Friday, November 03, 2006

Lyon's 2007 Prediction: 10% Price Drop, With Price Declines in Most Areas

A follow-up to Tuesday's post. The Sacramento Bee has some tidbits on Mr. Lyon's 2007 predictions:

Nationally, realty agents are trying to sell 3.75 million homes, a 7.3 month supply at current sales rates. El Dorado, Placer, Sacramento and Yolo counties have a 7.4 month supply, with nearly 15,000 houses for sale.

Though the number of sales are expected to rise about 7 percent next year in the four counties, the number of for-sale signs suggests "prices are going to decline in most areas," Mike Lyon, head of Sacramento-based Lyon Real Estate, told a North State Building Industry Association gathering Wednesday.

"We've got another year of this, another 10 percent probably, in the next year, of value loss," he said. "We won't see true price stabilization until 2007, and then we'll slowly start ramping back up again."

Folsom-based home-builder consultant Greg Paquin told the industry group that new houses won't see "real increases in pricing until 2009 or 2010, and then it's going to be more modest than we've seen in the past."
Excerpts from Mr. Lyon' s presentation [pdf]:
  • We will experience up to a 10% drop in values for most of the region in 2007
  • We will not see an increase in values until 2008 for most properties
  • Strong job creation and increases in income will be the key to a real estate recovery by 2008.
  • Do not expect the prices to increase as fast as they did from 2000 to 2005 after 2008.

Mr. Paquin's new home presentation is available here [pdf].


Lander said...

Thanks to JR for the Bee link.

rocklin renter said...

Ok sellers, drop your prices by 10% and see what happens!

(cricket sounds)

loomis renter said...

A smart seller will look at this prediction and immediately dump 10% off their property's value, providing potential buyers with the opportunity to purchase the house today at next year's lower price. Do I think property values will be 10% lower next year? Absolutely and more like 30% lower. Point is you've got to lead this decline, not follow it if you want to unload your "investment."

JR said...


You're very welcome. Does this mean you're sending me $19.95? Would you like my bank acct # so you can make a direct deposit?

All the best.

Anonymous said...

Thanks for posting Lyon's presentation, Lander. I was impressed by the graphs showing inventory levels for the past 12 years. It looks like 2006 inventory is about 50% higher than any other year since 1995.

The wild card in all of these predictions is the economy. Even if the economy remains stable and all these folks in the housing industry are able to find other jobs, there's going to continue to be a gradual increase in foreclosures as home prices decline gradually. But what if there's a recession? Then, it could all snowball.

I think the birds could start coming home to roost after the election next Tuesday. This entire nightmare of the last 6 years started on election day 2000, and it will hopefully begin to end on election day 2006. It can't be completely corrected for 2 more years, but we can get started on the right track.

Anonymous said...

We will not see appreciation like the the past 5 years for the rest of our lifetimes, perhaps never again. Absolutely, unprecedented.

sippn said...

I thought he said 6% decline for 2007. There were no 12 year graphs.

Most of us were looking at predictions similar in volume to 2002-2004.

Don't know where you guys were.

Saw Mike Lyon call a 1.8% price drop 18% - oops typo! It was 1.8%,

ModMec said...

Who in the heck is buying today? If you put a 10% down on a houese today, sorry!

JR said...

Lander, the downloads with the graphs and charts from Lyon and Gregory Group are fantastic. Once again, you deliver the goods. Thank you so much. We really appreciated your work.

There are two graphs that really caught my eye: 1) Lyon's 12-year listing history, which shows an all time high in inventory for sale and 2) Gregory Group's 10-year chart of home pricing vs income (1995: $39,185 income supports $161,509 home price. 2005: $54,797 income supports $489,329 home price). These numbers stronly suggests home prices must drop by 50%, to a price of $225,857, to sustain this area's housing affordability.
Anyone buying a home in the next 5 years may be in for a very rude awakening, as they could easily lose $200,000 in value. Historical norms will not be denied.

Anonymous said...

In order to see price stabilization due to a rise in income, we would also expect commensurate inflation. I don't think the Fed is going to allow that. They will start raising rates again, so we'll be lucky even if prices hold steady.

However, in places like the Bay Area, what I'm seeing is that a bunch of friends (2-4) are pooling in cash to buy a house. So that may keep prices steady, until such buyers realize that it's no point buying since home appreciation has stopped.

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

Anonymous 10:49,

The Bee has consistently provided accurate info about the Sacramento real estate market, through the up times and the down. Even though the Bee makes money selling real estate ads their coverage of the industry has been objective and I don't see any basis at all for saying that the Bee is "hyping" the real estate industry.

sippn said...

OK my comments were in error, you had the benefit of the downloaded presentation - thanks!

JR, I could agree with you that the median home price needs to follow median income somewhat, but that would be for all housing (including used/resale housing). New homes are too expensive to build, land too expensive, fees up to $140,000....

Its not the median 67% of people who own homes, its the wealthiest (top 67%). Most of the 33% who don't own are below the median income.

Merced Going Quickly said...

The Modesto Bee covers the market like S SacBee, but the Merced Sun-Star is another story. The paper fails to mention the national attention over and over again. I think they may be a little over leveraged on real estate ad revenue.

Another prediction. Judging from the looks of the Merced's region real estate and mortgage ads, the Merced Glamour Shots will be the Merced housing bubble casualty. I've posted a tribute at

sippn said...

(Business 2.0 Magazine) -- One of the many oddities of real estate investing is that the best time to plunge in is usually just when things are starting to go south - meaning now.

Anonymous said...

Mike Lyon's perdiction of 10% is a little low, but he is realtor. Adding another 20% should be just about right. That is only for 2007. More reductions will become reality in 2008 through 2010.

Oh by the way there is asbestos in Folsom and El Dorado. If anybody has a problem with that go and complain to your developer. Please read the study UC Davis did on this issue and understand the facts. This is a huge problem.

Still sippin... napa wine said...

Anon 1102

Here's the link to your cause

Please see the interesting map - Notice that Solano County, bordering UD Davis has the same odds as El Dorado County.... How about Napa - Oh my precious wine country - its double! Save the grapes!

Oh yeah, Davis has EPA Superfund sites, not 1, but 2... screwed up a sale of mine in the late 90's.

When I was a kid, Davis was better known for the West Lane Drive In. BTW, I hear if you look carefully thru the soccer fields, you can see the drive in parking rows coming back.

Patient Renter said...

Since we're talking about local coverage from papers such as the Bee, I think this article is interesting. It talks about the complaints that the Bee is receiving from homeowners who think that the Bee's coverage of the downturn is driving their home values down.

Anonymous said...

Patient Renter, thanks for posting that link (I missed the story because it was in the Opinion section rather than the Business section).

Quite humorous - like Wasserman said, no one complained about the coverage when the market was shooting for the sky, but now that it's tanking, he's the scapegoat for every seller who painted their front door red and STILL can't sell at Spring 2005 prices.

jr said...


The historic median price to income ratios in 1995 did not distinguish the differences you suggest: Namely that only the top 65% of wage earners owning homes. So it is not a fair comparison to account for that now in the 2006 stats.

If we take the basic historic ratios, use 3% inflation to increase incomes, you will see that in 2010 the median income will be $63,500/year. That dictates a median new home price of approximately $278,000. And that is where prices are headed. This is a 42% drop in nominal prices (down from $480,000) and another 12% more, silently stolen through inflation.

The argument that costs are too high, meaning commodity prices and municipal fees, will not hold water for long. Commodities are dropping rapidly and the subs are cutting their bids to keep working. The municipal fees have always been somewhat negotiable, except in the last few years when the builders were making so much money, they did not strenuously object to the increased fees. Now, there will be pressure on the cities and counties to get competitive, or shrink their own building departments and lay off workers.

These numbers are simply my projections based on a rational historical analysis. Of course, I thought prices were way out of balance in 2003 and 2004, but they kept going up. All I know is this: I think it is likely a home that sold for $480,000 in 2005 will sell for about $275,000 in 2010. I know for a fact prices will drop 10% next year. One of the brightest minds in the real estate industry just stated as much. So I will wait for Nov. 2007 and see where we are then.

drwende said...

In good ol' West Sacto, asking prices on the same model of home have dropped 10% in the past three months, and buyers still aren't excited. (It's easy to compare from the MLS because so many identical houses were built -- just look at square footage and builder to make a match.) Any seller who's still hanging on for $399k on a house now not quite "worth" $360k is wasting effort.

Here in Phoenix, prices in the furthest outlying suburbs are down 15% already. We rent from a small investor in a partly condo-converted complex that has failed to sell most of its units and is having to offer free rent deals to rent them. This is what's in store for the Sacramento area.

sippn said...

JR, what you are saying makes plenty of sense, but, let me bend your mind around this....

Buyers coming into Sac don't leave their excess bay area and so cal equity at the county line, they bring it with them.

My gut says wealth here is growing at a faster rate than median income. THe upper 67% gets to pick through real estate before the last 33%.

Is our income/home price ratio similar accros the US?