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06 Apr

The Little Bubble That Couldn’t

Posted April 6th, 2007 | View Comments

At the risk of quoting Bill O’Reilly, there’s a kind of a culture war going on between folks like me in the Real Estate Business (and presumably, homeowners who are concerned about the value of their investment), and the bubble bloggers, who’s premise is that the end of the world as we know it is happening / has happened / will happen / will never stop happening — something like that.

Lately it’s struck me that the sort of price depreciation I’ve seen since the peak of the market (in July or August of 2005, depending on what indicator you use) has been rather gradual compared to the double-digit appreciation of the previous five years. Bubble QuoteSo I set out to understand how much ground the average Sacramento County homeowner has lost in the nineteen months since July of 2005. Specifically, I wanted to know when prices were last at the “low” they are now. I expected the answer to be some time in 2004 or 2003.

Even I was surprised at how little the prices have changed in the horrible awful we’re-all-going-to-die period of the disaster-horror-story be-very-affraid time since the death-star-bubble burst.

The answer is this: In 19 months, the average sold price per square foot has gone down 10.2%. That works out to be a rate of decline of 6.4% per year.

So, 10.2% over 19 months is a bubble bursting?

Well, let’s see how the stock market compares. Here’s what Wikipedia has to say about the Crash of 1987:

The Crash was the greatest single-day loss that Wall Street had ever suffered in continuous trading up to that point. Between the start of trading on October 14th to the close on October 19, the DJIA lost 760 points, a decline of over 30 percent.

OK, granted, that was the result of five really bad hair days on Wall Street (if you count the weekend). Compared to that, the “mini bad hair day” of a 3.3% drop on February 27, 2007, was really no big deal. So a no big deal loss on the stock market is 3.3% per day, while the catastrophe of the real estate bubble bursting in Sacramento has worked out so far to a decline of 6.4% per year.

So I’m more than unimpressed by the bubblers. I used to be simply unimpressed — now I’m impressively unimpressed!

OK, so much for the rate of decline. Here’s a surprising word or two about the magnitude of the decline: the total losses in the past nineteen months since July 2005 have only wiped the gains made in the previous four months, from April to July of 2005.

Check out the chart below to see where today’s prices intersect the gaining prices of early 2005.

It’s the “end of the world as we know it”, and I feel fine.

Slow Leak

  • http://bawldguy.com/ Jeff Brown

    See the way you are John? I’m tellin’ Mom. You’re using logic and empirical evidence yet again! You’re shameless. :)

    It’s these facts you’ve so eloquently laid out that show exactly what the naked truth really is. You do your readers a great service John. Keep up the good work.

    I just published a post that kinda shows the Twilight Zone nature of what some markets have come to. Take a look, if you want, at http://www.bawldguy.com/show-of-hands-whos-ready-to-pay-20-for-a-burger/
    and ask yourself if Sacramento isn’t maybe rowing in the same waters.

    Again, great post.

  • http://www.sacramento-home.com/real-estate-agents/ John Lockwood

    Thanks Jeff — yeah, this one was a surprise even to me to tell the truth, but once I spent an hour at the coffee shop entering the numbers, the rest of the thing kind of wrote itself.

    Saw your article. I’m not sure I catch all the nuances of investment properties, as I tend to focus too much on cash flow, but I’ll bet if you graphed the last couple of years of San Diego you might find that the “disaster” is similarly overrated as it is here.

    I think both areas will continue to grow well after another few months of decline, but as my Johnstradamus post hints, I don’t put too much stock in predictifying.

  • http://www.stpaulrealestateblog.com Teresa Boardman

    Here in St. Paul prices went down by about 3/4 of a percent between this year and last. I keep telling my clients that real estate is local.

  • http://www.reagentinct.com Athol Kay

    I’m starting to buy David Learah’s line that the recent growth is an unprecendented market expansion that will basically hold it’s value.

    That being said, I wish I was seeing more construction for first time homebuyers. All the 55+ developments everywhere in my state seems like a value implosion waiting to happen.

  • Mark Ross

    I’m a broker from the Bay Area visiting family in Sacramento on Easter….great posting by Jeff….I’m a “listing” broker-the one that gets to offer the reality of the market to my clients. My favorite analogy is the following-” If you would have been told in 2003 that in 2007 your home would be worth XXX, you’d be impressed. That you missed the spike in the interim is unforunate, but overall, your sitting better than you would have been in stocks. That’s why they call “real” estate!”
    As of today, 4/7/07, I’ve had multiple offers on multiple properties in Martinez in the last few weeks….2007 will stablize…2008 will be awesome!
    I’m already polishing up the lock boxes! Great site!

  • http://www.sacramento-home.com/real-estate-agents/ John Lockwood

    Thanks everybody for stopping by.

    Mark, that’s definitely a good way to break the news of the lower price than 2005 gently, by pointing out how much higher than 2003 we still are! Thanks for the kind words about the site.

    I had a blog going in Alameda / Contra Costa county for a while — the focus was Oakland. If you know a good buyer-focused agent who likes to write, we should talk. I’ll drop you an email.

  • http://www.bloodhoundrealty.com/BloodhoundBlog/?p=1281 Thoughts And Observations | BloodhoundBlog: National real estate marketing and technology weblog | There’s always something to howl about…

    [...] John Lockwood had some solid and absolutely empirical evidence about how the real estate bubble is floating these days — at least in Sacramento. Some of the comments seem to say other places are experiencing similar numbers. Read this post. You won’t be sorry. [...]

  • patient renter

    “price depreciation I’ve seen since the peak of the market (in July or August of 2005, depending on what indicator you use) has been rather gradual compared to the double-digit appreciation of the previous five years”

    “In 19 months, the average sold price per square foot has gone down 10.2%”

    So let me get this straight: Appreciation occurs over 5 years, as you said, but depreciation is expected to have completely occured in 19 months? How about we project that 10.2% out over 5 years. What do we get?

    I’m not sure if you take your readers for fools in making such a ridiculous comparison or are merely trying to trick them?

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