L.A. sales down 50% in August

News item: The first look at August home sales in L.A. County shows sales dropped by 50% from year-ago levels. That is not a typo -- half the sales market disappeared.

Los Angeles Business Journal: "The expanding morgage crisis and credit crunch slammed the Los Angeles housing market in August, with home sales plunging 50% from the same month last year and 25% from July ... The pain was widespread, as only a handful of the county's nearly 300 ZIP codes managed to eke out any sales gains.... August's median sales price dropped slightly from its record July level to $579,000.

More: "Everything was great until about a month ago," said Beverly Hills real estate agent Syd Leibovitch. "Then, on one day -- Thursday, Aug. 9 -- everything changed as lenders shot up rates on jumbo loans to 9% and further tightened guidelines.... It became almost impossible to find a jumbo loan."

Our take: We wonder if a drop-off like this is unprecedented -- anyone out there remember a month when the market dropped this sharply -- 25% from the previous 30 days? 50% from the previous year's level?  We only ask because we're starting to believe the current downturn may not look like previous slumps. Yes, California real estate is cyclical, but as Countrywide said yesterday, this cycle is different.

Thoughts? Comments? Insights? E-mail story tips to lalandblog@yahoo.com.
Hat tip: Cal
Photo Credit: L.A. Times

Comments

[LouMinatti]

Of course it's different this time around. Southern California real estate will have to decline between 50-60% on average to become affordable using traditional lending practices. During the last slump in the 1990s the decline was 30-40%.

It's astounding to me that you guys in the news media, who are supposed to be keeping up with things like this, are only now figuring out that a catastrophe lies just ahead.

[John]

Well, if you can only get a loan for $417,000, you'll have to make the rest up in cash.

If you believe that most folks buying a house don't have a million in cash readily available, then it's logical to conclude:

An awful lot of folks are now stuck in the houses they're in for ten years.

There will be a artificial price point set at $500k or less for the majority of houses sold unless jumbo loans are available at a lower rate again.

The houses costing $500k ten years ago will be $500k again soon, assuming the buyers will put down $100k.

Multimillion dollar houses will be unsellable until their price drops dramatically.

Once those multimillion dollar houses sell for half of where they are now, our state legislators will start complaining about lower tax revenue and start to shut down services. Prop 13 works both ways.

Hey, a bubble's a bubble.

[Captain Credit Crunch]

Hallelujah! The apocalypse of 9 August!

Just remember, sales are down 50%, but 50% from what? The answer is, "an absurd level supported by loose lending." Say goodbye to price rises and hello to affordable housing in LA. Maybe the California Association of Realtors will even go back to their old affordability index. You know, the one with real lending standards?

Cap'n Credit Crunch

[YLG]

More than a year ago it was clear that this was going to happen. At that time I had never heard of "sub-prime", "CDO" and the like, but with housing prices in LA at these astronomically unaffordable levels, how could the housing industry be sustainable? Basic common sense said it would unwind eventually. Yet some of the greatest bankers and economists in the world are completely taken by surprise (unless they were in it for short term gains, and are just acting surprised).

With such universal stupidity, it makes me wonder about the future of our nation. Next thing you know, we'll invade and destroy a foreign country half a world away, under the most ignorant and ludicrous of pretexts, and then be responsible for thousands of gruesome deaths and a spiralling civil war, which, while sucking the American economy dry, destroys any semblance of American credibility. Oh wait, I forgot...

[Jack]

Lou Minatti, you're talking about decline in prices, and Peter is talking about a decline in sales volume. As for "keeping up," before you beat up on the media, you might want to make sure you actually realize what subject is being discussed. Peter is talking apples, and you're screaming about oranges.

[srla]

This drop-off in demand is nothing short of astonishing. The previous downturn in the early '90s saw nothing this dramatic. And such sharp downturns do nothing to reassure the lending markets, meaning mortgage interest rates are likely to climb still further, regardless of any Fed actions.

It's hard to envision anything but a downward cycle emerging out of this. Given lack of supportive fundamentals and a complete undermining of the forces that drove the pricing increases in the first place, the decline could be far more rapid than most of us would have expected. Rather than a slow decline, we could be headed right off a cliff.

This could get scary over the next couple of years. If only our economy were in more competent hands, this all could have been averted, or at least moderated. But rather than using his bully pulpit to attempt to inject ration into the real estate market, Greenspan simply fanned the flames and denied the existence of the bubble, and Bernanke did the same right up until last month. It will be painfully clear who to blame when it hits the fan.

[SReynolds]

"We wonder if a drop-off like this is unprecedented -- anyone out there remember a month when the market dropped this sharply."

Unprecedented?!?!?. How about 9-3-1929 care to guess what that date represents?

[Nick]

Half the buyers realize that waiting is the prudent course. The other half can't get a loan.

Sellers are in deep sh*t. It's a long way down.

[Charles Wilson]

The Five Stages of Real Estate Grief

DENIAL: "Don't listen to those doom and gloomers. They're nothing but a bunch of jealous renters. Probably Democrats."

BARGAINING: "Okay, maybe things got a little out of hand. If I take a 15% haircut, is that fair?"

ANGER: "You traitors in the liberal media are driving down prices and killing the American Dream! And dammit, stop laughing at me!"

SADNESS: "I'll be ruined, I'll tell you! Ruined! Everything I've worked for will be gone! Just kill me now!"

ACCEPTANCE: "Honey, who knew that we'd be so happy in a trailer?"

[thinker]

Some things only last so long. It is like reality setting in for the real estate,however I have not noticed any change in housing prices. Check any listing,homes are still priced like in 2005 period of boom,with current owner looking to make 200,000 profit. This does reflect in my understanding that there is long period when actual owner if i may call them realize they are in for it good. I donot mind because more time the current owner pay their banks, more bank will be willing to slash prices. Not only that more pressure will be on current holders of mortgage owner with ballooning inventory which will work for housing correction.
Now this will get the economy out of its lackluster phase, in roll due to more money available with that time renters and owners who will have spare cash to spent. At present rate , all are squeezed to live under the roof.
Most of money will go to create new jobs in different sector.
I am sure now manufacturing will peak, service sector will flourish and economy will have full steam.
Why wonot it, before housing we were rich country as we will always be.
So there is one silver linning

[Pasadena_Renter]

Stalling sales during the peak season have to put pressure on pricing. It is not an apples and oranges argument. It is basic economics. Demand has been artificially high for 5 years based on insane lending by CFC and others. People started to believe that "buying" a house with an interest-only mortgage made sense! That, of course the house would appreciate so they could refinance out of some ridiculous teaser-rate loan.

Artificially high demand pushed prices to the stratosphere. Now that lending standards have tightened somewhat, mortgage rates have gone up, and the populace has been disabused of the notion that real estate is a path to riches, prices have no where to go except down. In my neighborhood, only about 5% of the current residents could buy their current homes at today's prices.

[Cal]

I am unsure of Homedata Corp. methods for collecting data their absolute numbers differ from Dataquick (whose numbers dont come out for 2 weeks) but the percentages in change are pretty close comparing old press releases.

One line I'd like to comment on in the article:"“Back then, people were moving out of the region in droves, mainly because they had lost their jobs. We had net out-migration. These people had to sell their homes, no matter how long it took. Today, it’s a different story,” Kleinhenz said."

Net outmigration....Today ISNT a different story, California has net outmigration.

http://www.census.gov/mp/www/cpu/fact_of_the_day/006832.html

Young families wanting to move on with their lives are doing so outside of California because it is possible to have a family and a house at a much younger age. Baby boomers nearing retirement age are arbitraging to lower cost areas and banking the difference in housing prices. The baby boomers hurt near term because it is people at or near their peak earning capacity not being replaced. The young families hurt long term causing a "hole" in aging patterns of the state setting us up for a very weak future.

[Jas Jain]

--
BTW, in Aug'06 the sales were down 21% from year ago.

Jas

[J.W.]

YLG,
I had never heard of sub-primbe loans either, and I have been buying real estate for the last twenty years. And, yes, even I knew these prices were artificial but I could not understand why real estate in L.A. was appreciating....It all became clear in the last four weeks. I am reading everything I can get my hands on....And as you said, how could people who were making the loans not know this was coming when you and I knew? I just don't get it.

ps.I don't own anything in L.A.

[Kaye Thomas]

In the Fall of 1979 interest rates jumped 6.5% in a three month time frame.. Sales stopped as interest rates went from 11% to 17.5% and stayed high for 3 years.. If you didn't get a loan funded before Wednesday you had to wait for the next week.. maybe ..as Banks literally had no money to lend.
However prices did not drop much.. they just were flat for a number of years..There were a lot of foreclosures as builders could not sell new homes. There was a long running joke about condos in Redondo..

This was when there was a lot of creative financing with buyers assuming older lower interest rate loans and sellers carrying back second TD's and/or doing AITD's to get homes sold. There was a major lawsuit that changed how new home loans were written and made certain loans assumable depending on whether they were issued by State or Federally chartered lenders and pretty much did away with pre-payment penalties on most loans.

It was an interesting time with rates going up by the day.. When rates dropped to 12.5 % it was incredible and when they hit 10% well a buying frenzy took over.

Truthfully most of us never thought you would see single digit rates and certainly nothing under 9%.

[Toby]

I would say Feburary 1994, the month after the Northridge earthquake.

Major damage ocured on the 10 and the 5 and the 14. SoCal was getting hammered by job loses in Aerospace.

But still, with all of that, I bet it wasn't even close to 50%. Like they say "what goes up, must come down" and boy, did it go up.

I would say NOW, would be the time for everyone to put on their Slickers, it's going to start getting wet.

[yourkillingmelarry]

Here is the ultimate question in the face of this Historic Making data.

Can the Los Angeles economy survive a county wide 50% decline in residential RE transactions??

Here is some context. 40% of job growth in California in the past 5 years has been RE related jobs. RE related jobs are now a drag on the economy. We are getting strong indications that the residential RE recession is spreading into the Commercial Market which has acted as a buffer. We are in an uncontained credit crunch which has become a global problem and seems to be escalating. We are also getting strong indications the national economy is on the verge of a recession as evidenced by the August jobs report and the June and July revisions downward (these numbers are basically pre-credit crunch). Everyone counted on the FED to bailout RE but BB is looking at cutting the Fed Funds Rate in the face $700+ Gold, $75+ Oil, and what is most alarming a US Dollar index that is breaking a MAJOR MAJOR technical support level of 80 (currently 79.96). These are just the facts. The early 1990's are looking pretty good right now compared to this!

[suny cal]

Well,if you want to make more money you take risk. So did lot us. Now that one segment of economy is slowing, we have to look at other places to invest. so let housing ATM be slow, we will have other?

[Georg Pauwen]

I live in The Netherlands, and over here, the banks do all sorts of background checks before they give you a mortgage. Above all, if you qualify, you can get an amount only three times your gross income. The downside is that prices over here are completely inflated because most people get interest-only loans, meaning they only pay interest, of which about 50% is tax-deductible. Almost nobody pays off the real mortgage, and everybody is happy with it, since prices are going up. Right...you are not the only ones with a bubble.

[manraygun]

"you're talking about decline in prices, and Peter is talking about a decline in sales volume. "

So what's the point? Peter's post is about a decline in sales. Lou predicts the increasingly inevitable large decline in prices to follow. Apples and oranges maye, but they're both fruit.

As far as beating up on the media, there have been plenty of people (bloggers) who have seen this crisis coming for a long time. While it's nice that after years of relentless cheerleading the LA Times has seen fit to start this blog, it clear that they and almost all the main stream media missed the boat.

[Archer City, Texas (winds blowing from The Last Picture Show)]

Somebody read to me all the small print across the bottom of the tv screen in the 1 point 8 seconds allowed in a DiTech commercial.

[thinker]

It is not time to buy for sure,no matter what they tell you. Have you noticed, what car the real estate agent is driving?? I seen lot of MBZ, BMW and what not. How come they donot drive ford, accord, camary etc? well they made money bu selling , no matter who the seller or buyer. LOL. Please I must request all sane buyers, just do math, before you buy homes. I presume 500,000 or 250,000 over 30 years, which one is easier to pay off is no brainier.
Math is like 500,000 over 30 years and 6 % interest =1.079192 is dollar payment.
250,000 over 30 year 9% interest 724,155.
So even if interest go high ,but market correct you save 300,000 about.
So what is better, rent now or buy now?
Also we have not used 300,000 saved to be used over 30 year investment period how much will you make.
So I am sure market correction, will save us all. And 300,000 investment in economy will be good??

[LA Expat in Arkansas]

Archer City?!! I love that place: Home of Larry McMurtry and his fabulous, albeit pricey used bookstores lining the main drag. (Booked Up, I believe they were called). Are the bookstores still there? Listen up all you LA homeowners, take what equity you have, while you still have it, pack up the dog and kids and move to Archer City. Affordable housing, friendly folks and one hell of a bookstore -- and the library was pretty decent too.

[Randy Adams]

Kaye Thomas' account of the post-1979 situation is interesting. While she reports that prices remained flat for a few years, if you factor in the double-digit inflation in 1979 (11.22%), 1980 (13.58%) and 1981 (10.35%), house prices declined in real terms. The total decline--if Kaye is correct about nominal dollar prices remaining flat--was approximately 40% for that 3 year period. That particular housing correction was achieved by a weakening of the dollar. Ironically, the Fed was cranking the interest rate up as high as it could to try to kill off the inflation so that just goes to show how much control it really has over the value of our currency--some, but not as much as people like to think.

As so many people have pointed out on this blog, the current price levels are extremely inflated as demonstrated by their utter lack of proportion with the population's earnings level. I can't seem to find the data I want for 1979 but it's an easy bet that the relationship between house prices and wages in Los Angeles in that year was far closer to the norm than it is now. As a consequence, a much greater "correction" will have to occur this time around. I think it is very likely that this correction will consist of a mixture of drops in the nominal prices and significant weakening of the value of the dollars being paid for those reduced nominal prices caused by the Fed and the rest of the government's attempts to apply plaster in the form of an easier monetary policy at a time when the value of the dollar has already plummeted vis-a-vis other major currencies.

[fatwatervillage]

Question: since the RE downturn is now upon us, how long will it take for the property tax assesor to re-value homes? Or will they?