Your call: Does this look like the bottom?

From the reliable and reliably entertaining Westside Bubble blog: The Case-Shiller home price index for Los Angeles, including this morning's latest numbers. When you look at it this way, it's hard to make a case that we're close to the bottom.

What do all those lines and numbers mean? From Westside Bubble: "Los Angeles (black line, includes Orange County) is now down 24.4% from its peak in September 2006.... The national (orange line, their original 10-city Composite) index is down 17.8% from its peak in June 2006.

More: "Besides the original city index they have each city broken into Low, Middle, and High tiers (Under $417,721, $417,721 to $627,381, and Over $627,381). Los Angeles' Low Tier rose the most and has fallen back the most so far from its November 2006 peak, 30.8%. The High Tier rose the least and plateaued for a while before falling more steeply, now down 18.5% from June 2006."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.

Comments

[DF]

Seeing the C-S index made me think: would it be possible to use this index to break the current housing deadlock? Right now it seems that both buyers and sellers are far apart because there is no idea what on earth housing in LA is "really" worth. Rather than rising steadily (though not spectacularly) over time, housing values went up by a ridiculous percentage and are now plummeting. What this means is that no one has any idea whether current prices reflect any kind of real value, and there are enough arguments on both sides to justify wildly differential prices (sellers can always find some comp, sellers can point to the grotesque appreciation of the past few years).

So how about this: pick a house you like, figure it's value in 2001/02, and tell the seller, "If your house had appreciated at the standard Case-Shiller rate, it would be worth this (adjusted for inflation). That is the price I will offer you." And then refuse to negotiate or bargain or talk about travertine marble or granite countertops or whether they'll leave a plasma-screen TV for you.

I like this idea because it gives some notion of a solid benchmark of where value should be, regardless of recent crazy fluctuations in price. It also gives owners some reasonable appreciation (~3-4%/year compounded against 2001 values creates some solid equity, though the inflation adjustment knocks it back a bit), while also giving buyers some sense that they're getting a decent deal instead of buying at still-absurd price levels.

But I doubt this would work, for both practical and psychological reasons. Practically, people refinanced and got HELOCs when they thought their houses had magically tripled in value, so they're not financially in a position to sell for a reasonable amount given that they've used the "equity" that accrued in the bubble years. Psychologically, owners became so attached to the idea that their houses "earned" them hundreds of thousands of dollars in the past five or so years that admitting it was all an illusion is just too painful.

Still, if people who have patiently rented to wait out the housing bubble all took this approach, it might be a way out of the current buyer/seller standoff that is causing the RE market to stagnate.

[Valley Observer]

Drawing my own version of a smoothed line through the graph that bypasses both the post-1990 trough and the recent peak, I get a current index level of about 180. The LA Average and LA High tiers aren't far from that, so maybe they are near the bottom, except for the likely overshoot. The LA Low tier still has a way to fall to reach 180, but its growth was imaginary to begin with. At the highest level, the weak dollar is attracting European buyers who aren't fazed by multi-million prices.

[Cal]

I think a portion of the higher end fall is a compositional shift in the indexes. If you have more lower priced homes selling and then split things by quartiles you are going to get some of what was middle quartile values moving up to the upper quartile. I think the upper end is falling a bit slower than indicated here. It isn't selling well as the most homeowners cling to their price.

Just from the limited data I've looked at and to make a broad generalization on the market based on nothing other than a WAG, I would say the higher end depreciation is about half that, around 10%. I think holding on in a depreciating market is going to make the upper end of the market correct more severely but the correction isn't here yet. We are still in standoff mode.

[Nelcisco]

My response to JeremyR on the last blog was that prices would go back down to 1999 median prices.

I think it could get back to 1996 where the -21.1% arrow points.But what do I know, I can bearly give a 400k loan to a 100k earner without underwriters conditioning my mortgage files to death.

it ALL boils down documented income folks and if it isn't there,FORGET IT!! and we all know that at this point

[John T Watts]

If you draw a line between the beginning of your graph through the center of your highs and lows you come up with a diagonal line showing that we may be very close to the bottom.

[tealeaf]

One man's "speculative primary residence short" is another man's, well, "I don't want 50% of my $210k salary to go toward an 1800sf stucco box in Burbank".

shockg's damage control is below.

(boy is it fun to troll)

[jbunniii]

Looks to me like a further 50% drop from today's prices is not only possible, but inevitable.

[Mike S]

C-S isn't flattening any time soon: buyer fraud and speculation skewed market fundamentals--it was a bubble. Current price drop occurring amidst artificially depressed lending/borrowing rates.

Ongoing reckless monetary policy ensures interest rates will drastically ramp-up after the election; crushing home affordability; SPIKING PRICES DOWNWARD.

If you disregard the 2002-2006 'bubble' price spike, the C-S drops to 125 in a "normal" market. Throw in the abnormality of a reduced consumer base for many potential buyers lost their homes (credit) or cannot move up, the potential exists for CS-S to drop to 100.

Some call that an "over correction." It's basic economics.

[El Guapo]

John,

By your logic, I think you should draw your line along the bottoms (not the middle) to get a sense of the bottom. Draw your line through the middle if you want to see when we're half way to the bottom.

[Tim K.]

Here's the cool thing about "timing the bottom" - you don't have to be that quick to spot it.

If you look at the history of housing bubbles, it takes MANY YEARS for housing to bounce off the bottom. Even if you "miss" the first year, it doesn't move that fast. So relax folks, this isn't like a videogame where you have to POUNCE the instant you think the market is turning around. You'll have lots of time to see it happen in slow motion.

[Uncle Bill Climbs Mont Pelerin]

"...it might be a way out of the current buyer/seller standoff that is causing the RE market to stagnate."

You make it sound like this is a bad thing.

[CD]

I am going to use this graph as my Christmas card this season, and send it to all my neighborhood realtards.

[Uncle Bill Climbs Mont Pelerin]

...and let's not forget that this point on the Case Shiller graph our situation is much much different that before. Before, we were savers who often had down payments -- remember those things that are being required more and more now by lenders that are having a hard time selling their loans?

Remember our negative personal savings rate and the crushing debt out there? And all the other underwriting criteria, as Nel points out, is making it tough tough tough. Draw your lines through the bottoms, take the above into consideration, and figure on some major overshoot. Factor in the downward spiral of generally deflating economy and the fact that the numbers we see in general for inflation and employment are made to look nice and rosy, and Wall Street seems to be decades away from "deleveraging" to the point of safety.

People just aren't getting it. This is not a cyclical correction where an idealized market will settle at some nice equilibrium point, and we'll doopdoopdeedoop get back to business. Mike, tell 'em. Tell 'em what they've won.

This just in: After a day's delay, the arm on the Phoenix is now working. The first scoop has been analyzed and Phoenix's onboard lab has determined that the planet was stained red by huge quantities of ink that was generated by a civilization now long gone. Phoenix's cameras have captured what appears to be swarms of politicians, financial engineers, some realtors and lenders, scuttling about and apparently all feeding on themselves.

Also - Diana Olick, reporting from Virginia this morning reminds us that the foreclosure mess is not limited to the bubble states, that: "47 states have an increase in foreclosures of 20% or greater."

[Drew]

I honestly believe we are close to a bottom. Prices may fall up to another 5%, but that's about it. They may not rise quickly for some time either, but I just don't see that they're going to fall another 20, 30, even 50% as some people here seem to think.

At fact is that at these prices, a lot of people who are planning to buy a primary residence are looking to get into the market. Investors not so much, but they don't drive sustainable home valuations.

The fantasy, er, concept that many people harbor that "median prices need to fall to 3x of median income" for the market to stabilize is ludicrous. Consider that in LA maybe 40% of residents are homeowners, so you need to look at the median income of that top 40% to even begin to determine an "appropriate" home valuation based on this flawed financial model. Minimum wage workers never have been and never will be homeowners, at least not in LA, so including them in your calculation is disingenuous at best and delusional at worst.

You might as well wait for the "historical" 16-to-1 parity between the prices of silver and gold to return. It ain't happening, and neither is the 3-to-1 price-to-income ratio.

[E]

Yuppp...there was a housing boom.

Housing fall down and go BOOOOOOOM.

or as the commercial says

"Help me...I've fallen and I can't get up!"

[Laker]

DF, you mention: current buyer/seller standoff and offer some ways to break it...
Listen, you can't force the home owners to sell as you cannot ask renters to buy. That is why we call it supply and demand and that is why there is ECON 101 class.
Eventually, some sellers will need to sell for many reasons as some buyers will "need" to buy for whatever reasons. Those two will meet somewhere and we call that market price.
You can't ask a seller to accept an offer just because it fits the Case Shiller index...You can however use the Case Shiller to get your offer correct. If the seller is not accepting your offer (let it be based on CS), that means the seller does not need to sell, and can wait for higher offer. The seller can be private person or bank in case of REO.
Bottom line, eventually private seller will need to sell, Bank will need to unload the depreciating decaying house, there will come a buyer to buy it.
I posted on my mini blog the updated CS index up to march, with the two predictions. So far, CS index is pretty much supporting my prediction with 98% accuracy.

[MyLessThanPrimeBeef]

John, El Guapo is right. Normal technical-analysis would say you draw the line through the bottom to an idea of where the support is.

And if you do that, you will see the number should be about 100 for now, from about 50 in the beginning of the graph around 1980.

That suggests support at around 50% below today's low tier, high tier or composite prices.

[Nelcisco]

Drew,
Maybe true that 40% of residence in LA are homeowners but have you factored in out of those 40% who bought before the bubble?

I can tell you for sure that in Burbank where my in-laws have lived in the same house for 68 yrs (my mother-in-law, wife & sisters were born & raised there) and their neighbors that have spent at least 25yrs could not afford their home if they had to buy it again.

Their new surrounding neighbors that bought during the bubble are people in the media. 40% of the people are not in media or in Sales or business owners that make tons of $.

Uncle Bill thanx for you comment. because we're in a neg savings rate this market will not just correct itself to an idealized equilibrium point

[Duke of Moral Hazard]

This is definitely a new paradigm: MLTPB has forsaken french new wave cinema, Gibbon's 30 volume history of the roman empire, and run out and bought himself the Acme Do-It-Yourself Stock Analyzer.

Brave New World.

[shockg]

Interesting how a bubble blog chose to post a chart with yearly increments to achieve the desired picture.

[shockg]

Interesting how a bubble blog chose to post a chart with yearly increments to achieve the desired picture.

[pugtv]

Interesting ShockG is unwilling to put his money where his mouth is.

[wha]

OT, but interesting story:

http://www.latimes.com/news/local/
la-me-girlshot29-2008may29,0,7207837.story

For the people who berated others for pointing out the fact that Highland Park is a gangs nest in previous threads. This is the reality folks.

[Westside Bubble]

Shockg, the data is monthly, just the tick marks are yearly. The original post includes monthly drop percentages and a link to the original S&P/Case-Shiller monthly data that you, too, can enter into Excel and graph.

[tealeaf]

truthiness err shockg:

enlighten us with the "real" picture. Perhaps NAR/CAR has something similar, with a graph of historic pricing with a different increment?

yeah. I couldn't find it either.