Fortune mag: OC home prices should fall 22.2% in next 5 years

NEW -> Contingent Buyer Assistance Program
southoctracker_IHB

southoctracker_IHB

New member
Excellent, <a href="http://money.cnn.com/2007/11/06/real_estate/home_prices.fortune/index.htm">grounded story in Fortune</a> that came out today about the future of real estate, and why prices will revert to historical levels that take into account the price of renting (where have I heard this type of analysis before?). <a href="http://money.cnn.com/magazines/fortune/price_rent_ratios/">It also includes a chart</a> that projects OC will see price drops of <strong>22.2% over the next 5 years</strong>. Some quotes:





"We can't tell you what your house would fetch tomorrow. But we can help you through the fog of whipsawing prices and vacillating views to develop a clear picture of what your house will most likely be worth in five years or so. <strong>Over long periods housing, like stocks and bonds, follows a set of economic fundamentals. </strong>No matter how far prices get unhinged in a speculative craze - and we've just witnessed a blowout - those basic forces eventually regain their grip.





"...once the fervor fades, <strong>prices must fall to restore their normal, long-term relationship with rents</strong>. Rents exercise a kind of inevitable gravitational pull on prices. The ratio of prices to rents "behaves much like price/earnings ratios for stocks," says Yale economist Robert Shiller. "Like P/Es, price-to-rent ratios are mean-reverting." In other words, while prices soar from time to time, sending the ratio to exceptional heights, <strong>sooner or later the relationship is bound to return to its historical average</strong>."





"<strong>The cheap and easy money is gone, but</strong> <strong>the inflated prices it created are still here</strong>. No other factor was as important in driving the price-to-rent ratio to its current, unsustainable heights."
 
In my neighborhood, you can rent a nice 3/2 SFR for $1800-2000.



The cost to own this home with 100K down is (last time I calcuated it) around $4K once you back the tax benifits out.



I think 92867 needs to come down a little more than 22%. If you count Villa Park into that equation, it's a truckload more than 22% (you can rent in VP for $2500).
 
<p><em>"<strong>sooner or later the relationship is bound to return to its historical average</strong>."


</em></p>

<p>It always makes me a little nutty when I hear somone say the previous phrase or when they write it. To return to the <strong>historical average</strong>, the price must first devalue to less than the historical average or it would not be an <strong>average.</strong> If 22.5% would bring prices to the <strong>average,</strong> prices must decline below the average or the average will be much higher. </p>
 
<p>prices do not have to drop below average to become average. and i agree, the average has increased.</p>

<p>let's look at some numbers... 50,50,50,50,250. the average would be 90. the next number simply need to be 90 to be average.</p>

<p>and of course, before the 250, the average was just 50.</p>

<p>assuming the home price average was 200k before the boom, it could be averaging 450k now. so the median just have to go from 600k to 450k to make average.</p>
 
Then the price is not <strong>reverting</strong> to a <strong>historical average</strong>, as this article and so many others phrase. The price as you describe is attaining a new average. It is not reverting nor is it historical.
 
Even with a 20% reduction, I probably couldn't afford it.



500k gets reduced to 400k.



I'm sorry but maybe when it gets to around 250k (lol) then I'll start considering it.
 
<p>Well, according to that article it's projecting average OC prices to fall to 1.1 mil, looks like you still won't be able to afford it.</p>

<p> </p>
 
<p>the chart is for "upscale homes." Funny, a nice 4 bedroom home seems to be an upscale home for me, and you can find those for around 1 mil right now, not 1.4mil </p>
 
While good and all, they logic is still flawed. People just don't make that type of money around here. PLUS people here just don't have the cash on had (present company excluded).
 
<p>The $1.4 featured in the article is for a home twice the median price.</p>

<p>Also, be careful about their 22%, this is inflation adjusted. I belive their numbers are only 12% down without inflation.</p>

<p>Good study. It's always good to see big names predicting a decline (no offense IR!). OC is pretty big, 3rd biggest county in US, so you should expect big difference in various places in the county.</p>
 
we can't really generalize "OC"...if 22% for OC turned out to be right, then beach cities probably will be only down in single digits, while places like Santa Ana will be in the 30 to 40% range.
 
I'm not actively looking, but I live three blocks from VP in Orange. They are out there. I see them frequently enough to believe there are more around if you look a bit.
 
I have to say, if you found a house in VP for rent in the $2500-$3000 range, it is a fantastic deal. The house across from me is rented out for $3000. It is one of the smallest homes in the tract, hasn't been upgraded much, and is not in the best location. I.E. it is the first house as you pull into the street, the kitchen faces the entrance, and you would be blinded by headlights as you cook dinner. It was leased very quickly, and I thought $3000 was on the low side. I am not saying it is impossible, but it would be a rare find.





It looks like I have a neighbor with me on the forums.
 
I agree graphix. I live in Orange and looked for houses to rent this spring in Orange. Small (1800sqft) old houses in so-so neighborhoods were renting for 2400-2700 depending on condition. VP is of course a much nicer area, with bigger houses. Searching on realtor.com, there isn't a listing under 3700, and most are in the 4000s.
 
Three blocks is three blocks. It's Orange and not Villa Park. You may share schools and everything else, but it's amazing what three blocks can do. So see the same thing along the Costa Mesa/Newport border. Between East/West Costa Mesa. Between Santa Ana and Costa Mesa by SC Plaza. HB and GG. etc. etc.
 
When I was looking three blocks was worth $500-700 a month. I took a pass.



When I worked in Beverly Hills you could always tell where you were driving around by looking at the houses. If they had bars on the windows, you wen't in BH - you were in LA or WeHo.
 
You must log in or register to reply here.
Back
Top