How low will prices go?

Good morning. The L.A.Times' Peter Hong explores a favorite topic on this blog -- how low will prices go? The consensus in the story is that prices will fall in the 15% to 25% range, but maybe not that much in higher priced areas. The piece contains a mini-debate that has also been popular here: Will prices eventually weaken in more expensive coastal areas, or are those neighborhoods immune?

"Southern California home prices have fallen for five straight months, according to data released this month, and are now down 12% from their peak last spring and summer," Hong writes.

This sidebar contains a few predictions, including these:
--Michael T. Carney, professor of finance and real estate, Cal Poly Pomona: A decline of at least 15%, bottoming at the end of 2009.
--Delores A. Conway, director, Casden Real Estate Economics Forecast, USC: A decline of 5% to 10% in areas of L.A. and Orange counties where housing supply is tight; 5% to 15% in other parts of those counties; and 10% to 20% in the Inland Empire.  "The downturn will not be as severe in some areas. It really depends on the sub-market," she says.
--Edward E. Leamer, director, UCLA Anderson Forecast: A drop of 20% to 25%, bottoming in 2009 or 2010. "It will get back to normal when people buy a home to live in, not invest in," Leamer says.

Your thoughts? Insights? Email story tips to lalandblog@yahoo.com.lalandblog@yahoo.com

Comments

[Tim K.]

Here's the beauty of being a buyer - I don't have to be able to tell anyone an exact $$ figure, or percentage, of how low prices must go to know when it is the perfect time for me to buy.

What I do, is size up my local work area and pen out a radius of areas I'm interested in commuting from. Then I remove the areas that are in neighborhoods I don't feel comfortable in. Then I price the cost of renting in each of those neighborhoods, and when prices are about 12-16 times the annual rent that is being charged now, I know that prices are in-line with what the market will bear. If even that is too expensive, I know my job is not paying enough for the area, and I'm outclassed and should consider either a career change or moving way the heck to another area.

But the great thing is, I can repeat this analysis every 6 months or so and check on my situation - rents AND home price will fluctuate, so the calculation relies on both variables. When the two align within the 12-16 factor, I know it's time to begin shopping. Yes, in the past, the housing prices have overshot on the downside, so I know there is some possibility of missing out on an even cheaper home, but the point is I will be not be purchasing something so far out of line with historical trends that I am unlikely to get screwed with my purchase.

And over the last 3 years, the ratio has been improving in my favor, albeit slowly for the first two years. It's been improving much more quickly in the last 6 months.

These "experts" are averaging all of those factors into comforting sound-bite. Unfortunately, it lulls homesellers into a false sense of complacency.

[Ken Alpern]

Geez, maybe the author of this story should pay attention to this blog. It seems a bit behind the curve on what is happening.

[sunsetbeachguy]

Funny, with the exception of Leamer, none of these "economists" could see a bubble 2 years ago. What makes you think they are right this time?

Are they due for hitting the forecasting jackpot?

Forbes is saying 40% for LA and 30% for OC.

http://www.socalbubble.com/

What is missing from the discussion is all other things being equal.

What about a looming recession?

What about job losses continuing to ripple?

What about the credit crunch?

What about a financials/homebuilder bear market?

What about the FED letting inflation run wild?

There are too many moving parts to boil it down to a simple % decline number.

For me, the bottom will be signaled when the median mortgage payment to median 4 person household family income ratio is 20-28%.

See the historical pattern here:

http://www.thebubblebuster.com/losangeles/
summary.html

Or when total ownership costs/benefits are within a 10-15% premium compared to renting an equivalent space.

That is the only floor on housing prices!

Otherwise, let the relative freefalling continue.

[Jax]

SoCal won't see the bottom until 2012 (at the earliest). There are too many problems to see this mess get cleaned up before that time. When the bottom hits, prices will stay there for years. And, BTW......These professors should get another day job if they believe prices will only fall 10-25%. Prices will easily fall 40% ++. Wait and see.............I know I'm correct.

[caliguy2699]

5-15% drop in LA and OC? They must not have seen what is going on in most parts of OC already (Newport Beach and other coastal, high-end areas other than Laguna Beach seem to be holding fairly steady right now).

We're seeing drops of 15-40% from previous sales in '05 and '06, and most areas are also below '04 prices (a few below '03 prices), and much of the inventory isn't moving (the ones hit worst seem to be less expensive condos that saw huge bubble appreciation). The IE, from what I hear, is worse.

[John]

Those forecasters are being way, way, way too conservative.

Median listing prices are down 9.3% already, and the bulk of the ARM / teaser interest rate resets has yet to occur.

Prices are going to drop 15-25% in the nicer areas, 25-40% in the rest of L.A., and that's not even an extreme prediction.

Being mortgaged to the hilt to live in a place with terrible air, lousy infrastructure, and schools that are a national disgrace, really doesn't make much sense if your real estate is not only not going to give you a big return, but actually start losing value.

Don't get me wrong, L.A. is great for single renters and people who bought their homes at reasonable prices, but there are a lot of folks who will be packing up and heading out of state before too long, as good weather can only compensate for so much.

[MyLessThanPrimeBeef]

Toto, I've a feeling we won't be in Bubbleland anymore.

[producer08]

I say 80-90% drop, without the subprime scam 30-40% but that scam has artifically inflated prices into the stratosphere.

An estate selling for 6MM in 2001 should not be selling for 52MM now.

A condo selling for 100k in 2001 should not be selling for 600k

The equation does not add up.

They have to come way down and 2 trillion has to be written off in bas loans and those that put us in this position, well, they have to be left alone.

Then we can rebuild, it will probally happen by 2009/2010

[Rob]

Anderson's got my money. They were correct a couple of years ago. But where is the whole interview? A statement like a drop of 20-25% percent is about as generic as "Where do you live.... I live in LA."

These look like minimums...

[Bubblewatcher]

A drop of 25% from the peak median price of $505K gives us a median price still gives us a median of roughly $400K, which is still about 6-7 times median local income, and a 20% downpayment of $80K. Without stated income loans, and with a negative savings rates, where are they going to find buyers who can afford even that much?

I'm with those who feel 25% is too conservative.

[LA-renter]

Just need a few excerpts:

"Los Angeles County median home prices are about 40% to 50% higher than the median income justifies, Thornberg said. He said the market would settle when prices and incomes became more closely aligned."

"A drop of 20% to 25%, bottoming in 2009 or 2010. 'It will get back to normal when people buy a home to live in, not invest in,' Leamer says."

(If the price of a $1 house is inflated by 50%, the house costs $1.50. Now, if value of the house returns to normal, it would cost $1 again. Isn't that's a 33% decline in price?)

"Carney and other analysts said the big wild card was the economy: If the U.S. falls into a recession, all bets are off."

(I'd guess that all bets WILL be off in a year. Why has nobody considered that the market will "overcorrect"? Yeah, it's irrational but so is the bubble mentality.)

[Aldo818]

About a year ago, I felt that the most reliable forecasts ranged from 5% to 45% for the bottom.

All those forecasta had great points ranging from the "constant demand" that seemed unrelenting (even at sky high prices) to basic math using median incomes for the area.

I thought that a 30% drop was most likely since there are a lot of high paying jobs in SoCal that can afford the prices. However, the psychology of it all might be more pressure on buyers and sellers to stay out of the market until we get a better picture of the credit problems.

My current opinion is that we will see about a 40% to 50%. I think that the commutes will determine which areas will be more desireable thus, more valuable (remember that rule?). Also, we will be losing jobs as a county due to the downturn in housing (building, selling, servicing, appliances, ..etc.), adding more psychological pressure on the market to drop prices.

I'm no expert. It just makes sense to me after reading about the prevous SoCal bubbles and comparing the median incomes at the time.

Just my humble opinion...

[Marcus Castro]

Are you guys on drugs? Southern California has something like the 6th largest economy in the world and is one of the most desirable places to live in the world-just look at the housing shortage. The smart shopper will pick up some deals now before the market starts to recover and they look back saying "I wish I had bought that property back in '07/08 when prices were down. Final thought: If you buy a house today, what do you think it will be worth in 5 years using historical averages?

[John D.]

Everyone on this blog is always rooting for a huge decline. I can understand the frustration with being locked out of the housing market, but there just isn't much evidence of a large decline happening on the Westside or other good areas. There are too many buyers with too much money chasing too few properties. Even with the problems with jumbo loan availability, houses are still selling pretty quickly where I am. That means there's quite a few people with a lot of cash out there. Just because things go up, doesn't mean they have to go down. I predict a maximum of a 20% decline total in areas with current median house prices over $800K, but I think the actual number will be closer to 10%. Inland empire will be uglier for sure, but still nowhere near 40% on average.

You all shouldn't be so glib about 40% declines. If that happens, our whole economy is screwed. Try buying a house without a job.

[MyLessThanPrimeBeef]

Producer, you are right about the condo. But the $52 mllion mansion? The rich, we are told, dont' care. Heck, they will probably offer $200 million just to show you hoi polloi that you are...well, hoi polloi.

[longdriver]

30% to 40% in LA and OC and 40% to 50% in the IE. It's already easy to find listings 30% to 40% off peak in the IE and I'm starting to see homes listed for near 50% off peak prices. Even at those prices they are selling at a glacial pace. I see prices settling back to 2002 levels, prior to the fraud/frenzy years. Economist predicting 15% to 20% declines are either wishing or they don't get out much. Maybe they are factoring in the 10% to20% that most areas are already down. I doubt it though.

[caliguy2699]

"If you buy a house today, what do you think it will be worth in 5 years using historical averages?"

If we assume the historical relationship between rents and incomes (the one that fell by the wayside in recent bubble years) the house would be worth less in 5 years than it is worth today.

[Don]

For the coastal areas, the question is, what's changed in the last 5 years to justify the price increase? Are there that many more wealthy people in Los Angeles?

And then think about how much money is disappearing from the economy with each failed mortgage. Even if the mortgage is restructured to allow the homeowner to stay in their home, there is a significant amount of money that will cease to exist. There will be a recession, it's just a question of how bad and how long.

[culcer city rox]

I live in Culver CIty and prices are still stable/marginally increasing! All real estate is local. 1) The westside is expensive and Culver City is the real "last affordable" place. 2) The light rail line connecting to downtown LA will open in 2010.... buy now if I were you. I wouldn't buy as an investment but it's smart to buy for a home. :)

[MyLessThanPrimeBeef]

"If you buy a house today, what do you think it will be worth in 5 years using historical averages?"

---

Whatever it will be, it will still be worth less than what you will have if you buy it two or three years from now.

I hope this adequately answers the question.

[friendlyneighbor]

Marcus Castro, you wrote: "So Cal ...is one of the most desirable places to live in the world-just look at the housing shortage."

My question to you is, what housing shortage are you talking about? There are more houses in LA County on the market than I think I've ever seen before ever. I think any source keeping track of the real numbers will show that inventory has been steadily increasing for the past two years. Please enlighten us as to where this mythical housing shortage is! :)

[Shannon R]

Anyone who is surprised by today's market has not been paying attention for the past six years. The people who are tearing at their hair shrieking "OH NOEZ, THE REAL ESTATE MARKET IS CRASHING" are the same people who, as recently as a year ago, were stubbornly denying the bubble's existence.

It was obvious at least as far back as 2003 to anyone with the stones to face the truth, just like the dot com bubble was obvious as far back as 1998. The real estate market could never sustain double-digit increases year over year - SFDs were never meant to be, and never before in history have been, slot machines. There was NO WAY it could have been sustained.

The market is correcting itself. I bought my house in early 2006 for 900K, knowing I'd lose at least 200K in the first two years. And that is precisely what's happening.

Thing is, I didn't buy it planning to turn it over for a quick profit. I bought it because it's where I want to live until I leave the state. And I put 50% down, which means my house would have to dip below 1999 levels for me to be in danger. And that could happen, but unlike the person predicting 80%-90% drops (and, apparently, a severe, worldwide depression - you wouldn't want to see the rest of the planet if the LA real estate market dropped 80-90%), I suspect it's going to stabilize somewhere around 2001-02 levels. So no, I won't be turning my house around for a profit any time soon (or, possibly, ever), but I'm okay with that. So far. If nothing else, at least I won't be surprised.

[Cal]

IMHO

A foreclosure house that sold for 100k in 2000 sold for 525k in 2007.

Medians dont reflect what you get for your money, what someone got for their median money in 2000 was vastly different than what someone got with their median amount in 2006.

People will pick up foreclosure houses for 40% off their peak price in many areas of LA when this is all said and done with.

/IMHO

[Michael Snyder]

What we really have here is a crisis of confidence. The American consumer has been working against a tidal surge of double digit inflation for half a decade and there’s no relief in sight.

Gasoline, the lifeblood of our economy, has almost tripled in cost since the Fed decided to remove it from its’ “core inflation” figures. The costs of many if not most food items have doubled as a result of the increased costs of fertilizer and transportation. Unless you’re sending your “staff” to do your grocery shopping these expenses have had a significant effect on your life.

The fallacy of “core inflation” and “Reganomics” in general is the assumption that employers will raise wages to compensate workers for the increased cost of living thereby revealing a “softened” but realistic view of economic trends. In reality employers are on a mad dash to cut wages and benefits, siphoning ever more dollars out of the workers pockets to feed Wall Street and the Executives Lotto level pay cheques.

Most Americans don’t know the Senate & Congress pay themselves a separate retirement valued in excess of their salary for every time they’re re-elected along with a health care plan better than what's afforded any wounded veteran. As these Politicians line their pockets and build bridges to nowhere the bridges we drive on are collapsing. Our children are using our old textbooks and parents are holding bake sales to raise money for pencils. High School graduates can’t do simple math without a calculator and some fool thinks we should start to teach in Spanish in order to accommodate all of the illegal aliens filling our schools. Little league baseball teams have to pay the City rent to use school playing fields and the City Counsel just voted themselves a raise.

Meanwhile, back at the White House; trillions of dollars are being siphoned off the top of our GNP to prop up puppet regimes and fuel the slaughter of innocents in a transparent scheme to enrich the Texas oil men flocking to Dubai while Larry Kudlow shouts down anyone who thinks the consumer has anything to do with the economy.

Now the pundits are bantering about terms like, “slowdown, down turn and even the “R” word. I was cheering last week as a famous investor who’s name escapes me said, ( I’m paraphrasing )” Ben Bernanke is a man who knows too much about economics to make the mistakes he’s made lately. He’s made a fool of himself on the international stage by devaluing the dollar in order to help George Bush’s buddy’s on Wall St.” Maria Bartiromo looked like a beached fish as this man in a bow tie called George Bush an idiot and described how he’d just moved his family to Singapore and now was busy selling his stake in the US dollar.

We now have the highest debt to income ratio among Americans in history. This isn’t a story about greedy flippers or disgruntled renters; it’s not about interest rates and bubbles; it’s about a tapped out consumer who cannot continue to carry the burden of Corporate and Governmental greed and corruption. It’s the “little guy” that drives our economy and he/she’s drowning in taxes and interest. They can’t afford to see a Doctor and their children are struggling in school as both parents look for second jobs.

The stock market is fluctuating like the unstable structure it is and the “smart money” is betting the Fed will lower interest rates again December 11. Should Ben Bernanke “remove all doubt” by lowering interest rates again we’ll see $100 a barrel oil within days, $4.00 per gallon gas by the first of the year and falling real estate prices will seem the least of our worries.

[puckhead]

My question to you is, what housing shortage are you talking about? There are more houses in LA County on the market than I think I've ever seen before ever. I think any source keeping track of the real numbers will show that inventory has been steadily increasing for the past two years. Please enlighten us as to where this mythical housing shortage is! :)

Try finding a newer single family home in the Westside, near the ocean or La Canada or Arcadia for less than $1M. Everything is completely built out. I think people are underestimating the number of wealthy families in LA/OC county. Most people in my profession with duo incomes have own houses for 10+ years and are sitting on huge amount of equity. Prices can drop another 50% and none of use would blnk an eye. And we don't consider ourselves that unusual. The SoCal ecomony is the big wildcard in this. As long as the economy is sound, people will continue to make nice money but the number of houses in decent areas won't grow. Of course if the economy tanks, then all bets are off.