Bubble? There's no bubble.

Good morning, Steve Spurrier.  We darn near spit our coffee out when we read this passage from a letter to the editor in the Real Estate section of this morning's L.A. Times:

"In the L.A. market there is no bubble. Further, the situation in Los Angeles does not come close to what happened in the 1990s recession caused by the demise of the defense industry, followed by the Rodney King riots, fires, earthquakes and floods."

The letter is signed by Susan Stone of Agoura Hills, who is identified as a real estate agent.

We'll throw this open to comments with one quick comment of our own: We agree that this is not a replay of the 1990s real estate slump. It's different. This was a credit bubble, a large one, and it popped. Demand as we knew it six months ago is gone. This time the housing slump is quite likely to cause a recession, rather than the other way around -- a housing slump caused by a recession. So, yes, it's not the early 1990s.  The price declines might not be as deep this time; then again, they may be deeper. We haven't seen this movie before.

Your thoughts? Comments? Insights? E-mail story tips at lalandblog@yahoo.com.
Please note: This is an edited post; the original post mistakenly omitted the words "followed by" in Stone's letter. Commenter "waitingitout" pointed out the mistake, and we corrected it.
Photo Credit: L.A. Times

Comments

[jemarqu]

"... in the L.A. market there is no bubble. "

I would also like to deny the existence of gravity, the Earth's moon and the Sun.

[LA Expat in Arkansas]

Guess Ms. Realtor Susan Stone is loathe to give up her leased Mercedes, designer clothes, and new tract home in Agoura Hills..And, after they read Viles post, she be giving up her clients who have half a brain. A-Mazing!

[Willie]

I can only say that the realtor on this piece is in denial. When you lose 100k of equity in less than a year, the bubble is bursting or slowly deflating. Yes there is a bubble and the bubble is deflating rapidly. Then again is just an opinion and you know how Dirty Harry felt about opinions.

[amir]

Six months ago, many people would have agreed with this realtor; right now she's quite hilarious.

Floods, riots and Rodney King happened after the bubble popped which was in 1989. People have a tendency to create their own cause and effect scenarios based on their thesis. If prices had fallen in 2001 people would have remembered it as a result of 9/11 and maybe years from now people will say prices fell because of the war in Iraq.The truth is the Southland has a long history of booms and busts and each time people say: this time it's different!

When real estate prices become unrealistic they drop. Right now, using realistic loans, most buyers can't buy houses and apartments. Nor do investors rush in. For smart money to invest in California the prices need to show high rates of return of at least 7-8% on rents. Prices need to drop 50% to becomes attractive to both these groups.

Since Real Estate is slow to buy and sell and inquires major transactional costs, including moving costs, the market moves slowly. If this was like the stock market where one can sell an asset in less than a minute and the prices on assets are updated by the second, we would have already seen a Nasdaq-like crash of 60% in prices and major panic selling. But since this is RE it will take several years.

The Realtor is in denial.

[Matt]

Realtors are like leaf blowers.......their simply annoying!!!!!!

[al]

Ex: I bought a 9 unit bldg in santa monica at a retail price with a 'normal' 8% loan and income at 9.5 X gross with a 'low' 6% return 10 years ago. The rent is up 16% and the property value up about 100%. Banks will only make a 50% loan if I sold the property at the current value. A newer owner would have to buy at cash to get maybe a 3% return. With the emerging lack of liquidity from tightening credit, especially in home equity, noone will buy bldgs such as mine at such inflated prices with uber-low income. We may not burst and drop like a rock, but we certainly can sink like a bag of bones at the La Brea tar pits a long way until we revert to the historical norm in values.

[Dwayne]

The real problem that caused the current credit crisis and subsequent real estate bubble was that interest rates were too low for way too long for way too many people. Let's not forget that mortgage lenders were giving out 5% ARMs, no documentation jumbo loans with zero down payment. That is a recipe for disaster.

What responsible lenders did prior to the current bubble:
No documentation or substandard credit: +100 to +300 basis points
Zero down payment: +200 basis points
10% down payment: +100 basis points
Jumbo loan: +100 to +200 basis points

When the ARMs, 2/28's, interest only loans reset, the interest rates on those should be in the 9% to 12% range. The only borrowers who should receive the lowest interest rates are the ones with good credit, 20% down payment/equity and are not carrying a jumbo (+417,000) loan.

[Jason Hoppe]

There is no bubble? What is this person smoking?

[shockg]

The realtor is definately in denial and Peter Vile is exaggerating the hype of this market downturn by calling a recession. it's amazing that most legit economists see a 1 in 5 chance of a recession yet Peter is saying a recession is in the bag. Amazing.

[Billy]

Ms. Susan Stone's website says she has two lifetime teaching credentials, one at UCLA and one at CSUN. At least she has something to fall back on when the bubble fully deflates...

[M Wilcox]

Is her name Susan Stone or Susan Stoned?

[Sam]

Big deal-the bubble blows like it did in the early 90s and real estate deflates 25% and then by 2005 real estate goes up 200%. This is a typcial RE cycle in SoCal and predictable. Therefore the average price of a home in SoCal 7 years from now will be a million. Do you try to get a deal now or wait until 2014 and say I could bought that house in 2007 for $500K and now I cannot believe it is $1M.

[Enlightenment]

I vote that "Susan Stone" should lose her realtor license permanently for lieing to the public during an OBVIOUS housing down turn! California has too many realtors and we could do with her.

[David]

The 90s downturn in housing was caused by a slowing economy which was a result of many economic factors. This downturn will be the result of a deflating asset bubble fueled by low interest rates left untouched far too long by "Bubble Man" Alan Greenspan (oh sorry, he prefers to be called "Maestro")as well as loose lending standards allowed by many financial institutions that now find themselves out of business. The main stream media as well as the general public are finally coming to see this for what it really is; a house of cards, a ponzi scheme, an unsustainable economic event that never should have been allowed to occur.

Alan Greenspan, David Lareah, Leslie Appleton-Young and a myriad of other real estate industry shills, including the above mentioned realtor, will go down in history for their cheerleading that led so many to make the biggest financial mistake of their lives.

[Cal]

I was looking for a home for over a year in the Conejo and Simi valleys. The realtors there are universally horrible in their basic understanding of real estate. It has to be the managment of the local companies and their teaching because the other areas I looked at the realtors were much better. So it is no surprise to me that someone from Agoura would be writing such things.

Realtors have this 'thing' where their egos are tied to the price of the houses. It is completely idiotic and what they should be really worried about is keeping the market in equilibrium because it not only helps their local community it helps them because they are the "rake".

[waitingitout]

Pete, you omitted the key words "followed by" from Susan Stone's letter to the editor - she correctly noted that the riots, earthquakes and floods followed the real estate crash and its precursor, the demise of the local defense industry. Not to defend the indefensible...

As for the assertoin that the siatuation "does not come close" to that disaster - no, net yet it doesn't, but it's awfully early in the game to declare victory. When every other headline we read uses words like "unprecedented" and "record" to describe the number of foreclosures, the drop in the rate of sales, and the inventory on the market, it's a good bet we haven't seen the bottom of this thing by a far sight. 2008 will certainly be worse than 2007, and we have yet to see what the impact of Black August has had/will have on the broader economy.

But I agree with Ms. Stone on one thing - there is no housing bubble in Los Angeles. Only a growing crater where the bubble used to be.

[realiti]

In all fairness, the average "newbie" realtor is not savvy enough to sift through the industry nonsense spun out from the NAR "economic analysis" machine. Many have bought into the nonsense being spun to calm potential buyers and now find themselves trapped (overleveraged, overinvested and underemployed).

She's right about things being different now, but the only real difference between this collapse and that of the early 90s is that it will not be military jobs but rather real estate, mortgage finance, and construction jobs that lead the fall this time. The result will be the same, prices fall or stay flat until income catches up.

Let's face it, when you make your income from the fees on the sale of a house, it is always "a good time (for other people) to buy or sell a home" Whether or not there is a "bubble" in LA is an academic question, but the fact that 100% and "interest only" financing is history will delete thousands of potential buyers from the pool and trap lots of homeowers who were hoping to refi out of an ARM. Bubble or not, the readjustment of prices to the need to have a 20% deposit and show income to cover a fully-amortizing mortgage payment is feasible will be a painful one, especially for homes $750,000 - $2,000,000 where there was lots of "streching" to get a McMansion.

[Toby]

I don't know...is it denial or delusional at this point?

[William E. Jones]

I think it was George Santayana who said, "Those who cannot remember the past are condemned to repeat it."

[Dr. JwB]

shockg wrote: "it's amazing that most legit economists see a 1 in 5 chance of a recession yet Peter is saying a recession is in the bag. Amazing."

Can you back that up, please? You need to support the "1 in 5" statement, as well as the statement that "most" economists feel that way.

Most, to me, means more than half. I'm guessing that there are hundreds of economists at major universities, plus those who work for think tanks and the government. So you need to come up with more than a few names.

It would also be acceptable for you to be one of those PhD economists, and for you to have spoken with your peers in an informal survey (but I'd still like to know how many of your peers you have spoken with).

[Martin]

Your're absolutely right, Peter. We have not seen this movie before. ...At least not Act One. Act Two, I fear, might be quite similar to the last market crash beteen 1991 and 1995.

People will just walk away from properties with upside down loans. An out-migration to other less desirable states will accelerate. Banks will again struggle with losses. Housing inventories will rise dramatically. Prices will over-correct (I'm already making plans for that time). And those on the side lines will still twiddle their thumbs, wondering when the best time to buy is (assuming they still have a job) ... complaining about prices that are still unreaistic to them.

You see, we've all been there, done that already. Some of us have seen market shifts like this two and three times. This too shall pass and I think there is a large percentage of homeowners that will ride this big wave and wait for better time.

We can spend years analyzing and talking about every foreclosure, new weekly statistic, seller in denial, buyers who don't exist, banks that toughten loan processes and how So Cal is really a hell hole with palm trees. At least we have something to talk about at the dinner table.

But, again, this too shall pass. You'll see. It's a great life if you don't weaken.

[srla]

I''m not so sure which "4 out of 5" economists don't see a recession coming, but it would make sense to check their track records and see if they even recognized this bubble prior to six months ago, or whether they foresaw the inevitable demise of the tech bubble and the ensuing economic downturn in 2001-2002.

The fact is, the vast majority of "leading economists" failed to foresee the demise of the tech bubble, and, even when it was popping, they failed to predict the recession that followed. Most economists are, quite simply, terrible prognosticators.

So if you want a reasonably trustworthy take on the current situation, find some economists who DID call the previous bubble and recession beforehand, and listen to what they are saying. From what I have read, most of of them are expecting some sort of recession. Seeing as how our entire economy has been propped up by the housing sector for the past 4-5 years, I would have to agree with them.

[Giacomo]

I see from searching on the web that Ms. Stone has been in the business for quite a while, so it is probably safe to assume that she does not make these statements out of ignorance.
Perhaps her (published) letter had a designed effect, that is, to reassure a least a percentage of the buyers in her area, and land herself to some new listings hungry for her "upbeat" attitude.
Hey, it didn't cost her anything to try! And a year from now, she can just admit to having been overly optimistic.

[Nathan]

This is not the only real estate professional that I have heard lately with an unashamed bias. Just the other day I heard a friend of mine, a mortgage broker, telling another friend that "it's a great time to buy". Apparently these people live within a closed system, into which no new information can enter.

[Keith Lewis]

Yes the problem in the housing industry was caused by the sub-prime loans. The this was the beginning of the problem. This problem has been brewing for years now.

The median price income in California for a 4 person family is roughly $60,000. If this family was to bring home 75% of this gross that would be a take home income of $45,000. Now I am under the impression that 2/3 of your take home income is for your housing. That would mean that $30,000 would be for house payments ($2,500 a month.) This means that the average family could afford a $350,000 home yet the median priced home in California in July of 2007 was $547,500. We passed the $350,000 mark between 2002 and 2003.

This problem has been brewing for four years. My opinion is that this problem will take just as long to correct as it took to create. And until the incomes meet the market values, we will continue to see falling prices, foreclosures, bankruptcies and mortgage/loan industries closing their doors. Lay-offs will increase and we will be pulled into a recession if not a depression.

The only fix is time. HOLD ON!