Are we there yet? When will housing prices hit bottom?

Today's MDA DataQuick report shows that home sales are now rising in most of Southern California, and raises the second-most popular question* on this blog: When will housing prices hit bottom?

Rather than offer a guess, or a theory, I thought it would be instructive, if a bit complicated, to look back at the last housing cycle in Southern California. I'll use the metric of single-family home sales in the San Fernando Valley, because that's the metric I have in front of me, courtesy of the Southland Regional Assn. of Realtors.

Previous cycle:
Peak sales volume for July: 1,495 in 1988 (Median sales price at that time: $210,000)
Peak median sales price for July: $241,000 in 1989
Trough sales volume for July: 670 in 1992 (Median sales price at that time: $216,000)
Trough median sales price for July: $156,500 in 1996 (35% decline from peak)

Recap: In the early 1990s cycle, sales volume peaked one year before prices peaked; sales levels then declined for four years. Prices bottomed four years after sales bottomed. Prices fell by 27% after sales bottomed. Prices then remained at the bottom for 19 months, from September 1995 to March 1997.

Current cycle:
Peak sales volume for July: 1,273 in 2003 (Median sales price at that time: $373,500)
Peak median sales price for July: $655,000 in 2007
Trough sales volume for July: Not yet known, but quite likely July 2007
Trough median sales price for July: Not yet known

Recap: Sales volume peaked four years before prices peaked. If my prediction of a slight increase in sales in July proves correct, sales levels declined for four years -- which would match the previous cycle. We don't yet know when prices will bottom out.

There are a number of reasons that the two housing cycles could be very different. The early '90s cycle was punctuated by a recession (1990-91) and an earthquake (1994). The current downturn has its own unique characteristics, many involving the availability of credit.

Takeaway: In the last housing cycle, prices in the Valley bottomed out four years after sales hit bottom. We are likely at or near the bottom for sales in the current cycle right now.

-- Peter Viles

*The most popular question on this blog is: When will home prices start falling in (insert name of reader's favorite neighborhood here).

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

Photo credit: Getty Images

Comments

[Tim K.]

Peter, one metric that might be worth following is when housing costs overshoot, on the downside, the equivalent rental costs. Granted, that's a different number depending on your income level and access to credit, but it could very well be argued that once the majority of the population who is looking to buy a place, AND has gotten the information about the relative costs of renting vs. buying, is when home prices start back up.

That might be a harder number to come by for historical reasons - but I would argue that the ability for home buyers now, with the internet and nice home comparison databases like Redfin, Zillow, and Property Shark, the time gap for determining when it is time to buy has decreased, at least for that population which is self-armed with the data. The big question is how big is that population?

The 4 year gap of time between 1992 and 1996 needs to have its root causes examined - was it an expansion of credit that took that long? Was it the slowness of communication speed?

[Arti]

Once again this is all generalizations about medians and bottom-calls, when real estate is local and all the high end areas are still untouched and unmentioned. This blog should be called Inland Empire and East LA Land.

[Cyling in Hollywood]

don't you think that the overall economic cycle (currently entering recession/depression) might have something to do with this as well?

i really don't think that just looking at the previous housing cycle has much predictive value...

[CD]

Quit it already with the" are we there yet ? ". 2012 if we are lucky. You better start showing movies on your blog to keep us occupy as this conversation will get old fast as things are going from bad to worst.Lets talk about: how bad it is going to get ? What does the NAR says these days , can you amuse us with a Lawrence Yunn interview. We need a laugh around here...
Tell us about your new boss the ex Direct Tv Ceo. Is he a Kool aid drinker or has he got a new vision? Can you ask Sam Zell to stop calling my house for a new subscription ?
Will he hire Peter Hong as a doorman for his new LA Times condos ?

[Tim K.]

Arti misinformed: "Once again this is all generalizations about medians and bottom-calls, when real estate is local and all the high end areas are still untouched and unmentioned."

Clearly you do not read the comments or posts carefully, or you would have read Peter's great post about the new Redfin neighorhood and zipcode specific pages which clearly demonstrate that what you are saying is not true.

Since you love to speak in generalities yourself, perhaps you should do yourself a favor and check out some of those great graphs of prices per square foot. You'll see that prices in areas like Pasadena have dropped by 15% in the last 6 months alone!

[D]

When prices don't fall for 6 months straight is a good sign of a bottom.

[Chris]

Arti, besides trumpeting areas that are holding on to values but 95% of californians can't afford to live in, maybe you should do some actual research.

http://westsideremeltdown.blogspot.com/

http://www.doctorhousingbubble.com/
real-homes-of-genius-today-we-salute-you-santa-
monica-929-square-feet-for-969000-and-you-thought-
the-bubble-was-over/

[Chris]

Hey Peter,

While I like the content of this blog in general, I think it may be a bit too soon to be calling a bottom when there are many other factors involved in THIS meltdown. The comparo to the one more than a decade ago, while helpful with the insights, doesn't quite do the present day situation any justice. We are staring a smarter (so they think) industry that thinks hiding their REO's will help their bottomline or keep them from imploding, and dealing with multiple CYA occurrences that will end up exacerbating the mess. Also, without solid figures of the months long bottom plateau, how can you call it?

[Joe]

Prices are no were near the bottom I would say 4 years at the least in some parts of LA really who has a 1.2mill to spend on a home that was 500k 4 years ago not many people

[Steve]

The botton could be near and prices will be stagnant for a period of time. Still you could not pay me to buy any dump in Cali.

[MarkW]

I would like to chime in with a request.

How about looking at who is buying in the most distressed areas (i.e. IE). Is it first timers, investors, people retiring? It looks like these areas will hit bottom first, even if they are not at bottom yet.

I don't really care about Pacific Palisades. I don't know anyone that could afford to buy there even at 50% off.

[Chris]

Here's a rebutal:

http://www.doctorhousingbubble.com/
10-reasons-why-california-is-years-away-from-a-
housing-bottom-rebuttal-to-those-calling-for-a-bottom-
for-california-housing/

[Rob Dawg]

Thee correct question is whether we have enough information to be able to detect a bottom. The correct answer is no.

Look, we don't know. No one knows. More, we don't know how to find out. No one knows. With some 3rd quarter data say mid October we may have enough to answer the second question; do we have enough data to ask intelligent questions.

Bottom calling now or in the future is guessing. Plain and simple, guessing.

[Nick]

Contrary to the haters, I think it is valuable to look at history to try to figure out what might happen in the current environment. In this case, though, I think the closest parallel is from Japan in the 90's; they seemed to have a very similar situation, with massive financial fraud and government bailouts and prop-ups. They managed to turn what might have been a quick and painful correction into a 10+ year meltdown with their government policies apparently designed to drag out the problem.

Of course, like any historical parallel, our situation is indeed different. Where Japan in general had a high savings rate and low national debt, we have the opposite. I'm not sure how that will change our outcome relative to theirs, but I'm sure it will have some effect.

Anyway, I think learning from history can be very valuable, provided you are looking at the most accurate parallel possible, and objectively analyzing the differences. I wish more of our current politicians did so.

[Tim K.]

Rob Dawg - I appreciate your point about not having enough information to call a bottom, but I think you're being a little too "black and white" about it.

Your argument implies, incorrectly I believe, that the RIGHT course of action is to GIVE UP TRYING.

I believe it IS possible to determine the bottom CLOSE ENOUGH that it matters financially to an individual who is trying to get back into market as a homeowner or investor. While it might not be possible to determine the bottom within say, 1 week or even 1 quarter, it might be possible to determine the bottom within the space of 1 year, even if in hindsight.

That, I believe, is "good enough" and Peter's suggestions is that perhaps we should start looking for the signs now, so that when that "wow, it's been 1 year and I think the bottom has passed" moment is here, we will be able to buy with more confidence.

That's a worthy goal, yes?

[Rational Renter]

Umm...did anyone actually read Peter's analysis?

He is saying that a bottom is likely 4 years away, since we are now just past the sales bottom.

[Rational Renter]

Also, according to the LA Times, LA County sales are actually still dropping. It's only in the heavily foreclosed outlying SoCal areas that sales are up. So in L.A. we are probably still 4+ years out from the bottom.

[Cal]

I agree that we have bottomed in sales, there is no way we could replicate last September-March trough again. We are several years away from a price bottom and I think it could be much longer than people think before an absolute bottom is reached, but I think the majority of the decline will be weighted towards the front end (first couple of years after sales hit bottom) then kind of a slow lingering malaise from that point forward.

The California economy is hitting some significant downward pressures (seen unemployment lately?). And people keep pointing to the fact that international tourism and investors will save us. Maybe people haven't noticed that Europe and Asia economies are slowing. LAX is reporting a planned 11% cut in International flights.. where is growth and strength going to come from?

Credit is still tightening. MI companies are cutting max CLTV in CA, many of the few lenders with stated income left are dropping it, Fannie/Freddie are increasing fees, and the conforming limit is dropping 104k at the end of the year. It sure seems like we have a long way to go but at least we have a much wider acceptance and understanding of the many issues facing housing than there was even a year ago.

[Chris]

Sorry, I guess this line fooled me?

Takeaway: In the last housing cycle, prices in the Valley bottomed out four years after sales hit bottom. We are likely at or near the bottom for sales in the current cycle right now.

[E]

I'm with Peter that the bottom is at least 4 years out.

However...I think it's important to look at the types of loans that were in effect during the last bubble.

What was the % of Option-Arm loans back then?

How many foreclosures were there at that time?

2012 is pretty optimistic and if you think the "medians" or "sales volumes" tell the whole story then you are sadly mistaken.

Researching my old 'hood (Hancock Park), the bottom was in 97. Just in time for the dot com money to rush in and nurture the infancy of the bubble we are in now.

[E]

Also...don't you think that sales volume can be artificially inflated by the banks selling crackhouses in Compton at 75% off?

[Arti]

Well actually I'm with the bears and think we're nowhere near a bottom, I'm just bemoaning the fact that the blog is so focused on medians and marginal areas where homebuilders were building, rather than the westside, which is mostly unscathed. The discussion should be what's going on there, and how can you talk about bottoms when homes there have barely budged in price.

[Nelcisco]

"Are we there yet? When will it hit bottom?" is the headline

Answer: When housing once again becomes comparable to income and the denial market comes to terms with that.
If it does we can hit bottom this fall, but the way we've been seeing the monthly graph and charts on this blog where we're seeing 2k to 3k at a time, it could be till 2012 as CD said IF WE'RE LUCKY

[Dougmc]

Arti,

Single family houses on the Westside may not have fallen as much as you would have liked, but condos, single family homes in less desirable neighborhoods and older, un-renovated and undersized single family homes have been hit 15-20% and are continuing down. This is normal in a down market, when the price spread between less and more desirable properties usually widens. The most desirable properties usually are the last to slide and slide the least in percentage terms. We may get an exception to that rule this time around if mortgage underwriting polices tighten more for the $700,000+ properties than the lower priced ones. Recently I have seen some indications of price pressure coming from the above as well as from below.

[TheUrbanHouse]

Remember, real estate is not like stocks and doesn't fluctuate as such. It takes years for homes to turn over. If you are really affraid of not being caught in a downturn, buy once you see a recovery happening. The price increases we saw before were lead by years of much smaller gains. Historically real estate doesnt increase substantially more than inflation. I would rather pay a 5% premium and know that its going up, than to buy and loose 5%. People are still loosing their jobs left and right, interest rates are rising, people have lost tons of money in the stock market... Do you really think the decline is done? Or even if you do, do you really think its going to jump up 20% in the next year? I highly doubt it. Its time for declines or anemic growth for many years to come. Save, save and save your money right now.