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Home Prices: Why San Diego May Be The Place To Be

All anyone talks about in my neck of the woods is the value of their portfolios (down!) the price of gas (down!) and the price of housing (really, really down!).

As my colleague Diana Olickhas said--and many others agree, including the FDIC's Sheila Bair--we won't really get through this economic slump until we get through the housing problem.

Notice of Defaults and foreclosures in California fell 57 percent last month from August, according to Default Research. Hurray! Not really. "The significant decline is largely due to Senate Bill 1137 which was passed last July and went into effect on September 8, 2008," the firm says. The new law requires lenders to contact a homeowner 30 days before filing a Notice of Default, which is just now kicking in. "We expect to see the numbers increase again starting in November and December."

Until houses are priced where they should be, they won't sell. So what's the right price?

From 1968 through 2004, the national median home price appreciated 6.3 percent a year. Ten years ago, the median price was $128,400. If it had appreciated 6.3 percent a year, it would now be $241,000. But the latest figures from the National Association of Realtors has it only at $206,000, which proves that nothing moves in a straight line. It also proves once again that in real estate, it's location, location, location.

Take California, where home prices have appreciated 8.9 percent on average from 1968 through 2004, with some particularly wild swings along the way. The 2000 Census said the median home price in the Golden State was $211,500.

If it had, in fact, appreciated 8.9 percent a year, the median price would now be $418,000. But it's $328,000, according to the California Association of Realtors. Still, $418,000 is well below the median price a year ago of $478,000. That's quite a plunge, and a sign that not only were prices too high, but that there are now too many foreclosed homes clogging up the pipeline. This unique situation makes it hard to utilize historic norms, at least in the short term.

But some people are trying. Deutsche Bank has a report I got a hold of which predicts how much further prices will fall in many of the nation's housing markets. In Los Angeles, for example, the report says prices have another 21.5 percent left to plunge. Given that the latest median price in LA from DataQuick is $425,000, that means prices will bottom at $333,625. In New York/New Jersey, Deutsche Bank says prices will fall another 31 percent, same with the DC Metro area. Long Island still has another 33 percent to fall, along with Miami and Orlando, while Ft. Lauderdale is expected to fall even further, another 36 percent from current levels. Other markets predicted to fall at least another 30 percent include Seattle, Baltimore, and Virginia Beach. Boca/West Palm Beach has the biggest predicted drop still to come, 42 percent. Ouch.

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On the positive side, Deutsche Bank says San Diego prices have already bottomed, same with Denver, Boston, Ft. Myers, Florida, and Stockton--the foreclosure capital. Overall for the U.S., the report predicts prices have yet another 15.5 percent to fall, meaning the median national home price could get to $174,000; prices we haven't seen since 2003-2004.

But back to Stockton, the Sullivan Group says that in California's Central Valley, the epicenter of the housing meltdown, the pain isn't over yet.

Median home prices are still $31,000 higher than they should be, based on that firm's analysis using 6 percent annual appreciation. If pricing stays flat (wouldn't that be nice?) home values won't return to where they should be until mid-2010. But new home prices, which have fallen faster, are allegedly already back to where they should be.

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