The L.A. housing bubble: a snapshot in time

Calculated Risk, the reliably insightful economics blog, posted the above chart today as part of its coverage of the Harvard Joint Center for Housing Studies report. It's not up to date -- as you can see it does not include 2007 and 2008 data; but it's a powerful illustration of why the Los Angeles housing market really is different.  What happened here did not happen in most of America.  What happens next? That's why the blog publishes comments.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Hat Tip: Uncle Billy Reads Calculated Risk.

Comments

[Cal]

tew,

How do you know it's a suitcase of cash and not a parents HELOC? I think the underground economy of LA isn't any different than a decade ago, I just think our society was more willing (and able) to take on debt and spend freely.

[sandiegan]

Just for comparison:

According to DataQuick, the median price of home in San Diego last month was $380,000.

The median family household income for 2008 is $72,100.

That is a price to income ratio of 5.27 to 1.

According to the published graph, that's about 2001 price to income ratio...at least for LAX.

Was 2001 a good year to buy?

[Laker]

shockg, demand might be up up up, in sense of people want to buy, buy qualification for mortgages is down down down. Ask any mortgage broker, ask Nelcisco. Interest rates are up up up, foreclosures are up up up, unemployment is up up up...what do you get? price DOWN DOWN DOWN DOWN DOWN DOWN.

[Fred]

Shockg - how can you say these things with a straight face? Inventory is way up and asking price is way down. How does that spell increased demand?

[srla]

Clearly the IRS needs to refocus its collections efforts on such elements of the local underground economy. It is unacceptable that recent arrivals would be allowed to manipulate and loot the system in such a way while conscientious independent contractors are put under increased scrutiny and squeezed for every last penny.

That being said, the current decline is even more extreme than was the preceding upswing in prices. Such downward spirals tend to gain momentum as prices decline and investors/owners eventually begin to panic. If panic hasn't set in yet, you can be sure it will when declines reach 30 or 40% off peak. At this point, it is quite possible that prices will drop below trend levels as they did in the mid '90s - the bottom could well be as exaggerated as was the peak.

And I wouldn't count on foreigners with suitcases of cash to continue baling out homeowners when the decline accelerates. If they were smart enough to get that cash, then they are probably smart enough to avoid a loosing investment.

[Wick]

Well here you go.
My boss has a Washington based business with an LA office. He currently owns four, yes four, single family homes in West LA. He also has homes in Laguna Beach and Palm Desert.

That is how you get to 10x household income.

[MyLessThanPrimeBeef]

That red line looks like the profile of the Lock Ness monster, sticking its head out of water.

And we all know how dangerous that is.

The silver lining is that here, finally, we have definitive proof it exists...in LA, not Scotland.

[Mike P.]

The Harvard Joint Center for Housing Studies was a rah-rah housing bubble cheerleader in 2006. It's ok to use their historical data, but take any 'predictions' with a grain of salt.

You can read it for yourself, in the very first paragraph, here: http://www.jchs.harvard.edu/media/housing_wail.html

[Mark_Pasadena]

Using the 2000 census data and adjusting for inflation, the median income in Los Angeles should be ~$58,000 in 2012.

Using this information, I can predict that median home prices in 2012 will be:
@6x=$348,000 (-19% more to go from current Dataquick Listings data)
@5x=$290,000 (-30% more to go...)
@4x=$232,000 (-46% more to go...)

My educated guess is that at around 2012 the market for Los Angeles will overcorrect to 4x median income and will level off for several years following that at 5x median income.

It's nice to see sanity come back to Los Angeles home prices as the bubble deflates. It'll be particularly nice when I buy a huge house for $1 million in Pasadena from a squatter/homedebtor who bought it using a negative-Amortization Option Mortgage in 2006 for $2 million. I can't wait until I reclaim that house that should have always been mine from the pyramid scheme conspirators who kept me away from it during the bubble (BofA/Countrywide & the squatter who's currently in MY house).

[tew]

I second S.Y. I'll bet we settle at around 6x, maybe just a bit below. Then after that happens - years from now - reputable economists and commentators will spill endless ink trying to explain why it didn't revert to 4x - 5x. They will cite overseas wealth, growth in unreported income, Prop. 13, etc.

[Valley Observer]

The LA median family income is something like $45K. That breaks down into approximately (plucking numbers from the air) roughly 50% renters with avg Y of maybe $30K, and 50% owners with avg Y of maybe $60K. While there are certainly renters with a lot more income than that average, there are families with less, too. It would make sense to compare the average price to the $60K number, which is the sub-population buying and owning houses.

A lot of the owners couldn't afford to buy the house they occupy through no fault of their own, because they bought long ago, and we know incomes haven't kept pace with house prices. From their perspective, high prices equal a good retirement nest egg.

There are other viewpoints besides that of priced-out renters.

[E]

Medians....I have always looked at them as noise.

I expect "median" prices to go lower than both the bulls and the bears predict. There will be a slew of lower end houses that are dumped on the market at firesale prices in places such as Compton, Watts....probably Highland Park too!

Because there will be so many of these houses sold (probably to slumlords investors) the median will fall into that category of housing. High end asking prices may come down a bit but just because "median" falls city or countywide, it's not the same everywhere at that snapshot in time.

As median prices start to rise, it still doesn't mean that actual values are increasing as much of this will mean that the high(er) end properties that were purchased for @600k around 2000 and are now asking 2MM+ start to pull their head out of the clouds and realize that they were already the wealthier people when they bought their home for 600k and there *really* aren't that many people who can afford 2MM homes. The high(er) end will start to lower even as the low end stays flat having bottomed sooner yet as people step back into the market for nicer homes. Many of the higher end sales have been to flippers over the last 6 months to a year and those homes are now back on the market. Plenty of examples in Hancock Park with some being 2-3 year restoration projects. I would estimate that 80% of the houses in the Los Feliz (hills) have gone to flippers also as I have tracked the area closely.

Of the non-flips for sale...many of the sellers are 2004-2007 purchases who realize that they are screwed and either don't want to lower their price (Ego) or can't lower their price (Don't have the $'s to bring to the closing table)

The banks might as well face the reality that they are gonna have to unload their nicer inventory at realistic prices pretty soon IMHO and they might as well kick the high $$$ option ARM wielders out of their houses post haste instead of dragging the process out hoping to squeeze blood from a turnip.

Condos...they've always been a suckers bet. There was a building built in the 80's on the Wilshire Corridor (By the country club) that at the time were advertised from 1.8-11M. I'd be willing to bet that the 1.8M unit wouldn't get 2.5 today. And that's 20 years later.

If you can *afford* to buy a condo, rent it. Then put whatever your "savings" is into CD's. To own the unit that I'm renting my payment would be approximmately 4k/mo factoring the tax benifits and everything. I pay $1667 and that includes Water (hot and cold) Gas (for heating and cooking) Sewer and Garbage. My electric bill is $20-25/mo. And...it has all the slab granite, stainless and hardwoods that any shlub would require.

[shockg]

Peter, Can you post the IP address of the posters to deal with the fools who post under numerous alias'. Tell us how many names Laker posts under.

[Laker]

Peter can confirm this.
I only post under my name. Either from work or home.
Shock, a smart man once told me that if you don't have anything smart to say, better shut up. In the new age, if you don't have nothing good to write, save the blog space. And please, go a head and buy LA property.
Where is Lefty, both were fool speculators, but shock is not funny, and lefty was.

[peteviles]

Shockg asks, "Peter, Can you post the IP address of the posters to deal with the fools who post under numerous alias'. Tell us how many names Laker posts under."

Thanks shock. I can view the IP address of each comment, and sometimes take a look if I think something screwy's going on. Oddly enough, it's rare that someone posts under various names from the same IP address. I see no evidence that Laker does that. We all know that Uncle Billy changes names regularly. I find that amusing, although sometimes he worries me -- does he have multiple real-world personalities too?

I'm not going to publish IP addresses -- I think that's a bit invasive. But I do look at them from time to time.

[tealeaf]

Pete,

This job must be part-journalist, part-techie, and part cub-scout leader,

Bravo, my man. I couldn't do it.