On March 9th, 2006 after receiving the money from the sale of my house in San Diego County, I wrote in the post Won The Lottery :
Yesterday, I received the money for the sale of that house. It was A LOT of money. The amount of profit was insane. I am another winner in the California home seller lottery. The reason I’m a winner is because I’m not buying another home.
At the time I was told several times that once a person sells in California they are forever priced out of the market. Home prices could only go up in value. I was told that I was making a mistake. I disagreed.
While living in my gated community I suspected something was wrong. I saw neighbors using home equity loans to buy boats, replacing perfectly good landscaping with even more perfect landscaping and taking international trips. Then I saw how the lending standards went from solid to outright silly (illegal).
Something wasn’t right in the market and most people seemed too drunk off of appreciation to notice anything.
The stock market will continue to go up as long as there is at least one more buyer willing to pay a higher price for that stock. Having already lowered lending to fraudulent standards and with interest rates at historically low standards, it was just a matter of time before there would be no next buyer to push up the home prices. Home price appreciation can not exceed salary appreciation in the long term. This is a lesson IndyMac and other banks are learning as they implode or write down billions in losses.
Mish is reporting the latest housing numbers on Record Declines in Case-Shiller Index. San Diego from peak to today has already dropped 28.9%. It was irrational on the way up, it will be irrational on the way down.
Irrational Exuberance by Robert J. Shiller is the book that connected the dots for me. This is a classic book on investor psychology. The second edition has a full chapter that deals specifically with real estate. It was written just prior to the housing decline. I still recall clowns like Jim Cramer mocking him and his predictions.
Yesterday I was asked when I was going to buy next. I really don’t know the answer, but I threw out a guess of 3 years. When home prices were appreciating, people couldn’t save fast enough to keep pace with rising prices. Now we have the reverse situation. Prices are falling faster than most people can save. The net result is the longer one sits on the sidelines saving money, the better the home they will be able to buy when prices do bottom.
When will real estate bottom? Read my thoughts on Picking a Real Estate Bottom.