Case-Shiller from 3 months into the future

Tuesday, July 1, 2008

San Diego HPI - June '08

City average: 32.0% off the peak
Top tier: 11.8% off the peak
Middle tier: 33.0% off the peak
Bottom tier: 40.4% off the peak







Low and middle tiers are quite reasonably priced. If this were January, I'd probably call the bottom. But this is June, and we have record-shattering numbers of defaults in the pipeline, and these defaults will mature into REOs during fall and winter, when real estate activity is traditionally low. Also, interest rates have gone up considerably in the last month. Higher interest rates wouldn't yet be reflected in June closings. I think there's still potential on the downside.

Interest rates are about as high today as they were in August-September of '02 (except jumbos). If we assume that houses were fairly valued back then, and add 3% average annual inflation, we get this for current valuations:

Carmel Valley, 4S, Scripps Ranch: 40% overpriced
Carlsbad, Encinitas: 36% overpriced
Rancho Bernardo, Rancho Penasquitos: 28% overpriced (except for lower-end pockets where you can get by without a jumbo)
Mission Trails (Del Cerro, Allied Gardens, Tierrasanta): 6% to 22% overpriced
Clairemont, Mira Mesa: 3% underpriced
Eastlake, Otay Ranch: 8% underpriced (except for high-end parts of 91914)
Chula Vista, Imperial Beach: 9% underpriced
North of 78 (east Oceanside, north Vista): 10% underpriced
54-94: 15% underpriced

10 comments:

Myito said...

so do you think that prices in these higher price areas are going to drop 30-40% or do you think this is the premium that comes with living there?

Very interesting blog -- I'll get others to visit.

alex said...

why do you think that things were reasonably priced in 02?

why not 97, when they were half (CS75 v CS150 in 02)?


FreedomCM

W.C. Varones said...

That really pisses me off to see prices actually rising in the beach areas.

Is that based on actual transactions in those areas? I haven't seen much trading there.

SD Scientist said...

why not 97, when they were half (CS75 v CS150 in 02)?

In 97, after 6 years of foreclosure-driven declines, things were most likely underpriced.

Is that based on actual transactions in those areas? I haven't seen much trading there.

Yes, it's all based on actual closed transactions.

newhomes said...

Thanks SD Scientist, nice work!

A little confusion here if just looking at the period bewteen Jan-01 to Jan-06 (peak). It seems 54-94 (blue) had 100% outperformed CV-4S-Scripps (yellow). Do I inteprete it correctly? How would it be possible?

SD Scientist said...

It seems 54-94 (blue) had 100% outperformed CV-4S-Scripps (yellow). Do I inteprete it correctly? How would it be possible?

The second graph is scaled to Jul-00 as 100%.
Between Jul-00 and Jan-06 a typical house in 54-94 area appreciated from ~170k to ~450k (up 170%). At the same time, a typical house in CV-4S area appreciated from 510k to 940k (up 85%).

BDiego said...

Great work!

It's interesting to see all the lines compress into one cluster around 160% to 180% - the bigger the bubble gains the bigger the loss later.

It's worth noting that the actual differences in the 160-180 range aren't necessarily significant, since the chart depends on when you peg the starting values (2000 in this case apparently). Choose 2001 and certain areas would be much worse or better (ex. CV). This is partly because each price range and region took off at slightly different times and using different loan mixes.

In the same way, alt-A's reset in a very different set of years than subprimes and will skew a lot of comparisons time-wise.

Long-term in the future, it's hard to peg what fair prices are because it depends on how greedy people are going to be in the next 5-15 years. 2001 isn't a bad guess if you assume some amount of persistent greed in the market. But fair value does have a chance of getting in line with affordability again if the economy breaks this trend, and that means pre-2001 prices.

alex said...

Hi again,

"In 97, after 6 years of foreclosure-driven declines, things were most likely underpriced."

I would actually argue that the bubble started in yr 2000, so by 2002 prices were already bubbleicious.

Is the SD market that much different from the LA market? Is there historical data for the SD market like in the below graph?

If you look at CR's post (here: http://calculatedrisk.blogspot.com/2008/06/update-ratio-median-house-price-to.html)

It lacks SD data, but using LA as a substitute, it seems that a house price to income ratio of ~4 reflects stability (while the national level is ~3 (sunshine tax)), and this was the level in ~1997.

Thanks again,
FreedomCM

SD Scientist said...

it seems that a house price to income ratio of ~4 reflects stability (while the national level is ~3 (sunshine tax))

Price to income ratio isn't a great measure of affordability. I prefer the ratio of mortgage payments to income, or mortgage payments to rent.

http://piggington.com/images/explainerhomeprices.jpg

House prices rose considerably between 2000 and 2003, because we entered 2000 with 9% mortgage rates and by 2003 rates were around 5%. Payments remained almost flat.

http://bp0.blogger.com/_F-Z51q1pTp8/R8osDocOZKI/AAAAAAAAADk/4pvLcQP0R_Q/s1600-h/tiers-0208.png

Kevin C. said...

sd sci,

Could you easily split Carlsbad and Encinitas? I would love to see and share that data with the Encinitas City Council.

Encinitas has justified real estate transactions with the "real estate always goes up" paradigm. They also set their revenue projections based on that idea.

I began warning the city in 2004 about this error, and at first the warnings were totally dismissed and ignored. Now, they hold the view that Encinitas will be immune from a downturn.

So, seeing that data could help set public policy. (they will dismiss anything that includes Carlsbad).

Hoping you can help.

www.encinitastaxpayers.org