B of A's Ken Lewis sees another 20% dip in home prices

Bank of America CEO Ken Lewis says the bank expects a further 20% decline in California home prices. From Today's L.A. Times: "... Lewis said Bank of America's latest forecast called for a further 15% decline in home prices nationwide, with the decline going into at least the first quarter of next year. In the case of California, Florida and other markets that had the biggest booms, a further 20% decline is more realistic, he said."

For those of you wondering, here's what another 20% decline would look like if applied to median sales prices as tracked by DataQuick:

In Los Angeles, the median would decline from $422,000 in May 2008 to $337,600. That, in turn, would represent at decline of 38.7% from peak Los Angeles median pricing of $550,000.
In all of California, the median would decline from $339,000 in May 2008 to $271,200. That, in turn, would represent at total decline of 44% from peak California pricing of $484,000.

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

Comments

[Rob]

Now we are talking about some real numbers. The sooner the better....

[Cal]

You can tell that there are very few discretionary sellers in this market as the ones that want, but don't need, to sell are "waiting out the market" to get their price.

It is going to be a long wait.

What is clear now is what was clear last year, those that get out soonest get the most. Those waiting around will get less, it is that simple. Those retiring in the next 10 years expecting the house to fund their retirement are going to have to come up with a new plan.

[Lionhart]

I wonder how much home prices will fall , peak to trough, in upper end markets like Beverly Hills, San Marino, etc..
I dont think they will fall the full 38.7% that Ken Lewis is suggesting.. I do think it will hold up considerably better... ie, 20-25% decline.. Any thoughts?
San Marino has only dipped around 5% from its recent highs so far...

[dontmatta]

It's gonna be a long, lengthy process. Plus, by the time the correction is over, I don't think the market will be anything like it was in 2001 because interest rates will have risen even more. People will go back to seeing property as what it is, rather than a short-term investment.

Prices will back to historical levels, which means they will be tied closely to income/price ratios.

[Jonah LaFollette]

Wow...so housing prices may come back down to earth a little bit? It's about time!

[Giacomo]

Please thank Mr.Lewis for this insights.

(Hmmm, if I had waited to sell based on HIS warnings, I'd be in a bit of bother right now)

[It All Happens On The Margin]

We have been hearing for months, "the high end is immune. Everything will crater around West LA. No discount. No deals. Palmcaster and IE only. You are all speculators."

Now the CEO of one of the world's largest institutions, which backs most of the mortgages in our state, is saying we've got another 20% *statewide*. We're already at $100 per foot in the IE ... where is the 20% going to come from? I reckon there will be blood closer to the coast.

No... I will shut my ears and listen to our resident troll-bull, shockg.

[dclogang]

I predict 50% from right now (July 2008). It's going to get really bad... just watch.

Archive this post..and link to it when it happens!

[MyLessThanPrimeBeef]

It's going to be painful returning to normalcy. But the only thing we have to fear is fear itself. Going back to being normal is the natural way of things, the most normal thing in the world.

I think in Russia, after the fall of USSR, people there used to say that they just wanted to be normal, like everyone else in the world. They said that even in the middle of some Harvard professor's excruciatingly painful experiment in wholesale robbing of a country.

So, I guess, there is no point blaming people who want things to be normal again. Blame the people who made things abnormal in the first place. Wanting things to be normal, however painful it is, is not un-patriotic nor treasonous.

Blame the Bolsheviks, the communists who ran USSR all those years.

Blame the people who securitized junk mortgages and those who stamped them AAA.

Blame the extreme form of division of labor under which we are at a point where one expert doesn't know what another expert in the field is doing. Go go any decent university and talk a researcher and he or she will proudly tell you that there may be only 2 people in the world who knows what he or she is doing. Proudly? Is that a good thing? Bin Lackey admitted that he didn't understand SIV, CDO and the rest of the alphabet soup. The world is in for more and deeper troubles in the future if this doesn't stop. Besides torturing the world with endless and useless research in the first place, you can't work on a problem where only two others know anything about.

[jag]

This is not new news to all of us that blog here. We all have been predicting such decline. I guess hearing it from a CEO has more weight. I can only hear Shockg and Lefty denying that the infamous West L.A. is not going to be impacted by this forecasted decline.

[Nick]

He's still optimistic, imho. BofA is probably just projecting based on the declines while they clear out their existing inventory of REO and pre-REO properties, and not taking into account all the Alt-A defaults which everyone in their industry is hoping don't materialize. Heck, prices would probably drop 15% just clearing out the existing REO and in-process foreclosure inventory, not even considering the Alt-A portfolios, and walk-away properties resulting from the price declines across all categories of loans.

Course, if I were Ken I'd be saying the same thing. The last thing you want to do is plant the suggestion that the housing bailout bill will actually cost the taxpayers hundred of billions when prices drop further than the arbitrary write-down amount. Voters might get wise, and if your bought stooges in Congress won't offload your losses to the taxpayers, who else is going to bail you out?

[mike]

i can't remember who made this comment on this blog before but i wan't to give them credit for it "how much does he get for dispensing common sense"

[mike]

i thought most people on this blog were waiting for prices to tank and now the comments are saying it is going to get really bad. DO YOU PEOPLE WANT PRICES TO STABILIZE, GO UP OR GO DOWN?????????

[Ragnar]

A further 20% decline in CA is as decent a guess as any. However, there are a lot of variables at play both now and in the future, meaning that the 20% estimate is nothing more than speculation at best. Sure gets bloggers typing though...

[Jack]

I think a 20 percent further drop is realistic. Demand will return to about the 2000-2001 levels, so prices should adjust accordingly.

[Susan]

Ken Lewis sounds like a raging optimist.

Last month Chris Thornberg said he anticipates an additional 31% off of (then) current price levels. Thornberg has been more accurate than most in anticipating the scope and magnitude of this decline, but even he has been a little behind the curve.

In this week's Los Angeles Business Journal, Dolores Conway at USC, who has been way behind the forecasting curve, did make one statement to leave herself an out:

"If the bottom falls out of the economy and we have significant job losses, then everything will come down: home prices, rents, everything. That could take quite a while to work through."

Mr. Mortgage has been pretty good at analyzing what is coming down the pipe. If he's looking at the numbers correctly, we've only gone through Act One.

[Arti]

20%? Maybe in the marginal areas, where another 20% would make those zip codes fall in line with the historical growth trend lines as well as the median rent and income numbers for those areas. But in the high-end, the graphs are still apart, i.e. the home prices in places like Santa Monica have not even begun to come down yet for SFRs.

When the new wave of mortgage resets happens in the high end, for prime ARMs, that's when places like Santa Monica will finally feel the effects of gravity and come back to earth. It's going to take another couple of years for it to really hit, and when it does it will have to be much more than 20%, because they went up 100% during the bubble.

For Santa Monica to get back to the pre-bubble insanity levels, it would have to go down some 20-45% from today's prices.

[LA]

Another 20% down would take us to what level? 2004 or 2003 prices?

[Rich]

Be careful what you wish for. If the California market severely over-corrects because potential buyers can't get mortgages until the credit market sorts out, or because recession-related problems like layoffs take them out temporarily, the market may come roaring back in the recovery as people scramble to get what looks to them like outrageous bargains (compared with the bubble times) and banks loosen up terms again to cash in on the recovery; all the old bad habits can easily return if housing gets too cheap too fast...

[A Scanner Darkly]

Even if median homes prices in LA dropped to $275K from their all-time high of $550K a family would need $30K (10% dn + c/c) to get in and gross $60K to be safe. The question is is whether they will ever be able to build equity. My answer is no...the days of RE speculation and bubbles are over; the cat's out of the bag regarding clandestine subterranean lab facilties, subliminal microwave weapons technology, secret radiation captivities/socio-economic eugenetical programs. People will just want to buy a home, work and pray the roof stays on. Our leaders minds have become silly putty in the face of the militant ideological evil the world has ever known and the barbarians have entered the saunctuary.

[el_guapo]

Nick has the right idea. BofA basically wrote the bail out bill going through Congress now. That's why they took on Countrywide, because Congress is going to limit the losses for BofA and others. Taxpayers get the rest, along with a Fannie and Freddie bail out. But in order to sell this - you have to be on record saying that the nation has another 15% decline tops and California 20%. He may even be in the ball park nationally. It's just that he's talking his own book, if you will.

[shockg]

Only in the 909 and Palmtucky. The areas that matter to me won't see much of a decline. Basically more of the same.

[Cal]

Rich,

Now that is a first time I've heard that angle lol. Outside how different the regulatory structure will be the collective memory will also be there and the willingness to speculate in such a bubble will be greatly diminished. Bubbles have to have many things come together for them to happen (the first and foremost is the access to cheap credit) and there has to be significant time passing before the collective minds convince themselves "this time it is different".

While I do think that the faster we correct the faster we get this all behind us, I dont see the faster we correct makes it more likely that we will have another housing bubble. Too many people will be still licking their wounds for that to happen (outside of the many other factors arguing against it).

[TheUrbanHouse]

Real estate inheritently is not like stocks... it is not a liquid asset and price corrections take longer than what everyone on here thinks... This cycle is going to correct itself and is going to probably have many small little speculation bubbles on the way down, but the recovery is just as slow as the way down. We have dropped in areas where the demand is lower, but in the higher demand areas, the correction has yet to begin. Remember economics 101... the higher you are on the demand curve, the more subject you are to siginificant price drops. The demand at the top is just beginning to diminish. Depending on what happens with higher paying jobs in LA is going to determine what happens to the higher end markets in LA. They are in a wobbling place right now, finally just peaking a couple of months ago. When we start seeing those areas correct, we know this cycle is just beginning to bottom since its apparantley a bottom-up cycle and not a top-down cycle like the 90's. But at the end of the cycle... everyone was burned by the end of it, top and bottom. There is no reason to think this cycle is any different, its just the phase of it we are currently going through.

Just dont speculate on your home.. nothing in life is truley a get rich quick situation. Save your money now... buy in 2-3 years after you have a 20% down payment and a responsible lender will lend money to you.

[save your ammo]

A year ago, people on this blog were debating whether
there was a real estate bubble. Those who never heard
of a price graph were arguing with those who could
read one.

We've come a long way.

I think it was last September we started to get bottom
predictions for 2012-2014 from a couple of posters.
Most laughed and said the recovery would be in the
second half of 2008.

Reality bites. Time to guess, again.

[firesale]

Lionhart wrote:
"I wonder how much home prices will fall , peak to trough, in upper end markets like Beverly Hills, San Marino, etc..."

Places like Santa Monica and San Marino are like
the Dell computers of the Nasdaq collapse of 2000.
The best of the best held up as all others were
falling apart around them. But in the end, the foxes
got everyone in the hen house. These gravity defying
high-flyers suddenly collapsed, as if in a great game
of catch-up, rocketing downward after those who
had greased their way. When the last to fall finally collapse,
they will drop the fastest of all. The good news:
when San Marino is smoldering atop the heap,
we will have finally hit bottom. After that, the pile
will stir very slowly back to life. Very slowly.

[dclogang]

"i thought most people on this blog were waiting for prices to tank and now the comments are saying it is going to get really bad. DO YOU PEOPLE WANT PRICES TO STABILIZE, GO UP OR GO DOWN?????????

Posted by: mike"

I guess by BAD I meant bad for homeowners who are or who are going to be in trouble financially but GOOD for those who are waiting to buy.

I need to be more careful how I word things! My bad! and I did mean bad this time! ;- )

[Bill]

I have a question. Does Lewis mean a 15%-20% fall from TODAY'S prices or from the peak? Seems to me he'd be more likely to be talking relevant to the peak of $550k. If that's the case, prices would fall closer to $310k. I'd buy that.

LOTS of discussion here about the high end of the market keeping up. Keep in mind that the subprime mess has already happened but the OPTION ARM mess only starts next spring.

Just think of all the people living in houses valued at a million dollars who were paying a few thousand to live in them who now or soon will have negative equity. The upper 75th percentile has lost 28% in LA. Add in 6% to sell and you are looking at 34%. Assuming another 20% loss from today's prices and you are closer to a 50% drop once you add in the relator fees.

How many people in high end markets in California have 40% to 50% equity in their homes? I bet far less than most realize. You can bet nearly as many of them refinanced to buy their cars, etc when prices went on a run. Just wait til this time next year and there will be just as big a percent of wealthy people sending jingle mail as subprimers.

[Jeremy R]

“I wonder how much home prices will fall , peak to trough, in upper end markets like Beverly Hills, San Marino, etc..
I dont think they will fall the full 38.7% that Ken Lewis is suggesting.. I do think it will hold up considerably better... ie, 20-25% decline.. Any thoughts?”

My guess is 20-25%

I think it is ludacrous to believe that all markets fall a flat 40% uniformly. I think south central, lancaster, the I.E., and the harbor areas will fall a good 60%, maybe more. Places like Gardena, Reseda, East Hollywood, ktown, etc, may fall 40%. Places like Pacific Palisades, San Marino, Manhattan Beach, and Hancock park might only fall 25%. If you added all of those averages up, the overall market would be down more than 40%, since there are far more homes in Gardena, I.E, south central, etc., than there are in the prime areas.

The real question is how far will the mid-end places drop? Palms/Mar Vista, glendale, Westchester, redondo beach, Mt Washington…… 33%?

[George]

Let 'em keep falling. Even if the cost of home ownership stays the same (with interest rates rising), it is much better for new mortgage owners to have their mortgage heavy on interest: Interest is tax-deductable. Property tax is payed on the purchase price of the home (or appraisal). Want to pay higher property tax and be able to deduct less from your income taxes? Buy at $600,000 with 5% interest. I would rather buy the same house at $350,000 and 8% interest (or whatever the numbers would be - having equal mortgage payments).

[toby]

It's going to be closer to 50% when all is done and said, but at least this is far more realistic than what they were say only 6 months ago.

[A Scanner Darkly]

The barbarians have successfully defiled the basic concepts of home ownership. Remember from college business 101what the term "bricks and mortar" meant? How can the stock market do anything when the ultimate "bricks and mortar", your home, has been invisably invaded? How can you feel safe in your home when your children have been surreptiously implanted with "Radio Hypnotic Intra-cranial Visual Holographic Micro-biochips" by these wolfish manipulators who will later harvest/brainwash them for secret economic purposes and will call them schizophrenic if they b*tch about it? Or worse, kill them or subliminally force them to commit some crime due to prgram resistance? "The Silicon chip inside her head was switched to overload"- The Boomtown Rats

[Drew]

However -- people with ARMs that are resetting right now are still paying less than 6% in many cases (today's 1-year LIBOR + 2.5% = 5.79%) -- which is still affordable and less than they'd be paying if converting to a 30-year conventional loan.

Maybe this will change in another year, but for now most people with ARMs are not going to be in immediate trouble.

[mihcci]

Prices will continue to drop until the we return to the fundamentals. I can rent a 4br/2ba with a pool in Huntington Beach for $2400. To buy the same house (at the ridiculous prices they're asking) would be $4125/mo. Factoring out the tax benefits, it still makes no sense for me to buy so I put the difference in my retirement account and wait for the bloodbath to end. I wouldn't pay a nickel over 2002 prices; if that. Go to redfin.com and see how many homes in your area are (not) selling and how much they've already lost from previous purchase. I live in 92649 and there is a LOT of blood in the streets.