Sunday, September 09, 2007

Formula 409: Wiping Out Dirt, Grime AND High House Prices

Back in May, I posted an analysis on the remarkable similarities between the prices declines we are seeing now versus the last housing price decline we saw in the early 90's here in Orange County. In that post, I showed that during the last decline, according to the Case Shiller index, prices fell fully 40% over the course of roughly nine years.

With all of the talk about prices "stabilizing" and "bounces" set to occur next year, I thought I'd better come up with an easy way for people to remember the depth and duration of the last decline, lest they forget and make bad decisions in the absence of that context. The last decline wasn't pretty and to be quite candid, I'd to see as few of my friends and neighbor burned this time around as is possible. My guess is that if you're reader of my blog, you probably feel the same way.

So, here goes. With a 40% price decline ('40') over nine years ('9') and a little concatenation ( '40' & '9'), we get the handy mnemonic '409'; just like the cleaner of the same name.

Just to get things off on the right foot in committing this little ditty memory you ought to just go ahead and say it: "409." I'll wait...Now, you're going to need to exert more effort than that to remember '409', but I'd like to point out that remembering this handy phrase will benefit you in many ways:

  1. You will have an accruate grasp of the extent and duration of the last OC RE price decline.

  2. You will be able wow your friends and colleagues with your knowledge of OC RE history.

  3. You will have historical context when considering how far prices might drop this time.

  4. You will have a quicky and handy ready retort for many bullish rants on Lanser's blog.

  5. Not that it's of any relevant value, but you will also know the area code for SE Texas.

One menomic, so much value.

Now, one way to use the valuable information provided by 409 is for your own benefit. There are a lot of shills operating in the OC RE market these days with "7% in the bag", "inverted year", "bounce scenario", "shallow decline", "price stabilization", "good time to buy" and "get off the fence" rhetoric. Before you buy into their bullshit, ask yourself these questions as sort of a first-line filter:

  1. Do I think that this decline has fully ran its course?

  2. Do you assume this decline is going to be roughly half as bad, as bad or worse than the last?

  3. If you assume this decline is only going to be half as bad as the last (prices down 20%), has this market gone down 20%?

  4. If you assume this decline is only going to be as bad as the last (prices down 40%), has this market gone down 40%?

  5. If you assume it's going to be worse, do you have all of your money in gold bullion and sliver dimes?

If you can't answer "yes" to at least two of these questions, (#2 & #5 don't count) it is NOT a time succumb to the shills and purchase property in OC. The shills words are a siren's song, but if you consider 409, along with your beliefs about the current market

The other way to use 409, is to share it with your friends, colleagues and neighbors. If you hear someone you're acquainted with talking about housing, tell them immediately about 409. In fact, you might want to let anyone you who is considering buying a home about 409 to save them from the fate of those unfortunate enough to buy in the early 90's. Tell someone about 409 today!


Anonymous said...

I think that some areas are down 20% from the peak (fall 2005) and are well on their way to -50%.

Anonymous said...

But during the last decline weren't there lots of jobs leaving the state? Do you see that happening now? Where are all the people going to live?

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