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?