General question on predicted percentage drop in RE prices

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phantom600rr_IHB

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<p>I am a little confused about the various predictions that folks have made on this blogs as well as in the general media. Predictions of 15-50% declines have been made, but my question is: 15-50% decline from what starting point? For example, are these predicted percentage declines based on 2002, 2003, 2004, or 2005 prices? Also, I browse ziprealty and redfin regularly, and the asking prices on most properties are mostly 30-50% above 2005 prices (especially on new homes that were purchased directly from builders). Perhaps I am looking at too small a sample of properties, but even with 50% decline, wouldn't the ask prices come back to say late 2004/early 2005 prices? And if that's the case, even if we see a 50% drop in prices it'll mean very little to most potential buyers. </p>
 
<p>Irvinerenter. . .I will speak for you I am steal IR's thunder because I pretty much agree with his prediction.</p>

<p><a href="http://www.irvinehousingblog.com/2007/03/11/predictions-for-irvine-housing-market/">www.irvinehousingblog.com/2007/03/11/predictions-for-irvine-housing-market/</a></p>

<p> </p>
 
<p>tourbillon,</p>

<p>Do you consider mid-2005 to be the peak? Yes, I do agree that, in general, homes have not appreciated 50% beyond 2005 prices. However, I am seeing many current sellers' asking prices at 50% above their 2005 purchase prices. I guess those are simply their wish prices! </p>
 
<p>I don't have a percentage prediction necessarily.</p>

<p>My prediction is based on year 2000 prices adjusted for inflation. So I am assuming a 5% increase year over year and I think eventually the bottom will be reached at 2000 levels adjusted for that 5% gain or so.</p>

<p>Today a property that sold at 200k in 2000 should be valued at about 281k and 5% is generous. In 2012 it will be 359k with the year over year increases of 5%. </p>

<p>When that happens we will hit bottom. </p>

<p> </p>

<p> </p>
 
Keep in mind that new house construction typically takes 6-9 months from when the contract is written. So just because the home is priced at say 1M in 8/2005 purchase, is really more like a 11/04 purchase, closed in August 05. Add in 20% appreciation just during construction and make that 1.2M, add only another 10% or so from late 05 to early 06 then you're looking at 1.32M. The prices on top of this are purely wishful asking prices. Real estate doesn't go down (my realtor told me), so from '06 to '07 I should add on another 10% at 1.45M. Here's your 50% higher than '05 prices. Reality will bite when the true value comes down to pre 2004 prices and that 1M property goes down to 2002 levels of $700K or even lower.
 
<p>It also all depends who you believe. If you go by retail MLS median price when buying through a realtor, I believe we have a long time to wait before these huge drops are reported and univerally accepted. When you see the price drops on this site and recent posts on other sites (check out "If only I'd waited" athttp://bubbletracking.blogspot.com/)then you can see that sales prices are indeed down 30+ percent since the peak. I lost 25% on my house in florida yet the real estate sites on Yahoo said that the county had dropped 3% around the same period. Who do you believe? </p>

<p>I was talking to a guy at work today and he was saying one of the Engineers at my company bought a 2200 sq ft house in Irvine about 4 months ago. Asking price was 900K and he got it for 650K straight from the bank and negotiated a lower interest rate.</p>

<p>All I know is that whenever I do buy a house next time, no way in hell I am going through realtors and paying retail price. </p>
 
<p>Bubblegum,</p>

<p>Your analysis on purchases made directly from the builders is right on. I have not thought about the time lag of construction at all. Very good point.</p>

<p> My wife and I have been following various properties in the Northwood area. We are not investors by any means, just a family looking for a decent home at a fair price.</p>

<p><strong>26 TEAK BRIDGE, Irvine, CA 92620 <strong>List Price: $1,250,000</strong></strong></p>

<p><strong>42 SECRET GARDEN, Irvine, CA 92620 <strong>List Price: $1,250,000</strong>


</strong></p>

<p><strong><strong>57 BAMBOO, Irvine, CA 92620 <strong>List Price: $1,150,000</strong></strong></strong></p>

<p>The average purchase price for the above 3 homes were in the mid to high 900k back in 2005. We are currently renting in the Pasadena area and are looking to relocate to the Irvine area in a couple years. If your analysis regarding price drop back to 2004 levels (roughly 700k for those 3 properties) is accurate, that would be quite ideal for us 'bitter renters'. </p>

<p>Thank you everyone on this blog for enlightening the 'next generation of buyers'! </p>
 
Methodology? We don need no stinkin' methodology.<p>


A few years ago, about 2003, Sir John Templeton predicted that re prices would decline 90% from the peak. I am just mimicing Sir John. 70% sounds as good as 90% to me. It is all just a guess, and anyone who takes their methodology too seriously is taking themselves too seriously.
 
<p>Anonymous - I was being a bit flippant, but truthfully I do not have an exact percentage decline at which I will buy. All my trades, be they long term investments or short term speculations, have an entry and exit strategy, and residential real estate to live in is not much different. My entry point for purchasing an home to live in is not so much based on an exact percentage decline or an exact price decline, but is based on a change in the momentum of re prices and a change in the momentum of the present asset classes I am invested in. Does that make sense? If not, I will give a couple of examples.</p>

<p>And I would guess that it will be a few years before the momentum changes greatly. The last peak to trough in re was from 1990 to 1995, five years. Why would this cycle involve less time? If anything, I think the credit craziness of this cycle was much worse than the last and the percentage decline and time involved will be much more severe.</p>
 
<p>Yes, that makes complete sense. I am following a similar strategy - expecting a U shaped bottom that will stay flat a long time, so there's no hurry, there will be plenty of time to buy when it finally flattens out. If Shiller is unwilling to try and guess the timing/price at the bottom, then I should do likewise </p>

<p>Do you recall what reasoning led Templeton to predict the 90% decline? Read a bit on him on the internet after your post, he always has some reason for things (ex. why he bought all those stocks for < $1 when Germany invaded Poland) that make sense, although they may not be common opinion.</p>

<p> </p>

<p> </p>
 
<p>Ok, well not exactly the same strategy. If I understand correclty, you're seeing what your potential return is on a house vs. your potential return on other investments, and put your money wherever the likelyhood of a better return is greater. In my case, just looking to buy a place to live in that won't tank us should we have to move one day due to job relocation or what have you.</p>
 
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