What % decrease in SoCal RE values over the next 5 years?

jkarolyi · 08:54 AM

Lets see how good we are at predicting the future. In 5 years, how far will Southern California real estate prices drop? I use rents to determine actual real estate values. One percent of the value of the property should be the monthly rent.

My 3BR 3BA 1600 sq. ft. condo in Riverside, CA, probably the least desirable place to live in SoCal, is in escrow for $299,000 (I've decided to rent for a couple of years). Rents in my complex are around $1500 per month. I paid $149,000 for the condo three years ago, which I think is about the "true" value of the property.

Therefore I'm predicting a 35-50% decrease in RE values over the next five years. With all the new houses going up in SoCal without a corresponding population increase, supply and demand has to level this out to rent-sustainable values eventually. There was a 20-35% decrease during the mid-90s after an RE run-up that was much smaller than the one we are currently in.

What's your vote? It will be interesting to visit this thread in five years and see how close we were.

gaijindabe · 05-19-2006, 08:55 AM

With or without riots?

jyl · jyl's Garage

I voted for 20-35% decrease. I assume this is nominal, and takes 5 years. With inflation 2%/yr, that's a 30-45% real decrease. I'm thinking toward the higher end of that range.

jkarolyi · 05-19-2006, 09:01 AM

Without riots, major earthquakes, terrorist attacks, fires or other unpredictables.

nostatic · nostatic's Garage

depends on the area. Riverside? Yes, significant decrease. Areas where people don't have to commute far to work? Less of a decrease.

Porsche-O-Phile · Porsche-O-Phile's Garage

I think about 25%. There most certainly will be a correction, but it will be partially offset by continued strong demand. People keep screwin' (with predictable results) and keep movin' here, so population keeps going up. Demand in an area like this will ALWAYS be strong and there will always be someone desperate enough or stupid enough to keep buying even in a collapsed market. So it won't be a total meltdown (like 40% or more), but there will be a significant correction, probably followed by modest growth. . . Until the next bubble, when (predictably) people will say "this time's different". Hopefully by then I'll own a few properties which I can sell at obscene profit and get out before the next collapse, retiring to the Carribbean.

jkarolyi · 05-19-2006, 09:26 AM

>People keep screwin' (with predictable results) and keep movin' here, so population keeps going up.

True, but the population increase in California, including immigration and the exodus of long-time Californians to other states, is only about 1.5% per year. Judging by the number of McMansions I see being built around here, supply will be WAY more than demand for the forseeable future.

sammyg2 · 05-19-2006, 10:00 AM

North Orange county will dip slightly but not enough to worry about. Plus it always comes back up and then some.
Like the investing gurus say, "don't try to time the market unless you have a crystal ball".

ubiquity0 · 05-19-2006, 10:24 AM

The gurus also say "buy on value"

I'm not sure if anyone would believe real estate in CA is good value at the moment.

jkarolyi · 05-19-2006, 02:08 PM

Quite a few of my neighbors do...they think I'm crazy for selling.

sammyg2 · 05-19-2006, 02:26 PM

LOL, just think: in 5 years we will be able to buy back the same house cheaper, but we won't be able to afford the payments at a 10% interest rate

turbo6bar · 05-19-2006, 07:27 PM

Quote:

Originally posted by Wayne at Pelican Parts
Umm, isn't that high? 1% per month of the value of the property would be a 12% annual return. So, if a place cost $2K a month, that would value it at $200K in the market? In reality, I think the returns on rents are traditionally much lower than that - like 3-4%, but I don't have any graphs or numbers to back me up.

1% rent per month is actually reasonable in many areas. I'm inclined to believe CA landlords are accustomed to lower percentages, but this is juiced by greater appreciation rates. The 12% gross is reduced by expenses, so it isn't ridiculous. If I got a 3-4% return on my rentals, I would have shot myself a long time ago.

Quote:

A declining market makes the value of a downpayment worth much more

In addition, one can always refi from a high rate to a low rate, but lenders are not receptive to requests asking for an arbitrary reduction in principal.

Also, if mortgage interest is tax deductible, give me the high rate and low principal.

snowman · 08:08 PM

Right now, in much of upstate NY you can buy a house for as little as $35K. The mininum rent is about $600 per month as determined by welfare. Thats a 20 percent per year return on investment. Adjusted for property tax of about $1500 this still ammounts to a 16 percent annual return. In CA you can get about $1700 per month for a $750K investment or a 2.7 percent return without looking at taxes. Analyze this.
I own two houses in upstate NY and the return is great.
I am planning on buying 10 more.

If your looking for a lower rent, forget it.

pwd72s · 05-19-2006, 08:07 PM

Quote:

Originally posted by snowman
Right now, in much of upstate NY you can buy a house for as little as $35K. The mininum rent is about $600 per month as determined by welfare. Thats a 20 percent per year return on investment. Adjusted for property tax of about $1500 this still ammounts to a 16 percent annual return. In CA you can get about $1700 per month for a $750K investment or a 2.7 percent return without looking at taxes. Analyze this.

If your looking for a lower rent, forget it.

Ahhh, I see. The path to major weath is to become a slumlord?

snowman · 08:13 PM

Some of these are not slums, beleive it or not.

The locals have lost so much faith in their area that they will not invest in it, ie buy. But they continue to rent. WTF ???? Who cares as long as the rents hold up.

Porsche-O-Phile · Porsche-O-Phile's Garage

There's also a reason for this. Upstate New York has no resources, no appeal and no jobs. You'd be lucky to earn $600 a month living there. Why on earth there's a rent floor is totally beyond me. I've heard of rent control (rent ceilings, not that I particularly agree with 'em) but never a floor.

Thanks for sharing though - worth looking into I suppose.

turbo6bar · 05-20-2006, 05:46 AM

Quote:

Originally posted by Porsche-O-Phile
There's also a reason for this. Upstate New York has no resources, no appeal and no jobs. You'd be lucky to earn $600 a month living there. Why on earth there's a rent floor is totally beyond me. I've heard of rent control (rent ceilings, not that I particularly agree with 'em) but never a floor.

The government creates a rent floor. Section 8, through a voucher program, has maximum allowable rents for a given metro area and x number of bedrooms. Basically, HUD is saying,"I will pay the rent you ask, landlord, as long as your price is at or below Fair Market Rent."

What happens is landlords will buy crappy 35k houses, rehab, and then rent out via Suction 8 (emphasis on the sucking). Outside of Section 8, this house might fetch $510/month. Inside Section 8, this house will get fair market rents of say $820/month. HUD knows this is going on, and they encourage it. This program has waiting lists, and HUD needs more rentals to fill the need.

If you want to be filthy stinking rich, Section 8 might be a good place to look. It does require a strong stomach. I have resisted the lure. The program needs reform and it has bred a way of life.

Just run the numbers. Any person with motivation and some sense could own 10 Section 8 properties free-and-clear in 10 years. $820/month x 10 properties x 12 months = roughly $96k/yr gross, which isn't shabby for a part-time job. In reality, though, it isn't an easy job. A bad experience with Section 8 or a bad tenant can cause you to wonder about the future of the human race.

rent on,
jurgen

jyl · jyl's Garage

So here is a follow-up question that I think is just as interesting.

HOW did you arrive at your answer?

sammyg2 · 05-20-2006, 03:14 PM

It will be interesting to bring this thread back in a few years.

1973911s · 05-20-2006, 05:58 PM

Quote:

Originally posted by jkarolyi
Lets see how good we are at predicting the future. In 5 years, how far will Southern California real estate prices drop? I use rents to determine actual real estate values. One percent of the value of the property should be the monthly rent.

My 3BR 3BA 1600 sq. ft. condo in Riverside, CA, probably the least desirable place to live in SoCal, is in escrow for $299,000 (I've decided to rent for a couple of years). Rents in my complex are around $1500 per month. I paid $149,000 for the condo three years ago, which I think is about the "true" value of the property.

Therefore I'm predicting a 35-50% decrease in RE values over the next five years. With all the new houses going up in SoCal without a corresponding population increase, supply and demand has to level this out to rent-sustainable values eventually. There was a 20-35% decrease during the mid-90s after an RE run-up that was much smaller than the one we are currently in.

What's your vote? It will be interesting to visit this thread in five years and see how close we were.

Rents are on the rise. We just raised rents about 10% on affordable housing in California this year. Out of 9700 units, we had 14 people give notices.

Michael