California homes "overvalued by 40%"

News item from Bloomberg:  "California homes are overvalued by as much as 40 percent and stricter lending standards will probably contribute to 'material' price declines, according to analysts at Goldman Sachs."

More: "In August, the median price for houses in California was $589,000, though economic conditions only support prices of $350,000 to $380,000, the analysts said. The average U.S. home is 13 percent to 14 percent overvalued, the report estimated."

Our take: Not to split hairs, but we don't read this as a prediction of a 40% decline.

Your thoughts? Insights? E-mail story tips to lalandblog@yahoo.com.
Hat tip: Cal

Comments

[Steve]

a new median of $380,000 sounds just fine to me!

[speedlet]

It may well be a prediction of a decline greater than %40. Nothing says that prices have to stop at "fair value".

After all, after assets become overvalued, they can also overcorrect, resulting in undervaluation. This is the law of reversion to the mean. The pendulum swings both ways.

[JK]

*Yawn*... Wake me when home prices really reach an affordable level!

[mrincomestream]

"Our take: Not to split hairs, but we don't read this as a prediction of a 40% decline."

Yea, that's right keep that head buried in the sand...what is it going to take for folks like you to get it...? a tattoo on the forehead.

This is the third report this year from those who should know and have a vested interest and way larger stakes in the game than you, me and ten of your richest bloggers. All saying that Cali is out of whack and you still don't get it even as the dollar crumbles and Wall Street starts looking over it's shoulder.

What is it going to take?

[Ow Noer]

Good that you don't see it as such but the ones who matter such as the Banks who actually lend money will be regulated to follow the sentiment of wall street. Home prices will crash at least 30% equity will be non existent and home sellers will be crushed. Hope you enjoyed owning a million $ House because soon it's a bargain at 600K again. Foreclosures will go through the roof, wait that has already happened.

[albert]

What was the subprime lenders philosophy on the overextending the risky lendidng practices , stretching their financial recources way too thin during the time of *artificial housing boom* in America ? Everybody knew one day it would come to a halt and the companies which lended a lot of money out would be strung out , unable to collec,t with homeownes struggling to make ends meet with their reset ARM's.
I personally think , CA homes are overvalued by 50-60%.
Another important factor is , contrary to what we are constantly told about the economy (being good) , we see more and more people coming to CA , probably because there are no decent jobs in many states, so consequently people are moving it , contributing to the higher demand for real estate here.
I am wondering about how it would affect our state , if property values start going down , what will our state goverment , addicted to collecting ridiculously high taxes , do ?

[Willie]

...and add to that the raging wildfires in areas that have suffered the biggest dowturns in housing. Heavens forbid if we have to deal with an eartquake too.

[sunsetbeachguy]

Peter:

File this one under MOTO.

Masters Of The Obvious

Where were they 3 years ago?

The only excpetion is Jan Hatzius at GS and the guy who quit GS and wrote Sell Now!

[Joe]

That may be true, but there still is a housing shortage in California, not enough studios in cities. We don't need more houses, we need more affordable apartments in urban areas. And people will end up paying more for less. California needs to grow up, literally.

[Mike Domino]

It's amazing how the so called "analysts" are so accurate in predicting the de-valuation of California real estate. If Goldman Sach's can predict a decline of 40%, why couldn't they predict the melt down in the sub-prime market that affected the securities they sold?

[John]

"Not to split hairs, but we don't read this as a prediction of a 40% decline."

Sure, but it's not like Goldman Sachs is going to come out and tell homeowners they're up the creek without a paddle. They're trying to make a case for staying away from investments involving CA real estate, not encouraging people to dump their homes now before the real corrections hit.

40% overvalued is kind of a lot. That suggests either a steep decline back to normalcy, or a long period of real estate price stagnation. Either way, it's probably best not to get into the market right now, unless you can buy at a 50+% discount.

I wonder how the beginner vulture investors that were excited to buy properties for a 20% discount feel now.

[Rich]

I think Speedlet had an important point--panics are the downside mirror image of bubbles, and can happen as easily. I see signs in my own northeastern market that the unexpected difficulty homeowners are having selling off their own homes in order to enable them to buy new ones (Hubbard Clause "I buy yours when I sell mine" offers are being refused) is quickly forcing down asking prices for homes that are already reasonably priced: sooner or later owners of expensive homes must join the crowd and cut tons of equity from asking prices in order to get on to their next place. This could very well turn into a stampede, leading to an overcorrection.

At the same time, mrincomestream and others should understand that owners will not willingly let go of homes when they are too upside-down on the mortgage; when the equity loss is too negative many will have literally no alternative but to try to live out the market until the next upturn. Most homeowners don't have the resources to walk away with losses in the hundreds of thousands of dollars, which will be the common problem in the California market...

[waitingitout]

I agree with Pete. Just because something is "overvalued" doesn't mean it will come back to its value. GS wasn't about to go out on a limb and say so. There are factors that contribute to higher prices in California that are independent of the underlying economic conditions. Mortgage to income ratios have been higher here than the rest of the country for decades. That doesn't mean current prices are sustainable - count me in on the crash bandwagon. But analysts who only look at the numbers (GS, Schiller) are missing the forest for the trees.

Some markets will fall 40%, for sure. Sacramento and the IE...honestly I'd be thrilled if Los Angeles falls half that. That would put the average home in LA within spitting distance of the confirming limit, and that's all a lot of people need.

[Dr. Gary]

Some houses are 40% overpriced.

Some houses are 40% underpriced.

Some houses are priced just right.

Find the house that suits you.

[manraygun]

"...many will have literally no alternative but to try to live out the market until the next upturn. Most homeowners don't have the resources to walk away with losses in the hundreds of thousands of dollars"

"Most" homeowners don't set the market price. Prices are set at the margins by those who are forced to sell, not the vast majority who stay put. It's the minority who can't afford their mortgages (eventual foreclosures) or those who'll have to sell due to illness or divorce etc, who'll lead the decline.

[mrincomestream]

Rich-

Wishful thinking on your part...what you have just witnessed from GS was a warning shot for some big time nastiness coming down the pipe. You have been paying attention haven't you. GS has written off billions in the last few months. Guess who going to own a lot of the foreclosures coming back GS. Guess who will be doing mass comp killing in your neighborhood GS. Follow the bouncing ball my friend.

And you're right owners won't willingly mark to market if they are negative... but guess what...the banks will.

[Kim]

Wow, a GD newsflash. A 1500 square foot home in some LA suburb cum Mexican slum is not worth a half a million dollars! Give Bloomburg a medal.

[Enlightenment]

If you are retired and don't have any children or major ties to this area, I suggest you sell and get the heck out of here with a pot of money, then go to another part of the USA that has cheaper housing! You will have money to burn after buying a house in the midwest.

[Dog-Walker]

Kim,

Quit with the "mexican" slurs. It's dumb.

[jb]

Off-topic.

We are all thinking it but nobody is saying it.... I wonder if any of these fires were intentionally set to escape from a house that is not worth what is owed? (no offense or lack of sensitivity to those who lost homes intended - I feel very sorry for them)

[Jeff Lebowski]

Actually, JB, I don't think anybody is really thinking that, since the fires orginated in undeveloped areas, not somebody's house, and I would want to think that nobody would risk the death penalty (yes, arson of this nature is a capital offense) just because they are upside down on their mortgage (join the club!).

What I am thinking is, how will the fires affect the home market, especially in SD? Aren't home insurers going to pay out according to their assessment of current home value, or is it replacement value? Will people that were upside down to begin with in SD not rebuild?

[D]

Insurance pays replacement value not market value. I guess you've never had home owners insurance.

[Don]

Ya, it's worth noting with insurance that even though you may have paid a million dollars for that house, most of that price is for the land. If it burns to the ground you may get $100K or so from the insurance company to rebuild. Last time I owned a house (in the mid 90s), a 1500sf ranch house had a replacement value of just $30k. It's more now, no doubt, but it won't help someone get out of an upside-down mortgage.

That said, the sort of person who'd start a fire to get out of their mortgage is also likely to be the sort of person who doesn't think any of it through.

[Jeff Lebowski]

That's right, D, I'm an "angry bitter renter," as some would phrase it around here. So, I've never had homeowner's insurance before.

[MyLessThanPrimeBeef]

If California homes are 40% overvalued, and sex is 60% overrated, does it mean having sex in a California house, fuzzy math aside, is really zero, nothing?

Comments, anyone?

[phead]

Empire etc) suffer 40% declines. Thousands of houses were built there the last ten years and most people who moved out there are families with lower incomes that could not afford a house more centrally located. I can easily see many families struggling with their mortgages out at these locations. But if anyone is expecting to swoop in and buy a house at a more desirable location with good schools such as La Canada, Pasadena, South Bay etc, at a 40% reduction, you’ll have a long wait. The population of California is rising and people will continue to want to move to prime locations that are centrally located. Because of scarcity of land, new houses are not being built in good locations. I live in Pasadena and the number of SFH’s for sale in my neighborhood is about the same as last year. The prices are also about the same. I’m looking to buy a house in another city and prices have not really moved that much in the cities I’m looking at. It’s all supply and demand, there’s way too much supply in the IE and Riverside but the supply of SFH’s in prime areas is not growing at all. More than anything that’s going to keep a bottom on prices in some cities. Anyone expecting to buy a house in La Canada that’s selling for $1 million currently for $600K in the next few years is dreaming.

[phead]

When we see these headlines of expected 40% decline in California, people need to realize that real estate (like everything else in the state) is very diverse in the state. It would not surprise me if over built locations out in the boonies (like Riverside, Inland Empire etc) suffer 40% declines. Thousands of houses were built there the last ten years and most people who moved out there are families with lower incomes that could not afford a house more centrally located. I can easily see many families struggling with their mortgages out at these locations. But if anyone is expecting to swoop in and buy a house at a more desirable location with good schools such as La Canada, Pasadena, South Bay etc, at a 40% reduction, you’ll have a long wait. The population of California is rising and people will continue to want to move to prime locations that are centrally located. Because of scarcity of land, new houses are not being built in good locations. I live in Pasadena and the number of SFH’s for sale in my neighborhood is about the same as last year. The prices are also about the same. I’m looking to buy a house in another city and prices have not really moved that much in the cities I’m looking at. It’s all supply and demand, there’s way too much supply in the IE and Riverside but the supply of SFH’s in prime areas is not growing at all. More than anything that’s going to keep a bottom on prices in some cities. Anyone expecting to buy a house in La Canada that’s selling for $1 million currently for $600K in the next few years is dreaming.

[investorguy]

phead: Please don't confuse the whiners with logic. It upsets them and their heads explode.

I haven't read this blog in two weeks thanks to a travel schedule, and the last two days have been a great reminder why I shouldn't waste my time. This blog has great potential, but it's been hijacked by renters, whiners and those who believe anyone who makes money in real estate is evil.

Some of us are out making money in this downturn, while too many others are simply crying in their rentals and posting with wet dreams of 50 percent price drops basin-wide that'll never happen.

They have sad lives. Very sad.

[MyLessThanPrimeBeef]

Phead could be right about not being able to buy a $1 million house in today's market in La Canada for $600K in the next few years.

What is likely though, is that you can probably get that house for $800K say, 12 years from today.

It's a lose-lose situation for everyone. No one can sell and no one will buy in the meantime. It's almost like a prison sentence.

[TakeFive]

"...desirable location with good schools such as La Canada, Pasadena,..."

La Canada, yes. But Pasadena, lol! About the worst schools in the state. How it commands the prices it does is beyond me. At private school tuition to any calculations about Pasadena.

[Toby]

It's 40% overvalued. Meaning the market should be around 350,00 instead of the 589,000 that it is today. That sounds about right.

The problem is, that's not going to be the "bottom" of the market correction here. That's just where the ride ends.

The market will "over correct" for a period of time (for how long is anyone's guess, but also determined how awful this correction will be).

Remember, for the next two to three years the housing market at best will be "soft", if something unforeseen would happen ( a really bad job market dive or hyper inflation or anything) 250,000 median price for a period of time is not impossible.

And in fact, very doable.

[ddot]

I have heard the argument that Phead poses from a number of real estate agents, but how does that hold up in light of the extinction of jumbo loans? Is there enough of a demand from wealthy Angelenos who can afford to offer substantial down payments to maintain those prices in "high-demand" areas?

And I echo the same sentiment on Pasadena. There's no explanation for those prices, considering the public educational system is at best subpar.

And for those who say the high end can't be touched, what about Irvine? Granted all of that development left them with a lot of supply, but they have the lowest crime rates in the country and decent public education. But still their prices are getting chopped like crazy down there!

[phead]

You are right about the public schools in Pasadena, but I think prices (lower) there already reflect that. Compared to comparable SFH’s in nearby cities with good schools like South Pasadena and Arcadia, prices are lower in Pasadena. Prices in Irvine are going down because of over supply not only in Irvine but in all of South OC. Compare that with Pasadena, La Canada, South Pas etc, you can probably count on one hand the number of new SFH’s less than $1 million built in those cities the last few years. I think what you’ll find in these cities is that buyers will be those sitting on large amount of equity in their existing homes or very wealthy people. The last few years we’ve seen a lot of very wealthy new immigrants from Asia, India and Middle East. New home buyers will not be able to afford, which is very sad because I have kids and buying a decent house for them will be difficult.

[GCD]

I think phead is half right. The high demand areas will fare better. However, those areas will still see price drops in my opinion because many who bought in those areas in the past 4 years did so with ARMs and interest only loans. Also a lot of flippers hit those areas due to the short term appreciation. Now that lending standards are tighter, buyers no longer have the "prices will keep rising" mentality, and shortage of flippers, prices should decline moderately over the next few years. I agree that this process will be prolonged in the high demand areas. Look at the last downturn, cities like Beverly Hills, Santa Monica, Bel Air were the last areas to drop in price. It took a good 5-7 years from the peak to see real price drops.

[sfvrealestate]

"Home prices will crash at least 30% equity will be non existent and home sellers will be crushed..."

Wait a second. Prices have just about doubled in the last five years. So, if prices come down 30%, they'll come down to what they were about two to three years ago. The only sellers that will be hurt will be those who bought two to three years ago, or used their home as an atm card, not the long-time owners -- they'll see equity gains regardless.

[erin]

if you're going to moderate these comments, why not leave out all the angry, unproductive name calling vitriolic posts. I'm interested in reading your point of view on this blog but find all the nasty comments on bitter renters vs evil homeowners irritating enough that I rarely do read it.

[joeinlosangeles]

sfvrealestate:if you're going to moderate these comments, why not leave out all the angry, unproductive name calling vitriolic posts. I'm interested in reading your point of view on this blog but find all the nasty comments on bitter renters vs evil homeowners irritating enough that I rarely do read it.

The emotion is understandable considering how emotional all this is. Many homeowners are worried about losing their homes or huge profits they expected. Many renters, who have felt left out of the great appreciations, are seeing this as their time to swoop in and get a fair price finally. This is a zero sum game and there will be winners and losers. The value of this site is it gives the perspective of the waiting-on-the-sidelines, ready-to-pounce buyer.

[N_C]

"if you're going to moderate these comments, why not leave out all the angry, unproductive name calling vitriolic posts."

I agree with Erin. There is so much useless name calling in some of these comments. It doesn't add anything to the discussion.

[Bill B]

-----"I agree with Pete. Just because something is "overvalued" doesn't mean it will come back to its value. GS wasn't about to go out on a limb and say so. There are factors that contribute to higher prices in California that are independent of the underlying economic conditions. Mortgage to income ratios have been higher here than the rest of the country for decades."

THE UNFORTUNATE PART OF THIS ARGUEMENT is that the reversion to the mean prices of $350k to $380k already reflect the higher mortgage to income ratios here in California. Historical home price to income levels are around 3:3 to 1 nationwide and between 5:1 to 6:1 in California. MEDIAN HOUSEHOLD INCOME IN CALIFORNIA IS $54K IN 2006 ACCORDING TO WIKIPEDIA which would translate into historical fair value of $270k to $324k.

However with borrowing costs about 2% lower than historical which translates into the ability to afford @22% "more house". Thus their analysis of fair market price is pretty spot on...maybe a bit optimistic even.

And, uh, didn't u think the guys at Goldman Sachs were smart enough to use local historical pricing ratios to determine a fair market value?