Wednesday, February 4, 2009

Seriously, another 20%?

Some are of the opinion that we have another 20% drop left in the more desirable zip codes. There have been suggestions that we could potentially lose 100k on our house value (which would be over 20%). While anything is possible....I'm not sure it's probable.

Below is a graph of inflation adjusted prices for Folsom and EDH, using two separate data sources. I inflation adjusted backwards (from the most recent value) since my data does not go back as far as I would like. Looking at the charts, it sure seems to me that we have squeezed out the majority of the bubble.

This is not to suggest we are at the bottom of the market cycle, as we are likely to over-correct due to the deteriorating economy. But I am rather doubtful we are going to drop another 20% from here. If that does occur, we would have much bigger problems on our hands than home values.

It is my opinion that we are no longer in an over-supply situation. It's now an under-demand situation (lack of qualified borrowers given current lending standards). The home purchase chain is still broken due to all the foreclosures. In a healthy market, a purchase allows the owner to "move-up," which is rarely the case in the current market (hence the "move-up" markets lag in their recovery).

In terms of the larger metro area, the last time I ran the month's inventory data, Sacramento metro was down to 4.6 months. It’s been below 5 month's inventory for the last 5 months. According to my same data, in 2007 it was between 7.8 and 12.4 month's inventory. This is considerable improvement.

Of course, we could probably wait for another year and find something just as nice for less. But the future is uncertain. Right now we have convergence. Interest rates are low, the rent/buy numbers work out, and so does the home (I still have to pinch myself to believe what a nice home we are able to afford). I am a firm believer in the saying: A bird in the hand is worth two in the bush.


Buying Time said...

As for my current opinion of the market (which may be jaded), I think we are in for a further 10% decline in EDH and 15% in Folsom. This will give way to a long period of flat prices, due to the foreclosures and eventual rise in interest rates.

If someone has data to support a prediction of an additional +20%, please share.

Paul said...

You have the house of your dreams, at an affordable price and payment. Enjoy it!

As to 20% more, anybody can guess anything. Personally, I think another 10% decline is easy. But to predict the final housing price bottom with any certainty, I think that is not going to happen until we know (a) the depth and severity of CA's budget crisis; (b) the depth and severity of the current recession; (c) what local employment is going to do. And of course, this all assumes we don't have one or more major melt downs on Wall Street.

Buying Time said...

Exactly....from here on out, its all about the economy.

Husmanen said...

Regarding the rent/own calculation I have an example from EHD.

RENTAL. 2548 Stratford Cir, EDH is for rent on CL by for $1,975 per month. A PITI to cover $1,975 per month is loan about $260k or a $325k house with 20% down, 30 yr and 5.42% APR.

HOME FOR SALE. 2510 Stratford Cir, EDH is for sale on for $485k. With the same loan assumptions above, the monthly PITI is about $2,900.

Before tax advantage of owning is calculated, there is a one thousand (1000) dollar difference per month. After tax (28%), owning costs about $400 per month more.

Calculating based on a tax deduction can get you in big trouble in these economic times. Covering the entire PITI is a safe bet.

Husmanen said...

that is

forgot the 'e'

smf said...

We are not in normal circumstances.

The excess housing out there has NOT been dealt with, and there are LARGE amounts still out there.

Till that gets handled, the bottom is still nowhere in sight.

Couple that with declining populations, and you got yourself into bigger problems.

BTW, I am more than willing to lose $100K in equity in the house we purchased last year.

This thing is far from over.

Buying Time said...

I agree that the rent/buy doesn't work out across the board. Of course, there is often a big difference between asking and selling. You really think that home will sell for $485? I don't know the comps real well, but I would hazard a guess around 440k.

I'm comfortable calculating in some tax advantage, as that is a substantial chunk between property/mello roos and interest....just don't do it at the 28% level if you anticipate a reduction in income.

Jacob said...
This comment has been removed by the author.
Jacob said...

So is this a case of using data to form an opinion, or now that you own you have an opinion and will see proof in everything and find stats to back you up?

Another 20%? Who knows for sure.

We will definitely over correct as all busts do.

In some places we are reaching the point where housing is where it would have been with normal inflation. But the bigger problem is how many jobs we are losing and that CA is doing nothing to draw more businesses here and will likely be cutting their own jobs for some time.

Under demand or over supply equal the same thing right? Too many homes for sale compared to the people that can afford to and want to buy.

Still way too many foreclosures. Still way too many "investors".
Still way too many job losses.

That said, you have found a home you love in an area you love for a price you can afford. That is all any of us can hope for.

You will probably have buyers remorse until you spend some holiday and birthdays in the home and then the buyers remorse should fade.

Husmanen said...

I too agree that the rent/buy does not work across the board on every home, but it should on most homes if we were close to any price bottom.

Your guess of $440k is probably close, prices are really being pressured right now in EHD. By Fall 2009, I guess less than $400k, could be sooner.

Also, Mello Roos are not tax deductible.

Sold in '05 said...

"Also, Mello Roos are not tax deductible."

This is the way that I have always read the law and figured my personal tax benefit in the buy vs. rent calc.


EVERY homeowner that I have asked about it says that they just put down whatever is on the bottom line of their property tax bill and that includes M/R. Is that how it's done? Does anyone know of someone getting caught on this?


Buying Time said...

Thanks for the link Husmanen. Like Sold in '05 I have heard very conflicting reports on this. Even the link you gave is not a definitive no...(more like a mostly no).

Any tax professionals out there?

sacramentia said...

I'd like to know too. I had one tax person tell me HOA's were deductible because of the maintenance term that Husmanen's link mentioned.

Tank said...

Throw out any models that seek to project what the market will be in the future, had there been no asset bubble in the first place. That presupposes a return to normalcy henceforth, which is a huge assumption, and it will not happen. Huge government borrowing (at all levels) over the next two or three years, causing skyrocketing interest rates, will only add to the problem. A better model on which to base what will happen is to review the data after the last huge bubble pop in 1929, or more recently in Japan. In communities with the biggest bubbles, Realestate lost nearly 2/3rds of its value. We, no doubt, live in what had become a big bubble area, but have lost less than 1/2off peak. It still has a long way to fall.

Husmanen said...

The Franchise Tax Board may have written something to discourage writing off Mello-Roos, I have not found any evidence that it enforces this, or can enforce it. Of course a CPA would have to confirm, but here is the link and some interesting text:

"Because the IRS has not challenged the deductibility of Mello-Roos taxes, the prevailing view is that Mello-Roos taxes are deductible. However, if the IRS were requested to issue a letter ruling on this issue, observers speculate that the ruling would prohibit the deductibility of Mello-Roos taxes on income tax returns."


"Some observers maintain that the question of tax deductibility depends on the nature of the project being financed. They claim that if the taxes are being used to finance a facility or project that benefits the general welfare and is more regional in nature, generally the taxes are deductible."

Buying Time said...

Well if I am ever nominated for a cabinet position, let's hope they won't hold it against me =)

(Thanks for tracking that down Husmanen!)

Husmanen said...

Your welcome, I believe it is a case of "don't ask don't tell".

BTW, this new view on it will force me to review some of my calcs.

Enjoy the home!

patient renter said...

Well if I am ever nominated for a cabinet position, let's hope they won't hold it against me =)

Hahaha. Actually, it might make you more likely to be nominated!

HOUSE2008 said...

You will probably have buyers remorse until you spend some holiday and birthdays in the home and then the buyers remorse should fade.

So TRUE! Couldn't have said it better myself. I tell people at work, to buy a house for the loong term. Enjoy it,make memories in it & just be greatful that you can afford it. Personally, I want to see my Granddaughter come down these stairs. I care not a rip about how it'll appreciate/depreciate. It's a HOME use it!