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

[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?