Monday, November 05, 2007

California prices could plunge 35%, costing $2.6 trillion in lost wealth

From Marketwatch:

WASHINGTON (MarketWatch) -- Home buyers with the very best credit are still having a difficult time getting mortgages in California, raising concerns that the real estate market in the nation's most populous state could fall much further, sending home values spiraling lower and toppling the state's economy into recession.

The drop in home values could cost the typical homeowner as much as $200,000 in lost wealth, for a total hit of $2.6 trillion statewide.

"We could see rapid price declines," said Dean Baker, an economist with the Center for Economic and Policy Research, who's been warning about the housing bubble for years. "These are huge numbers," he said. "Consumption will fall off."


Lone Ranger said...

A 35% decline in constant dollars seems optimistic to me.

A 50% to 60 % decline from peak in the Central Valley within the next few years is entirely plausable.

35% decline would be a reasonable assessment only if the economy were to remain relatively healthy...but that ain't gonna happen.

golfer_X said...

Statewide the decline will probably be 35% but the bubbly areas like the IE and the Central calley will surely be higher. I'm not having a hard time finding homes listed 40% off peak in the IE and we've only just started. The IE did not start imploding until early this year. I've found a few at 50% off but those are few and far between (and most of them appear to have sold at super inflated prices previously). I ran across one in Corona that sold in 2005 for 1.7M that is now listed at $800k. (I think the 1.7M was a scam though).

Professor Shays said...

A suggested 35% decline isn't all that much, given the dollar it is measured against and the decline in the purchasing power of that dollar. Point your browser to this chart:

As you can see, in in 2002 it stood at 120. Today it stands at about 74. That represents about a 38.4% reduction in the index. So, as you can see as we get closer to 2002 prices (as measured in 2007 dollars) there really has not been much of a price drop.

My sense is there is a good chance we will see "good buys" approaching the 50% of August '05 sales price in the near furture. But that doesn't mean they will be a good buy from an investment standpoint. Once the bottom is reached (my best guess is 2011), we are going to see a flat market for quite a while.


hankmeister said...

a quick scan of the real estate section of the Sunday Californian will yield houses selling in the $115-$125 per sq ft range.

Wow! 2011... I guess that fits. 2500 new homes per year consumption 4500 houses on the market and 5000+ paper lots recorded...
9500/2500 = 3.8 years of supply sitting out there. btw, I haven't heard one word about the paper lot supply spoken of on here.

Bakersfield Bubble said...

"I haven't heard one word about the paper lot supply spoken of on here"

Excellent point. How many of those will actually happen? My guess is they will be dragged out over the next several years (5-7).

Standard Pacific is the builder with the biggest balls in the local market right now. They are moving forward on hundreds of paper lots; I assume it is because their are on the verge of bankruptcy (see their bonds and stock price).

Bakersfield Bubble said...

My guess is still for a 50% decline from the peak. Median peak was $315,000 and I am guessing it will hit $160,000. We are already in the $250k range so we are almost half way there!

civil-ized 2 said...

All the doom and gloom about prices falling until much will a house cost in 2011 if that happens? $75,000 ~ $120,000 for a median house?

Prices have already fallen in our neighborhood from $335,000 peak to $200,000 and they are not selling at that price. That is already a 40% decline. Granted, not taking into consideration the adjusted dollar and all, but from a purely price/dollar - per square foot price reduction, that is already fallen.

The neighbor who paid $297,000 near the peak has a $2700/month mortgage. If you can get financing right now for a $200,000 house, the mortgage would be around $1600/month.

Rents are going up to around $1300 ~ $1500 a month around here, lots of new renters with bad credit (former homeowners who lost their houses). Once rents equal owning, don't you figure there will be a balancing out?

Once prices in our 'hood drop to the $175,000 level, it will be cheaper to own than rent. I am not an "expert" but wouldn't common sense say that some, not all, but some peope would start buying, instead of renting when faced with that situation?

WaitingToBuy said...

The problem is Civil, that the mortgage industry is biting the dust...big time. It's hard to get a mortgage right now and it will only get worse, especially for the people that were forclosed on.

OtherSideofBellCurve said...

Professor Shay, I think you may be confusing inflation with the value of the dollar in relation to foreign currencies.

While it is true that the dollar has tanked in the last year compared to other currency, the value doesn't change much here in the US (inflation). Unless of course you plan on selling your house and buying a home in another country, your dollar has just about the same US buying power that it did in 2002 (adjusted for inflation of course.)

Your chart referred to the dollars falling international value, not inflation.

Professor Shays said...


Whether or not we like it, we live in a global economy. Hence the importance of the dollar's purchasing power as against other measures. My point in all of this is that what you bought in 2002 for $100, if it is still priced at that level would be worth today around $62 today. Maintence of the same pricing level results in an actual loss. Well real estate didn't do that. It went up in value (and in effect became less afordable). I guess my point in all of this (and I must have not made it clear enough) is that while we talk about 50% declines in value, that percentage is skewed a bit because today's dollar isn't the same at the 2002 dollar. You just can't buy as much with it. Just go to the grocery store and buy a loaf of bread and you'll see what I mean.

Now inflation helps in decreasing the purchasing power of the dollar, but it isn't the only contributing factor.

OtherSideofBellCurve said...


I agree that the dollar cannot buy as much because of inflation since 2002. But, the dollar crashing internationally by 40 or 50%, or whatever it shows in that chart, should not be used to adjust the value of housing in the US unless you are investing in housing and in the international markets.

For example, if a gallon of milk produced in the US in 2002 cost a consumer $2.00 then it may cost $2.25 in 2007 because of inflation. But, it's not going to cost that consumer $3.00 because the dollar crashed internationally. I admit, there are other effects such as possibly more milk exports causing a domestic shortage and raising doemstic prices somewhat. Now, if you were to buy a gallon of milk in Germany in 2002 and it cost you $2 US, it would cost you $3 US today because of the dollars international nosedive.

My thoughts are we will see housing prices here in Bakersfield level off to around a $160,000 median in the next 2 years and then we will have a prolonged period of stagnant pricing.

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

Hey Bubble..
Point of clarification. The 5000 paper lots I'm talking about are RECORDED. If you go look at the active tentatives map that the city sells, there are 35,000 tentative lots out there still just in the city. The map in on the city webpage somewhere.
That doesn't count the ones in the unincorporated areas. And developers are still moving on new projects! e.g West Ming.
My guess is we won't hit bottom till the earthmovers stop cutting new pads. Supply is still increasing.

xs10shell said...

This is part of an article posted on

Foreign buyers grab depressed real estate
Dollar's slump has revived market for vacation homes in some areas

By Ben Casselman
Wall Street Journal
Published on: 10/13/07

One group hasn't soured on the U.S. real estate market: foreign buyers.

With the dollar at historic lows against the euro and other currencies, real estate agents, appraisers and developers say overseas buyers are stepping up their purchases in the United States. Some are buying vacation homes in Florida, California and Colorado that would previously have been considered out of reach. Others are gambling that properties purchased now will translate into savvy investments down the road, when both the dollar and the U.S. housing market eventually rebound.

Some brokers are aggressively marketing to such potential customers, translating brochures into Russian, buying ads in Irish newspapers and hitting the road —- pitching new condos to prospects in Dubai and Seoul.

Developers are getting into the act, too. DPS Sporting Club Development, with properties in Georgia, Wyoming and elsewhere, has opened a sales office in London.

Adam said...

Americans are so ego-centric, forgetting to look at what's happening in the rest of the world....

Don't forget this housing price bubble has truly been an international phenomenon: read any of the bubble blogs based in England, Ireland, Spain, France, Australia, etc, and you'll see the bubble is NOT just an American fluke, but is truly INTERNATIONAL.

The same dynamic of EZ-money lending that's played out in the U.S. is running elsewhere, only we're ahead of the curve.

As the house of cards starts to tumble, the scenario is going to be repeated elsewhere around the globe; illusionary wealth created by a pseudo-demand for real estate will be wiped out equally quickly by a collapse (remembering the run-up took 6 years)....

Perhaps the wealthy elite in the Middle East (who've accumulated wealth from petroleum reserves) and the Chinese will see this as an opportunity to snap up hard American assets, but the economies of all these countries now seem irrevocably intertwined now more than in the past.