Paul's Appraisal Blog

    I was talking with a new client the other day, and we were talking about the bank-owned purchase transaction that he was brokering. Of course, the conversation turned to "wow-look how much values have gone down...", when he asked, " How much further do you think they will go down?"

    Obviously, I don't have a crystal ball and can't predict the future. However, I can see patterns and am aware of historic trends that lead me to believe that we are very close to the bottom.

    First: I have observed that when this "crisis" started toward the end of 2006, comparable sale prices were all over the map. That is to say, when I would look up comparable sales for a property that I was appraising, the values had a very large range, often over $100,000.  Now, towards the end of 2008, the comparable sales values have a much tighter range- much closer to what it was like before the "crisis". To me, this is a sign that we are near the bottom. Banks are not willing to discount any more, and properties are being bought up in under 3 months.

    Second: Historically, home values tend to rise slightly higher than the rate of inflation. In most areas, this is around 7% per year. Here in Southern California, we have a very strong, diverse economy and desirable climate. This should sustain this modest gain in the long run.  If we go back to slightly before the big run-up in prices, and apply the 7% per year, then we see that the "discounted" prices we're seeing now are right about where they should be. For example, if a house was bought in 1998 for $200,000, then applying 7% per year until 2008 would be 70% or $340,000. Actually, though, the percentage is compounded yearly, so the actual value would be more like $393,430. 

    Third:  When I bought my house, the "rule of thumb" was that you could afford a house that was 3 to 4 times your yearly income. Again, we see that these "discounted" prices are about in line with this rule. If a family has an income of between $70,000 - $150,000 (Senator Obama stated that a family making $150,000 a year is middle class...), then the current prices are right in line.

    Another thing to consider is: Why did so many people buy in these hot areas to start with?  The answer is because people want to live there!!!  Southern California is still a great place to live and property will always be in demand. As they say, they aren't making any more So Cal real estate!!

    Well, I hope my case makes sense. I may be completely wrong, but I don't think so. I'm starting to see more sales and feel that we are coming close to the end.  If you would like more info or would just like to talk about the market or any specific areas, go ahead and give me a call. As I said, I love to talk shop and hear from my readers.