, either due to the fact that the household can actually afford the higher int. rate or they have refinanced (or will as soon as the pre-payment penalty period is over). We may call this “artificial” demand but these people really wanted to own a home. What may have been artificial is what they could really AFFORD to buy (due to the mortgages and brokers who pushed them). My bet is that many of the defaults happening now are more a result of the MAGNITUDE of the purchase rather than the purchase itself. Bottom line is that yes, you’re right. The exotic mortgages are getting many people into financial trouble, but many of these people may have been just fine if they had purchased a less expensive home (referring back to my last comment, above at 8:09 am).
Until some tendons finally screamed, ‘no more’ I was a long time serious body builder, and with excellent results. This conversation reminds me of the guy who has different theories about lifting weights and is adamant his theories are correct. Not only is he right, everyone else is wrong.
When I was 50 and one of these types came in my gym with his hot air, I challenged him to lift what I could, or shut up. Now he was in his mid-30’s, was taller than I, and looked pretty damn strong. What happened?
His ‘theory’ made him look good, but a 50 year old bald guy embarrassed him. Big time.
There is no bubble, and nobody can currently point to one. NASDAQ in 2001 was a bubble. Why? Because it went from 5,000 to +/_ 2,000 almost faster than you could watch it happen. And it’s still not that much higher. Again, that’s what a bubble and a bubble bursting looks like.
The SD real estate market will has, according to the latest published stats from DataQuik less than 3% so far. So can we please stop treating bubbleheads as if they’re saying anything of import?
And Steve, if Kris is 47 I have hair. You must get the same looks I get when I’m out with my wife. It says ‘that guy must be really wealthy.’
Thanks, Jeff. You’re onto me and my evil plan. I married for money.
Now, I may divorce over age – The fact that he has chosen to out me on mine, that is.
“there is no bubble, and nobody can currently point to one… so can we please stop treating bubbleheads as if they’re saying anything of import?”
fighting words from a desparate man.
3700 sqft homes on 15,000 sqft lots in Valley Center are now being offered by builders for $599,000. Just 6 months ago the same exact models went for $800,000. I think I would consider a $200,000 slide in 6 months bubble bursting.
If that example was the rule Jack, it’d be front page news nationwide. Alas, it’s the exception that proves the rule. Seems you’ve chosen to ignore what the stats say county wide – less than a 3% drop.
Using your approach all Chinese men are over 7 feet tall – that is if I use Yuo (sp) Ming as the foundation for my contention.
Desparate indeed.
I am going to attempt to relate this whole argument to my personal experience in the last down cycle. In 1989, Steve and I bought our first Scripps Ranch home. Our equity from a little Pacific Beach condo (huge by our young standards) allowed us to purchase the larger home. About thirty minutes after we made the purchase, the market “tanked”, in our eyes at least. By tanked, I mean our funny money began to quickly evaporate. However, at the lowest point in the market, our home lost about 10 – 15% of its value – on paper. Did we consider this a bubble bursting? You bet; our five year plan became an 11 year plan. A $30,000 to $50,000 paper loss felt like a catastrophe to a young couple. Did it destroy us? Heck no. We road it out until values came back, as they always do. We had bought a home we could afford, we had enjoyment of the property for over a decade, and we ultimately recovered our equity plus some and were able to buy our next, larger home. No bubble then, no bubble now, in my humble opinion. Just another market cycle. Of course, your perception is your reality, Jack. And many share your perception, which is making this transitional period difficult for buyers, sellers and agents alike. However, we’ve seen it before and we will see it again. The sky is not falling, we are not going to hell in a handbasket, and I rather doubt any of us are going to be living out of a refrigerator carton anytime soon. So, back to what Steve has been saying all along. If you want homeownership for enjoyment and for the long-term, you will be fine. There are some nice opportunities out there. If you are looking to make a quick buck, it may not be the right environment. And certainly, if personal circumstances are forcing a sale, it will feel like a big, fat, painful bubble regardless of the reality. I suggest we all reconvene in five years, dust off this conversation and reflect. Time will tell.
listen to the cycle, listen to the signs and watch the canaries and follow the cycle.
I know there’s a cycle, you do too, even Jeff would admit there’s a cycle. what is the definition of a cycle? upturns and downturns.
what clue you into the direction of the cycle? inventory numbers, sale volume, and finally, the price drop. by the time you see the price drop it is already too late.
in late 2003 inventory in OC was almost non-existent. we bought in. by mid 2005 the trend was fully in reverse, inventory was starting to expand. we sold and cashed out $100,000. by mid 2006 inventory was 100% of the level in mid 2005. the flipper that bought that condo had to bring money to the table to get the condo sold. keep in mind the median price in OC is still in the positive.
same thing in SD. inventory started rising from 4000 units in 4/2004 to 14,000 units by mid 2005 and now 23,000 units. at the same time, sale volume dropped off. the median is the lagging indicator in the whole thing. so to look at the median as the gauge of where the market is going is like Jeff looking at his broken tendon and saying he probably should stop lifting weights.
The valley center example is the canary. listen to the canary. another canary is San Marcos. There you have people who purchased in late 2005, ignoring the trend in rising inventory and declining sale and only following the lagging indicator, aka median price. a typical 2500 sqft home went for $750,000 to $800,000. Now one can get it for $600,000.
don’t tell me the guy buying in at $800,000 isn’t kicking himself. his carrying cost is a whole lot higher than the guy that get in now at $600,000. he is not going to be able to save quite as much cash to take advantage of the low end of the cycle.
now why shouldn’t we jump in at $600,000? because we are only a few month into the negative median price territory, which means the down cycle is just starting. why jump in when it will continue to fall?
people are lemmings. once you got a trend established, in this case downward, the market psychology shifts and everyone hold. it’ll keep pushing the market down. remember: the market and the comp is driven by the ones that sell, not the one that hold on. as all the folks that can hold on withdraw from the market, the only one left in the market are the desperates. that is when you will really see the huge drop in prices.
when do you jump in? what the math pencils out and when the leading indicator like inventory start dropping again. this is all about supply and demand folks. it really isn’t that hard, it just requires restrain and understanding of delayed gratification.
I think what Jack is saying in principle is exactly right, but his emphasis is on the wrong syl-LA-ble. The time period Kris talked of, in the ’90’s was the worst real estate ‘down cycle’ since the baby boom began in the ’40’s. We lost giant local employers during the S & L crisis. It was terrible. If there was ever going to be a bubble bursting it surely would have been then. But it didn’t. The run-up in the last half of the ’80’s was huge, and there was still no burst. There was no burst after the huge ’70’s run-up either.
Yes, there are cycles and you’ve described them very well. Just stop short of bursting, crashing, etc., because it just ain’t so. But, like Kris said, the passage of time will be the only way to know for sure.
And Kris, let Steve use one of his precious ‘Get Out Of Jail Free’ cards!