In Palmdale: Waiting for prices to fall

Good morning. Peter Hong's update on the Palmdale real estate market in today's LATimes is worth a read. Prices are falling out there -- he profiles a family that bought a four-bedroom home in 2005 for $385,000 (yes, 100% financing), and now a very similar home nearby is listed for $325,000.

The problem, though, is that prices are still too high to attract buyers. "For the market to recover, 'the median price has to come down to match incomes,'" Lancaster real estate James Baker told Hong. (There's a thought you rarely hear from a California real estate professional: prices must reflect income levels.)

Falling prices will mean more recent buyers and borrowers without equity, which will mean more foreclosures.

Despite what you hear from Washington, rising payments are not the only cause of foreclosure -- in this cycle, many foreclosure-bound borrowers go straight into default while still paying the lower, initial interest rate. In the land of no money down, falling prices mean foreclosure risk. If you start with zero equity, and prices fall, it's nearly impossible to sell or refinance.

More foreclosures means more houses for sale, which puts further downward pressure on prices.

Your thoughts? Comments? Insights?

Comments

[Timc]

A few months ago, the head of the Real Estate group in the Antelope Valley talked about buyers being scared out of the market. He then added that they should not wait too much longer as he felt the bottom was near. I was laughing as I read this on our local paper's website. Not only do they not follow the trends of the housing market here, but when they finally do, it's basically lies.

The bottom is nowhere near as far as I can tell. The for sale and for rent signs are popping up all over. The developers have stalled out and it would not surprise me to see some of these developments go unfinished as the builders pack up and look for other lines of work. I can say that alot of homes were sold up here in 2006, which basically means that every one of them is in a state of negative equity right now. There were many homes built during the runup on the West side, they sold in and around the $500k mark, I know for sure they are at least 20% below that value.

In this fishbowl up here, we saw an amazing house buying frenzy that was accompanied by the equity tapping and car buying. But the pendulum has swung back and I agree with the last statement in the article. It's a downward pressure that gains force as it feeds upon itself. Every foreclosure will drop prices which will lead to more foreclosures and more price drops. It may not exactly be about affordability in the end, but more about paying for a loss over the next 30 years.

The REA's up here are done sugarcoating it, it's now in their best interest to see things become affordable again so they can actually sell homes. It's my opinion that housing must fall back to 2004 prices in this area for any sort of recovery to begin. The downward pressure may do this, helping some sellers to realize that 2006 prices are no longer valid.

[memoryman]

Why do we have a very short memory? This whole cycle happened before, prices went down in the early 90's and people got afraid of buying houses. What happened to those who bought during that time? They got tremendous equity after a few years. Stop reading this news and look for a house to buy now. You know the old saying, history repeat itself! It's when all the bad news are popping on everywhere that gives us the signal it's time to buy. I'm not a realtor but one thing I know is I got A on my history class!

[dav]

Finally, a reality-based real estate agent.

If you follow the trend in the case-shiller LA price index from the last downturn, median prices in the region will fall at least 40% from the peak and will bottom in 2011-2012. The "it's different this time" crowd likes to mention the aerospace layoffs in the mid 90s and say that we won't have as serious a crash as we did then. But we have serious financing problems and IMO a looming recession. In fact if you consider sales tax revenue and unemployment, California is probably already in recession.

Prices will revert to affordability... before the next bubble begins.

[Dr. JwB]

as of now, the front page link leads to a totally different article.

[insert conspiracy theory here]

[anon1137]

An economic study reported in the papers earlier this year showed that declining home values, not the ability to make mortgage payments, was the number 1 reason for foreclosures. When buyers get in with no downpayment and then values fall, they walk.

[Semphris]

Finally here is an article that I can contribute to.

I've lived in the Palmdale/Lancaster since 2001. My income is roughly twice the local median household income as per the city web site demographics data. Essentially I earn more than 92% of the local households.

Back in 2001, in the Rancho Vista area, older homes (3 to 4 bdr) were selling for the low 200Ks. New construction was growing rapidly and some larger homes were showing up for the mid 300ks. Recently many of these same homes are being listed in the low 400Ks with the larger homes selling for the mid 600ks. Heck, there are whole neighborhoods on large lots trying to sell in the millions. Its totally insane. There are entire neighborhoods here sitting empty while large sections of the newer homes have all gone section 8.

I have a large family so I'm realistic that I will have to compromise alot when it comes to purchasing a home that will suit my needs. Thats what I signed up for when I had kids. But its odd that as an upper middle class wage earner, I can't realistically afford the homes that a poverty stricken family, transplanted from south central LA, can get into this state assistance. So I rent.

BTW, crime here is horrible. We don't have our own police department (only the LA county sheriffs) and we have two prisons that release the inmates into the local area.

[Westside Bubble]

"For the market to recover, 'the median price has to come down to match incomes,'"

This should be repeated as often as possible!

[albert ionidi]

I think government will take every step necessary to keep home prices up. They need you to stay in your house to continue paying unrealistic property taxes and save face for the upcoming elections , swaying potential voters with fake its fake care. It seems like they don't think much of us , responsible renters who saved and waited for this wave of insanity to stop. They might have some statistics showing that we vote less or something so we would not make an impact. Otherwise , its hard to explain how the can enrage us (not the fake homeowners) with those kind of statements like cash for struggling *homeowners* and other ridiculous measures (all out of our pockets).

[Jeremy R]

"Why do we have a very short memory? This whole cycle happened before, prices went down in the early 90's and people got afraid of buying houses. What happened to those who bought during that time? They got tremendous equity after a few years. Stop reading this news and look for a house to buy now. You know the old saying, history repeat itself! It's when all the bad news are popping on everywhere that gives us the signal it's time to buy. I'm not a realtor but one thing I know is I got A on my history class!"

by memoryman

I welcome your post. You are right, people do forget history. According to history, the last cycle went from a high of late 1988, back to its original height in 1997. The cycle was nearly a decade long. 2006 is similar to 1998 if history does repeat itself. And thus, 2013 will be the time to purchase again, according to histroy.

you might say, you are wasting your money on rent!
You would be wrong since rent is far below a mortgage payment still. If rent was closer to ownership, you would be right. However, it isnt.

you might say, well, if you buy now, you can start paying off principle!
You would be wrong since you are in reality paying the bank 5% in interest for a falling asset, and very little principle. Of course, IF history repeats itself.

You might say, well, if you buy now, you get a tax right off!
You would be wrong since you first have to give uncle sam a huge property tax payment. you also have increase maintenance costs.

You might say, well, if you buy now, at least you can being enjoying it!
Well you "may" be right there, but right now I have wonderful furniture, a beautifully decorated apartment, I live 100 feet from the baech with an ocean view for a FRACTION of what a mortgage would cost me. I think I am quite comfortable at the moment. Also, the comfort of your home may not be as nice knowing you CANT sell it for about 7 years. Again, assuming that history repeats itself.

In 2013 when houses do get back to 2006 prices, I will buy if interest rates are low. That way, when the next super peak hits in 2017, I will be way ahead of the curve with tons of equity!

[Cal]

dav:"If you follow the trend in the case-shiller LA price index from the last downturn, median prices in the region will fall at least 40% from the peak and will bottom in 2011-2012"

Just make sure you understand that Case-Shiller is an inflation adjusted index and factor that into your calculations.

The Fed might just try to hyperinflate their way out of this mess, the last inflation numbers werent exactly encouraging.

[Tim]

Why would anyone pay that much to live here in the antelope valley?? I just don't get it...especially with commuters. Who in their right mind would pay that much for a house in a mediocre city with terrible weather so they can sit in traffic for over 3 hours a day? Boggles my mind...

[perks]

The outlying areas are always the worst to fall. What's happening in Palmdale is the same thing that's happening in the far-flung parts of the Inland Empire. Prices tumbled when the housing market crashed in the early 1990s (helped out by the collapse of the 5/14 interchange during the Northridge quake), and it took several years longer to even bottom out (which, if I remember right, happened around 1997) before starting to recover. That isn't too different from the greater L.A. housing market, but when prices fall overall, prices in the least desirable areas fall the hardest. And, no offense to anyone who lives out there (I actually like the peace and quiet out that way), the Antelope Valley is not one of the most desirable areas.

I don't think folks are "afraid" of buying out there. The current issue is, who would want to buy out there when homes closer to major employment centers have become more affordable? I had considered purchasing a home out there a few years ago because I couldn't afford a home any closer to L.A. at the time, but I decided to rent for a couple years before diving in. (I lasted two years before throwing in the towel and moving back into the city.) Knowing that I'm within reach of buying a decent house closer to work, and knowing that traffic from Palmdale isn't about to get any better, I no longer have any desire to consider moving back to the Antelope Valley--even though I could afford a bigger and newer house out there.

[toby]

This whole cycle happened before, prices went down in the early 90's and people got afraid of buying houses. What happened to those who bought during that time? They got tremendous equity after a few years. Stop reading this news and look for a house to buy now.

Posted by: memoryman

Oh no no no, you're talking about the late 90's. Like 97, 98 and 99.

If you bought back in 91 to 2995,, you sat upside down for about 9 years. You did not break even until 2001 to 2004.

Believe me, I learned the hard way. (thank god I loved where I was living and eventually I sold it for more that I paid... eventually).

[longdriver]

This article paints a much better picture than what's actually happening out there. Spend 15 minutes on Redfin and you can find house after house listed 30% to 40% below peak prices. I found a few listed for 50% below thier last sale (near the peak). Palmdale like the IE will see a dramatic drop because of the insane runup. How can people making 50k to 80K afford $400k homes? The numbers just don't pencil out. Without NINJA loans or some other creative financing these homes would never have sold at those prices. The Median out there and in the IE should be around $200K-$250K, and a number that high only makes sense because interest rates are still relatively low.

Add in $4/gal gas to commute from these places to work and these folks are doubley screwed.

[Semphris]

perk,
Your comments are pretty much the bottom line. A significant part of the housing upturn was inpart due to speculation that people down south would prefer a larger cheaper home and the willingness to commute. That ended when gas prices changed. Even so, there is no escape from the AV when the 14 shuts down.

As a side note, there are still some coolaid serving REAs up here and they're feeding buyers a health serving of .....

[michaela]

The housing market will recover silently without all of us noticing it. Otherwise we will be all buying if we know it coming. What will happen is it will just recover right before our eyes and when that time comes, you can't even buy a single house because you will get outbid everytime you make an offer.

[Lina]

I'm not a realtor but one thing I know is I got A on my history class!
Posted by: memoryman

memory an, what did you get for your econ 101 class??? Have you learned supply - demand? Have you learned affordability rules???
Prices will go down at least to 2002 levels, since the income then can get close to afford median, but more likely 2000 levels.
True bottom will be when renting the house would generate enough to pay mortgage, tax, insurance, and maintainabilit. With so many signs of for RENT now, i don't see rent going up that fast, so prices need to get down.