When is the bottom? How long until we should expect an economic recovery? Of course, nobody knows for sure, but this academic (yet easy to read) paper takes a good stab at it. It analyzes the aftermath of major financial crises in more than 20 international economies - including the U.S. in 1929 - in an attempt to see our future through history's eye.
Here is the Cliffs Notes version of some of what we might expect - if what has happened elsewhere and before goes to plan in the U.S.:
- Unemployment rises about 7% after a financial crisis, and doesn't peak until 4 years after it ends. So, we could be looking at double-digit unemployment in 2011.
- Housing downturns last six years, on average. That means there won't be a full-fledged recovery (on a national scale) for about three years.
- Stock market declines usually cost 55% and last three and a half years. Dow 6500?
- Government debt soars to 86% of GDP. And, by the way, financial stimuli are nothing new.
Here's a property in Lake Forest that is likely near the bottom in terms of price declines.
22293 Vista Verde Dr, 92630
Asking price: $280,000
Asking price/ sq ft: $186
Purchase price: $462,000
Purchase date: 6/13/07
Size: 3 beds, 3 baths, 1,504 sq ft (built in 1979)
MLS: S546548 (122 days on Redfin)
ZipRealty price tracker: Price Reduced: 11/03/08 -- $300,000 to $280,000
Zillow Zestimate: $554,500
HOA dues: $260 + $94
Type: Single Family Residence (actually a townhouse)
Style: Contemporary
Stories: 2
Lot size: 704 Sq. Ft.
From listing: Great Value! Completely remodeled. Laminate flooring, 6' floorboards, remodeled kitchen with top of the line Maytag appliances, all baths have been refixured with new pipes, new recessed lighting throughout the great room and Master bedroom. All new woodwork and new interior doors. Nestled in the forest with views from the balcony and patio. Lots of storage. Nearby award winning schools, Lake Forest 1 Assn amenities.
This property is a short sale. The current asking price is 39% off the mid-2007 price. If we assume a gross rent multiplier of 160, we would estimate the property achieves rental parity if its market rental rate is about $1,750 per month. We do know smaller 2-bedroom units in this neighborhood have been on the market for $1,650 a month recently, so we assume that at this price, the townhome does achieve rental parity.
Whether the lender lets that happen considering how much debt is likely on the property is another matter. Assuming 6% sales costs, the loss on the home would be $198,800, assuming a successful sale for the full asking price.
7 comments:
In the "Aftermath of Financial Crises" report you have a link to the conclusion drawn was that 'severe financial crises show deep and lasting effects on asset prices, output and employment. Unemployment rises and housing price declines extend extend out for five and six years, respectively.' Using this theory we have a long way to go and your example today has not hit bottom. I also think many people are waiting for the 'nicer properties' to come down in price ($450K today might be $275K in 18 months with a lower interest rate).
Some Nits to pick:
1. There is no such thing as an "average downturn", so drawing conclusions based on past averages is misleading at best.
2. "Rental Parity" is not the bottom. Typically, bubbles overshoot the downside rational due to heightened expectations that are subsequently disproved and participants become disillusioned.
3. The 4 points made actually go against the conclusion that we'll see "bottom pricing" anytime soon. Increasing joblessness is a rental deflationary force. We'll see lower rents, which then drive lower prices. At first, the housing bubble was bursting under its own weight; now, it's reacting to the economic forces underlying everything else in addition to the bursting bubble. I'd say that this is a long way from being over. You've got destroyed confidence and a poor economy.
Chuck
Does that rental parity number include the $350 in monthly dues?
I think your analysis is pretty spot on, the naysayers can say what they like. This slowdown is going to be long and there is little that can be done about it.
Ryan Philipenko - Edmonton Real Estate Blog
Love all those wires behind the wall mounted TV lol.
holey moley. i am a regular anonymous commenter here, and i lived in the Vista Verde complex for over 5 years. i still own a unit there. it's a 2-bedroom 1400 sf unit and we rent it out for $1800 monthly. You could of course rent a 3-bd out for a bit more than that. it's a shame they don't seem to have included any pictures of the forest, because that is actually a really nice feature in this complex.
and just for kicks, we have actually decided to put in an offer on a house. it probably doesn't qualify as south county, but it's close. it's an REO priced $40k less than it sold for in 2001, and $300k less than it sold for in 2006. i'm nervous as hell, but barring any unpleasant surprises in the inspection i think it's a good deal.
Does that rental parity number include the $350 in monthly dues?
A GRM of 160 is simply a very quick way to estimate whether or not a property is in the ballpark of rental parity. It doesn't account for HOA dues or mello roos - to get the "target" price, you multiply how much the property would rent for each month by 160.
You're right to point out the high HOA dues - that certainly would add additional costs that may or may not put this one out of the rental parity range.
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