Housing Nowhere Near Bottom

This photo was taken on August 18th, from the entrance way to a condo complex (formerly apartments) in Normal Heights in San Diego, California. There are 42 total units here, and 14 lockboxes, almost all foreclosures and short sales. The complex seemed like a ghost town, and is nowhere I'd like to rent. Quite depressing, frankly.

Guess what? Cap ratios even at this condo complex are all quite a bit under 10%. Asking price on most of these condos is in the $150k range, while the rents are barely $800-$1000/month. After expenses (taxes and HOA fees), these 'steals' barely amount to a 17-20 PE. While parts of North County, San Diego, like San Marcos, Escondido, and Oceanside, are full of foreclosure deals that collect above a 10% yield, most of San Diego is nowhere near this level.

The epicenter of this market collapse, properties priced in a range that formerly attracted subprime mortgage funded buyers, is completely detached in valuations from the rest - single family homes most often in more premium areas. Areas such as Carmel Valley and Del Mar are still in the stratosphere with bubble-like fantasy-driven prices.

I am writing this from the perspective of someone searching for rental property investments. While there are pockets of opportunity, the bulk of southern California needs a dose of reality (or do I?). Rents are telling of true property value, and the message is clear: prices will come down further to align with fundamental value dictated by rents versus investment expense outflows. Fundamental value is somewhere around 100-120x monthly rent, and most of San Diego is double that.

Disclosure: none

Comments

[notsosmart:]

the longer the properties stay empty the more they dederiorate.this will be a tough comeback.the only bottom i know for sure is the one im sitting on.dont believe anybody.

2008 Sep 07 11:53 AM

[Urbane Gori...:]

But....But... You must be wrong! All the articles I read these days tell me we're reaching a bottom in home prices!

The fact that we are encroaching on higher and higher unemployment numbers, that our output is decreasing and small news-articles like "10% increase in Mall vacancy factor" seems to escape their notice and fascinates me. How are we approaching a bottom if business is slumping and more and more people are losing their jobs?

Cheerleading is one thing, stupidity is another.

Thanks for a simple clear article.

jegan ;-)

2008 Sep 07 01:43 PM

[David K:]

The impending bottom of the housing market is a wishful fantasy that all participants want to come true sooner rather than later. The housing boom was fueled by 10 years of cheap money, poor economic policies and the idea that prices only go up. Take a look at Robert Schiller's work (irrationalexuberance.... From the the period of 1890 to 1997, U.S. Real Home Prices had a median value of 103 (100 is the base index). The index peaked at the end of 2006 at 203 and was at 167 at the end of June 2008. Just to get back to the historical median housing prices still need to depreciate by another -38%!

2008 Sep 08 04:45 PM