Bay Area Sweet Digs

February 7, 2008

Falling Faster Means Hitting Bottom Sooner

steephill Falling Faster Means Hitting Bottom SoonerToday in Campbell, chief economist for the California Association of Realtors Leslie Appleton-Young revised her earlier housing market forecast while addressing an audience of Intero real estate professionals.  The good news?  We will reach rock bottom sooner than predicted so we can begin the long trek upwards.

The bad news?  She had originally predicted a 4% overall drop this year – and just revised that estimate downwards to reflect a more realistic 8-10% drop. 

If you toss a ball downwards with a higher velocity, it will reach the ground faster.  This analogy is alive and well for our local real estate market too. 

Other economists have predicted as high as 15% declines throughout 2008, which would drop the median home price in California to just around $500k even.  

Although this decline is bound to be painful – I prefer ripping a bandage quickly rather than slowly to avoid prolonging the agony.  Lets hope the prediction of a quicker turnaround is accurate. 

Posted by brenda.keener on February 7, 2008 11:43 PM | del.icio.us | Digg

  • Interesting blog, and thank you for pointing it out to us. I agree, many people in Silicon Valley make over 6 figures, but this still isn't enough to allow home ownership. The steep declines were probably predictable, and are the natural way of bringing a system back into equilibrium................
  • The technical aspects are interesting to look at, and I've done a bit of that on my new blog:

    http://walnutcreekcaliforniare...

    But at the heart of the issue is this - well employed people can't really afford homes in the Bay Area right now. They 'think' they must at these rates, but the prices are SO out of proportion. It's just not sustainable.

    Now that lenders aren't goading buyers with 0 down , interest only, ARM mortgages we'll finally see a rational market return. That means steep declines in home values for the near term - hopefully not as bad as it was in Japan in the 90s.
  • Brenda Keener
    And no, I am NOT discounting the very real economic issues that are driving these issues. I am just saying that we have a complex situation, and the more publicity it gets, the worse it gets.
  • Brenda Keener
    Sorry for the bad comment grammar! My position is based on the fact that propanganda has been used in ALL wars, including the current one in Iraq. Why? Because the media has enormous power over common public thought. If the media were to downplay the housing crisis - it certainly would not end. But how can you quantify the number of buyers - and sellers - who choose to shun the market today because of what they read in the paper or heard on the news?

    No one CAN quantify this!

    In economics class while taking my MBA degree, we also learned how the media could take a downturn, focus on it, and actually help tip the scale towards a recession.

    The "great unwashed" - as the Silicon Valley VC community likes to term the masses - are VERY susceptible to what they read and hear. Most people are sheep, they don't question, they just subconsciously tailor their life decisions to what they hear.
  • Helen
    "I would love to see an experiment ran where they just focus on the positive for two weeks."

    It's hard to take this posting seriously with grammar like this. Sorry.
  • Doug
    Brenda, you are so offbase stating that housing prices are in large part driven by the media. The media is pretty good at reporting current conditions around the country, this is their job. The fact that prices are dropping right now is not due to a negative influence by the media, but rather due to fundamental imbalances in the market due to credit issues and income/price, rent/own ratios.
  • Also, I DO believe the media has an enormous impact in driving prices and the economy in general. This is no joke, as the media steers public sentiment. Most Americans are sheep, and they take everything on the news as gospel.
  • Interesting.....let me know if you find a link. It would be a great piece of history to showcase here in the blog.
  • David
    I wish I had a link, but there is a great collection of headlines I saw at someone's website from the last R.E. downturn. Actually, the media reported on the downturn pretty well as it was happening, and were negative for a solid 3 years from 1989-1992. Then R.E. kind of faded away as prices stabilized and didn't move much (slowly up, "as usual").

    The media is better at being a contrary indicator for stocks than R.E.
  • David Gordon
    The media does not drive pricing. It acts as an accelerator once things are already in motion as a result of market mechanisms. It helped to gain even more momentum on the way up, and it is now starting to help the momentum in the opposite direction now.

    I have read in more than one place that once the MSM starts saying how bad it is to buy/own real estate (because historically the negative RE news hasn't been early to the party) we are at or near bottom. I don't buy into that with the current situation - maybe the MSM has gotten on the train earlier than usual this time.
  • Doug
    "I definitely agree with you that the media drives pricing more than anything else."

    Please tell me this is a joke.
  • Brenda Keener
    Ok - I am properly put in my place! However, having studied economics - I do know that the global outlook and consumer expectations DO drive ASPs in most markets. If you think things are going to go up, you behave accordingly. Likewise, if you believe prices will drop further, you wait.

    I definitely agree with you that the media drives pricing more than anything else. I would love to see an experiment ran where they just focus on the positive for two weeks. I would bet anything we would start to see an upturn, as the constant negative wouldn't be there in minds of the buyers.

    One last note - I would hardly call anyone who predicts a double digit decline in housing prices a cheerleader!
  • Sorry Brenda. I just don't buy the notion that a bunch of realtors showing up to listen to their chief cheerleader speak is indicative of any kind of "credibility."

    Low sales volume is one of the characteristics of a major real estate downturn and it will continue as inventory remains high and likely increases. Now the MSM (mainstream media) has really joined the rally of negative news and few (at those who can qualify now) are interested in buying.

    I too wish the bottom would get here quicker so I can snatch up some bargain properties, but history tells us this doesn't happen overnight.
  • David
    And $475K is still overpriced, especially for a state average. For the entire state, a 20% drop down to $380K would not be surprising at all. Remember that half the state does NOT live in the Bay Area or LA/San Diego and places like Fresno are even more out of whack in terms of price/rent and price/income.

    I have to agree with Doug. It's not "optimism" that moves houses as much as the price. Price it properly and it will sell.
  • sw
    Sorry, should have included the link. $475K is the current median price as of December 07 for detached single family homes according to CAR.

    http://www.car.org/index.php?i...

    The median price for all of 2007 was $558K so that is probably what you were seeing.
  • Doug
    "I do wish some would start to take the optimistic view so that more inventory would move."

    I think of it from a different point of view. I do wish sellers would start to take a more pessimistic (realistic) view by lowering prices further so more inventory would move.

    Afterall, it's a known premise that sellers are sticky on the way down. It's them who need to readjust their assumptions, not the other way around.
  • From the San Jose Mercury News, the median price for all of California is around $518K or so (would have to look up the article again for the exact number). I am sure there is some discrepancy in the reported numbers depending on who is doing the reporting.
  • sw
    The median price is already at $475K. A 15% drop would bring it down to just about $400K.
  • Brenda Keener
    I think they have some credibility, or they wouldn't draw large audiences.

    Also,David, I hear what you are saying. I hope we do hit bottom towards the end of 2008 which is what some experts are saying, but the truth of the matter is that we will be lucky if we hit bottom in 2009.

    I do wish some would start to take the optimistic view so that more inventory would move.
  • David
    PS. The historical median time for a R.E. bust from peak to trough is about 4.5 years. We're barely into year 2. We probably won't hit bottom until 2010, especially if you look at inflation-adjusted prices. So, we could have a 20% nominal drop, and then 2 years of flat prices, so that the bottom is really 30%+ off the peak in 2010. But if you find a place in 2009, you won't "lose" much money, just lose ground to inflation for the next year or 2.
  • David
    Very interesting. If the chief cheerleader says a 10% drop, you can be sure it'll be a 20% drop.
  • Doug
    CAR and NAR have absolutely ZERO credibility and their words should not be taken seriously due to their inherent biases.
  • While I give her a little credit for her revising her ridiculous prediction just 4 months ago--

    "I've obviously had to eat my 'soft landing' words," said Leslie Appleton-Young, chief economist for the California Association of Realtors, referring to a refrain from the statewide housing forecast she delivered in October.

    --let's not forget who she represents and gets paid by, just like the joke of an economist who speaks for the NAR, Lawrence Yun.

    And she is about the last of all the economists in the world to predict a drop of 10+% in California for 2008. A little more than late to the party I would say.

    And I wouldn't bet on a quick turnaround anytime soon, but that's just my opinion.
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