View from Silicon Valley- House prices never go down in the Bay Area?

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We appreciate it when our readers are skeptical.  It's kind of the whole point of our web site when you think about it for a minute.  (Plus, it's gratifying to learn people actually read our stuff!) 

Below is an e-mail conversation with a reader from earlier this week:

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Dear editor,

I am weary of my friends continually telling me that house prices never go down in the Bay Area, or at least not substantially.  Can you point me to the data from which you derived the following conclusion in one of your recent missives that I can use to rebut their herd mentality?  The excerpts are from "Playing with the housing stats" on 3/26.  (Editor's note: http://www.viewfromsiliconvalley.com/id139.html)

"Ignore the -38% decline in the San Jose median during the early-90s hiding behind the green curtain."

In context:

"More likely, is SCCAoR is not capturing all the county sales. It is merely a happy coincidence if the resulting inflated numbers happen to scare more buyers into rushing out to snap up a house.  After all, real estate prices only go up, right?  (Ignore the -38% decline in the San Jose median during the early-90s hiding behind the green curtain.)"

Thanks for a dissenting view,
XXXX

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Hello XXXX:

Thanks for reading. 

You exactly hit the nail on the head.  Nobody, my own wife & family included, believes prices will go back down.  Of course, when "everybody" is betting on the same thing, who is going to make money?

Your question led me to re-check OFHEO statistics (http://www.ofheo.gov/HPI.asp)  & I mis-remembered the percentage (it was -27%, not -38%).  The bottom line remains 1988 -1989 buyers were underwater for a decade.  They were bailed out by the dot-com boom in 1999 -2000.  I am unable to imagine what is likely to come along next & pump that much money into the local economy to service, not to mention further increase, the debt loads currently being accumulated.

This chart was published 2nd quarter 2002.  The newer OFHEO reports have not updated this graph, although the data probably exists and I could re-plot it given some free hours to tease out corresponding figures:

(Graph sent to subscribers, contact editor for a copy...)

Keep in mind San Jose is & was the "cheap" area for Silicon Valley housing.  The effects in the higher-priced areas were more extreme, not less.

It has been my experience I cannot convince someone who believes housing never goes down to think otherwise.  My consolation is it's been cheaper to rent than own for the last couple years.  I sleep well  at night.  I don't have to depend on events beyond my control to preserve my life savings tied up in a single asset. 

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Dear Editor:

Thanks, this is good data from a reputable source which will help me persuade my wife that house prices are not always up and to the right.

XXXX