Why the housing crisis will be worse "out there"

There is a lively debate on this blog and elsewhere about whether the foreclosure crisis will make its way from the hardest hit areas — the Palmdales and Lancasters — into the center of Los Angeles. My suspicion is that the eye of the housing storm won't move much. Yes, the economic weather will worsen all over L.A., foreclosures will rise. But the most severe economic damage will take place in newer, recently built, far-flung communities that have already been hammered. And not just because of the bursting of the housing bubble.

Consider the effect of $4 gas. A 110-mile round-trip commute gets very expensive in a hurry. Consider that fast-growing areas such as the Inland Empire have suddenly lost a major source of economic vitality: home-building all the economic activity it creates and sustains.

But consider something bigger: the possibility that Americans are slowly deciding they don't want to live in far-flung suburbs and exurbs any more. This is the central argument of an essay by Christopher Leinberger in last month's Atlantic magazine titled "The Next Slum?"  The next slums, Leinberger asserts, will take shape in soon-to-be neglected suburban cul-de-sacs: " ...  many low-density suburbs and McMansion subdivisions, including some that are lovely and affluent today, may become what inner cities became in the 1960s and ’70s — slums characterized by poverty, crime, and decay."

Why? Leinberger sees a growing preference for "walkable" neighborhoods closer to urban centers, and closer to mass transit. He sees a glut of large-lot houses — he quotes one academic who sees "a likely surplus of 22 million large-lot homes."

Then what? Collapsing prices, and a decline in home ownership in wounded suburbs: " ... the fate of many single-family homes on the metropolitan fringes will be resale, at rock-bottom prices, to lower-income families — and in all likelihood, eventual conversion to apartments."

A caveat: This theory doesn't fit neatly in Los Angeles, where urban poverty has already spread its way into what were once middle-class suburbs. But it's still worth considering. 

Don't get me wrong. I'm not predicting the housing troubles and foreclosures won't spread into more affluent, centrally located neighborhoods. But the damage there will not approach what is already happening "on the metropolitan fringes."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: "Degrading images" in Palmdale, submitted to Your Scene at latimes.com by Frank.

Comments

[anonymous]

puckhead. are you pasadena or south pasadena? what are comp 3/2's listed for on your block? what did you buy yours for, what would you list it for? what do you expect to get?

what'd you report on your tax return? - just kidding

lots of zips in pas have fallen into accessable numbers already.ie do a search for 3+2 on zip realty in pasadena under 850 and you get 194 homes back and only 5 over 800 it starts as low as 300 for some shack - albeit the people in this shack go to pasadena public schools, which is why you have to drop the 20k per kid for the private school.

I'd say that's evidence of a serious correction already. but of course, we're just starting.

[NoWayinLA]

Sorry, I'm not buying it, Peter. The housing crunch is headed for the more affluent neighborhoods.

1) The subprime blowup is already well underway, but the option-ARM blowup has yet to begin. Lancaster, Inland Empire, and High Desert are NOT option-ARM country. Option-ARM country is OC, SD, and LA.

2) The subprime blowup is close to running its course. For example... a few years ago, a friend and co-bitter renter was outbid on a nice 4-bedroom with a pool in Riverside. She bid $350, and it sold for $405.

She's in escrow for that same house right now. $199, and all it needs is carpet and paint.

3) Even with the rising cost of gas, the savings between a 110-mile commute and a 10-mile commute is still much less than the savings on an $800k home versus a $200k home. You can always buy a Prius instead. At the very least, downgrading from the gas-guzzling SUV everyone owns to a small car will more than offset the difference in gas prices.

[toby]

I said it once. I'll say it again (and over and over and over again).

Pete, You're wrong about this. LA is a ticking time bomb.

They always, Always, ALWAYS say this. EVERY TIME!

LA wont get hurt, it's only going to be so and so. Oh sure LA will take a little on the chin, but all in all, LA will be fine. Oh and let's not forget the foreign investors. They always come when LA needs a home buyer (I rolled my eyes when I wrote that last one).

And with that, all I have to say is take a good look at Hollywood.

Or should I say, next year, when the W Hotel and the other projects come on line.

The LA Condo market will be the first to melt down, but believe me, the LA housing market is going to get hit just as hard as the rest of the state.

To think otherwise, well, is plain wrong.

[anonymous]

Hey, Anonymous.

Nice post. And on the money. Is the bubble cheering LA LAND bubble-pop cheerleader set cash rich? Relatively, most definitely. We've all been saving for 25-30% down for 850K lefty-area metro LA 3/2 shacks just so we might be able to afford the 3.5 - 4.5k 30yr fixed rate 6.5% mortgage on our measly 250K two-worker household incomes.

Now that it's coming back down and we're left with these downpayments that many of us have achieved and many more are tracking to....

oh boy, do we love those case-shiller graphs - best roller coaster downfall we've ever seen. and even better, bring on those interest rate hikes.

--anonymous

[anonoymous]

downtowndweller. you have to understand that the posting community is probably largely a suburban set. and not a bunch of ex-wiliamsburgers, or hollywood/LA between Vermont & the beach, the 10 and just north of Franklin crowd. So downtown seems a bit much to I guess the general community. but if you're an east coast, or west coast small liberal arts college person who listens to emo. downtown la is the shiz. i'm sure viles, living the bohemian journo lifestyle, w/his fashion designer wife, have friends downtown too. sorry you felt so marginalized by the general public here.

[rickstar1]

Most pheasants don't need public transportation because they can fly.

[Valley Observer]

I wonder what's going to happen to all the SUVs. People are presumably leaving them in the driveway already, and/or trading them in for something more efficient, but they are solid (definitely over-engineered for taking your kid to youth soccer) and should last a long time. They consume so much gas it's not obious that the 3rd world wants them either. Is there an industry that converts them back into the trucks they were originally?

[Carolina]

The author of this article is an egghead (professor) with a biased point of view. At least one of the blighted areas he referenced in Charlotte, NC was very poorly constructed in an overbuilt area. It is no surprise that this development has decayed rapidly into a crime ridden slum. This development is an exception for the Charlotte area and really shouldn’t be used as a generalization.

City life with a small living space, no yard work, and close amenities make a very nice environment for old people and young people without children. Families with children can’t resist the draw of the suburbs - big houses, nice yards, superior schools. Healthy kids need a place to play, a safe community, and excellent schools. For families with children, the suburbs have too many advantages for most to consider living in the city.

In knowledge industry based suburbs, full time commuting is rapidly becoming a thing of the past. Many savvy business setup satellite offices in suburbs as a recruitment incentive and encourage telecommuting all or part of the week. Cheap, fast broadband connections and secure network access through virtual private networks permit knowledge workers to collaborate and produce from any geography. If you are working on a virtual team with members in Europe, China, India, and various parts of the US it really doesn’t matter if you are working from your business office, or your home office in a really huge, safe, beautiful, suburban McMansion.

Rapidly evolving communications technologies, communications applications, and new business models have a growing impact on how we work and where we choose to live. It reduces or eliminates geographic requirements on employment. You can work for your employer of choice and choose to live anywhere. In this environment, most families with children are going to choose suburbs over cities. The suburbs are thriving and here to stay.

[Valley Observer]

"3) Even with the rising cost of gas, the savings between a 110-mile commute and a 10-mile commute is still much less than the savings on an $800k home versus a $200k home. You can always buy a Prius instead. At the very least, downgrading from the gas-guzzling SUV everyone owns to a small car will more than offset the difference in gas prices."

I think the main part of that equation was left out -- the 2 or 3 hours a day extra the long commute requires, not the gas money. Time spent commuting is important to me.

[brettdl]

Peter,

I tend to believe the high-end will be hit hard. As I recall the 90s in Los Angeles, the market crashed like a wave in reverse: from the exurbs back into the city.

By 1998, almost 10 years later, even parts of the Westside were still recovering. Prices were beyond my reach, but not by all that much. Prices then skyrocketed.

Looking from the overall perspective: it takes much more time for middle managers, executives and small business owners to get walloped by a downturn. I think everyone is simply forgetting the power of the average Joe to affect everyone in the economy.

I read that Atlantic article a few weeks ago and decided it was more an essay than a hard look at numbers. Many old suburbs evolve downtowns or attract colleges or good jobs and become quite urban-like in due course. Depends on city leadership.

People -- especially families -- will flow to wherever they can find employment, a good lifestyle, decent schools, low crime and low taxes.

[Perdido en el Ecuador]

Peter & others -

This is actually an old topic of discussion in the history of urban planning.

I think it would be interesting to see if the author really went looking at American cities, beyond the one or two examples he provided, for evidence.

As for the LA Metro in general, it can be argued that we have reached our "natural" boundaries and that most development now will be in-fill. This will probably be the case as long as jobs do no got to second- and third-ring suburbs, like Ontario or Santa Clarita. People are realizing how bad the commute from Victorville or Palmdale is to the major employment hubs, but if you only have to go to Ontario or Santa Clarita, fringe growth will continue.

Additionally, many of the suburbs build in Los Angeles were originally built for working-class consumers, in towns like La Puente and Bell Gardens. These towns and others like and near them have never been home to large middle class populations. I'm not sure if you will ever see true middle class sections of town, suburbs like Arcadia, Fullerton or Woodland HIlls, turn into slums. I would find that very hard to see, even considering the factors the author of the article provided.

Though I am not adamantly disagreeing with the author's thesis, I think he is buying into a very myopic and urbanist point of view that wants to see places like West Adams and Highland Park bloom. Now if you know anything about Los Angeles Unified and the quality of the housing stock in this locales, in comparison to Arcadia or Woodland HIlls, I cannot imagine married professions with children making this trade.

[pugtv]

I'd take Shockg more seriously if he replaces rhetoric with arguments backed by numerical / analytical support. I'd really like to understand his perspective. But alas ... all we get from him are rants ...

[Laker]

I work with a guy that lives in the San Berdo-riverside area next to the 215 freeway. He drives about 230 miles every day to work...
He now cries that he spend about $1300 per month driving 4 days a week to work. He also spends 4-5 hours a day driving....
He bought the house with 30% down...now he can't even walk away because he doesn't want to lose $180,000 of his cash...
This is a true story no a shockg story...
There are plenty of housing markets in US that you can find 4 bed 2 bath 2000 sf for $150,000. This should also be the price in the IE and lancaster / palmdale areas. However, there is a huge supply of houses in these areas and relative to the population it will create a supply/demand inequality and thus prices in these areas will be lower than comparable houses in Arizona, Texas, north Carolina, etc. The gas is a huge factor, and people will simply not live in IE and drive 5 hours a day spending $50 in daily gas...Some of these people will move in city apartments, and some to out of state.
In summary, IE and high desert areas will overshoot below normal. Median price will be $100,000-150,000 tops. Any short term investment in that area is doomed to fail. However, i do see the industry moving to these areas slowly as a result of tax incentives and general growth. But this will take 50 years or so, so if you want to by houses for spec in that area, your children will probably benefit from it when they get old...in the mean time, you will subsidize your tenants for 20-30 years.

[Tourist]

Even though I live in Miami, I read this blog almost daily since LA and Miami seem to be blood brothers when it comes to RE, immigration, crime etc. We do not have such a blog here, although I have thought about starting one. Here, we have seen incredible price drops. I have started buying. When I see condos within 2 miles of Bal Harbor in an area that is soon to have an LA Fitness and Starbucks around the corner (actually these are not my preferred places to work out and sip coffee,but I know a certain segment of the population believes they signify "upscale") going for 50 to 60 K. you cannot tell me we are not beginning to see the bottom.
I am seeing 2500 sq ft waterfront homes here (with no bridges to the Bay) going for 500K and units in bayfront buildings going for 160K. I have been in this game for a long time (long enough to know to sit on the sidelines starting in 2004) and I believe these bottom of the barrel deals will dry up within 18 months. Happy shopping.

[wattersedward@sbcglobal.net]

Sorry, but Downtowndweller sounds like a PR type under the employ of the downtown developers who, by now, realize that thier stuck with a slew of high end units that will never be filled. Don't feel too sorry for the developers though, your taxpayer dollars will be funding the conversion of these units to offices, warehouse space etc...

[jeff Huppert]

It's over.

[peter m]

"Leinberger sees a growing preference for "walkable" neighborhoods closer to urban centers, and closer to mass transit"

If folks want to reside closer to the big city(LA or Westside) for example, because of amenites and thrills of city living then fine, no problem.
In LA there are plenty of areas close to dwtn or westside within 10 mins/half hr drive and with abundant access to local metro. Here are just a few of the places:

Note: these are in most cases highly undesirable hood areas as far as crime, lower -end demographics, crapped out LASUD school system, hood pollution,ect. U truly have to be an urban pioneer and comfortable with the unpleasant realities of living in gang-infested areas/ third world milieu but at least u are close to dwtn, public transport, and all the cultural anemities of the big city. Just think of it as saving all that gas money and getting a dirt-cheap SFH unit or duplex at half-off from a $500,000 Overpriced, overrated Dwtn condo.

LA zip 90011 just south of LA dwtn. Within spitting distance of dwtn but a real nasty polluted 4th- world slumzone. Need a gasmask to get around some of those streets .

China town: 10 minites from dwtn but again rough slums and decayed aspect.

Boyle hts /East LA: 15-30 minites from dwtn. Amazing old rundown decayed near- historical buildings pockmarked with abundant graffiti . Here is storied Hollenback. Abundant metro access but u have to really be confortable living in a tijuana zone. BTW East LA has heights just like silverlake with wonderful views like highland park.
.
Westlake /rampart district: 10 minites northwest of dwtn.
Beautiful examples of third- world decayed tenement stews packed with just- arrive immigrants but housing would be dirt cheap here. Closer to dwtn that silverlake and great access to metro.

Korea town: hopping eclectic mismash of immigrants and busy Asian shops , wonderful diversity and ethnicities, good upcoming deals here on multi-units. Here u can see the dwtn skyline less than a mile away. Slummy and decayed in large parts but where is that brave urban spirit?

[Anthrodiva]

Let's not forget, there is Riverside, and then there is Riverside County. San Bernardino County, and cities like Rancho Cucamonga and Chino Hills. The variety of housing and neighborhoods out here is like anywhere else in SoCal.

You have the healthy 'core' of Riverside, and while prices are dropping, it's not going to vaporize having been here since 1875. Anywhere you have a fully developed economy will fare better than places built on nothing but hot air and dry wall.

Then you have the McMansions of Murrieta (which are OC commute dependent) where I see a chill wind coming, and the High Desert build out of places like Victorville where I agree with everything said above.

[NoWayinLA]

Valley Observer: "I think the main part of that equation was left out -- the 2 or 3 hours a day extra the long commute requires, not the gas money. Time spent commuting is important to me."

Indeed. That's the choice everyone makes when deciding on the burbs or the city. But people have been living in the burbs for decades anyway. Some people value the quality of the time they have away from the city even more than the time they lose on the road to get there.

I'm one of the SoCal escapees, and I still chose to live one hour away from the city where I work. The quiet and the space appeal to me. The quiet, the big yard, and the occasional deer wandering in all are worth the extra 2 hours a day. I pay the price with the long commute, but the reward is that my family gets to be in this superior environment all day long.

Living downtown would mean terrible traffic and no place to play. Plus, with the difference in housing prices, we'd be eating ramen noodles every night. The concept of house-poverty is not more desirable than a two-hour savings.

To each their own.

[Ace]

Peter, I think you are way off with this post. The 'out there' areas will be harder hit because their incomes are way out of wack with their home prices. Gas prices are so minor that they don't even enter into the conversation.

A lot of the areas that will really get slammed are the areas where they built a lot of houses in the last 10 years. They don't have the stable neighborhoods where half of the resident own their homes outright. They will have more desperate sellers who will drive the market down.

About gas prices, I get so annoyed with everyone complaining about gas prices. Unless you own an airline or fleet of tankers, the increase in gas should only affect the lowest income families. Most people only spend about $200 a month on gas. Even if gas goes up 50 percent, it will only cost you another $100. If you are living that close to the edge that $100 will break you, you have much bigger problems than gasoline.

Everything is getting more expensive. Adjust your budget or getting a better paying job.

[puckhead]

"lots of zips in pas have fallen into accessable numbers already.ie do a search for 3+2 on zip realty in pasadena under 850 and you get 194 homes back and only 5 over 800 it starts as low as 300 for some shack - albeit the people in this shack go to pasadena public schools, which is why you have to drop the 20k per kid for the private school.

I'd say that's evidence of a serious correction already. but of course, we're just starting"

Pasadena is pretty diverse. Some neighborhoods are no better than what you find in Sout Central LA. Some neighborhoods are huge mansions on mega lots. You can't really tell by zip code. Some of the "lesser" areas of Pasadena are getting hit pretty hard, I see lots of for sale signs. All I know is there are not a lot of for sale signs in my neighborhood and the houses that do go on sale sell in about 1-2 months, instead of 1-2 days in the crazy bubble years. I think more than anything, it's just getting back to normal, which is good.

Another poster said that good school districts will put a bottom on some cities. I can't agree more. Within the last 2 months I've had two friends trade up houses to Arcadia and La Canada soley because of the schools. They were not concern about falling prices because they plan to be there at least 18 years and they saw it as an investment in their kids. With so many school districts falling apart, the ones that can keep up their test scores will see high demand.

[peter m]

http://bp3.blogger.com/_nSTO-vZpSgc/
SBQUxjh7ciI/AAAAAAAAChM/KFGceHLosIQ/s1600-h/
CAR-%25decline.png

This is a report and table from CAR on YOY declines in housing prices in all CA major regions. In case the link dosen't work i will make a few summarization points on selected areas. The data are for SF detached Homes. Data Month is for march 2008 and Percent change is from peak prices usually from summer 2007 though some areas peaked earlier or later.

Los Angleles dropped from $616,000 to $431,000, a percent drop of 29.90% and $ decline of -$184,280.
That is for average of all SFH's in LA .

High desert dropped -30.37 % and average prices for SFH's down to $253,214

IE is down -33.37% and SFH's dropped down to $276,630 . Since the IE is 95% sfh's many of them large 4/3's this is more significant .

"The median price of an existing, single-family detached home in California during March 2008 was $413,980, a 29 percent decrease from the revised $582,930 median for March 2007, C.A.R. reported. The March 2008 median price fell 1.3 percent compared with February’s revised $419,640 median price"

I know, i know. It is the lower marginal LA ghetto crapburgs with zillions of foreclosures pulling down the median for LA . % drops of
-40% in Paramount, La Puente, Compton, or other cesspool zips has nothing to do with 1.5 million $ prices in the Manhattan Beach riviera.
Wrong, those pricy beachside shacks will drop -30-40 % by end of 2009. Maybe sooner. All it takes is several distress REO's/short sales/forced sales in a hi-end zip to pull down entire area, and the distress is coming hard on the heals of the worst recessionary/ deflationary collapse since the great depression. Interest Rates are slowly going up and this will put another dagger into overpriced westside/beachside RE

All links and quotes are from Mish's Blog, a completely reliable honest no BS source.

[Stephen]

This will be true. Just google terms "Peak Oil", "Global Warming", and "Sustainability". Also, see the movie "The End of Suburbia" as well. Suburbia was designed on a abundant supply of very cheap oil. Now that oil is getting expensive and scarce, this model cannot continue much longer.

[Rich]

This one gave me a chuckle because when I worked in the architecture library of a right-coast ivy-league school whose name we dare not say back in the '70's the big urban planners and architects writing all the books were convinced that the American suburb was going to die, etc., with virtually all of the same arguments hashed out by Leinberger. Didn't happen then, not going to happen now, and not going to happen in California or Boston. The reasons are numerous, some having to do with the better quality of life in suburbs even with commuting; some having to do with the freedom afforded by the automobile; and some having to do with the inherent problems of cities. The occasional burst of reconstruction of downtowns in decaying cities, such as was seen in the '80's and in the recent bubble, are about as much urban rebuilding as you can expect to see in the future without a massive shift toward government-sponsored urban planning including public transportation; and the seedy but tranquil quality of life in aging exurbs across the US is not going to get any worse, except to the extent that density turns these areas back into cities.

The urban planners and architects are idealists influenced by a literature heavy on European socialists who live in a successful urban environment and can't understand why the American suburban environment doesn't collapse as they expect it to...

[flip]

What this article (and post) fails to factor in is the TREMENDOUS condo/apt boom in some parts of Los Angeles (dwntn, hllywood, miracle mile, for example). Foreclosures are certainly popping up slower in better neighborhoods, but prices are coming down just the same. If we are in a recession (or entering one) I don't see the demand for all these new units - many which are hitting the market now and through 2009. There will be a lot of pressure to fill those rooms, which means lower prices, less profit, and more pressure on banks to collect on the developers who needed financing for these properties. If I recall correctly banks are not doing so great already, and we have another wave of ARM resets coming soon. Depending on how the recession hits LA will probably affect the housing implosion in LA. And my feeling is that it's going to bad, but that's my $.02.