Goldman Sachs Report on California House Price Valuations

[IrvineRenter_IHB]

Goldman Sachs report on California House price valuations

This is a PDF File.

From the report:

"OUR CALIFORNIAN HOUSE PRICE MODEL

1. From 1985 to 2003, 82% of quarterly variation in the

OFHEO index of Californian home prices could be explained

by only two economic factors: state-level disposable

income and interest rates.

2. This relationship broke down in 2004; sales of

“affordability products” (e.g., subprime, option ARMs,

home equity loans), which spiked in 2004, drove Californian

home prices well-above levels supported by economic

conditions, in our view.

3. Now that the secondary market for these affordability

products has all but disappeared, we expect home prices to

return to normalized levels (i.e. price levels implied by

current and forecast disposable income in California as well

as U.S. ten-year treasury yields); this implies a 35-40% fall."

Nice to see they finally figured it out.

 

[awgee_IHB]

35%-40% sounds about right ... if, or do I mean IF, disposable income does not decrease.

 

[IrvineRenter_IHB]

Everyone should read this.

 

[socalhousingbubble_IHB]

It is really, really good- and the most compelling evidence so far for me to question my ~25% drop scenario.

SCHB

 

[homeless_IHB]

It compelled me to post my first comment here.

I have made several offers recently and I always find myself debating with Realtors the state of the housing market. This report makes sense and illustrates the disconnect in home values that began in early 2004.

Thanks IHB!

 

[profette_IHB]

homeless,

We have a saying around here, "Friends don't let friends make offers." Hat tip to Troop!

 

[awgee_IHB]

homeless - Another saying we have is, "Asking a realtor about the housing market is like asking a barber if you need a haircut."

 

[mediaboyz_IHB]

IrvineRenter - great find...thank you!!

 

[NanoWest_IHB]

This is a great piece.......California may be over priced by 30-40%. I believe that Orange county is overpriced by 50%.

 

[IrvineRenter_IHB]

When I was calling for a 40% decline, many thought I was crazy. I feel a sense of vindication now that Goldman Sachs has published the same conclusions.

 

[mino2126_IHB]

IR....don't be so humble maybe the good folks at GS got a whiff of the site and figured out the right things.

 

[effenheimer_IHB]

On my blog, I used to say that a 40-50% decline would bring OC RE back into line with market fundamentals but I didn't have the cajones to actually predict such a severe fall back then. Kudos to IR.

Now let's hope it happens without causing soup lines at Irvine City Hall (and across the country).

 

[NewToOC_IHB]

This report is great! My fiance thinks I'm too pessimistic on real estate and that prices won't drop much more. Now it might sink in.

 

[hs_teacher_IHB]

I still think that once the median price of a condo reaches 300K, there will be buyers to keep them at that price.

Same goes for SFR, once it reaches 500K, there will be buyers to support that price point.

So I believe the median price should drop between 20-30%. I think that current prospective buyers would make the move if prices drop by 100-150K.

Saving 100-150K from today's price is pretty significant. I don't think that prices will drop below 2004 median.