Retracing the housing bubble: 1997

As promised, the blog is retracing the housing bubble in hopes of better understanding where we are today and how we got here. This is not meant to be a definitive history, but a rough outline for discussion. I'll likely add to these posts with more information, anecdotes, and statistics, partly at your suggestion.

1997: The housing bubble begins to take shape in Southern California as median home prices slowly begin their long rise. In celebrity news, the L.A. Times' Hot Property reports that Brad Pitt (pictured) has bought a two-bedroom, 2,200-square-foot house in the Hollywood Hills for about $400,000.

According to DataQuick's tracking of median sales prices in Southern California, prices bottomed at $146,000 in January of 1996 and again in February 1997, ending a five-year slide. Prices across the region then began a historic, 10-year rise, peaking at $505,000 in March of 2007, a rise of 246%. Had prices over that period only matched inflation, as measured by the consumer price index, median home prices would have peaked at about $189,000 in 2007.

1997 at a glance: Median sales prices rose $12,500, or 9.8%; inflation that year, as measured by the CPI, was 1.7%.

Month   SoCal median sales price     % change y/y     %change from bottom
Jan.              $147,500                                  1.0%                      1.0%
Feb.              $146,000                                -1.0%                       0.0%
March           $152,500                                 1.6%                       4.4%
April              $152,000                                 1.3%                       4.1%
May               $155,000                                 2.6%                       5.5%
June             $156,500                                 2.0%                       7.2%
July               $155,000                                 2.0%                       5.5%
Aug.              $159,500                                 4.6%                       9.2%
Sept.             $160,000                                 5.3%                       9.6%
Oct.               $158,500                                  5.7%                      8.6%
Nov.              $160,000                                  6.7%                      9.6%
Dec.              $162,000                                  8.0%                    11.0%

Your thoughts? Suggestions? Insights? E-mail story tips to peter.viles@latimes.com.

More on Brat Pitt: The home Pitt bought in early 1997, fresh from proposing to Gwyneth Paltrow in Argentina, was the third he had purchased in the same gated enclave.

Photo Credit: CP.

Transcript: Sen. Obama's speech on housing

Transcript of prepared remarks delivered Thursday by Sen. Barack Obama on housing and the economy, as posted on www.barackobama.com:

"I want to thank Mayor Bloomberg for his extraordinary leadership. At a time when Washington is divided in old ideological battles, he shows us what can be achieved when we bring people together to seek pragmatic solutions. Not only has he been a remarkable leader for New York –- he has established himself as a major voice in our national debate on issues like renewing our economy, educating our children, and seeking energy independence. Mr. Mayor, I share your determination to bring this country together to finally make progress for the American people."

Click below to read the rest of the speech.

Obama on housing: 'Extend a hand' to homeowners

Sen. Barack Obama joins the housing speech parade today with what appears to be a difference-splitter: more government action and intervention than John McCain proposed this week, but not as much as Hillary Clinton favors.

Read the entire Obama speech here.

Reuters, via CNBC: "Democratic presidential candidate Barack Obama called for greater government regulation of the U.S. financial system Thursday and proposed a new $30-billion economic stimulus plan to help homeowners. ... He proposed a $30-billion stimulus plan that would provide relief to areas hardest hit by the housing crisis, and an extension of unemployment insurance for those out of work."

L.A. Times: "Democratic candidate Barack Obama ... called for reform of the nation's regulatory system, immediate relief for homeowners caught in the sub-prime mortgage crisis and a $30-billion stimulus package to boost the economy.  'If we can extend a hand to banks on Wall Street, we can extend a hand to Americans who are struggling through no fault of their own,' he said."

On this language, McCain, Clinton and Obama agree: They support aid to the blameless. Who doesn't? The idea that there is some discrete group of blameless, faultless borrowers is a convenient piece of Washington fiction that ignores recent history. Everybody in this mess made mistakes. Borrowers took out loans they didn't understand to buy houses they couldn't afford. Some borrowers understood the risks they were taking; some didn't. Lenders made spectacularly bad loans because someone (Wall Street) was stupid enough to buy the loans. Washington witnessed the entire train wreck and declared it a good thing as it was happening, and only now sees the wreckage.

It's hard to see how an intelligent government response will somehow emerge from collective ignorance of what happened.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: Getty Images

What I learned from The Drudge Report today

Today's earlier post on the dramatic median price decline in California was linked by The Drudge Report, and many of you commented on how the Drudge audience changed the tenor of the comments section. Yes, it's a different crowd.

But I learned something from it: I received quite a few e-mails complaining that the post lacked historical context, because it failed to mention, or quantify, the huge run-ups in prices in California that preceded the decline.  At first, I reflexively dismissed that criticism -- all of us are well aware of where we stand in the cycle. Then I thought about it, and it struck me that a number of regular readers have made the same complaint recently.

You're right -- this blog needs a bit of a history lesson. I'll start with a modest one tonight, and, with your guidance, keep at it until we've put together a workable history of the bubble.

Tonight, the big picture. In June of 2000, DataQuick reported that median sales prices in Los Angeles had reached $203,000 -- finally reaching the levels of the previous peak, in May of 1991.  Though I think a history of the bubble probably goes back to 1997 or so, when prices started rising from the bottom of the previous cycle, June 2000 will do for tonight:

Month/Year    Median home price in LA    Y/Y % Change
June 2000      $203,000                           2.5%
June 2001      $228,000                           12.3%
June 2002      $269,000                           18.0%
June 2003      $313,000                           16.4%
June 2004      $414,000                           32.4%
June 2005      $475,000                           14.7%
June 2006      $517,000                           8.8%
June 2007      $545,000                           4.8%
Feb. 2008      $460,000                           -12.9%

Thoughts? Comments? Aspects of the Bubble History you'd like to see? I'll try to post more tomorrow.
Email story tips to peter.viles@latimes.com.
Photo Credit: AFP

Blame game: KPMG accused of lax auditing of New Century

From The LATimes: "Driven by a 'brazen obsession' with generating sub-prime mortgages, Irvine's New Century Financial Corp. engaged in improper accounting that overstated its profit and allowed top executives to reap millions of dollars in inflated or undeserved bonuses, a U.S. Bankruptcy Court examiner said in a report released Wednesday.

More: "Michael J. Missal's report said senior managers 'turned a blind eye' to the 'ticking time bomb' created by the high-risk lending in 2005 and 2006. At the same time, Missal said, New Century's auditor, KPMG, contributed to the problems by failing to exercise due care in reviewing its books, leading to material misstatements in New Century's financial reports."

From The New York Times: "In a sweeping accusation against one of the country’s largest accounting firms, an investigator released a report on Wednesday that said 'improper and imprudent practices' by a once high-flying mortgage company were condoned and enabled by its auditors."

KPMG denies the accusations in the report, which was commissioned by the United States Trustee overseeing the New Century bankruptcy.

Your thoughts? Comments? Email story tips to peter.viles@latimes.com
Photo Credit: New Century Financial's Irvine headquarters, in a file photo from May 2007, via L.A. Times

Transcript: Sen. McCain's March 25 speech on housing

Transcript of Sen. John McCain's March 25 speech on housing, as prepared for delivery, from www.johnmccain.com.

"Thank you for joining me here today. I just returned from a trip overseas that included assessing the state of affairs in Iraq, the Middle East, and Europe. I will have more to say on those important issues in the days and weeks to come.

While I was traveling overseas, our financial markets experienced another round of upheaval. This market turmoil leaves many Americans feeling both concerned and angry. People see the value of their homes fall at the same time that the price of gasoline and food is rising. Already-tight household budgets are getting tighter. A lot of Americans read the headlines about credit crunches and liquidity crises and ask: 'How did we get here?' In the end, the motivation and behaviors that caused the current crisis are not terribly complicated, even though the alphabet soup of financial instruments is complex. The past decade witnessed the largest increase in home ownership in the past 50 years. Home ownership is part of the American dream, and we want as many Americans as possible to be able to afford their own home. But in the process of a huge, and largely positive, upturn in home construction and ownership, a housing bubble was created."

Click below to read the rest of the speech.

Transcript: Sen. Clinton's March 24 speech on housing

A transcript of Sen. Hillary Clinton's speech on housing and the economy, delivered March 24 in Philadelphia. The transcript, from www.hillaryclinton.com, is of her remarks as prepared for delivery.

"Thank you. Thank you. It’s great to be back here at Penn and in Philadelphia. I remember giving the commencement address here some years ago and I always had that image of the beauty of this campus and, of course, its extraordinary reputation. And I’m delighted to have a chance to be here with you to talk about an issue that is critical not only to Pennsylvania but to our country.

Click below to read the rest of the speech.

Paulson: Let housing prices fall

Important speech from the Treasury Secretary (pictured) today: "Housing prices need to fall further to permit shell-shocked housing markets to stabilize and policy-makers should not interfere with that process, Treasury Secretary Henry Paulson said on Wednesday."

More from Reuters via LATimes.com: Treasury Secretary Henry Paulson "... said regulators including the Federal Reserve were 'vigilant' and doing everything they could to minimize damage to the economy but played down the value of a more direct government role."

The entire speech is here:, but I've taken the liberty of cutting and pasting the section in which Paulson addresses housing prices:

"The housing downturn and the surrounding uncertainty are significantly impacting our financial institutions and capital markets. However, we should not lose sight of the fact that this downturn was precipitated by unsustainable home price appreciation which was particularly pronounced in a relatively few regions. A correction was inevitable and the sooner we work through it, with a minimum of disorder, the sooner we will see home values stabilize, more buyers return to the housing market, and housing will again contribute to economic growth. Having stability in housing markets will in turn contribute to better conditions in credit markets for mortgage-backed securities.

More, "Data releases every month create headlines about declining housing sales, starts and prices. Yet, declines are exactly what we should expect during a correction. It takes time to work through the excess inventory – and we are. The question many are asking is how deep the correction will be and how long it will last. ...

California freefall: Home prices down 26% in February

Signs of distress are piling up in the California housing market, where prices are falling at three times the national rate of decline.

--Statewide, median sales prices fell by a stunning 26% from year-ago levels in February, with home prices dropping at a rate of nearly $3,000 a week, the California Association of Realtors reports. Further, the CAR says the Fed's interest rate-cutting campaign "will have little near-term direct effect on the housing market."

--In the San Fernando Valley, losing a home to foreclosure is now almost as common for families as buying a home. The L.A. Daily News: "During January and February, there were 1,084 foreclosures and 1,335 sales of houses and condos in Valley communities from Glendale to Calabasas, according to the San Fernando Valley Economic Research Center at California State University, Northridge."

"It's bad. It's really bad," market analyst Nima Nattagh told the Daily News.

The California Association of Realtors  reports median prices fell 27.2% from year-ago levels in the hard-hit Inland Empire east of Los Angeles, 30.9% in Sacramento, and 39.1% in Santa Barbara County.

On a percentage basis, the California price meltdown is more than three times as severe as the national decline of 8.2% in median prices reported this week by the National Association of Realtors. On an absolute basis, the California meltdown is even more severe: Nationally, prices fell over the past year at a rate of $338 per week; in California, prices fell at a rate of $2,788 per week.

According to the CAR, "The median sales price of an existing, single-family detached home in California during February 2008 was $409,240, a 26.2 percent decrease from the revised $554,280 median for February 2007." The February 2008 median price fell 4.8 percent compared with January’s revised $429,790 median price.

"The Federal Reserve Bank’s recent action to reduce the federal funds rate will have little near-term direct effect on the housing market," said CAR Vice President and Chief Economist Leslie Appleton-Young. "However, Fed rate cuts should result in more favorable real estate finance rates as we move through the year."
 

More on McCain's housing speech

Earlier I wrote that it was hard to pick a headline out of Sen. John McCain's housing speech today, and tonight I stand corrected, by The New York Times: "Drawing a sharp distinction between himself and the two Democratic presidential candidates, Sen. John McCain of Arizona warned Tuesday against vigorous government action to solve the deepening mortgage crisis and the market turmoil it has caused, saying that 'it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.' "

A long headline, but a good summary of an important speech.

More: "... in a departure from Democrats, who have focused on the lending industry’s role in the crisis, Mr. McCain suggested that some homeowners had also engaged in dangerous practices, including borrowing too much in hopes that a rising market would cover their mortgages."

Key quotes from the speech, which you can read in its entirety here:

--"But in the process of a huge, and largely positive, upturn in home construction and ownership, a housing bubble was created. ... The normal market forces of people buying and selling their homes were overwhelmed by rampant speculation." Comment: It was a bubble -- sounds obvious, but you didn't hear this from Sen. Clinton yesterday; her lengthy analysis of the housing problem failed this pass-fail test of intellectual honesty.

--"Some Americans bought homes they couldn't afford, betting that rising prices would make it easier to refinance later at more affordable rates. There are 80 million family homes in America and those homeowners are now facing the reality that the bubble has burst and prices go down as well as up."  Comment: Again, sounds obvious, but Clinton's speech treated falling prices as a crisis to be stopped, not a reality to be faced.