Ask Pete: Your questions answered

You folks asked a bunch of good questions, thanks. I'll answer the easy ones:

1) Dave from Huntington Beach: "My mom is 60 and still working as a physician. She sold when the market was low several years ago (back in the '90s) and never was able to get back into the market. We think she should buy right now when prices are low so that she has a place to retire in 5-10 years. Do you think that's a good idea?"
Pete: If she finds a house she really likes that she can afford, and losing some equity won't bother her, buy it. Otherwise, no rush. It's a buyer's market and getting more so. Prices are still falling. She'll get a better deal a year from now.

2) DSL: "I don't see any price drops in any desirable San Gabriel valley suburb (San Marino, South Pasadena, or desirable areas of Pasadena and N. San Gabriel). Where is the huge price correction all of your readers keep yelling about?"
Pete: The huge price correction is in lower-income areas where there were lots of first-time buyers, sub-prime loans, and new construction. My guess is more established, upper-income neighborhoods with good schools and stable homeownership will continue to outperform the market -- but prices will slip eventually.

3) Nathan Wood: "Given the current housing market, do you think we could see from the peak to the bottom an 80 percent decrease in housing prices to more normative levels based upon workers earning power?"
Pete: No.

4) Wilson: "If a broad bailout is passed and every defaulting homeowner is given a principal reduction, would you join a growing movement of folks who will intentionally default on their mortgage in order to receive a principal reduction?"
Pete: No, but it makes sense that lots of homeowners would deliberately miss a few payments to get into a cheaper mortage. I wouldn't do it because I don't have a mortgage, and even if I did, my wife and I take our credit scores seriously.

5) D: "Break out your crystal ball Mr. Viles. How long do you think the downturn will last and how low will it go?"

Pete: I'm guessing prices will fall until late 2009 or early 2010.

6) D: "Will higher end home prices decline more or less than median?"
Pete: Less.

7) Hugh Junit: "What is the meaning of life Pete?"
Pete: Don't know but my boss says the question is answered in "Hitchhiker's Guide to the Galaxy."

8) Laker: "Peter, Do you think the government will actually inflate the prices of everything enough so that 2006 prices will look OK in 10 years from today?  That is, the house price will lose real value but not nominal value."
Pete: No, house prices will lose real and nominal value. Whatever that means.

9) TakeFive: "So how do you feel about your decision to continue renting, but in a new location? Do you feel any longing to be a homeowner, or do find your situation satisfactory?  Will you consider buying in southern California? When? Has this decision been affected by comments on this blog?"
Pete: We like our new home, and the kids love the back yard, but we'd like to own a house someday. Our situation is satisfactory but not ideal. We have tried to buy in Southern California and will probably try again. Blog comments have helped me be comfortable waiting to buy. Ours is not that complicated a decision: factoring in everything -- schools, commutes, the housing market, our incomes, etc. -- we can't afford to buy a house we'd want to own right now.

10) Jon Ericson: "Why don't agents tell their clients to lower their asking price?"
Pete: My understanding is that many agents do tell their clients to lower their prices, and some clients just don't want to hear it. At some point, agents want to sell houses. This market stinks for them.

11) John: "When do we hit bottom? 2010? 2012? Later?"
Pete: Late 2009 or early 2010. Total guess.

12) John: "Are the predictions of L.A.'s population growth of millions in the next few decades overblown? Could our horrific schools, traffic, pollution, and the general expense of living here cause L.A.'s population to stabilize or even shrink?"
Pete: Population will grow until or unless immigration policies and enforcement change dramatically.

13) John: "Is degentrification in some of the most recent "hip" neighborhoods (Echo Park, Highland Park, or, more likely, El Sereno and Washington Heights) possible?"
Pete: Yes.

14) Don Q: "What do you think is going to be a more powerful driving force of home prices?
On the one hand:
-tighter credit
-return to the pricing mean
-real estate as disfavored investment class
On the other hand:
-government intervention/bailouts
-printing money/inflation of assets
Pete: The one hand. Sorry, a joke: tighter credit, etc., will continue to drive prices lower.

15) pugtv: "My question -- can you post Lefty's real email address so we can personally tell him what a moro ... er ... genius he is? lol"
Pete: Can't post his e-mail address, but will invite him to answer questions in a forum similar to this one. (Think about it, Lefty).

16) anthropocentric: "How do you think our choice of new U.S. President will impact housing?"
Pete: Not sure. We're early in the government response to the crisis. The biggest government response has come from the Fed, and that's likely to be the case for a while.

17) KeysToAHouse: "My understanding is that from the mid-seventies to the mid-nineties, median home prices in the United States hovered around 2.8 times median U.S. income ... That all changed in the last ten years, and that ratio peaked at around 3.9 last year (and was far higher in SoCal). Do you think we will eventually return to that 2.8 figure (either through declines in home values, or through wage growth, or some combination thereof), or do you believe something has fundamentally changed that invalidates that historical ratio?
Pete: I don't think we're going back to 2.8 in southern California. Two things changed: low interest rates and new mortgages that allow you to rent your house from the bank instead of buy it.

18) Last question, from xtine: "A friend of mine who is a career speculator thinks international buyers will keep the LA housing market inflated. your thoughts?"
Pete: International buyers will help keep a very small part of the LA market inflated -- the $2 million-and-above market.

Photo Credit: A 1930s-era Monterey Colonial in Montecito, featuring office space inside a converted water tower, listed for $12.95 million, by Everett Fenton Gidley.

Comments

[Cal]

I think someone should have asked you what is the most annoying quality of Tony Pierce?

OT: Did anyone, and I mean anyone, go to the LA Times/ California Association of Realtors home buying fair Sat & Sun or was it a dead zone. I didnt see any press about it either way.

[peteviles]

Tony's a good guy -- if you find him annoying, I'm afraid you'd probably find me annoying too.

[Cal]

Pete,

I was just trying to come up with a question that would get you in trouble with your boss. ;-) My humor powers are limited so that was the best I could come up with.

[firesale]

DSL: "I don't see any price drops in any desirable San Gabriel valley suburb (San Marino, South Pasadena, or desirable areas of Pasadena and N. San Gabriel). Where is the huge price correction all of your readers keep yelling about?"

Ahhh, San Marino, jewel of the bubble...
As the Option ARMs reset,
the Bells of St. Edmund's begin to toll for thee...
Price justice awaits, just around the bend...
Burn, yee tardys! Burn!

[Hank Venture]

i think you short changed on the answer to #17, dont you? Those kind of loans and rates are not guaranteed forever.

[John]

Good work Peter. Please start doing this 1x a week. It's good to have a source of reasonably honest real estate info.

(I keep running into real estate agents, and it's SHOCKING how little they know about the state of the market.)

[Martin]

Now this is a clever new twist to your blog, Peter. Now you're the Dear Abby of the Southern California real estate debacle. Your brief answers and guesstimates are on the money. I'd enjoy a weekly Q&A in L.A. Land.

[JW]

Peter: Re. your answer to #5.
I disagree.
(1) Between 750,000 and 1 million bank-owned properties will hit the market this year, (total USA and many of these will be in CA) or about a quarter of the homes up for sale. This will continue to slow sales and depress prices further.
(2) Over 2 million subprime borrowers have ARMs that will reset to higher levels in 2008 and 2009. It will take up to another year (from their ARM reset) until many of these homes are foreclosed on and hit the market.
(3) By the time all of this happens, it is highly likely that the recession will be in full force, complete with job losses, etc. which will cause many other homeowners to attempt to sell homes that they can no longer afford.
(4) Add all of this together and I see falling prices until at least 2012 and due to the huge inventory of homes, much tighter loan qualifications for a mortgage..................I believe we'll see a three bedroom, two bath home in a decent suburb of L.A.. County in the $250k range by 2012. BTW: Anything the government attempts to do to stop is is an absolute waste of time and money. They don't have enough money to stop it without doing much more harm to the USA for the next 50 years. When the election is over, there's going to be an enormous amount of pressure on Congress to do something about health care, Social Security, the economy and the Iraq War.
I don't claim to have a crystal ball.............just trying to extract some strong possibilities from the information that is available.

[Steve]

Peter another great effort, yet I do not get it. Why put up with all the SoCal RE BS. A simple solution is just move from the dump and live happily ever after.

[JW]

P.S.
You're doing an outstanding job with this blog.

[Jason]

'3) Nathan Wood: "Given the current housing market, do you think we could see from the peak to the bottom an 80 percent decrease in housing prices to more normative levels based upon workers earning power?"
Pete: No.'

I'd really love to know how Nathan came up with an 80 percent decrease from peak to bottom as a normative level. Because last time I checked, that'd probably reflect housing prices well below the average earning power in California, something like a return to prices a couple of decades ago.

[DSL]

Firesale, that's pretty funny... I actually attended St. Edmunds for Nursery School. Smal world eh?

[Dave from Huntington Beach]

Thanks so much for answering my question! We're glad you were able to help us. Housing prices may keep going down but she's eventually going to need the tax break on her income...

[Chris in Sacramento]

The graphs I've seen show a huge increase in ARM resets starting in 2010-11 -- similar to the # of subprimes in 2007-08. How do we think that plays out?

[Drew]

I say "ditto" to the idea of a weekly Q&A session -- it allows for at least a brief discussion of many points that may be too small for a full log entry, or that raise a different slant on points already discussed.

[InspiredLA]

Yes - please make Q&A a weekly event. I've followed this blog for a couple of months and appreciate the broad economic perspective presented here - it all being inextricable from what's happening in RE.

Question: Are we waiting for a shoe to drop at Wells Fargo? Several months ago, WF was reported to have the lion's share of the subprime market, yet they've been strangely mum on any fallout.

[Santa Barbara Real Estate Voice]

Interesting post, but I am not sure what this had to do with this listing on Camino Viejo here in Montecito CA.

[HulaGirl]

Hi Pete,

Are there any statistics on how many real estate agents have bailed from the sinking ship thus far? Would like to hear from agents who are willing to share how this is REALLY effecting them professionally and personally.

Also, do you have access to any demographics showing influx of people moving to California vs. people leaving California - any projections?

[Dave from Huntington Beach]

Thanks for posting our last question Pete. My mom (from the first question in the first of this series) actually went looking and found a couple duds and one really nice place in Huntington Harbor, but felt it was overpriced at $390k for a 2 bedroom condo. There are others selling in the area for $350k. Considering the owners who are trying to sell it bought the place for $330k in 2003 (thanks redfin.com!) how low do you expect the price to fall for that one? How does the prices flattening out affect things? Do you think we're ready for a turn?