How far will prices drop?

Good morning, Armanti Edwards, and happy Labor Day. Here's a quick roundup of what we've seen this morning; we'll file once or twice more today, but otherwise it's a Holiday Schedule at L.A. Land global headquarters.

How far will prices drop? 7%? ... 16%? ... 30%? .... 50%?  Manhattan Beach Confidential rounds up various gloomy predictions (gloomy if you are a seller).

The "Hey, everybody else was doing it," defense: The L.A. Times' Michael Hiltzik reviews the Countrywide saga. It now appears Countrywide's sophisticated public relations response to the mortgage crisis was drafted by a 7-year-old boy: we made a bunch of really foolish loans because, well, everybody else was doing it.

If you are trying to figure out the ramifications of a possible tax break on "phantom income" from a forgiven mortgage debt (this is the income tax that homeowners owe after selling their house in a "short sale," for example), read Kathy Kristof's explainer here.

Lastly, since it is a holiday weekend, a time for leisurely and expansive thinking, we encourage you to comment on yesterday's post about Cashing Out and Leaving California: If you owned a home here outright, would you stay and enjoy L.A.? Or cash out and leave the 405 in your rear-view mirror?

Comments, thoughts, insights and bloviations are always welcome.

Comments

[Jason]

I'd guess probably 30%. There are a lot of folks making 100+K a year that do not have homes, so it's unreasonable to expect nice homes to sell for $300K again. I'd say nice properties will be going for around $400-$450K once the correction is complete.

[Roger Moore]

There's probably some truth to Countrywide's "everybody else was doing it" theory. Remember that most mortgage companies aren't lending their own money anymore. They're making loans, packaging them up, and selling them on the secondary market. That effectively takes control of the market away from conventional mortgage companies and gives it to the buyers of mortgage backed securities.

[jemarqu]

Southern California alone is such a huge real estate market. With some areas that are over-populated and some areas were just over-built. Depending on where you live is going to determine the loss of value in your home.

My best guess depending on where you live we are going to see drops from 25% to 45%. No matter what, it's going to be a long 2 1/2 year wait for those who bought during the boom and those waiting for the bottom to purchase.

I am just like a lot of readers on this blog, I am holding on to every nickle and dime of my disposible income waiting for the bottom to come.

[Dr. JwB]

Hmmm, well I think any estimate I would make would be just a guess, but here is a random incomplete thought based on affordability:

Whatever the realtors tell you about demand ("people always want to live is SoCal, so demand will always be high, so prices can never fall"), the part they are leaving out is that people don't want to live in SoCal so badly that they will live on the street in SoCal. Being homeless is not an option most people consider.

So, maybe the 28%/36% rule doesn't apply anymore, but there must be some percentage, or some total amount of money/month that is a maximum that people can spend on housing, for a given median income. No matter how much people want to live in SoCal, money is finite for most people. So what is that percentage, or that total monthly cash outlay? 50% 75% Any guesses from the usual crowd of LALanders?

My point is, whatever the difference between current prices and the prices that are truly affordable for people here is all that is sustainable in the long term. So if the median income is 50K (or whatever), and people can spend XX% of 50K on housing, what median home price does that predict?

People may stretch their budgets to live here, but there must be a breaking point.

[BetterVillage]

Does Armanti Edwards post here too?

Housing prices will drop 75% across the board in California, Arizona, Nevada, and Florida. Countrywide execs will be forced to move their operations to Nigerian boiler rooms. Bank of America will join forces with google and will begin to censor our blogs. We'll be forced to move underground and communicate using ultra low frequency burst broadcasts.

Back to equilibrium in 2012 when the Mayans will begin a new calendar.

Sarcastic as hell but it's too hot not to be. At 9:00 in the morning!

[shockg]

None of the above. The media (especially this blog) is hyping up this great apocalyptic market crash. We might see another 4-5 decrease.

[longdriver]

I did a little research and found a NAR report on Riverside that charted home prices and income ratios from 1980 to 2006. The median price chart has ups and downs but if you plot a straight line through 1980 and the TOP of the last peak (1992) out to today you come up with a number of $225. If you plot the line through the low point after the last peak (1995) you get $150k. The Median out in Riverside is $420k. So, to get back to the mean line prices would have to fall anywhere from 45% to 65%.

The second chart I found interesting was the income ratio chart. From 1980 to 2002 the income ratio fluctuated between 2 and 3 times the median income. Starting in late 2002 the curve went parabolic and shot up to todays current levels of over 7 times median income. That's a big jump in 5 years.

from these it's easy to see the bubble. It's also easy to see that prices should come back down to traditional levels which would put them somewhere near 2002/2003 prices.

Both these charts are from the NAR and can be found here.

http://www.realtor.org/Research.nsf/files/06CARiverside.pdf/$FILE/06CARiverside.pdf

[Keith]

I predict the prediction game will now grow to maturity and drive everyone batty for the next 2 years. I would hope that someone with media resources could cross reference "doom-n-gloom" against "what bubble?" and see if anyone puts their foot in it enough to be burned at the stake.

I keep comparing all this to dot com in the 90's, the chilling thing about that scenario was how fast it all vanished. The real truth with housing is it can and will reset all the way back to the point where the average person gains the confidence to buy a house again. How low can it go? We'll just have to wait and see. I chuckle at the folks who say it will never return to 1995 pricing as if that was a hundred years ago. It was there once, it sure may hit it again.

On Countrywide, of course it was their responsibility to their shareholders to engage in the same practices everyone else was doing not matter how unsound. The ugly side of capitalism is known as the "race to the bottom", it's the tenet that public responsibility is all fine and good as long as practicing it doesn't give the other guy the edge.

Happy Labor Day!

[Pat]

Pricing is completely dependent upon the neighborhood. Auctions have shown 30% price drops already in parts of Riverside, San Bernardino, and San Diego counties. Other areas, like the Westside have shown drops of less than 10%.

[Pat]

Don't you think Nate Longshore deserves a mention?

[amir]

Anybody who read Fooled by Randomness or The Black Swan knows that most predictions (especially economic ones) are usually wrong. Not some of the predictions wrong, all of them! The entire range of predictions is wrong. I think that people that predict a 10-30% drop are all wrong because such a drop will feed on its self. If the market starts dropping it will drop for years with no end in sight, or it won't drop at all. But it will not drop a little and then stop.

[Dr. JwB]

I think someone (Pete, I'm looking at you) should keep score of all the people brave enough to put a number and a day down for the minimum. Then we can look back and see how wrong we all were.

Well, not all of us. Someone will be right . . . will it be shockg who thinks another 5% down at most? Or will it be BV who sees a 75% drop?

Then the LA Times can buy the winner a combo meal at BK which would come with a paper crown symbolizing that he or she is the King of Housing Prediction!

[investorguy]

75.3% of all statistics are made up on the spot

[Roger Moore]

I'll guess that prices will drop 55-60%. They're currently overvalued by about 100%, so it would take a 50% drop to get them back to normal. As usual for these things, though, they'll overshoot some and wind up below normal at the depth of the down market.

[Cal]

Countrywide has long maintained the "everyone else was doing it" defense, in the article they act like they were the follower not the leader. I disagree completely. If you look at who mass marketed Option arms the most, it was Countrywide. They had a huge hand in the big refi boom and as they started faltering they moved into the purchase arena with their lax guidelines and underwriting. At the same time selling the line to Wall Street that they were the experts and knew exactly what they were doing. They were the leaders in the field in every way, shape and form.

In late 2005-2006 as origination volume started dropping in spite of the wildly lax guidelines, originators like Countrywide took it a step further. Whatever the issue was with a loan that would cause it to reject, they granted exceptions to the guidelines to get the loan accepted. These exceptions are a phantom part of the housing story not talked about. It made the 2006 vintage of originations the worst in history. So at the height of prices you have a complete lack of standards. In reality 2006 probably was a much "better" housing year as far as volume and pricing than it should have been based on the published underwriting guidelines. This orgy of bad lending (with Countrywide being at the forefront) has caused the whole industry, instead of an orderly unwind, to blow up.

All because they couldn't admit that it was bubble and showed their "expertise" by not using any of it.

p.s. Chatter on the broker boards (which traditionally has been pretty reliable in my experience) shows that Countrywide is still doing the exact same thing now. They are basically limited to Fannie/Freddie but they are pushing things like they were before (the two things I hear being pushed are appraisals and reserves). It's a very dangerous game they are playing right now, but Mozilo is desperate to maintain volume so he can cash out. These guys simply cant exist on a level playing field.

[Dr. JwB]

investorguy, perhaps this Simpsons quote is appropriate . . .

Homer is invited to be a guest on Smartline (TV show). Kent Brockman interviews
him.

Kent: Mr. Simpson, how do you respond to the charges that petty
vandalism such as graffiti is down eighty percent, while heavy
sack-beatings are up a shocking nine hundred percent?

Homer: Aw, people can come up with statistics to prove anything, Kent.
Forty percent of all people know that.

[Cal]

Its a mistake just to look at the house price because it ignores interest rates. I think the much better measure is PITI to income ratios. The problem with the data that I have seen is you have this great amalgam of non-amortizing loan products (interest only, option arms) and 2nd loans that in much of the data I have read aren't accounted for properly. And now of course you have the wider spread between jumbo and non-jumbo to account for.

But the calculations based off of those fundamentals dont tell you the amount (if any) of overcorrection that can occur in illiquid markets. Since this market isnt efficient you get great lags between fundamentals and prices. As late as 2000 you could get a home from the bank for 100k-150k in and around the SFV. The market simply cant take a large volume of motivated sellers or buyers. Right now, I wouldnt call too many people in our market sufficiently motivated and that is why you have this stand off.

I certainly think that people will get some houses at 50% off of peak prices in an fire sale situation at the low point but this wont be the average home buyers experience during these times. It will take much research and attention to the market for buyers to find these deals.

[investorguy]

LOL @ JwB

Cal: You make a lot of sense -- 50% won't truly won't be most people's experience. I'm predicting 20% to 25% as the bottom (and to those who are gonna start saying "I told you so!") jumbo lending tightening so dramatically in the last month changed my thinking a bit).

There are still a lot of factors that will prevent the kind of 50% across-the-board drop that the short-sighted commenters here crave (sticking their heads in the sand about what that would do to the SoCal economy as a whole). Prices aren't dropping at foreclosure sales. Banks aren't discounting their REOs.

There will be some steals in short sales, but most consumers don't have a clue how to buy a short sale property. And any 50% deals that might be made on REOs will be total dogs -- the lean-to in the I-10 median, for example.

In addition, folks who can afford their mortgages will just ride it out, not adding to any drop. The 50%ers are relying on a massive flight from LA, and that's not going to happen. LA adjusts -- always has, always will.

[investorguy]

BTW, interesting piece on MSBNC today that confirms what I heard the last time RE slumped: keep an eye on the backlog to tell when things are starting to turn.

[sfgal]

Cal -- great postings. When you talk about Countrywide pushing appraisals and reserves, could you explain more? And what are the good broker boards I can lurk on to learn more????

[smokey]

Well.......if you go back and look at blogs from......say......six to twelve months ago.....there were MANY (you know who you are).......that were saying "This is LA numbskull, prices AREN'T going to drop!"......

[Cal]

sfgal:

I watch Broker outpost:
http://forum.brokeroutpost.com/loans/forum/1/2.htm

And Grapevine:
http://www.brokeruniverse.com/grapevine/

As for pushing appraisals/reserves accusations, there are brokers who get borrowers they cant help due to collateral value (house isnt worth enough) or DTI ratios, the borrower goes to Countrywide and the loan gets closed. If you can make the appraisal hit a higher value it is easier to close a loan. What pushing the reserves number will do is allow someone with a lot of debt still get a loan. If you have a lot of credit card debt but lots of cash saved you could still close a loan. The posts I saw was that the reserves were made higher than the original broker could find in their research and CFC was able to close the loan.

This could be bitter grapes and brokers just not knowing the guidelines or lying because they do not like CFC. Or it could be truth, there is no way of knowing, but if the threads start getting more prevelant than it generally means that others are experiencing the same issue as reported earlier. Be your own judge.

[Randy Adams]

The prediction of 20% to 25% down is too modest. The last slump pulled prices in solid neighborhoods down by a full third. Kaye Thomas confirmed this for her area (beach cities) and I can confirm it for the areas I watched (West Hollywood and Silverlake). The defense industry shutdown triggered much of that decline. But look at what has fueled this economic boom: the real estate market and people's frenzy of converting their equity into spending. That "resource" is tapped out. We have burned up all the gas that drove the George Bush economy. Other comments on this blog have already nicely outlined the dominoes. Once people no longer have their credit to expend, every bit of discretionary spending takes a major hit and there goes the economy. How bad? Nobody knows. But housing in this area (SoCal) will undoubtedly go down more than a quarter, UNLESS the geniuses in Washington DC contrive to make the unavoidable correction happen by gutting the value of the dollar. In that case, we will see hyperinflation. It's one or the other.

[wdb2103]

JamarQu wrote "I am just like a lot of readers on this blog, I am holding on to every nickle and dime of my disposible income waiting for the bottom to come."

Its funny because I know people who put/used very little of their money down and kept the rest in the pocket (02 & 03 when you could do that). Their home went up in price and they refinanced later to a fixed. Oh yeah---They still have their 400,000 down payment in the bank. That's the kind of thing I'm hoping for when the market adjust.

[Cal]

A pretty interesting Countrywide opinion given here:

http://www.cnbc.com/id/20586788?__source=RSS|blog|&par=RSS

"But Mozilo is still in denial and insists his lending standards were not lax; his products were appropriate; and his fees - of up to 15% for some subprime products – were not out of line."