23Degrees' Froth Thread

[Cigar]

I just tried to revive 23Degrees' Froth thread, and received a notice that it's more than 197 days old so I had to start a new thread of the subject.

I thought it time to revive this thread which started 6 months ago, and take a fresh look at 23Degrees' proposals. First I'd like to make the observation that Randolph vastly underestimated the problem 6 months ago, and I highly respect his opinions and value his contributions. He stated:

Looking at the Case-Shiller Index just released for San Diego and my own extrapolations, it appears to me the decline of home prices needs to be on the order of 33% to get back to the trend of fundamental value. That is annual median price of a detached home of $600,000 declining to $400,000, some where in the 2003 year price range.

With benefit of hind site, in an area of the San Francisco Bay Area with which I am familiar, homes have dropped 33% already, and everything I read indicates that we are only half way through this adjustment, I know of a home which sold for $596,000 in January of 2006 (with cost to cure issues) which was resold for $405,000 this January (with no cost to cure issues since all termite and home inspection work had been done two years earlier), a decline of 33% one month into the initial phase of the first quarter of this year, I've read that our area has suffered a 27% decline during the first quarter of this year. I would think that prices are going to stabilize at more like the 1998 to 2000 levels, not the 2003 levels.

When financing and credit availability is thrown in to the mix, it can distort the investment value and market value relationships. When the FED acts to stimulate the economy by lowering interest rates, inflation not withstanding, there is going to be a demand for housing that comes from the rental market. Vacancies on rentals start to rise. That limits rent increases. Apartment complexes are converted to condominiums and sold to those same renters because they can afford to buy. That takes rental stock out of the market and helps to increase rents.

Now my point, in the neighborhood within which the home I cited is located, the average rents have increased form an average of $1,500 to $1,700 per month a few years ago, to $2,000 to $2,300 per month now, an average of $500 a month, or 33%! So as home values fall because people are losing homes, the demand for rentals apparently increases.

Assuming that the 27% first quarter decrease in values is accurate, appraisers who use 6 month old comps are tracking values 27% inflated, and assigning an opinion of value to the subject property which is inflated by 27%! The appraisal model of using comparable sales to determine current market value is broken, and it appears that the old concept of using the three approaches and averaging them may be the only way the appraisal industry can accurately appraise property (at least residential).

I think we should take a fresh look at 23Degrees' proposals, or others should offer other proposals which could in some way remedy the current situation. In a stable market comparables provide a realistic appraisal model, in an inflating market comparables provide a conservative appraisal, but in declining market comparables appear to be more harmful to all involved than any good they can provide.

I think one of the most valuable parts of the prior thread was the San Francisco Federal Reserve projection and this graph:

 

[Terrel L. Shields]

Your area is hit harder than ours where prices have, at least for the moment, stabilized although total sales are way down.

 

[Randolph Kinney]

This graph comes from

Federal Reserve Bank of San Francisco​

By examination, prices will fall further assuming rents will continue to rise. How much?

 

[Cigar]

Here is an interesting calculator comparing renting to buying.

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?_r=1&oref=slogin