(There’s a “high end” in Chula Vista?)

You actually did a great job of answering your own question. We spent a lot of time and words on this issue in numerous previous posts, so I’ll try to summarize. Don’t buy if you don’t want to!! Kris’ title was obviously a sarcastic shot at those agents and organizations who are always making the case. We don’t. But there are alwys reasons to buy and that’s why there is a market.

Some people don’t want the insecurity of having a lease run out every 6-12 months. They don’t make the decision as to whether they can stay. Others enjoy the net benefit of the after tax cost even though it may be higher than the rent for an equivilant dwelling. There are even those who like the idea, old fashioned as it may be, of paying down debt, thereby imputing equity. Or better yet, eventually paying off their mortgage and owning the property free and clear.

Too many people tried to become “investors” in the purchase of their own home, using 100% financing, limited monthly payments, etc., thinking that the market would never fizzle. Many are now paying the price for being wrong. Listening to agents, mortgage brokers and/or others who (wrongly) suggested prices would always rise does not relieve the ultimate responsibility from the buyer. No one forced their hand at the signing table. Kris and I have repeatedly mentioned a few of our own clients, whom we cautioned and advised NOT to buy in late 2004 and 2005, not because they weren’t qualified, but because it was obvious they were buying for the wrong reason. They had visions of $$ signs dancing in their heads. Nothing we said would have changed their minds. Even without the Crystal Ball, it was becoming clear to us that the potential for a reversal in prices was inevitable

Regarding the bubble, the run-up wasn’t as much supply driven (as in lack thereof) but extraordinary (and artificial) demand brought on by the loose financing. Regarding the purchase of land, it’s like any other investment which is way different from buying a home for oneself. Professional investors don’t always succeed. Amateurs should do a LOT of homework before plunging in without a good plan and proforma.

Thanks for your comments!!

The difference I see is the need versus want. I may want to trade in my 3,000 sf for 5,000 sf, but if the market isn’t cooperating and I am not in a financial pickle, I may just chose to wait. On the other hand, it my principal balance is going up every day while prices are going down, I will have to eventually bite the bullet, and thus become the next comp. This is what we are seeing at the lower price points.

Then there is the micromarket issue. When prices got out of hand, people naturally migrated to outlying areas in search of affordability. No one really wants a 60 minute commute to work, but in 2005, they may not have had a choice. So when prices soften, demand naturally returns to the more centrally located areas, and the Ramonas and Temeculas and Chula Vistas get hammered. Scripps and even the coastal communities are not immune to market corrections, but because of location alone, I think they will continue to be more insulated.

Price/Rent - Thank you for addressing that comment to Steve. It is far too long for me on my first cup of coffee.

I imagine that I may be able to answer my own question as to why people will buy nonetheless: the scarcity effect, which I believe is a hard-wired evolutionary phenomenon dating from our hunter-gatherer days. Scarcity effects are what drive bubbles. People want to buy before it’s gone! Oh no! There’s only one condo left in that building! I better buy it, before someone else does! Oh, there are other bidders! Well I’ll keep bidding them higher and higher! I NEED this. I can’t LIVE without it. But in a world with perfect information flows, you will clearly see that buying at any price doesn’t make sense when there is an attractive alternative like renting for ludicrously cheap rates in comparison to the purchase price. Of course, the fact that rents were flatlining during the bubble while sales prices skyrocketed should have been a HUGE red flag. But the covetous buyer sees only see scarcity.

I believe scarcity effects are what drove the housing bubble, and what is currently driving the bubbles in commodities (see: food availability decline & hoarding, as opposed to “famine.”).

I am reminded, at times like these, of the words of a former professor of mine who taught (and authored the definitive treatise on) transnational financial law: “Would you really be so foolish as to invest in land?” Clearly he was being hyperbolic to drive home the risks of securitizing mortgages (a risk we have now seen played out). However, if realtors want to sell people the idea of land as an “investment,” they should then be held to the same standards that brokers are, i.e. required to consider the suitability of an investment for a particular client. I heard a radio ad last night extolling the virtue of land doubling in value every 10 years historically; i.e. a 7% return annualized, which is lower than the over 10% annualized return on the S&P since 1975. Selling a house to someone who can never afford it, with the siren call of rising prices due to high demand and it’s a great “investment”, is unethical, and it should also be illegal. Especially when the Price/Rent ratio is so unbelievably high as judged against historical values.

Scripps houses are more…expensive than most of the homes in San Diego. The Median sales price in the 92131 area code for all 272 homes sold last year was $750k according to SandiCor. I believe the median price for all of San Diego was around 500k (citation needed). According the Shiller index for just San Diego, from the peak (Nov-05) prices have dropped about 32% for homes priced under $405k, about 26% for homes between $405k and $609k, and only about 17% for homes over $600k. This means that percentage-wise, wealthier homes have experienced a fraction of the price reduction that cheaper homes have.

In other words, the only reason Scripps hasn’t been hit as hard as the rest of San Diego is because houses cost a lot there. Why the higher priced market hasn’t been hit as hard is a subject of much debate. My personal theory is that higher priced homes are usually owned by wealthier people (duh) and wealthier people tend to be more responsible with their money. (or they wouldn’t be wealthy for long) Because of that, they probably didn’t overextended themselves as much, and are less likely to slip into foreclosure. Foreclosures are the main driver of price reductions right now with other sellers being content to let their house collect dust for 200+days waiting for the martians, er I mean buyers to come back.

I think overall, even the top markets will eventually correct at the same percentage scale, it will just take longer. So we’ll eventually see a bottom in the lower priced houses with the high priced houses continuing to show declines.

I’ve seen a lot of agents use the upside-down graphing method lately. From my experience though, they don’t usually tell me that the graph is flipped upside-down, and they usually remember to flip the text so I can read it.

Great writeup!