Broad: Home prices will fall another 20%

News worth noting: Eli Broad, who co-founded KB Home, said today he expects home prices to drop another 20%.

From Bloomberg News: "'I don't think we're anywhere near a bottom in housing,' Broad told Bloomberg TV at the Milken Institute Conference in Beverly Hills, California. 'We're going to have a big inventory of unsold, unoccupied homes that's going to take three or four years to clear out.'

More: "'People were using their home equity as really an ATM machine,' Broad said.... 'They were spending more money than they were earning by taking equity out of their home. That couldn't go on indefinitely. We're now paying a price for that.'"

Some quick math: A 20% decline in existing median sales prices in Los Angeles would push prices down from their current level of $440,000 to $352,000. That would be a decline of $198,000, or 32%, from peak pricing of $550,000, reached last summer.

Your thoughts? Comments?
Photo of new homes in Sylmar / Los Angeles Times

Comments

[fred]

to countrywide...........my keys are in the mail.......thanks for the 8 months free rent and my trip to cabo.

[Cal]

Is that barbed wire fence in the picture there to keep the homeowners from walking away?

[el guapo]

He was referring to the US housing market. LA (and other bubble areas) will get it worse.

[Tombstone Realty]

The Price to Be Paid..... right into KB Homes' pockets.

[Laker]

Cal, You knocked me down from my chair....LOL.
Though, I'm not sure the barbed wire fence will be enough to keep the "loan owners" from running away....But your idea is hilarious! You might want to share it with Congress people like Frank and Dodd...I might actually stand a better chance of propping up house prices than they current proposals.

And Peter, you are using his 20% decline of national price decline and applying it to California and LA. That is big time wrong. I believe that by now, we have pretty good consensus that if US home price goes down 10%, it will go down 20% in LA, so If US home price was to get down 20%, i say LA prices might get 40% off and that is very conservative if your compare the run up numbers and percentages...
And that is in addition to what has already occurred...I start to see many nice houses in the valley for early 2004 prices, and still not getting picked up...Take 40% of that, and you end up in 2000 prices....(nominal dollars....)

[boyoboy]

Eli Broad is speaking in general terms. Realistically, the markets decline differently. That is, the good areas decline little as they have a larger pool of prospective buyers. Good areas will always be more valuable. As for those waiting/cheering on the sidelines and waiting for things to go down more, they are the two-thirds that are the habitual L.A. renters that I count on to rent my properties. Thanks btw... They will wait for the declines but should start saving money for gas for the commute from the IE when they buy at rock bottom.

I have seen little evidence to show that the San Marinos, RPV, PV, 90210, or my home's area declining other than seasonally. Not even on any of these blogs....sari

[Truth2Pwr]

The whole faux housing "appreciation" boom was nothing but a greed induced mirage created by a bunch of idiots who failed to realize that those "How can I be out of money if I still have checks?" bumper stickers were meant as a joke and not financial advice.

Of course there is no bottom in sight. Of course there are years of falling prices still to come. How long do you expect that it would take before inventory overhang returns to normal levels and a supply/demand balance point is achieved between buyers and sellers? It's gonna be a looooong time from now my friends!

[IToldu2CashOut]

Sounds about right...Might even be worse. I think some homes will see an 80% decline, but on nice properties without many flaws and good location 30-40% including westside and especially downtown.

[x-man]

boyoboy--

they said that same thing about the nice areas of tokyo. the high land is the last to be submerged. this is by all metrics an historic downturn.

did you know know if you put down 300K on a 1.5 house at current jumbo rates your monthly is almost 8500 bucks!

that alone tells me that prices in the 3M to 1M range in the nice areas of LA are going to by at least a third from here.

[nea]

shouldn't "another" 20 percent be referring to a drop off the peak level and not the current level? Am I missing something here?

[adrian]

Boyoboy,
It's been a year since I stopped looking for a condo to buy in Westside.
I may have spent $15,000 in rent but I have saved at least $100k by refraining to buy.
And I still wait, I'm not in a rush to waste my 40% down payment.
My friend bought a townhome in Northridge, new development, listing price was $565K. He paid $535k. Now, the other vacant ones list for $484k, 10 months later. If I offered $450k, I bet I would move in tomorrow.

[JW]

Well, Mr. Broad is getting warm. Median price in L.A. will go much lower than $350k. By 2011, it will be much closer to $250k. I was saying this same thing three years ago and many poo-pooed it. Now, we're seeing what's already happened and all the elements are in play to drive these insane prices lower and lower and lower.

[the problemwithcaring]

I have seen little evidence to show that the San Marinos, RPV, PV, 90210, or my home's area declining other than seasonally. Not even on any of these blogs....sari
Posted by: boyoboy |

"My homes area"?...Which is?..why not spell it out? Don't be scar'd...Your desparation is naked...and sad...but, outrageously, on this blog still harmless and funny. So go ahead - say where you live!

All the time I listen to family, friends, co-workers and acquaintences moan or make denials about the real estate market, and I think -- this bubble stuff is depressing. Then I get back to this blog and read comments like the one above illustrating the obvious greed and stupidity of this market, and it makes it easier to accept this correction as good thing.

[toby]

Eli is right as long as we don't have an Earthquake in the next 4 years.

Since it's been 14 years since out last major shaker, I would give it a 80% chance of a 5 or bigger in the next 4 years.

And if we do have an Earthquake, I would guess a median sales price of around $250,000.

[Joseph...The Real Estate Guy]

It's coming!

Thanks to these genius CEO'S!

[LeftLA]

JW: What color is the sky in your imaginary little world?

[Ace]

JW 'Well, Mr. Broad is getting warm. Median price in L.A. will go much lower than $350k. By 2011, it will be much closer to $250k.'

Not likely unless interest rates skyrocket.

A $250k house can be purchased with zero down for only $1482 a month. The median apartment rent in LA is now $1699 per month. It would be pretty unlikely for the median home price to go below the median monthly rent.

If the median approaches $300k, it will be cheaper to buy then rent.

Maybe the price of rent will decrease too? Who knows?

[Fred]

Where is the mainstream media article advising current homeowners to sell now if they think they will need/want to sell at some point in the next decade? You will have to aggressively market your house (i.e., lower its price), but you will undoubtedly make more money selling now than you will over the next handful of years.

Not only is this prudent advice for any current homeowners, but it would have the added benefit of speeding up this inevitable correction.

[Patrick Duffy, HousingChronicles.com]

Yes, Eli is still talking national averages, and different areas -- and neighborhoods -- will perform differently.

But here's what I'm wondering about: income property investors (including me) who are waiting on the sidelines to pounce as soon as purchases become cash-flow positive.

For example, if I were to rent the same type of home I bought in 2003, I'd pay 45% more than I currently pay for P&I, HOA and taxes -- and that's before I factor in my tax write-offs for P&I and property taxes. I'm sure there are many other such examples in specific areas.

If my value has already fallen by 20% from its peak, it really only needs to only fall another 10% before the numbers work as a income property, because these types of owners generally sit on their holdings long enough to wring out depreciation before moving on, often transferring their gains tax-free through a 1031 exchange.

It's not just an equation of prices and incomes: it's also one that includes potential rents and the availability and cost of capital to fund those purchases.

[FreedomCM]

Posted by: Ace | April 28, 2008 at 05:35 PM

A $250k house can be purchased with zero down for only $1482 a month. The median apartment rent in LA is now $1699 per month.
**************

Except you can't get a 0 down anymore. And most renters don't have $50k for a 20% down payment. And even then, figure PITI = ~10% with a little maintence, more if there is a HOA.

That gives you maybe $2100/month.

Are there a lot of buyers who make $100k, have a $50k down payment, and don't mind doing the work of homeownership?

That's why the rate of homeownership is so low in LA, where the median wage is low relative to the housing cost.

[mattress man]

"I have seen little evidence to show that the San Marinos, RPV, PV, 90210, or my home's area declining other than seasonally. Not even on any of these blogs....sari"

JUST WAIT FOR THE OPTION ARMs TO RESET.
THIS PRICE PURGE WILL MOTIVATE THE OVER
EXTENDED SELLERS IN PRIME NEIGHBORHOODS.
THESE WERE WELL-EDUCATED BUYERS WHO WON'T
BE ABLE TO POINT TO BAD AGENTS, LENDERS,
APPRAISERS, ETC. AS THE REASON FOR THEIR
PURCHASES... ONLY THEIR OWN STUPID GREED.

SAN MARINO HERE I COME !

[Ann]

A $250k house can be purchased with zero down for only $1482 a month. The median apartment rent in LA is now $1699 per month. It would be pretty unlikely for the median home price to go below the median monthly rent.

If the median approaches $300k, it will be cheaper to buy then rent.

Maybe the price of rent will decrease too? Who knows?

Posted by: Ace
_____________

Hmmm.....Ace, you need to add PMI (not having 20% down), taxes and insurance to that number.

Adding those to the $1482 in interest and principal will bring the cost of buying in above renting since all of thos will most definitely be more than another $217.

Traditional lending standards were not more than 28-31% of gross income for:

(1) principal and
(2) interest and
(3) PMI (private mortgae insurance if less than 20% down) and
(4) insurance and
(5) taxes

It is NOT just prinicpal and interest that make up the cost of the montly nut.

When all of those things (1-5) are equal to or less than renting, then it is the time to buy.

And yes, it is quite possible that rents will begin to fall as prices of homes begin to drop.

[B to the Real]

Another 20% means from todays levels. The decline has not started in the City. As people begin to search for options and find deals for 30% for less, the will begin to migrate from the City to the Valley and when prospective buyers see price declines in Silverlake at similar rates, they will buy in Silverlake instead of West Hollywood and so on... The ripple effects are long from over and the outer areas have been hit extremely hard. Its a matter of time before the prospective Valencia buyers realize they can buy a home in Palmdale for 50% if what they would pay in Valencia and there goes the chain effect. Its not rocket science. Its econ 101 and real estate 101. Not to be a pessimist, in fact I am bullish on LA in the long term, but we still have some house swapping to happen before this is over with.

Mr. Broad didn't get where he is by bullish (i mean fullish) investment behavior. Last cycle in LA there was a 3 year bottom before prices began to creap upward. Don't be in a rush. Housing isn't traded like stocks and will not rebound from the bottom, wherever that may be, over night (or a year for that matter)

The outskirts such as San Bernardino and RIverside have yet to see a bottom. Take a look at their income base, and you will realize there is still some ways to go before the median household income can afford below the median price even with a 20% down payment, even 40% for that matter.

I hate to sound negative, and I tend to not be, but, all in all, be patient as this cycle has yet to resolve itself.

[Doug in Toronto]

I've always thought that a house is "worth" what a willing buyer will pay to a willing seller. It's time to rethink that. A house now looks to be "worth" what a willing seller will accept from a willing buyer. A subtle change, but an important one. When I first bought my house (18 years ago), I was told that "house prices here double every 7 years". I'm still waiting; current data suggests that it's gone up around 20% over those 18 years. Not a great rate of return, but then I made an unusual decision when I bought my house: to live in it. Look at TLC or HGTV: all you see are programs where people buy rundown houses for a song, spend tons of money they don't have on tarting up the old place, and then expecting to double / triple / more-ple their money. Welcome to the real world, kids.

[DSL]

Mattress Man, if you look at the foreclosure by zip lookup San Marino has had zero this year and zero last year. This is not a crowd that buys homes based on resetting ARMS, this is a crowd with large down payments and healthy incomes. Personally I hope you are right as I am trying to get into this market, but I think it is very much wishful thinking. Prices might come down 10%-15% due to anemia in the surrounding areas affecting the sales prices of those looking to sell and trade up into the neighborhood. But the large "capitulation" people are looking for to spill over and hit San Marino and PV and other desirable areas like it has the IE or Paramount is a pipe dream in my purview.

[KAL]

Okay. Obviously a lot of people here buying into the doom and gloom. I'm not saying things are rosy, far from it but some of the comments on here are absurd.

I see this very simply. America in general expanded way too far from the metropolitan areas (where most people work). They sold homes in places MOST people don't want to live (hot as heck Palmdale or Lancaster or Valencia or wherever). To suggest that this will ripple out is absurd. We are already seeing the development ghost towns.

With gas prices skyrocketing, people will want to commute LESS AND LESS. What does that mean? People will not pay outrageous prices to live in the burbs. Those prices will come down HEAVILY (as they have somewhat already).

So, will prices come down in the city and in the "desireable" areas (such as the westside, Santa Monica, Pacific Palisades, etc.)? Of course. But I don't see the hit as being as bad as those far away developments. It just wouldn't make any sense. Closer commutes and nice neighborhoods will keep their value.

Just my two cents.

[B to the Real]

KAL I couldn't agree with you more. The more desirable areas always get hit the least. Price fluctuations will always be more dramatic the further you go out. The prices will ultimately hit the desirable area, albeit not as great, but they will. With a recover, the desirable areas will recover the quickest as well (in general). But the ripple effects will occur nonetheless.

Like I said, I am bullish in the long term for LA. Demand is huge, we have run out of land and the movement is back towards the city. With that in mind, condos can continue to be built, but the stock of single family homes for all intensive purposes and % of the stock, is relatively fixed (a couple thousand new sfd versus however many hundreds of thousands of homes is a minimal amount of new potential competition), as with condos, there can always and will always be newer and better buildings to compete with. So as history has always shown, the best areas recover the quickest and the condo market generally is the first to go down and last to recover (its a more elastic demand situation).

If I find a sfd 10% lower than todays listing prices in a nice neighborhood, you bet I am jumping on it. The 1990's were an unusual circumstance where 500,000 people left LA county due to the collapse of the old defense industry and since then, LA has positioned itself well to not be overly weighted in any one industry.

Commute times and value definitely commensurate with one another. But the best indicator is to think of a two person income, think of two starting attorneys (it is all about competition, right?) have a combine income of 200k +/-, this results in a starter home price of a certain amount, its a baseline for the competition in a nice area. Sure there are not a ton of people making that kind of money, but its what the market is ultimately based on, affordability.

Rents have grown a lot lately and will continue to. When you begin to see a relative cap rate in the 6% range, the market has probably stabilized. (A 6% return with 20% down) relative to rent, is probably beginning to indicate it makes sense to buy as opposed to rent. Sure its not about becoming rich, real estate over history really isn't about that. Its about finding a place your happy to live in that makes economic sense.

Enough jabber on this Eli Broad subject and enough of my philosophy on theory of real estate :) The real answer to all of this is, in my meaningless mind, is that none of us can predict the future. Buy a home when you can afford it and are happy to live in. The days of Flipping Out reality shows on Bravo are over. Sure some people will always make money on that, but peoples homes its not a get rich solution. Nor should it be.

There is always an entrepreneur in all of us, we just all need to remember these days about the real risk involved.