Riskiest real estate in America? You're standing on it.

News item: PMI Mortgage Insurance's analysis of real estate markets across the country finds that the riskiest place to own property in America is ... (wait for it) ... Southern California. PMI measures risk in terms of the probability that housing prices will be lower in two years. These are the markets where PMI believes that's most likely to be the case:

1) Riverside-San Bernardino-Ontario (94% chance of decline)
2) Las Vegas (89%)
3) Phoenix (83%)
4) Orange County (Santa Ana-Anaheim-Irvine) (81%)
5) Los Angeles (79%)

It's worth remembering that a recent study by the Federal Reserve Bank of Boston found that the leading cause of foreclosure is ...  no, not rising mortgage payments... no, not job loss.... but falling prices.  In other words, it's likely that the markets listed above will see rising foreclosures over the next two years.

Comments? Insights? Email story tips to peter.viles@latimes.com.
Hat tip: OC Register's Lansner on Real Estate blog

Comments

[Laker]

What a surprise....wow...
It is a fact that price are on the way down to converging to income levels. Since prices in LA are so disconnected from them, there is a lot of distance (price decline) to make. Since houses are not stocks, they cannot be unloaded in minutes or hours...so it will take time even with 20% annual declines. That is why PMI knows (~80% probability) that the price in Jan 2010 will be lower than today. They know the bottom will be after all option ARMs and 5 year ARM reset in 2010. That it why it is safe to assume bottom will be in 2010-2011.
I also realized today something interesting. We all talk about the people that bought at the peak in 2005-2006 and they way they are upside down...Do you realize that people that buy TODAY are upside down the next day after getting the keys...

[bradneal]

It doesn't take a rocket scientist to figure that one out. Honestly, it gets a little silly around here with you bloggers spending all your energy whining and speculating about the market. Look folks, real estate is cyclical. It goes up for a few years (sometimes 7) and then it goes down for a few years (no more than 5). But all in all, it progrsses upward. Real estate is supposed to be bought , not sold. No shut the hell up and get back to work.

[LA-renter]

Maybe PMI forgot the Mediterranean-climate factor...

[ManuLa]

"But all in all, it progrsses upward. Real estate is supposed to be bought , not sold."
Do you mean that one should not speculate with real estate (like flipping houses etc etc)? As for progress over time, it sure does, just as surely as the price of apples. That does not make it a good investment: Case-Shiller index averages a little above 3% a year over the past 50 years. In other words, don't count on your tract house to pay for your retirement...

[perks]

Ah, what the hell...

That means there's still a 21% chance that prices in Los Angeles will go UP! There has never been a better time to buy in L.A.! Hurry and buy, buy, buy NOW!!! before you get priced out of the market forever!

-Lefty

I have to agree, somewhat, with Bradneal's sentiment. Obviously if you're looking at real estate as an investment, it is important to time the market. I've gotten a lot of useful info from this blog, but the bottom line is that I--like a fair number of others--have a legitimate need for stability in my housing situation and am willing to take on some negative equity for a few years if it means my payments are not going to change and I'm not going to have to consider moving into another house. Equity is all imaginary money anyway, so if I owe more than my house is worth...So what? If I find myself in a position where that actually matters, I have more to worry about than just equity.

[Cal]

If you read page 5 of the PMI report, they have a cool chart (though the map is much cooler) of how their predicted data is matching up with their predictions.

From the report: "The U.S. Market Risk IndexSM score translates to a
percentage that predicts the probability that house
prices will be lower in two years. For example, a Risk
Index score of 100 means there is a 100 percent
chance that the OFHEO All Transactions House Price
Index for that MSA will be lower two years from the
date of the data"

Los Angeles MSA risk index is 79.

Also interesting from the data is that Los Angeles has the lowest affordability index of any MSA in the report.

[ManuLa]

I think that to a certain degree it is a risky proposition to treat the house in which you live as an investment vehicle, let alone as an ATM. For investments, there are index funds - the risk is pretty much the same, yet the returns are higher (BTW - that sounds like a paradox, but it's not - it's the miracle of diversification). It seems that the SoCal real estate market is finally coming to the realization that here too, there is no free lunch.

[Kelly]

Since this blog is called "LA Land," let's discuss LA "Land." Did you know that California comprises roughly 100 million acres, and only 2 million acres are left to develop? If you take away federal land, Williamson Act land, and other protected land, only 2% of California is left to develop. The way California is zoned right now, we can only accommodate 1 million people in the next 30 years. 18 million people are coming! California must rezone to accommodate this population explosion.

General Douglas MacArthur once said, "All a man has to do to get rich in America is find out where people are going, get there first and buy land." This is my long-term investment strategy.

[dyno1]

Ya, i'm losing money on my home but i'm actually pleased to see the correction. The home prices in SoCal were unrealistic compared to salaries. I always viewed my equity as phantom money. I feel bad for people who were treating their home like an ATM. Does anyone really need granite counters or an outdoor kitchen ? Most of those "outdoor kitchen" people are gonna be under H20 in the next 1-2 years.

[joeinlosangeles]

It''s not silly if you remember that buying a house is the biggest investment someone will make in their life. And making a good decision on when to buy a house can be the equivalent of five or six years worth of 40-hour work weeks. So, in essence, while you are shutting up and "getting back to work," you may be making a lot less money than people who are spending that time studying the real estate market.

--it gets a little silly around here with you bloggers spending all your energy whining and speculating about the market. Look folks, real estate is cyclical. It goes up for a few years (sometimes 7) and then it goes down for a few years (no more than 5). But all in all, it progrsses upward. Real estate is supposed to be bought , not sold. No shut the hell up and get back to work.pp

[lefty]

hey people you need a big grain of salt to listen to anything PMI says; they let their stock price drop over 80% this year, no kidding! just do the opposite of what they say, because there will be no better time than now to jump into metro L.A.!!

[Uncle Billy]

Why did I get the feeling from reading bradneal's post that he's more a part of the problem than the solution? Why do I get the feeling that some of his vitriol might come from not being able to make his or someone else's mortgage nut? If the pharma industry can create completely new diseases for which they can sell completely useless drugs, maybe they can come up with something for bilious mortgalgia or bellicose depreciitus?

Totally unrelated -- the interesting thing in the following video is its total avoidance of Los Angeles real estate, though it does deal with some "doom and gloom."

http://tinyurl.com/3ax3v6

[l.a.guy]

For most people buying a home should like buying a piece of art, buy it because you like it and can comfortably afford it. It will bring you happiness if it does nothing more than fulfill it's intended purpose. If it happens to appreciate over time and you sell it for a profit, so much the better. I dare say most people don't have the necessary expertise or finances to buy RE as an investment. (the readers of this blog excluded, of course :-)

[smokey]

But but but..........ZILLOW says my house.............

[Cal]

I was reading the study this article was based on tonight. Funny we always here about the favorable demographic trends for RE when in fact its just the opposite.

http://tinyurl.com/2kxkct

"Boomers were "an incoming tide for four decades. Now the tide's turned, and it's going to make it much harder for housing markets to rise," said Dowell Myers"

"The math is simple: 79 million boomers have driven up housing demand. That trend will reverse itself when boomers are age 65 to 75; there will be three sellers for each buyer, Myers says."

For some reason I bet Lawrence Yun wont ever read this report. If someone buys today they have to deal with the housing bubble deflation and hope things re-inflate before 2021 before the boomers hit.. just to break even. The late 80's boom took 11 years peak to peak to recover (and it was a much smaller boom).

[Gene J]

I looked at our area in the study. 3% chance?? It has already plummeted 15% and still dropping lke a rock!

[Rich]

Since it's a recurring theme among those angry at the bubble, we need to take it by the horns: A home is an investment, whether you like it or not. Angry ideological statements denying that fact reveal the inner state of the speaker but are not rational. A home represents the largest purchase the average person will make it their lifetime and, as we have seen, will inevitably deplete all other investments the person may hold if the wrong property is purchased for the wrong price at the wrong time. Buying a house must be done using investing principles, in order to stave off ruin later. For better or for worse, your house is an investment and one that should be done carefully. Those who speculated and lost didn't do the proper assessment of risk involved in buying properties at higher price levels or beyond their income. There's not a single thing about this reasoning that is anything other than basic investing strategy, so don't waste your breath defying it, spend some study time to become better at it...

[Joseph... the Real Estate Guy]

Real Estate is still the best "Long Term Investment".

Equal Opportunity..
.It's always a good time to buy if you qualify!
(Fixed Rate, of course)

In my 17 years in the business, I have made a lot people rich...

[Daniel]

Did I miss something or did LA Times all of the sudden stop reporting the statistic from dqnews.com? It was front page on cnnmoney.com yesterday but nowhere to be found where it usually is in LA Times. Did the numbers just get too depressing to handle or? LA down 10.5%?

[Laker]

Hey Kelly, you mentioned "only 2% of California is left to develop.... Cali can only accommodate 1 million people in the next 30 years. 18 million people are coming! California must rezone to accommodate this population explosion."

What kind of BS is that. Go on the 5 freeway past the 14 interchange. You have miles over miles till you hit something. You can go north, west, east miles...of vacant land. I don't know where you got 2% undeveloped. In fact, 2% might be right but the opposite way. In Cali there is 98% of UNdeveloped land.
18 million people are coming? From Mexico? yeah sure. Those will buy all LA real estate. Making $6 an hour will afford $500,000 house...What are you smoking Kelly???

[Vivin]

I saw on the Santa Clarita Real Estate Blog that most of the foreclosures in LA are in Palmdale and Lancaster, at least based on a study from propertyshark.com

[alan smithe]

Another sensationalist headline.... congrats Peter.

Seriously LA Times, can you take the keys away from this guy now?

Oh wait, I bet there's a 99% chance that the LA Times will be worth less in 2 years. Let's do anything we can do increase revenues.....

[JW]

Posted by: bradneal
"It doesn't take a rocket scientist to figure that one out. Honestly, it gets a little silly around here with you bloggers spending all your energy whining and speculating about the market. Look folks, real estate is cyclical. It goes up for a few years (sometimes 7) and then it goes down for a few years (no more than 5). But all in all, it progrsses upward. Real estate is supposed to be bought , not sold. No shut the hell up and get back to work."
____________________________________________

WRONG, Grasshopper......................Uh, that's not a fact at all. In many markets around the USA, real estate just stays at the same values for many years. Sometimes it goes up and sometimes it goes down. Only in bubble markets where people act like greedy idiots do the prices yo-yo up and down for :X-year" cycles.
Also, there is NO set time periods where prices will go up or down in a bubble market. It's a function of loan availability, affordability, desirability and greed that drives prices up and the lack of loan availability and affordability will drive them down and down and further down. If you look at the bubble markets for housing that have occurred in the USA since the 1890's, you will see varying periods of time for the rise and fall of home values. And if history repeats itself once again.............housing prices are destined to fall back to 1997-1998 prices. We're already in a recession and headed towards a depression so prices could drop below 97-98 values. By 2012, we will all probably know the answer.

[Maggie Knowles]

Daniel - you can get the LA Times chart on DQNews at

http://www.dqnews.com/ZIPLAT.shtm

It's still got the Nov. data. They said they will update it later this week.

[Uncle Billy]

Kelly, Rich, Joseph,

Please provide evidence to support your claims. So many throw out these empty posts. You are doing nothing to contribute to the discussion by slinging unfounded clumsy rhetoric, if unfounded.

[sfvrealestate]

Vivin, I just looked at the list of Notices of Default for the last week. Indeed, there are WAY more filed for Lancaster and Palmdale than anyplace else in the county. L&P should be ghost towns very soon.

[Stymied]

How can anyone say in seriousness ("perks") that "Equity is all imaginary money anyway, so if I owe more than my house is worth...So what?"

Does this mean that he doesn't care about his monthly mortgage payments, that they're expendable, like rent payments? That unlike the average American, who moves every five years - i.e., around 10 times in a lifetime - he is planted like a potato and will never ever need to convert his equity to cash in order to purchase a home that is smaller, or larger, or located nearer a new job? If so, why bother to buy a home anyway, since you don't expect it to have any value, and renting is surely cheaper than buying in today's market?

Really, I cannot take this kind of talk seriously. Either this guy is underwater now and doing world-class rationalizing, or ??? Please, just listen to yourself...

[TakeFive]

Posted by alan smithe :

"Another sensationalist headline.... congrats Peter.
Seriously LA Times, can you take the keys away from this guy now?"

Must be some new form of OCD that causes people to repeatedly visit a blog just to criticize it.

[Laker]

sfvrealestate: "L&P should be ghost towns very soon."
Where do you think these people will go??
Couple of options:
1) Many of them are working in LA and used to rent in LA. In the boom years, they wanted home ownership, they could not afford to buy, so they bought in lancaster/palmdale. Now they will come back to rent in LA.
2) Similar but here the owners are loving lancaster and palmdale so much, that they will love to stay and rent in lancaster/palmdale...highly unlikely.
there will be a demand for rental though not necessarily housing rental, maybe apartments /condos might better make sense.

To all peter bashers, shut up!. Peter Viles is doing excellent job here. Thank you Peter!

[Monkey Under The GPs Microscope]

House prices in SoCal need to be cut in half across the board. If not then everyone is going to be in the employ of Global Finance Group of Beverly Hills. These NWO kuckleheads are selling an adult-dvd production co. in Chatsworth tied to over 280 grow houses. "Weeds",only much more highly organized.

[Cal]

"Vivin, I just looked at the list of Notices of Default for the last week. Indeed, there are WAY more filed for Lancaster and Palmdale than anyplace else in the county. L&P should be ghost towns very soon."

Various parts of the county started having issues earlier or later. The progression of NOD/NTS is basically the same just time shifted based on when the troubles started occuring. Things are melting from the outside in and bottom up.

People were saying "it cant happen here" are now saying "it can happen here but at least it wont be as bad as P&L" they just arent looking at the progression correctly. People stretched just as much, if not more, to buy nearer to the job centers. Rampant flipping made it worse. Affordability is at a low for the nation here for a reason.

[Rich]

"Kelly, Rich, Joseph,

Please provide evidence to support your claims. So many throw out these empty posts. You are doing nothing to contribute to the discussion by slinging unfounded clumsy rhetoric, if unfounded."

Pretty Bizarre to be dismissing reasoned arguments from me and a sprinkling of statistics from Kelly in with Joseph the Real estate guy's bizzaro rant, but this is a blog, not a dissertation, so rhetoric rules, baby...

[Late bloomer]

That's pretty scary! 98% decline? It could really happen. All signs are directed towards it. I am selling my house get my money and rent in an apartment.