It's worse out there, chapter two

A while back I bloviated that the housing collapse was not an equal-opportunity destroyer of value and would ultimately be "worse out there" -- that is, worse in remote suburbs. The enterprising folks at zillow.com have documented exactly that. The above graphic shows declining home values in concentric rings spreading out from the center of Los Angeles. Here are the numbers:

0- to 10-mile radius (Los Angeles, Glendale, Pasadena, Inglewood): -14.2%
10- to 20-mile radius (Long Beach, Los Angeles, Whittier, Torrance): -16.0%
20- to 30-mile radius (Anaheim, Huntington Beach, Garden Grove, Fullerton) -18.4%
30- to 40-mile radius (Irvine, Palmdale, Santa Ana, Ontario) -20.5%
40- to 50-mile radius (Riverside, Fontana, Lancaster, Corona) -23.5%

The percentages represent year-over-year decline in home values, as estimated by Zillow, from Q1 2007 to Q1 2008.

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

Comments

[bode]

The obvious comment is that the second ring (-16%) includes the west side of Los Angeles, Santa Monica, Malibu, etc. I don't think anyone (least of all this blog) would argue that the west side of Los Angeles has been harder hit by the bubble bursting than downtown, Pasadena, Inglewood, Glendale, Burbank, etc.

Basically, using a circle to describe areas that couldn't be more different seems like a silly way to handle this. Who in their right mind would compare Irvine to Palmdale? Or even Santa Ana to Ontario? Corona to San Juan Capistrano? Last I checked, the engine of commerce in Southern California was biased towards the coast, yet this nonsense links coastal towns to areas 40 miles inland. I think what you see with this graph is the inland areas have been hit so hard that a 50% drop in the inland empire plus a much smaller drop on the coast is what you're looking at.

A lot of people have argued that east coast banks lost their shirts in California because they didn't understand what they were doing. This map, in a nutshell, doesn't know anything about the region. It just happens to look cool.

[Fred]

Yes, but Peter, the folks at zillow aren't documenting how things will actually end up. They're documenting how things have happened so far. And those are very different. All things being equal, the prime areas will deteriorate the exact same amount (percentage-wise) as the far-flung areas. Any other possibility is economically insolvent.

HOWEVER, the caveat is that all things are NOT equal. There is another wrench in this equation; the collapse of the housing bubble isn't the only factor here. There has been a fundamental change in the economy due to elevated energy prices. Those exurbs WILL see deeper price declines than the prime areas of L.A. because there has been a fundamental drop in demand for those areas.

That being said, even the nicest areas of L.A. are falling back to their (still relatively pricey) 2001 levels. That's all the fundamentals support.

[Laker]

Peter,
Did an earthquake magnitude 10.0 just hit downtown LA and is slowly spreading out...or in?
It actually looks like a reverse earthquake starting from the outside and getting in. The epicenter has the lowest damage (yet) As we go (drive) out, the destruction (of imaginary wealth) is piling...
Really funny and entertaining.

[Tom Lindmark]

Nice graphic but probably only true for the short term. There is substantial evidence that relative differences in housing prices among various price levels have historical correlation. It may well be that the higher priced homes closer to the central city have stickier prices than the outlying areas simply because those closer to the center can hold on longer.

I would also suggest that LA and Manhattan are probably two of the worst regions to use to prove any point.

[Mark_Pasadena]

I'm glad I live in a good part of Pasadena (Madison Heights)!

I do want to move up to a bigger house in 2-3 years when the dust settles, so I'm hoping we continue to have a soft landing in Pasadena.

[campechano]

It's like and cone pointing down...sure the exurbs are feeling the pain but the bottom WILL FALL OUT in the "center".

"Nicer" areas are going to see and even more dramatic correction in the next few months when flolks become unable to hold out any longer. When 'zoners have to start selling their coastal poperty in california there will be a day of reckoning and it's not going to be pretty.

[Fred]

The Zillow estimates are way off. Foreclosures are typically being offered for 100K less than their Zillow estimates. What a joke. But they may just be looking at computer generated comps more than a few months old which in this market are completely irrelevant.

[Fred]

The other thing to consider is the impact on gas prices. Mission Viejo might be a lot nicer than Palmdale, but right now outlying areas are getting crushed by $4.60 gas which is pushing a lot of people who bought as much house as they thought they could afford over the edge.

No similar impact if you bought a downtown condo a few blocks from the office.

[Steve]

I like Zillow very much, yet this is worthless. The >18.4% encompasses Palos Verdes which has had no discounts to dumps in the inland empire. Why does everyone think downtown LA is the megacenter of all this. I bet more then 70% of the people in these rings have nver even been to the downtown area and speaking of gas prices never will. Downtown is a unique hell hole in its own that pales with problems in comparison to the inland empire. High gas prices wil impact downtown LA before it impacts the inland empire.

[Bill]

...and for as long as the price of gas continues to be high, those far flung places well off the center will eventually become ghost towns. I foresee prices in these areas at about .25 (cents) on the dollar.

I was planning to buy "cash" one of those "Toll Brothers" 5500 sqf mansions in Rancho Cucamonga, but obviously their prices are still unrealistically high in the $1.3 to $1.5 million dollar range (2005-2006 prices). However, under the current market conditions, with all the negatives out there (housing collapse, tightening credit, high price of gas, high prices for food, high price for clothing and escalating utilities expenses) made it a no brainer to not take the jump and remain in my 1600 sqf Pasadena Townhome. I only live 15 miles away from my job and my wife less than a mile.

While we could easily afford their asking price, their price did not reflect that this is not 2005-2006. In addition, the cost of gas would have eventually made the place unafordable, even with no mortgage payment, just property tax, insurance, upkeep and the price of gas would have put us way over our heads.

[SoCalJim]

The graph, while it may look interesting, assumes that "downtown" LA / surrounding area is the "center of it all." Sorry, but that area is far from that. Not even close. It is probably the least energetic and active downtown area I have ever seen in terms of business and social life, particularly considering that we are in the second largest city/metro area in the country, but that is what happens in a freeway city. For professionals, there are many more opportunities outside of that "central" area, and probably more in OC.

[Tim Hebb]

We put together a more granular view of declining values in the San Fernando Valley for the local Redfin blog early this month that suggests a general conformation to the principle, but is probably more useful to buyers and sellers (if there are any of those endangered species remaining).

Take a look:

http://losangeles.redfin.com/blog/2008/07/
the_chill_is_on.html

[Mike Rosen]

We've found Zillow to be less than completely accurate on their values - they often omit the fact that some homes have been totally renovated, have larger living areas, and thus are worth more - even in this declining value market. The real problem is NOT the depreciating values, rather lenders absolute and steadfast refusal to lend new mortgage money. They are the biggest impediment to a recovering economy. They were there when the going was good, but nowhere to be found when we need them the most. It is an appalling and derogatory negligence of our lenders to turn their backs on us. Shame on them for being greedy and then blaming us for the result of their previous reckless collusion with realtors, appraisers, and mortgage brokers. They are a despicable bunch. Mike Rosen, CFA.

[flaminia]

For decades now, the core of Los Angeles has been the Wilshire corridor. This extends from (and includes) downtown to the Santa Monica coast, from the Hollywood Hills/Santa Monica Mountains on the north down to about Pico or so. So it's a long ellipse. The concentric areas should be drawn out from that shape to secure a more accurate pattern.

[Giacomo]

This would make sense if we commuted in flying cars to a central district. Since we don't, it doesn't.

It would make more sense to chart by terrain (aren't most "soft landing" areas in the hills, or on the coasts?) or average temperatures (desert living is cheaper for a reason). And -- if we were prepared to be intellectually honest--we'd look at map of ethnic group distributions as well.

[TC]

Palmdale/Lancaster is more like 35-40% y to y.

Zillow is not all that accurate.

[It All Happens on the Margin]

For professionals, there are many more opportunities outside of that "central" area, and probably more in OC.

@SoCalJim,

OC is cratering, dude. Sorry.

Job losses in OC over the past year were the deepest in the state.

I love OC, but right now it's in the pits due to the concentration of jobs related to finance, housing, and auto.

It will definitely recover (2012-2013), but the only things carrying OC are healthcare and tech - and those are getting hammered, too.

http://mortgage.freedomblogging.com/2008/06/19/
it-could-be-2013-before-oc-recovers-from-mortgage-
job-losses/

Not that LA is much better (concentration in entertainment is hurting), but OC is no picnic.

[Nick]

Strangely, I find myself largely in agreement with Mike Rosen about the lenders being largely at fault for the mess. Unlike Mike, I don't blame them for not lending now: they have tightened their standards to compensate for risk, as every business should if they want to be long-term viable (note the only "lender" who is still giving away money recklessly is the federal government, which is too stupid to notice or doesn't care). I blame them for lending during the bubble, and allowing prices to be driven up by their lack of standards, creative financing, and lack of pricing in risk. This is due, in large part, to improperly accounting for losses due to systemic risk, and a cultivated impression that the government would bail them out if they failed (see the GSE's for the largest example).

If we could just get the government to stop making reckless loans, and disabuse the GSE's of the idea that their losses would be socialized, we'd not only get to the bottom and thus start recovery sooner, but we'd lessen the chances of another bubble. Let's compare that to what our government is actually doing, and realize that we're far too stupid to handle the bubble correctly even when it's obvious, much less when it's forming.

[TrojanDLA]

Good points Bode, this circle is inaccurate, and the trend should have two hotspots in terms of value retention: coastal + downtown > inland areas.

Huntington Beach, Newport Beach, Irvine has held up very well compared to the cities only 5 miles inland.

[DSL]

Bill, why would you want to leave beautiful Pasadena for the IE (even for more house)? Rancho Cucamonga might be a nicer part of the IE, but it's still the IE. Stay in Pasadena and avoid the commute, thugs, and streets awash in for sale signs due to foreclosure.

[Mousebender]

The lenders have returned to conservative lending policies because they would go bankrupt if they did not do otherwise. Their "previous reckless collusion with realtors, appraisers, and mortgage brokers" was their previous business strategy. This reckless collusion was the primary cause of the housing bubble; easy financing drove demand, which drove prices to unaffordable levels. The ultimate result is that misleading lenders lent money to naive buyers, or in some cases, to fraudulent buyers who instantly skimmed cash from their purchases and defaulted immediately, leaving mortgage creditors holding the bag.

The effect of this lending bubble was to move future housing purchases (and therefore increased building and housing-related consumption) from the future into the present. The economy's housing sector is now overbuilt and the inventory is overpriced. It will take years to absorb the massive surplus and restore equilibrium.

I can imagine Mortimer Duke from Trading Places, yelling "Turn those machines back on!". Reinflation of the lending bubble (which drove the housing bubble) is not going to happen.

[It All Happens on the Margin]

Correction, TrojanDLA.

PARTS of Irvine are holding up. It's an odd market because it has quite a few zip codes, and straddles the area between Newport (turtle ridge/rock, UCI) and the Cleveland Nat'l Forest (northwood II), and everything in between (quail hill, deerwood, greentree, etc).

So Northwood II is taking it in the shorts, and so are many other 'inland' parts of Irvine.

Here's a newer northwood II home listed at $240 per foot:
http://www.irvinehousingblog.com/blog/comments/
shadowplay/

Eventually, it will all crack.

[the problemwithcaring]

Bloviate -- You keep using that word. I do not think it means what you think it means.

[Rich]

"Reinflation of the lending bubble (which drove the housing bubble) is not going to happen. "

The history of the economy since the '80's is that Wall Street players discovered the intoxicating rush of juicing up profits through leverage and how securitization helps simplify things by passing off risk and management costs. Other players, including middleman banks serving as credit card franchisees and the consumers themselves, reaped benefits from the concept that they had never experienced before. Everybody wanted to play the game for their piece of the pie.

After the recession of the mid '90's shook out a lot of bad risk credit card holders and foreclosed a lot of mortgage holders, we all expected standards, especially for credit cards, to tighten up. NOT! People with bankruptcies and students without credit histories were getting flooded with card offers as though nothing had ever happened, and we all know what happened to mortgage lending.

The essential problem is this: you can either have a steady-state economy where prudent standards discourage leverage, or you can have a volatile economy where all players are allowed to access leverage at whatever level they please. In the competitive world of hedge funds and investment banking the players who leverage win the investors, so all the other players follow suit. This will happen again at the end of this downturn, no question about it, and if this exact real estate bubble doesn't rise, something very like it will. One reason I have faith in the long-term value of real estate as an investment is that the genie of leverage is out of the bottle and will inevitably reappear in the future to take us on another magic carpet ride...

[peteviles]

theproblemwithcaring writes, "Bloviate -- You keep using that word. I do not think it means what you think it means."

Thanks, prob. Dictionary.com defines bloviate as "to speak pompously ... To discourse at length in a pompous or boastful manner."

That's generally what I mean. It's my way of saying, these are my thoughts, but I know it's fairly pompous of me to think they're the last word. It's my way of inviting the crowd to bloviate back at me. I had a boss who loved the word and used it more accurately, and now I just look for reasons to use it.