The Bill Gross Plankton Theory: Watch Out, Beverly Hills

As promised, more on the Bill Gross' Plankton theory of real estate. Bear with me, it's a short post and there will not be a test.

To begin, one popular theory of the current LA real estate market holds that the subprime meltdown hitting the Antelope Valley and the Inland Empire will never climb its way up the food chain, and up the price ladder, to the $900,000 and above market, let alone to Beverly Hills and Bel Air.

Then there is Bill Gross' Plankton Theory: that it's all one big market, it's all related, and every part of the market is vulnerable to trouble at the bottom.

He wrote this a long time ago, in the summer of 1980, before Reagan was elected: "Plankton, of course, are almost microscopic organisms that serve as food for higher life forms. Without plankton almost every fish and mammal in the sea could not survive, since most species depend upon other fish for their existence and plankton are the initial building blocks of the entire process."

What does that have to do with housing prices? Be patient, grasshopper. Again, this is Gross from August 1980: "In the case of real estate, the plankton would be the first-time buyer (perhaps a young married couple) with a desire to own their own home but with very little capital to carry it off. When the time comes that they can’t pull it off – either through an inability to come up with a down payment, or to service the monthly mortgage – then the ‘plankton’ would disappear and the rapid escalation in housing prices would ease as well. For, unless the current homeowner has someone to sell his house to, he’ll be unable to afford the house with the view or that extra bedroom, and the process would continue into the echelons of Beverly Hills and Shaker Heights. In the end, the entire market would wither on the investment vine and home prices would stop increasing at the same rapid rate. So to gauge the health of the housing market, look first at the plankton."

There, that wasn't so complicated, was it? But do you agree? Comments are always welcome.

Comments

[Brian]

This makes perfect sense. Except that the AV and IE aren't the only places to be hit by the subprime market. In LA and OC, where prices are higher, people have taken much bigger risks to become home "owners".

LA and OC are going to be annihilated in the crash. It's already happening in Riverside and Lancaster, and it's rapidly moving towards the coast.

[Richard H]

I don't think there is ANY relationship between the housing market in the Antelope Valley and the Inland Empire and the real estate market in Beverly Hills and Bel-Air.

Exhibit A is the blog just posted on David Beckham.

How did he move up the food chain?

More likely from the high end London real estate market to the high end Los Angeles real estate market.

What is it they say about Vegas? "What happens in Vegas stays in Vegas"? Would a crash in the Vegas real estate market have a tsunami effect on Southern CA?
Why should a crash in IE or AV have any impact "further up the food chain"?