A collapse of prices at the low end in L.A.

The recent post arguing that Los Angeles has split into two real estate markets -- the high-end, where prices are holding relatively steady, and everything else, which is deteriorating quickly -- generated a lot of comment, so I'm back with more.

This time I looked just at the ZIP Codes in L.A. County with 20 or more single-family home sales in February, according to DataQuick's analysis. Here they are:

Area/ZIP                  No. of sales       Median Price      decline from Feb. '07
Lancaster/93536            50               $258,000            -31.7%
Palmdale/93551             36               $308,000           -25.8%
Reseda/91335                35               $393,000           -26.0%
Norwalk/90650                30               $352,000           -27.8%
Lancaster/93535             29               $202,000           -36.0%
Long Beach/90808         27               $515,000           -8.0%
Altadena/91001               25               $549,000           -8.6%
Granada Hills/91344      24               $469,000           -23.4%
La Mirada/90638              23              $450,000           -16.7%
Lakewood/90712             23              $430,000           -19.9%
LA/Mar Vista/90066        22             $832,000            +0.8%
Lancaster/93534             22              $185,000             -36.2%
Northridge/91325            22              $565,000             -26.1%
Rancho P.V./90275         22            $1.11 Million        +3.3%
North Hills/91343            21              $440,000             -21.4%
Palmdale/93552              21              $238,000             -33.9%
Canyon Country/91351   20              $405,000             -19.0%
Claremont/91711             20             $495,000             -16.2%
Pico Rivera/90660           20              $380,000            -20.3%

Playing with numbers can be dangerous, but I'll try (and I know you will correct me). Slice these "liquid" ZIP Codes into price ranges and average the price changes and this is what you have:
Below $300K: Avg. price change is -34.5%
$300K-$400K: Avg. price change is -26.8%
$400K-$600K: Avg. price change is -17.7%
$600K-$800K: No ZIPs with 20 or more sales
$800K and above: Avg. price change is +2.0%

Your thoughts? Another chart you'd like to see? I don't have easy access to prices per square foot for a year ago, which is why I ignored advice from a commenter to focus on that metric. Sorry.

Comments

[puckhead]

I think the most facinating part about your chart was that there were no zips with +20 sales in the 600-800K range. I'm in that range. I don't have enough money or equity to move up without stretching my finances and I like my neighborhood and house too much to sell even when I think the price of my home will be lower in the future. Basically, I'm sitting this out until the dust clears.

[Francine]

The Case-Schiller Tiered Price Index for LA shows this as well - low-tier dropping faster than mid-tier dropping faster than high, but they don't show high as rising, just dropping less precipitously.

[original thinker]

It's like running up hill while the earth gives way
beneath you. Where you were a few moments
ago has slipped that much further south and the
+2.0% grade ahead is just a temporary rise about
to tumble into the abyss.

[gio]

I disagree. I rent a house in Sherman Oaks the owner's been trying to sell for a million. It was reduced to $850g's, and had zero serious buyers in 6 months. Realtors I spoke to in this area say those with bigger bucks are trying to keep it quiet that the high ticket properties are not selling. The truth is many in the upper middle class have not yet been forced to sell since they have fixed mortgages, savings to cover monthly mortgage, are lucky enough to have a steady job or a long-term contract guaranteed income, or have renters like me covering the mortgage.

However, the value of the properties is rapidly declining. Real Estate people have secretly confessed to me that prices will not go any lower than where they were in 1997.

There are homeless real estate agents now sleeping in their cars in areas like Lancaster. The bubble has burst.

[Kate]

Does the number of sales include transfers back to the bank (i.e. is a foreclosure a "sale")?

It's just hard to understand why there would be such stunning sales numbers for one month in Lancaster otherwise.

[amir]

Too close to call. We're less than a year into this multiple year decline. I think everything is going to fall into an abyss.

[Jack]

>prices will not go any lower than
>where they were in 1997.

I don't think they will go quite that low. 1997 prices were the same as 1993 prices, which were the prices after the last bubble burst, which were a little higher than 1983 prices, when the bubble before that burst. I think you'll see prices bottom out at about 1999 or 2000 levels, where they'll then sit for three or four years.

The Fed will start to move up interest rates pretty quickly after the November 2008 election, which will put some pressure on the market. We may be heading for some ugly inflation in the next three to five years, at levels we haven't seen since the 1970s. That will put some pressure on prices, too.

[Uncle Billy]

This will make Stanford Kurland, ex Countrywide CEO happy.

How did we miss the following?: He just opened a new company called "PennyMac."

http://pnmac.com/management.htm

"Private National Mortgage Acceptance Company, LLC (PNMAC or "PennyMac") is a financial services firm created to address the dislocations in the U.S. mortgage market. Our focus is investing and servicing residential mortgage assets on behalf of private investors.

PennyMac is acquiring loans from financial institutions seeking to reduce their mortgage exposures. Our core guiding principles are to create value for investors and consumers while preserving home ownership. We will support an environment of the highest standards, fostering ethical personal and business practices."

Check out one of their Technical Directors: "led advanced technology development for the Intelligence Branch of the Israeli Defense Forces." Looks great on the website... "we've got one of those genius techie Israeli guys," but you've got to wonder about this fellow who is most likely violating a confidentiality agreement by putting it on his resume or disclosing it to his new employer.

[Roger Moore]

It's a good start, but I can think of two methodological suggestions:

1) You should group zip codes by their prices a year ago, not their price today. Sorting by their current price applies an after-the-fact sorting. Places that have seen their prices fall will naturally tend to be low priced now, while those that have seen increases will be high priced now. DQ doesn't list the year ago price, but you can calculate it from the current price and the year-on-year price change.

2) If you're going to average the data across zip codes, you might as well include all zip codes, not just the ones that have large sales volumes. To eliminate fluctuations caused by zip codes with tiny volumes, you can make a weighted average.

Applying this method, I get the following:
Price Range %Chg Volume
$000-300K -29.3 27
$300-399K -28.1 183
$400-499K -17.5 511
$500-599K -14.9 728
$600-699K -16.3 284
$700-799K -12.8 214
$800-899K -9.5 105
$900-999K 4.0 61
$1.0-1.5M -10.2 182
$1.5-2.0M -2.5 64
over $2.0M -18.3 47

The broad picture is close to what you're painting. Price drops are less as you go from cheap zip codes to moderately expensive ones. What I find very interesting, though, is that the prices seem to have fallen in the areas that were over $1 million last year, with substantial drops in the most expensive zip codes.

[tew]

Numerous obvious reasons for this. Among them:

1) Low end areas are near open land, so building isn't as constrained.
2) Low end areas are "undifferentiated".
3) Low end buyers are generally less sophisticated and more likely to be conned or overextend themselves.
4) High end buyers are likely to not only have high income, but have meaningful savings. Low end buyers are often live "paycheck to paycheck" and don't save. One small setback (like a teaser rate expiration - surprise!) and they're toast.
5) High end buyers are more likely to have family money or other sources of financial help.
6) The price/income ratio in low end areas probably got exceedingly high, while that in high end areas probably did not get as extended (especially if adjusted for wealth).
7) Low end places have more people exposed to early job loss when the economy slows. The high end areas haven't been tested yet - the non-mortgage financial sector, including numerous redundant private equity firms, hasn't really begun laying off the high end folks. They will.
8) High end areas probably have more owners with substantial equity in the home, so there's less incentive to walk away.

[Paul Farrens]

I have been watching national real estate pricing for decades, and have continually been astounded at the disparity in home values in different urban areas. The cost of build a home is just about the same anywhere in the US as wood, brick, cement and labor has very little regional variation.

The difference is the cost of the dirt the house is built on, which is strictly a matter of supply and demand. I have looked on for a long time as prices soared in some markets unreasonably, fueled by "I want it now" attitudes and ARMS that eventually collapsed. Perhaps the consumers are beginning to see the folly of "Keeping up with the Jones's" at any expense.

I escaped the San Francisco market 25 years ago. I am now in the Dallas area, with a 2400 SqFt 2 story house on 6 acres appraised 2 weeks ago at $155,000. How can this disparity be explained?

[the dude abides]

Peter: That seems like a reasonable analysis. Thanks!

My theory is two fold. 1) It will take time for prices to work their way up the food chain, and 2) those in the higher end markets are better positioned to weather the storm, at least for a while. So they will hold for the moment.

But the few that can't and were too agressive in how they financed their purchases will end up setting the comps in those neighborhoods, ultimately leading prices down.

[Peter Basson]

Long Beach is down 8% but Lakewood is down 20%!!!

This makes no sense at all. The two communities are basically side by side. However, Long Beach is more urban, diverse, has more crime, and poverty. Lakewood is largely suburban, white, has low-crime and is almost uniformly middle class.

Just shows that these "stats" are largely meaningless.

Everything is going down, and all these esoteric formulas don't mean a thing, eventually.

[LA-renter]

Peter, I enjoy the month-to-month numbers. Kinda like the box scores on the sports page: HR, RBI & AVR leaders. But will the numbers let us tell the future? Or, vindicate the bubble watchers?... (There really is a Santa Claus!)

The complete lack of consensus, on what the "problem" is, is quite amazing.

To some, like many viewers of this blog, the problem is overinflated property values and excess debt. Thus, any assistance should facilitate home deflation and stricter, more restrained lending.

To others, the problem is credit. The Federal Reserve seems more worried about availability of credit than inflation. Thus, the "system" needs more money. Interest rates need to be lower.

Ironically, many of the people who talk about a housing and credit bubble are the same people who talk up the price of commodities and gold, which look like bubbles too! Even more comical, the rationale for the commodity inflation and housing inflation sound similar. There's a limited supply... only so much land in "good" locations... the Chinese and Indian economies are devouring raw materials...

By the way, I enjoyed the Q&A in today's (Thursday) LA Times. Japan's former deputy finance minister, during the inflated 1990's, was interviewed.

Mr. Sakakibara thinks our officials are being too reserved! "...Don't put in public money bit by bit. A huge infusion at first." That kind of solution sounds great in hindsight or from a distance. The problem with this cure is that you assume the extent of the problem before it happens.

[brad]

Amir you are such a doom and gloomer why don't you move to Mexico and call it a day

[Cal]

If you want last Feb median price sq ft, you can use the power of them internets to get it:

http://web.archive.org/web/20070404050835/
www.dqnews.com/ZIPLAT.shtm

As for methodology, I think the variance within any one month plus the use of medians make it a pretty futile cause. Yeah, I know, there I go again.

[Laker]

Another take is that lower end is essentially cheaper and therefore has more sales. If you track the sales in low end, you will see many investors that snap properties planning on flipping them.
I have already seen at least two such flippers that are now stuck with dumps that they remodeled but can't get offers close to their asking price....I'm talking about flippers that buy $400,000-500,000 houses in the west of the valley and fixing them cheap and placing for sale at $600,000-800,000...
the regular joe is simply not buying now.

On the other note, i know personally two families that purchased homes in the last 2 months. They both used interest only to buy $1,000,000 houses. Don't wonder, it was simply to have lower monthly payment. Nobody cares today about paying off the loan. People get 10 year fixed rate IO, and hope and pray that they will move before that and that house priced will be higher than today.

[l.a.guy]

"I disagree. I rent a house in Sherman Oaks the owner's been trying to sell for a million. It was reduced to $850g's, and had zero serious buyers in 6 months."

Is a house that someone bought 10 years ago for $300K, that MAY have had comps for a few months in 2006/7 putting it's theoretical value at $1M, really lost any value? In my mind these houses haven't lost value, they were never worth that to begin with.

I don't think you're going to see a collapse of prices in Sherman Oaks, they'll go down 25-30% from their artificial peak, but after that people will just hold on to the homes instead of sale. I think generally speaking the people living in Sherman Oaks are going to be on pretty solid financial footing relative to lower income zipcodes where more people will be forced to sale due to resets.

[vultur]

Any stats for nice areas on the Westside? What are the macro trends for Santa Monica, BH, Brentwood, Venice, Bel-Air, Pacific Paiisades, Malibu, etc?

[peter m]

"This makes no sense at all. The two communities are basically side by side. However, Long Beach is more urban, diverse, has more crime, and poverty. Lakewood is largely suburban, white, has low-crime and is almost uniformly middle class."

Lakewood is indeed still a decently kept up clean LA suburb but most homes there are the WWII era built starter- sized 2-1 or 3-1/2 1000-1200 sq ft cottages . Plus the closing of boeing plant may be having an effect. That would be the only explanation of why Lakewood is seeing prices in the $400,000 range. The adjacent LB clean zips of 90815 and 90808 also seem to be seeing prices at around $500,000. Again the closing of the local boeing plant may be having an effect there as well. The homes in these zips are larger than lakewood, averaging 1500-2000 sq ft . so prices would be a bit higher.

[jimmy]

I am on board with the housing crash at the low end. However, I noticed high end that is not beach close is also in trouble. It appears to me that only beach close high end is solid. This is a true american tradegy for middle and lower class people. When this is over, you will have your high end beach cities, and everything else will be undesirable. No more middle class. What a shame. If I was not already in a high end beach home, I would consider moving somewhere else. It is not worth it.

[toby]

A fire burns from bottom to top. They're dead, they just don't know it yet.

[MyLessThanPrimeBeef]

Forget about Beverly Hills or Malibu.

It's like Sparticus said, 'Rome without slaves is no Rome'...or something like that.

[rocko]

I would be interested to see a per zip code analysis, particularly with an LA focus:
90036
90026
90039

thanks so much!

[Corntrollio]

Housing prices are sticky. As I've mentioned here before, only a small percentage (maybe 5%) of houses sell every year, and those 5% set the "market" for everyone else. It's not like the stock market where things have an easy market price, and the only time you market to market is when there's a sale.

In the nicer neighborhoods, the number of sales is much lower, and maybe only 2-3% at most sell every year. With such low turnover and low sample sizes, it's hard to tell what's happening. These neighborhoods are indeed more stable, and people are more likely to be able to afford the houses. That said, looking at the Arcadia blog, it's clear that even some of these nicer houses were 100% financed.

What I see happening is a slow but sustained drop over a few years in the high end. Right now, many of the people in nicer neighborhoods think they're entitled to the ridiculous 2006 bubble prices and aren't selling. But as time goes on, these houses won't sell for those ridiculous prices. And if you think your neighborhood is immune, you're forgetting the 1990s.

[mike]

to gio

how much rent does a house in sherman oaks that is alleged for k850 go for rent? and does the landlord reduce that amount on the grounds that he might pull the rug out from under you at anytime with a good offer???

[brad]

Laker, a 10 year IO loan is fine. In fact, it;s brilliant. The real question is the loan to value. So long as your at 50% or so you look pretty smart.

[SavedbyGrace]

I concur with Corntrollio in that the decline in the more desirable communities will be slow but sustained as compared to the lower price areas. This is consistent with the other RE bubbles in that the decline comes as a wave - hitting some areas sooner and others later.

Volume preceeds price in the housing decline as sellers will do anything and everything to avoid lowering the asking price. We've seen sales volume drop off a cliff in LA county (you only listed 19 zip codes with 20+sales) so I say the tsunami of price reductions is around the corner.

Thanks for compiling the numbers for the post.

[sfvrealestate]

My take: Controllio and Laker are right, sorta. Less expensive (and also newer housing stock in outlying areas) = more sales volume + first time buyers = riskier loan products = bust. The established neighborhoods = long-time owners = less sales volume + move-up buyers with assets = less risky loan products = more stability in neighborhoods.

[IToldu2CashOut]

If you look at places in South Orange County and Ocean Side, another area that would never go down because everyone wants to live there, you'll see houses that were bought for 1.4 million now listed at 750k and no buyers in sight. These are mostly new construction, many with ocean views.

How do you track a price drop that has no buyer?

[Rob]

Just some rambling I would like to add to several posts...

1997 Pricing will never happen. Unless you can catch an overcorrection, you’re looking for 2002 as a baseline. Even then it will be neighborhood specific, and you will need to be vigilant.

Just looking at the neighborhoods, some are still in the denial stage. Other, lets say poorer hoods, had to give in sooner most likely to the monetary push mentioned already.

Long Beach is a trendy Beach Community, parts of it anyway, unless you’re within a block of the beach, time is not your friend. Unless your renting!

[Jess Rabinowitz]

Your analysis is interesting in regards to different neighborhoods in LA. However, of more importance is the TOTAl NUMBER OF SALES and TOTAL SALES VOLUME measured YOY (Year Over Year). This will give you a better picture of what's happening here in the RE market. Measured form the market peak in 2006 you will see undeniable declines. Of course, all of this is directly related to available credit and speculation. At WestsideREmeltdown, I have analyzed these 2 factors and it's significant looking at YOY from 2006 - 2008.
Also as mentioned, PPSFT (Price Per Square Foot) measured YOY, would be interesting.
Lastly, remember, a few buyers will always overpay in a declining market.

[Cal]

Just because it hasn't happened yet doesn't mean it won't happen. The high end isn't moving because the sellers and realtors are in denial of the situation, we don't know what market price of that segment is yet just that it is hurting.

In the last bust the high end fell more than the low end.. it's a smaller market and once affected is affected to a greater degree.

From Dataquick archives circa 1995 to support my position:
"The high-profile million-dollar market has been the hardest hit of all housing categories during the economic slump of recent years. Sales were cut in half and sales prices declined by 35 percent and more. Prices in other home categories have declined 15-20 percent, DataQuick reported."

http://archive.dqnews.com/AA1995MDH06.shtm

[Lou]

I wouldn't call Northridge, Granada Hills, and Canyon Country low-end but those areas are unique to themselves. They are areas populated by people who stretch themselved to live beyond their means. They have good jobs but don't want to admit that they should be renters or live in a different neighborhood. Those areas are full of option ARMs and will feel the real brunt in the next two years.

Oh yeah, I live in Northridge,

[jb]

So just in theory - if we did end up with a 30-40% haircut at the high end, who will take it in the rear? the buyers who "moved up" or the banks?

Would this be substantially different from the low end?

[Truth2Pwr]

Enough with the "much sound and fury" over expensive homes still holding their value.

Now that standard accounting has finally come back in style, it won't be going out again for a loooooong time. This means that if you can't afford a home, you won't get a loan. Which means that the buyers market for homes that only 1% of the population can afford will consist of (you guessed it) 1% of the population, not anyone willing to lie on their application.

So explain to me again the mathematics of how the market for high-end homes is going to be unaffected in the long-term?

[Laker]

IToldu2CashOut wrote: "...bought for 1.4 million now listed at 750k and no buyers in sight. These are mostly new construction, many with ocean views.
How do you track a price drop that has no buyer?...."

IToldu2CashOut , very easy. First, if you're buying, look at the asking prices of similar properties. Those should not be lower than your property of interest. e.g. if you are about to place an offer for a house for $1,000,000 just because the "comps" show it, and you have similar house for sale for $900,000 and on the market for 180 days... then you know you should offer LESS than $900,000 and sure not $1M.

As others have said, RE is very illiquid. Therefore the info of pricing is lagging at least 2-3 months. (almost as the case shiller reporting is) So basically, if we know today that the market is 20% down in area x, you should assume that the market is actually down MORE than 20%.

I believe i mentioned before that properties in the good areas of the valley are now selling for 2004 levels.
GDC, i got another one for you to prove my point:
24840 EILAT ST 91367.
Sold Feb 29, 2008 $980,000
Sold Sep 21, 2006 $1,525,000
Sold May 21, 2004 $1,075,000
Sold May 22, 1998 $510,000
Can you SEE that it got sold for LESS than 2004 level.
I checked this house from inside out, all it needed was clean/replace the carpets.
btw the zillow estimate is $1,300,000....

[Valley Observer]

I would feel a lot better about the numbers if they represented the same houses at two points in time. As it stands, you can't tell what effect the mix of high- and low-priced houses has on the average. Within Northridge, for example, there is a range from 70s tract houses to new gated communities.

[Trudy Self]

Twenty or 30 years ago lenders had a very pragmatic and functional tool to determine the strength of a home loan--it was called a downpayment-- skin in the game.

Many of these least expensive houses were sold to individuals at 100% financing-- is anyone really surprised these loans are failing?

There is much discussion about the moral hazards of a bailout-- the moral hazard was when buyers were told they didn't need equity to buy a house or make money on real estate. There is also much discussion about how much prices have to come down to be affordable. I notice the discussion is on price of house not amount of loan. A $500k house with a 20% downpayment results in a $400K loan, much closer to affordable. Bring back downpayments and forget about future regulations that will work as well as most gov't regs-- badly if at all.

[GDC]

Laker,

I'm glad to see some houses are now selling at 2004 levels. I hope we will see many more of these. I think you and I both know that the majority of current listings are still using prices from peak levels. These sellers are still in denial.

[DSL]

Sorry to burst your bubble (pun intended) Jimmy, but La Canada, San Marino, South Pasadena, and large swaths of Pasadena will never be considered "undesirable", despite not being beach adjacent.

[Juan Garcia]

That's some crack detective work, Peter. You mean that sales in Lancaster are trailing those in coastal enclaves like Mar Vista? Who woulda thunk it!

[Corntrollio]

The other thing people are forgetting is that even on higher end homes, many of the buyers HELOC'd themselves. Some of these people were smart and used the HELOC to remodel their house, thereby increasing its value along with their principal balance, but many others went on vacation, paid for private schools, bought BMWs and boats, went to Rodeo Drive, etc. This can be the equivalent of 100% financing in these neighborhoods.

Check out this house in Arcadia:
http://www.irvinehousingblog.com/2008/03/19/the-
millionaire/
The owners bought it in 1981 for $265K. They now owe $1,214.5K, and are trying to sell it for $1,299K, which they won't get. Why? Because it's not everyone else's responsibility to pay off their HELOC.

[ajax34502]

The high end prices are staying up because the rich can afford not to sell their homes it is as simple as that.

As far as I know real estate in general in LA is not selling, highend or lowend, the prices still have a long way to come down.

If and when the dow goes down 5000 points then we will see the rich rush into selling their homes and you will see 70% drop in value but as long as the dow stays up the rich can ride out this recession, 90% of their money is in the stock market and until it tanks they will have a huge buffer zone..

[Santa Barbara Real Estate Voice]

We are seeing similar stats here in the Santa Barbara area. Pockets of our town are holding out very well...these are areas near to the beach, on the beach or the high end above the $3 Million mark.

Outside of this we are either stable in prices or continuing to fall with condos fairing the worst. I would say the nicer areas have only fallen about 15-20 % from their peaks but other areas are off 30% and condos as much as 40%.