'No sign of a bottom' for housing

The monthly Case-Shiller numbers -- the ones based on repeat sales of the same house -- show L.A. housing prices fell by 19.4% over the past year, the L.A. Times reports at this hour.

The latest Case-Shiller report, for February, indicates Los Angeles prices are falling at an accelerating rate, dropping 4.3% from January to February. Of the nation's 20 larges cities, only San Francisco (5.0%) and Las Vegas (4.8%) experienced steeper price declines.
"There is no sign of a bottom in the numbers," said David M. Blitzer, chairman of Standard and Poors' index committee.

If you want to know where the housing bubble was biggest, just look at the cities now suffering the biggest declines:

1) Las Vegas   down 22.8%
2) Miami        down 21.7%
3) Phoenix  down 20.8%
4) L.A.-Orange County  down 19.4%
5) San Diego   down 19.2%

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo credit: Associated Press

Comments

[Figgins]

Peter,

I pointed out this trend about two weeks ago, after reviewing the avg sales prices you posted on the blog. The pendulum is gaining speed. Just as a pendulum swings, we will experience a price drop more severe than a correction before prices start to rise.

If you can time it right, you can buy at below "true" value before this is through. We all know about the "greater fool" when prices rise, but the opposite also exists - those who will sell no matter what because they think the price will never recover.

[John]

ouch.. and remember for some places those percents may represent a 50,000 dollar drop. In LA LA land and OC these represent drops of 100- 300 k...

Ouch...

[Ttown]

My fiancee and I are planning a wedding in September and have been looking for a starter home (1400-1800 sf) on the Westside of Los Angeles for a couple of months now. We currently rent separate apartments with roommates in Santa Monica and Venice. We see ourselves as exemplifying the average buyer in this particular market-- we both work on the Westside, are college educated and pursuing MBA's, and have a combined income of about $220K. We have estimated that we can spend between $700,000-$760,000 on a house (with 15-20% down) without stretching ourselves too much. The amount of decent houses in this price range is pretty dismal. We have 2 offers on 2 different houses in this price range (one is a short sale and the other a bank owned property), one of which has 7 other offers on it and the other one which has 2 other offers on it. The prices on these 2 properties has been bid up due to the high demand for houses in this price range. If our bids aren't accepted we will probably just rent and try to get a 6 month lease to see where the market heads. I know a lot of other people whom have similar backgrounds as us who will enter the West LA market when the amount of houses in this price range increases.

[mike]

this price decrease is only affecting the lower end portions of l.a. county such as lancaster and palmdale.

[MyLessThanPrimeBeef]

'No sign of a bottom,' says our S&P man.

You have heard of topless, well, this is bottomless.

It's naked, as pornography should be.

[not mike]

Just keep telling youself that, Mike, and everything will be OK. Just remember to click your heels.

[tbgpalisades]

I'm not trying to be facetious, but if you only have $220K income - the west side of LA is out. Better look to Mar Vista or Sherman Oaks. Not many new buyers in the past 5 years on the West side with under $300K income.

[cbk16]

Long term this is good new for our economy. When the average family makes 50K, 700K average prices for homes means only investors can afford homes, everyone was being prices out of the market. Now there is hope that our children can afford a home. Hopefully the governemnt will not allow sub-prime loans and investor lones when we have hit bottom so the crazy buble increase will not happen again. Now if we can just figure out how to bring down the high cost of Gas, the real threat to our economy....

[anonymous]

Banks are controlling the acceptable sale price (this is not the same as a listed price) right now. They have a huge inventory in the distressed markets:

Here are the five areas that had the highest foreclosure rates in the first three months of this year:
1: Stockton, Calif., 1 in 30 homes in foreclosure

2: Riverside/San Bernardino, Calif., 1 in 38

3: Las Vegas/Paradise, Nev., 1 in 44

4: Bakersfield, Calif., 1 in 51

5: Sacramento, Calif., 1 in 55

Source: RealtyTrac

They won't unload all this inventory for, what was the last figure, 14 months?

There are actually two products in this market right now: 1) trashed foreclosed homes and 2) immaculate homes being sold by someone other than the bank.

If you've been house hunting, you'll see a lot of #1s and maybe a few #2s, but most in the second category aren't even listed.

[NationalBubble.com]

You can watch David Blitzer from S&P discuss the horrible real estate numbers on CNBC. Pay attention to what he says about the “hidden supply”. Very interesting.

http://tinyurl.com/3voj3x

[Robert in Palm Springs]

We can extrapolate from the above markets that Palm Springs is experiencing similar declines. From shopping the market for over 2 years, i know this is true, at a minimum.

If you don't have to buy a house now, don't. You can tell that the downward momentum (see other story on blog), is growing in velocity and size. For example, in Miami, most of the large condo projects haven't even been completed yet, so inventory will soar when they are, putting more downward pressure on prices.

The same is true for the entire economy: it is growing weaker faster than it was and will continue to do so. The danger is far from over, in fact, it is just starting.
The drama should get really interesting around the time of the election. I have yet to be impressed by any candidate's understanding of the financial crisis we are in, much less have any solutions.

What a pathetic mess we have created for ourselves! We all share some collective responsibility for allowing this to happen, some more than others, of course.
On that note, I think a cocktail is in order!

[William Steinberg]

We sold our place in Encino in June 06, and did great. We bought 4 units in the Pico/Fairfax. While rents remain high, what's happening to the value of the property? We get mixed signals from RE agents. Will the prices of bldgs. like ours stabilize before the single family market or after or what? Has the value of rental properties gone down as much as single family dwellings? Info in this area seems rare.

[Arti]

Peter,

When are you finally going to devote a blog post to the one question on everyone's mind: in the face of these relentless declines in LA, non-condos in the westside of LA and Santa Monica have remained relatively untouched--why?

Please open that up for discussion already.

[Cal]

William,

If interest rates go up and rent growth doesnt rise to compensate then the price of income units prices drop. That is just basic math regarding capitalization rates.

Of course new investors coming into the market might be asking for higher capitalization rates then you did when you purchased and if that is the case values would be down. If the capitalization rates they are looking for went down your value went up.

So ask agents dealing with investors what capitilization rates they generally are looking for (or recently have purchased at) and compare that to your own. If you take your net income and divide it by the capitilization rate that the market is currently implying it would give you a ballpark figure for your place.

My guess is capitalization rates have risen because they were pretty low near the end there.

[jag]

Arti,

Why don't you provide us with the Statistics of the Westside of LA and Santa Monica yourself? I'm really interested in seeing 2005/2006 compared to 2008 figures.

[x-man]

Arti,

The nicest areas will be the last to fall. Right now a 1.5 M house with 20% down, you are looking at 8500 bucks a month just for the mortgage. NOTHING is moving between 1-4 million anywhere in LA.

Most of those people listing those homes have ARMS and are facing a reset in the next 6-30 months. They can't reduce their asking prices--they owe more than the home is worth. You will see an avalanche of shortsales on the west side starting in June and continuing for the next 3 years. It will knock 50% off prices in NOMINAL terms before it bottoms.

There is no way to stop this, no bailout is possible, with the securitization issues. And there will be massive outrage (rightfully) so, for letting people with multi-million dollar homes get tamp downs.

Patience. The contagion has decimated the valley, has Los Feliz on the ropes and the first symptoms are just popping up on the westside. There is no escape.

[househunting]

There are actually two products in this market right now: 1) trashed foreclosed homes and 2) immaculate homes being sold by someone other than the bank.

If you've been house hunting, you'll see a lot of #1s and maybe a few #2s, but most in the second category aren't even listed.

Posted by: anonymous | April 29, 2008 at 02:57 PM

I guess that depends on where you are looking, HB, Costa Mesa, FV - I have yet to see a "trashed out, foreclosed home" and yes, I have been looking at foreclosures. Also there are lots of nice houses not foreclosed and for sale, there are several brand new, foreclosed and never lived in. And those $2.5 million homes right on PCH? At least one has come a cool million off the asking price to $1.5 mil prox. Nice, huh?

[Enlightenment]

All housing prices in California are going to fall, even the higher priced houses. It is just a matter of time, and if you think otherwise, you are just a fool in denial.

The recovery is far off. It always takes time for a bubble to burst and drop down to the bottom before it recovers, but now that we throw in HIGH GAS prices and HIGH FOOD prices and INFLATION, the housing recovery is going to take longer than if INFLATION of consumables were NOT happening.

Warren Buffett, the world's richest person, said on Monday the U.S. economy is in a recession that will be MORE SEVERE than most people expect.
http://www.reuters.com/article/ousiv/id
USN2847461420080428

Screw the economy. I'm going to save myself and conserve, because the government isn't going to save me like it did for all of the greedy housing liars.

[Tokyo Temp - ex LA Renter]

To TGBPalisades,

So you are telling me that people making in excess of 300k a year want to buy those crappy 1100 square foot/6000 square foot lots, post WW2 ,prefab piles of crap for 800k?!

All the people I know who make that kind of money, and I know quite a few, would not want to buy any of those Culver City or WLA piles of crap for anywhere near the asking prices.

In 2001 I was making about half the 300k salary and I could of easily afforded a half way decent pile of crap in Culver City, but I wasn't ready to buy, but now, just forget it!

Did everyone, besides me, start making such huge salaries? I make more but not that much more

No one I know suddenly had their salaries doubled and I know people of all different income levels. From airport workers, software engineers to visual effects artists and supervisors, and everyone is making about the same. And all these people live on the West side.

Though this is anecdotal, a lot of people I know through friends and acquaintances,I've heard were buying homes in the West side with ARMs, I/O loans and the like, but those loans aren't up yet! And I'm sure there not alone! So the West side will take time.

Again I can't imagine why some of these big earners would want to buy the crap that is available.

In most other parts of the US, people I know making that kind of money are not paying 800k - 1M for those 3/1 - 900-1100 square foot boxes on5000-8000 square foot lots. Only in California!

Though, I won't even talk about the craziness going on here in Tokyo! Makes West LA look dirt cheap.

[sfvrealestate]

Arti, re non-condos in the westside of LA and Santa Monica have remained relatively untouched--why?
-- because there's still high demand and the demanders over there make a lot of money. Ttown's post answers this question.

[puckhead]

“The nicest areas will be the last to fall. Right now a 1.5 M house with 20% down, you are looking at 8500 bucks a month just for the mortgage. NOTHING is moving between 1-4 million anywhere in LA. “
This is a common misconception. A buyer of a $1.5M house will either;
A) Roll over large amounts of equity from an existing house so they’re not paying $8.5K/month
Or
B) Put a minimal amount down because interest rates are low and their money can be used elsewhere to earn a better return.
Either way, they usually have enough liquid cash available to meet the payments. You don’t see very many people with mid to high 6 figure incomes living paycheck to paycheck. And even if they do go belly up on the house, people are underestimating how much money there is floating around SoCal, and people with money won’t be buying some McMansion in Palmdale. They’ll all be chasing the same houses in the same neighborhoods that we all lust about.
Nothing moving in the $1-$4M range in LA? Check the sales in the South Bay, Santa Monica, La Canada and San Marino. Sales are slow vs bubble years, which is good. But people are buying.

[Robert in Palm Springs]

If you want to see a lot of trashed out vacant new or foreclosed homes, go to Desert Hot Springs. It looks like the Dust Bowl era.

[KingHorse]

I'm with TokyoTemp. As another poster pointed out, when the average family in the US makes 50K, these prices are still through the roof in terms of what a consumer economy with sinking/flat wages can support. As usual I seem to be the lone NYC metro area lurker on this blog and so my metrics are superficially different, but the basic situation's the same. My combined DINK household income is around 150K -- not as impressive as Ttown's but apparently still 3x the nat'l average. Still, I'd been cruising listings up to 700K, thinking I could swing it (we are also debt-free). Ttown's story reminded me to get real and wait another year or two. Friends, if even they can't afford a house, it's still all priced wrong.

[alex]

YEA!!!!!!!!!!!!

[Hank Venture]

Peter, it's like you don't even read your own blog: shockg called the bottom yesterday.

[dusting off hands]

I'm glad I could clear that up for everyone.

[peteviles]

Hank Venture wrote, "Peter, it's like you don't even read your own blog: shockg called the bottom yesterday."

Thanks, Hank. I caught that. I think ol' shockg is a little itchy with the trigger finger. Now, Lefty, if he calls a bottom, that's a horse of a different color.

[Laker]

shockg, check out my modest blog (click on my name posted by laker:)
I put my prediction with pink line and your prediction in yellow line.
Let's see who is going to prevail....
If you ever learned physics, chemistry, electronics, or any science, you would know that economy is like energy - it never disappears but just changes form or type and just transfers.
Also, from math, prices might have spikes and jitters, but generally, pricing curves are smooth over long runs. Also any disturbances tends to return matters to equilibrium. For our case that is normal prices as they appear to be during the last 100 years adjusted for inflation. Now you tell me, I'm wrong...
I might be off in timing and numbers, but the general shape of decline is absolutely correct. There is no way out, and so far Case shiller is almost exactly fit to it.
Enjoy.

[santamonica]

A town home in the north of Wilshire (Santa Monica) was sold (short sale) recently for 660k. The last owner bought it for 800k in 2006.

Also I heard there were 9 offers for another town home nearby after the listing price was reduced from about 1m to 810k and sold above the asking price though

Price in the west side will come down, just be patient

[Long time listener . . .]

I think this is the newest argument of perma-bulls regarding the West LA market: only households with income over $300k bought there, and they are immune to the downturn, so they will just hold out until prices come back. This is a nice twist on the generalized bullish (delusional) view that prices in my neighborhoood won't decrease but its too nice. When you look to census data and other demographic information, its clear that very few households relative to the number of houses in West LA make over 300k. In the toniest zip code of 90210, the median income is 112,572 using 2000 Census data. That is amazingly high compared to the surrounding zip codes (only 90077 at $141,527 and possibly 90067 have higher household median incomes, while all others are no higher than 70k median household income, and most are in the 40s and 50s.). Now in 90210 and 90077 more than 30% of households have greater than $200k income, but that is certainly not the case in any of the other zip codes. And its probably much less than 15% that have household incomes greater than 300k. This pretty much decimates the myth that everyone who lives and owns on the westside makes a ton of money. Its just not true. While there are greater numbers of those people on the westside then in other places, the supply of houses is greater than their numbers.

All this leads to the conclusion that even the westside's run-up in prices was not driven by the increased demand of rich people, but rather the increased availability of exotic loans and cheap money. As such, it will eventually come back to a point in line with historic norms of affordability for that area, around 4x median income, or around 300k median for all of the westside, with Bel Air, Holmby Hills etc. remaining ultra-rich enclaves. Just look at prices in 2000 for Santa Monica and Westside. That's where we're headed, because that's what the population of buyers will support. Incomes have not increased over those 8 years, and now that we are back to prudent lending practices, prices will return to normal.

Although it is apparently very difficult for home sellers to remember what normal looks like.

[puckhead]

Long term listener,

A few holes to poke in your argument;

1) Median income will never equate to median home prices. Most areas of SoCal, and especially the Westside, has a large rental population. It’s more realistic to say that you have to be around the 75% in household income to even afford a house on the Westside.

2) Trying to match household incomes to median home prices does not take into account all of the families that have lived on the Westside prior to the bubble years. I don’t live on the Westside, but I live in a neighborhood where houses go for $700K-$1M. Many of my neighbors have lived in their houses for many years and based soley on their household incomes, there is not f—ing way they should be living in their house. But they do because they bought there houses 15 years ago at $200K.

3) If houses in the Westside ever approach $300K, I will whip out my checkbook and write a check and buy a house. And I don’t consider myself “rich”, just doing OK. There are many many many people doing way better than me willing to buy at those levels.

[deanfv]

All you out there who think the west side, malibu, bh etc prices won't fall are NUTS. Simply irrational to think that an asset that doubles in price cannot fall by one-half. NUTS.

80% of buyers using jumbo mortgages in Callifornia used stated income on the application. So yeah, they made $300k a year ON PAPER. Those mortgage products are gone. LEt's just say that 50% were lying about there income. That means 30-40% of the buyers are gone.

Demand is down: No exotic mortgage products at low teaser rates does that to demand.

Supply is UP, way, way UP: foreclosures and distressed sellers will do that to supply.

West Side = You're FACKED, just like everyone else.

[Long time listener . . .]

Puckhead, let me address your arguments. This is by no means an ad hominem attack, just fleshing out my reasoning.

1. Median income will always equate to median home price. Always has, always will. Its just that in LA that relationship is different than other parts of the country. During the last housing bust in the mid-90's the ratio of median price to median income dropped to slightly below 4x. That is still higher than what is typical in most other parts of the country where it is historically around 2.5x. This correlation holds true regardless of what section of the population is owning/buying a home. Historical trends are historical trends for a reason. The reason the ratio is higher in LA is exactly because more people rent and less people own. Its just more expensive. But there has to be a correlation to incomes. If so many people rent, then landlords have to be able to buy at a price that makes economic sense. If prices don't come down, landlords cannot do rent at rates that make economic sense.

2) This is exactly my point. These families bought when typical middle class families could live in typical middle class neighborhoods. That is the historical norm, and recent history is the aberration. If your neighbors bought 15 years ago at 200k, just run that through a CPI calculator, and you have what should be the price today.

3) If you can write a 300k check, that you are doing very well. In fact, you are rich. You just don't think so because you are comparing yourself to the uber-rich. But you are doing better than 99% of people out there.