Reduced: Prices falling in expensive neighborhoods

The L.A. Times' Peter Hong reports this morning that the luxury real estate market is beginning to crack. Homes like the Beverly Hills mansion at left are being reduced in price -- this one was originally listed at $12 million, then reduced to just under $10 million.

"Median sale prices fell by 13% in Beverly Hills in April, compared with the same month last year. Rancho Palos Verdes dropped 18% over the same period, while Newport Beach's 92660 ZIP Code took a 34% hit, according to DataQuick Information Systems."

More: "Experts say these areas and others are catching up with price declines that struck first in outlying suburbs such as the Antelope Valley and the Inland Empire, where many first-time home buyers purchased their properties with sub-prime loans.  'You can't have one market hugely cheaper than another forever,' said UC Berkeley professor Thomas Davidoff, who specializes in real estate."

I'm curious to hear your thoughts on this story, as this is one of the two or three most-discussed subjects on this blog: whether expensive neighborhoods will eventually see large price declines. I know many of you have been waiting and hoping for significant declines and haven't seen them yet in your neighborhoods of choice. Thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: Los Angeles Times

Comments

[TakeFive]

Tim K. wrote:

“last year you would be hard pressed to see any [Pasadena] REOs selling for less than $400K, and now it is common to see a new one pop up almost every week.”

Let’s grab a beer and drive over to take a look at it. Most of these are in NW Pasadena – not really the expensive area I was alluding to. But I will concede that it is now possible to get into Pasadena for under 400K.

I liked this note on one of the listings [Redfin]:

IF YOUR BUYERS HAVE A VISION AND CAN IGNORE THE MESS, THIS COULD BE A PERFECT HOME. .. .

[Arti]

Thanks for remembering me Someday! You do have me pegged. It's frustrating to work so hard to squeeze out 250k, 300k or whatever per year and all you can afford with that salary is a 700-850k mortgage which gets you a very average two bedroom condo in the westside. I could rent that right now for 2k a month. Makes no sense whatsoever, where are all the people making the 500-750k a year you need in order to afford the median Santa Monica three bedroom shack? Only way I could do that is by marrying a serious earner and give up the cute trophy housewife dream. I'm not going to give up and do that, no, this will not happen in my America. I will wait this out.

[Tim K.]

TakeFive - I do agree these are mostly in the NW area of Pasadena, but you have to admit, even those DID NOT EXIST even last year.

I'm not arguing that Pasadena is affordable NOW. I'm saying that it is undergoing the same downward trend as every place else - it's just starting from a much higher place.

Yes, even the expensive places you mention are going down. See all those nice 3-2 bedroom homes in Hastings Ranch now asking $800K? Those were asking 1.2 million only two years ago. *that's* progress. And it's only continuing to go down.

[puckhead]

Ah leave it to Laker to cherry pick data points. I would hate to pick Laker for a pick up BB game because he would hang out at the half court line and cherry pick cheap baskets. Laker states that Rancho PV declined 18% and Newport Beach 92660 declined 34%. But he completely ignores farther down in the article that adjacent Rolling Hills INCREASED by the same % decline as PV and that Newport Beach 92663 INCREASED 66%. Me thinks that if you look at the volume for all 4 locations, that volume is so low that one cannot conclude anything from the data.

So Laker thinks that the high end will crash/decline more than the low end. Is that decline measured by $’s or by %? If you’re talking $, then it’s not much of a prediction. If you’re talking %, then I get to write a check and buy my dream beach house. The only problem with that scenario is that I may have money, but there are waaaaaaaaaaaaaaaaaay more people that have more money than I do, are they going to sit back and let me buy a Manhattan Beach house for $400K? I can only hope that day will come, but I don’t think it will.

[Cal]

"Me thinks that if you look at the volume for all 4 locations, that volume is so low that one cannot conclude anything from the data. "

Not about the specifics of those zip codes, but low sales volume tells you all you need to know. It is a denial of the market conditions as they exist. Not selling is NOT selling, it is data in and of itself. Are many homeowners on the high end hoping to stick it out? I think so. The question is whether they can or whether its a good idea (inflation and carrying costs).

The prevelant thought of "It can't happen here" is running into the reality of "It is happening here". We will see which wins out.

[150 multiple choice questions`]

Puckhead, I really doubt you're so stupid (although I'm starting to wonder) that you can't understand the idea of some areas are more expensive than others, but by a premium amount and price connected to the adjacent areas, more distant areas and reality? Peter, will you please ban Puck from the boards if he writes the words "400k in Manhattan Beach" again?

I agree the article was fairly middle of the road/useless, but if you look at trends you can see some interesting and important things. That sales are so low in the more desirable areas (and # of listings are way up) shows a HUGE change and is similar to what took place in the now imploding areas 6-18 months ago. Also, note the fact that NOWHERE was showing median declines 12-24 months ago. Now all the lower cost areas are as are many (most?) of the more expensive areas... median is a poor indicator but it can show trends. There's no question things are much different.

[solvent]

puckhead - yeah, I totally agree with you. the very second a house in Santa Monica, Venice, Palisades, Hermosa or Manhattan Beach drops to even $550k (like THAT's even gonna happen), there will be bidding wars, and the first to lose will be the middle-income folks whose strongest financial asset is the belief in their own entitlement to live in highly sought-after neighborhoods such as those.

Even amidst an economic downturn, L.A. will still be flush with intelligent, high-income earners whose buy-now pricepoints for a house in a good neighborhood is still way higher than the average earner.

[Jeremy R]

"THE talented middle class are leaving los angeles. There are no new rich class who would be stupid enough to buy a palace in los angeles. If you have a chance to work outside the cesspool called Villagroisa's reconquista land, wouldnt you? the untalented middle class who cant go anywhere would just keep paying taxes for the Mayor's people. Sooner or later, this town would just be like Mexico. The rich scr---ing the poor with not middle class. If I were you, I would leave now."

Liz. Not everyone hates LA. I happen to like it quite a bit. I am very skilled, and so are all of my friends and co workers. I agree that the middle class is leaving, and that LA has its problems, but PLEASE do not presume that I am here by force.

THat is a ridiculous assertion.

[tealeaf]

solvent:

unfortunately things happen on the margin. not-so-intelligent people bought in with suicide financing or levered up to an irrational amount. Yes, even in high end areas - I can think of quite a few twenty-something loan officers and RE agents that made serious coin over the past 7 years.

there are "sell now" price points, as well - and based on the scant volumes, they are even further down than the decelerated prices suggest.

[JEremy R]

"THE talented middle class are leaving los angeles. There are no new rich class who would be stupid enough to buy a palace in los angeles. If you have a chance to work outside the cesspool called Villagroisa's reconquista land, wouldnt you? the untalented middle class who cant go anywhere would just keep paying taxes for the Mayor's people. Sooner or later, this town would just be like Mexico. The rich scr---ing the poor with not middle class. If I were you, I would leave now."

Oh yeah, I hate how evreyone thinks LA is mexico city. NYC is lauded as a historic international city. NYC is 60% black and hispanic, and only 35% white, and 10% asian. If you swap 15% of NYC's blacks for mexicans, NYC would be just like LA demographically, except it has all the pretty towers to wow people!

If you dont like minorities, move to Portland.

[jimmy]

Hate to bring the bad news. Prices in Newport, Manhattan, Santa Monica are not falling. These are foreclosure free zones that feel no pain. Sales are slow, but sales are usually slow in expensive areas. That means nothing. I feel sorry for many who decided not to buy near the beach years ago because it was "overpriced". Now, it is even more "overpriced". Wait five more years, and it will even be more "overpriced". Now is your only change to get in one of the beach areas. For now, the prices have stopped rising. Soon, they will be rising again. Don't wait for them to fall. They won't.

[Long time listener . . .]

Puckhead and Solvent, can you explain why you could buy a house for 400k on the Westside, in Manhattan Beach, and in Santa Monica in 1999? Wages haven't gone up, the same amount of people make over 200k now as then. What has changed such that there is a tsunami of waiting buyers who can all afford 550k houses under traditional (read pre-2001) lending standards?

While I am a big bear on the housing market in LA, today I was looking at rentals, and I began to think that it may make sense to buy if the right property got within throwing distance of rent. Plus I wanted to see what I would qualify for with the new FHA lending limits at $729,750 for LA county. So I went online to see what I would qualify for. Well, with a salary of $225,000, run through the Ginnie Mae calculator yields an FHA loan qualification of only $363k. Well that doesn't get me much. Ginnie's calculator yields a maximum loan amount with conventional loan of $672k with a down payment of around 119k. Tell me what I can get with either of those options. The FHA Loan gets me nothing in LA for my family of four to live in. The conventional loan may get me a crappy 3/2 in a so/so neighborhood with bad schools. And that option requires me to pay 50% of my salary in housing costs. Now how many people in LA make 225k/year and have 120k saved up for a down payment? The answer is not very many. Not enough to fill all the for sale houses on the Westside and in the beach communities. Not even close. And those that do don't want to live in the houses that they can "afford" right now.

[culver]

It's a weird time. We just had a house on my street in CC sell in 1 week with nine offers, all over asking. Another listing closer to downtown CC went over asking with 19 offers.

Then again there's an idiot in my neighborhood with a 2+1 asking 1.4 million for his place. When he drops it to 600 will that really represent a 60% price reduction? I don't think so.

[puckhead]

LOL’s 150 point multiple choice?!!!!!!!!!!!!! Classic post!!!!!!! I could see the steam coming out of your ears as your fingers were madly pounding over the keyboards. Pleeeeeeeeeeeeeeeeeeeeeese slow down and try to write some coherent sentences because not only am I being insulted, I can’t understand WTF you’re trying to say!

[Cal]

http://banking.senate.gov/public/_files/Summaryof
ManagersAmendment.pdf

Amendments passed by the Senate to the housing bill.

Conforming limit... 550k.

Income verifications through IRS (assume a 4506-T) for the bailout program.

A fig leaf to say they are stopping people from intentionally defaulting:
"Expands the certification requirement so that borrowers must certify, under penalty of law, that they have not intentionally defaulted on any debt, not just their current mortgage, as in the Committee Print. The borrower is liable to FHA to repay any benefits achieved through the reduction of the mortgage based on the borrower’s misrepresentations."

I'll read through the real thing later.

[adrian]

I have a funny story about a condo in Westside.
I walked in, the condo had been reduced from 669k to 609k, I told the lady I have only 500k to buy.
I got a call from the agent 5 minutes later, saying he cannot go further down, there won't be anymore new condos for sale in the next 2-3 years because nobody builds right now.
Next day, I left him a message saying that my bank gave me 10k more. Again, he called me right away stating that he can go lower another 10 to 20k but no more.
So, the day before, he would not go lower, now he could drop another 10-20k.
I wonder if I should play his game or just stop at 525k.
Any advice?

[puckhead]

Cal,

No arguing that we’ll see declines in all areas and will see going forward. I have a major problem with uber-bears saying that the declines will be the SAME in all areas, because that’s just the way it is. We all agree that the IE was WAY overbuilt and the majority of the buyers out there were lower income families and bought during the height of the bubble. We all agree that the IE is an awful commute because of lack of good jobs out their. Compare that to other centrally located neighborhoods that have not seen a new house built in the last 10 years and where the majority of households have been at their present locations prior to the RE bubble. Explain to me why the later neighborhoods will see the same % decline as the IE? I can’t speak about every zip code in SoCal, but I can speak to my little hood. I see the same number of for sale signs as I did last year. There are no houses for sale on my street. I’ve been at my house over 10 years and I’m one of the “newcomers”. You can’t put a price on safe neighborhoods, centrally located and good schools. I could sell my house and buy a mansion in Lancaster. Never in a million years and I’m not alone in that thinking.

I also see many bloggers saying that during the 90’s all areas fell the same. There are 2 major demographic changes in SoCal now vs. 20 years ago. Number 1 is the concentration of wealth. From antidotal observations and dealings in business, I think there are many more “high income” and “low income” families in SoCal now vs then. It’s the middle income families that are being squeezed and are in decline. Number 2 is the decline of many neighborhoods since the 90’s. 20 years ago you could find a decent house/neighborhood in places like the SFV, Lawndale, parts of Gardena etc. Even parts of the Westside have seriously declined are not worth living in. If you want a decent neighborhood now with good schools and somewhat centrally located you have the South Bay, the Palisades, South Paz, Arcadia, San Marino the hills above Glendale, La Canada and that’s about it. All of these areas are built out, no new houses while the pool of desperate families wanting a place to live with good schools grows.

[puckhead]

Long Time Listener,

Very valid and well thought out questions………and with no insults so you win a prize. You say that people are not earning much more now vs. 1990. I tend to disagree, I think there are many more “high income” families now vs. 1990. I think there’s a higher concentration of wealth along with poverty in SoCal. All I know is that from my daily business dealings there’s no shortage of money floating in SoCal. Another thing you have to consider is that once a family gets into a good situation house wise, they are not moving unless the job moves, divorce or foreclosure. Turnover in many neighborhoods is very very low. All I know is that I’ve been looking for a decent house in South Paz and San Marino for 6 months and the inventory of decent houses has gone from really really really pitiful to just really really pitiful. The one change I’m seeing is that bad houses in bad locations even in good neighborhoods will sit forever. But if you have a turnkey house on a quiet street, it will sell.

As for your situation, I feel for you. I would not want to be a first time homebuyer in SoCal. $225K dual income household is not that uncommon in SoCal and you have a lot of families to compete with. If you are looking for safe and good schools I would not even look in LA. Irvine, Cypress, Walnut, Simi, Valencia are all safe, family friendly and have good schools. Don’t be in a hurry because I’m not as kooky as most people make me out to be, I do think prices will go down further. Good luck.

[Cal]

Concentration of wealth? Now would this be housing wealth or real wealth? I see a lot of debt in California. People were able to purchase whatever they wanted with debt, the banks were giving money away. People were able to delude themselves that they were richer than that actually were. I think it is isn't clear at all just how much our local economy was built on that illusion and how much wasn't.

But as always I am happy to debate any statistics that you can provide. The income demographics so far don't bear out what we've seen in housing or the economy and there are the negative saving rate statistics and unprecendented level of debts taken on by Americas households.

I see a lot of people that were (past tense) able to buy things, something called effective demand. But I don't see a lot of wealth. I also believe we will see less effective demand and more people having to hunker down and pay their debts instead of consuming. It is during the period of slack demand and economic slowdown that the prices will be the weakest. This is because the distressed supply will be the highest and available credit will be the lowest.

I think this will affect the top end of the market more than the low end (especially when the financial layoffs hit) similiar to what happened in the early 90's. The upper end fell more than the low end, because the upper end is affected to a greater degree by small shifts in demand. Also the spread between levels in the market jumped dramatically during the boom I think the level between the First Time home buyer, first move up, second move up markets will compress back down to a more normal spread.

[Mike G]

Palisades, Malibu, South Paz, are you kidding me? The SAT scores for kids from those high schools is well below 1600 and falling fast. Crime is way up with murder rates surging. The acceptance rate to Yale and Harvard are pitiful. I wouldn't go there at night without a bulletproof car and a security detail. I've seen graffitti, which means that gangs and drugs can't be far behind.

If you want to live in a decent neighborhood, really your only option is upper north-western Malibu Hills. We are fortunate in that we can send our staff to city when we need something, so we don't have to risk it ourselves, or get it off Amazon.com.

Our kids are homeschooled by ex-Oxford professors so we don't have to face the nightmare that is Harvard-Westlake.

Really we're just a hardworking middle-class family trying to get by.

[Laker]

puckhead,
Actually i did not cherry pick anything, i simply quoted Peter's post. That's all.
As far as decline of the high end, yes Option ARMS were the majority of the loans north of $500,000. They are still there but soon start exploding in mass. Most of the subprime we've seen thus far was IO, and 2/28 standard/hybrid ARMS.

[DF]

@Adrian:

Without knowing specs like neighborhood, price/sq ft., it's hard to say whether this specific price is right. But any RE agent who tells you he can go no lower on a deal when the price has just been reduced about 80k is likely not being entirely truthful.

Remember: he who can walk away controls the deal. It will take a while before owners adjust their prices downward to reflect market losses. If you can wait, you probably should.

[E]

Regarding concentrations of wealth...there was an L.A. Times article about 2 or so years ago, where the topic was "How many millionaires" are in different cities.

It was an interesting article and one that I actually haven't been able to find on google. (Perhaps Pete can dig it up more readily)

Anyhow...one thing that wasn't mentioned was how they arrived at the magic number to declare someone a "millionaire". I was always under the impression that someones "net worth" was calculated as a total of all their assets not including their primary residence. If 2nd homes were such a hot thing...how much of the total was from "paper equity" on 2nd homes?

There was also a figure thrown out that the average (not median) was somewhere around $1.2 million. It could have been higher...but I know it was less than 2 million.

If we are talking "averages"...how much do people like Munger skew the average?

[150 Multiple Choice Questions]

Well Puckhead, I guess you've made it clear you ARE an idiot. The point is, no one has said that a house on the beach in Manhattan will go for 400k, so why do you keep saying it? Is that clear? Can you wrap your head around it?

[E]

Puckhead...

the majority of the bears have never said that they would get a house on the beach in MB for 400k.

Nice strawman.

Please...I thought you were a little smarter than that.

Wait...sorry...no I didn't.