Soft Landing? Depends on what you consider SOFT
Chuck Ponzi April 21st, 2005
Now that the real estate tide has begun to turn in San Diego, we have all been hearing a lot about how real-estate economists are predicting a housing “soft landing”. Here is an article that describes the March slide, and provides pundit John Karevoll, a DataQuick analyst, the opportunity to open his mouth and insert something. One thing that he is right about in the article is that, “We’re seeing all the signs we’d expect to see when we near the end of a cycle, with growth in the market receding a bit.”
Personally, I found the idea of a “soft landing” to be totally preposterous, it is like those people who ask you to walk calmly and slowly to an exit in the middle of a theater that is completely ablaze…mob mentality only takes a little while to take over before you have people trampling each other to get out. Anyone remember the shortage and following glut of cabbage patch kids?
Still, I wanted to graphically represent my beliefs and show how truly unbelievable their rationale is. First of all, several assumptions are made about the current situation in San Diego. I tried to find the most conservative source of information for determining what the “correct” price for a San Diego home should be. I found it with ConsumerReports.org. With fact-based analysis, and a penchant for conservatism, I find them to be thoroughly believable when purchasing anything from a car to a baby seat. They report that in San Diego, the “Actual” price for a home was $417,900, while the “Affordable” price is $266,600 in 2004. Also, to be as conservative as possible, and based on factual research, one would expect that future inflation would tend to mimic past inflation, and that the correct or affordable price would increase by 3% per year, which historically is closer to correct home appreciation. Also, I considered that a “soft landing would be an increase of home prices at 1%. Now, most homeowners would laugh at that return, it just would not be enough to keep them there, but anything higher would prolong the return to affordable or correct housing prices. I have inserted a graph extrapolating from the 2004 numbers forward considering these variables, and measured when we would be able to come back to an affordable price.
A “Soft Landing” For San Diego 
Does it surprise anyone that it would take 22 years, or not until 2027 would we see the “soft landing” end? That’s hardly soft in my opinion. Better we take the hit now and get it over with.
I reran my numbers to be a bit more aggressive, and used 3.5% increases and 4.0% increases for inflation/affordable home price appreciation, which historically is unprecedented, but came up with 16 and 15 years respectively, to return to baseline.
The conclusion is this. Either 1. We take a hit now when investors panic and run for the door, or 2. Investors accept a protracted expectation of diminished profits over the following 20 years. With all that my parents (baby boomers) have experienced in various markets, I doubt that we will see #2 happen, since most of them would be dead before they could retire. I trust the numbers that Consumer Reports publishes, and believe that over the next 3 to 5 years we will see a downward price adjustment (read: bubble) to deflate prices about 28% (nominal) from current prices. This is calculated by taking the future corrected median price 5 years from now assuming 3% increases per year and plotting that against current price levels. Will the prices go below that number? It’s possible. People love homes, but banks love getting their money back more. We will see a tightening of loan applications in the next year after huge scandal arises from loan fraud both on the brokers’ and buyers’ parts.
