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

[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.

[Amy]

I love reading these old posts.

Since April 2008:

- Global financial crisis
- Unemployment in LA is almost double digits
- The state of CA is bankrupt
- $0 down home loans have disappeared
- Rents have declined
- The population of the city has declined (so much for "we ran out of land" LOL)