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.

Comments

[puckhead]

First time listener,

I agree that most analyst will look at median incomes vs median prices via the perspective of a historical trend instead of matching the two. However, I’ve read waaaaaaaaaaaaaaaaaaay too many bloggers try to support their contention that houses must fall by 80% so that the median incomes CAN afford the median price. And all I’m saying is BS to that. Median household incomes = renters, not median price of homes.

Per your post, you stated that in the 90’s that median income fell to 4x median prices and that it overshot to over 10x median prices. So what’s the sweet spot where we get equilibrium? 7x? What’s the medium household income of SoCal? I’m guesstimating at about $60K? 7x 60K is about $420,000, which is not far from where we are at. And no I’m not suggesting that the median house should be $420K, I’m just saying $420K is more realistic than the $200K prices some perma-bears are suggesting.

[anonymous]

Flaaaash
Buyer mentality will only play a percentage role in the overcorrection. The overcorrection will be the result of the massive credit contraction that will compound the issue monthly for years to come. 25% drop had been considered 'aggressive' downward speculation just last fall. There is no reason to believe that the Rational Expectation of 1999 is still conservative, given the unique, cataclysmic circumstances we now enjoy. My point is buyers may get in at 10% above '99 trying to jump the bottom, figuring in rational expectation - that does not mean that those buyers will turn around credit contraction or that there will be enough buyers to prop up the market. Even if some people jump on the 10%, 20% above 1999 level, it does not mean that home prices will stop falling. If the fed bails out homeowners who are in upside down mortgage, it still does not mean that home values will stay where they are. Credit is contracting and the pool of owner-candidates has reduced dramatically - they've either been in the boom already, or were out of the boom because they couldn't qualify for even the expanded credit pool, or they were in that outer circle of subprimes - and now there are no loan products to service them.

That leaves me and about 10 other people on this blog who have 20 or 30 percent down and a strong, fully documented income.

If the recession/depression is bad enough, the pool of buyers (maybe even us 'smart folks' who have downpayments - won't have jobs in 12 mo's) will continue to shrink as they lose jobs and mortgage rates will continue to raise, despite the fed's rate cuts as banks try to reduce the risk they have on loans. Bottom line is I expect all of us are still underestimating the calamity we face now and in years to come.

[Manitou]

Long time reader...first time poster...

LA is a changed city after this real estate mania. Lets not forget that rent is also higher in the last 10 years as landlords keep up with home values. And rental prices will continue to increase more with all this foreclosure madness. So falling in line with rent is not equal to 1999 either. If you rent and have to move now, buying is not a bad option when considering straight month to month comparisons.

I just moved from my 500sq. ft 1BR Silver Lake apartment that I moved into as my first solo starter apartment in 1998 for $550/mo. It just rented for $1500- and it had rats! That's 300% in 10 years which anecdotally is pretty much par with the rate of home prices. Other 1 BR on the same street are renting for $2400 (I guess that's the rat free price).

Continuing the anecdote, I got some time-sensitive down payment money. So I found a great-for-me 3BR 2BA house three times the size of the Silver Lake apt that is nearer to my work in a nice part of Lincoln Heights (with no rats either). I'm paying $2k a month in fixed rate mortgage.

Yes, clearly the great difference here is between LH and SL for sure. But a 1600 sqft house for 2K/mo sure seems like a deal compared to a 500 sqft apt for $1500/mo (much less $2400!)

Couldn't be happier in my starter home. And I'm sure I'm not the only one who can attest to these numbers.
So, yes prices might still fall, but the sky will not.

[First time listener . . .]

Puckhead, I may have misspoken, but I believe that the historical norm for median price is 4x median income. I can't find the post, but I think it was on this blog that traced that multiple through the 80's and 90's, and what I remember finding interesting was that during the height of that boom, prices only rose to about 8 or 9x income at the peak, and only for a short while. They definitely undershot 4x on the way down. I actually think 4x is a reasonable possibility given historical norms and our return to fundamental underwriting standards.

And Manitou, if you can't find a 1 BR apartment in Silver Lake for less than $1500 or $2400, I'm not sure if your internet is working properly.

[Miami Fat Cat]

I just paid 40K for a condo that sold for 185k two years ago. Quite nice too, 1 bed, 972 sq ft. New Appli. Granite...etc etc...rentsfor $900. Maint is 244pm, taxes 178 pm. Do the math, I find this to be the beginning of the bottom.

[NoWayinLA]

I question the value of tracing the bubble all the way back to the last bottom. These things have a way of over-correcting.

The stock market of the roaring '20's gave its first indications that things were out of control when shoe-shine boys were giving stock tips. Likewise, the housing bubble's first sign of trouble came in the first quarter of 2002, when a non-traditional sector of the population jumped into housing: lame-o's.
http://www.theonion.com/content/node/27886

[mbagrad]

Manitou - I also call BS on your story. My neighbor has a 1br 1bath HOUSE for rent (about 700 sq. feet) for $1450.

Also, I rented a 1br apartment in Hollywood in 2000 and paid $825/month. Silverlake wasn't any cheaper then.

Either your last place was a true dump and didn't really rent for $1500 without some serious upgrades or you had a steal.

Secondly, where did you find a house in Lincoln Heights for only $2000 per month? That implies a price of less than $400,000. And FYI there's no such thing as "a good part of Lincoln Heights"

Are you sure it's not a townhouse?

Either you're exaggerating or you're a realtor...

[Doug in Toronto]

I watched yesterday's marathon of "My First House" on TLC with a combination of disbelief and dread. Many of the would-be buyers should not have been thinking about buying a home at all. I'll grant that some of these folks have had some rough luck along the way, and I'm sure they're all fine people, but common sense dictates that many of them shouldn't consider buying houses they obviously can not afford. Consider the guy who had a budget and wanted to stay within it, only to have his g/f blackmail him into overspending with the phrase "You want me to be happy, don't you?" He finally agrees to buy a home out of his comfort zone, only to find out that his lender has gone out of business and he has 48 hours to scrape up financing. Or how about the self-employed woman whose broker says that they just won't disclose that she's self-employed and let's just keep the financial stuff out of it? I'm so glad that I live in Canada, where this kind of foolishness is not the rule, but a rare exception. Most of these folks would not even be considered for mortgages in this country, unless they have some skin in the game. Here, you must put at least 5% down to buy a house at all, and even then the banks will insist that you take out insurance with Canada Mortgage and Housing Corporation (CMHC - a government agency that insures mortgages, among other things housing-related), since it considers you to be high-risk. No-money-down, 100% mortgages aren't allowed here, and I'm just fine with that. Of course, some of our banks are being impacted by the subprime fiasco, but that's because of their own greed and not that of individual homeowners.

BTW: The over/under on the folks shown on TLC's marathon going through bankruptcy or foreclosure (or both) within 2 years is set at 75%.

[Manitou]

Sorry mbagrad, the numbers stand. I'm no realtor.

I moved into the 1br / $550/mo bugalow duplex from a large $700/mo 2br because I thought $700 was extravagant (!) Now that was foolish. A unit in that 6 plex with the 2br just went for $1600/mo I did some upgrades to the place that the landlord funded, but I've been subletting that place to New Yorkers for $1500/mo during the summer for years.

As far as LH, my opportunity to purchase was limited to specific time frame and location, and I found more than dozen good houses under $400k in the last year. Not all of which were to my needs and expectations, but many of them were. And with most of LA right now, many are still for sale, but the best ones sold quickly. There were even two offers I made that lost to multiple offers in already slumpy market in the fall/winter of 2007.

This is all anecdotal, and is not a market analysis, I'm just offering a case in point that rent and mortgage were not at some crazy imbalance when weighing the options on my recent move.

The wider point was that the discussion in finding the bottom in relation to a decade history of LA home prices should include the fact that many Angelenos now spend significantly more in rent in 2008 than they do in 1999. That for sure is going to effect the reality what people are willing to pay in Los Angeles to own as the bubble settles.