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

[latesummer2009]

With the accelerating declines in the LA area, it will be very hard to call a bottom. Perhaps we should start thinking when buyers would jump back in according to price, instead of years. Look at the IE. Once prices dropped about 50% and were actually affordable, sales picked up. Unfortunately on the Westside, prices may have to drop even further before they are "affordable"

As L.A. Land has said, up to 71% of 2006 L.A. Area buyers are now UNDERWATER.

Keep up the good work Peter. This blog is what L.A. needs.

http://www.westsideremeltdown.blogspot.com

[jb]

Fannie + Freddy = Toast. I work in the financial industry and I am laughing at how stupid you taxpayers are, SUCKERS!!!!!!

[Noodle]

Pete mentions the `94 quake and that may have had a bigger impact on SFV sales than in other areas. I had a condo in Reseda at the time and though it was trashed pretty hard we were green tagged -- which made our EQ insurance company try to lowball rebuilding.

It took 5 years before our HOA went to arbitration and got a settlement to repair our places and structurally retrofit. In the meantime, nobody could sell (or even rent them out, who wants to live in a trashed condo?) And I knew of several people in our complex who went into foreclosure because they had to move (job-related relos, etc) and could not get rid of or rent out their places. No need for funny loans to get upside-down in this situation.

Did other (non-EQ-damaged) areas of the city have similar statistics?

[Cal]

For the SFV, 1994 sales were very good for homes and horrible for condos.

1994 home sales was the best since 1989 and wasn't bested again until 1997.

1994 condo sales was the worst year on record yet.

I think for the reasons Noodle mentioned, condos were tied together, homes could be moved quicker and easier and the earthquake gave both sellers and buyers reasons to get deals done.

[frank]

I think bottom is still a long time away from even thinking about it. The fact that foreclosures are four times higher today than any other time in our history cannot be ignored. In the next four months we will see even sharper drops in home prices as sales slow and inventory grows.Banks just have too much real estate on their hands and they just cant get rid of it fast enough. The pressure on banks to weather the storm is impacting this market like never before. there are too many factors affecting the market negativelt to even think that we are close to bottom.

[Laker]

: latesummer2009,
Sales in the IE are based on local people that already own houses there but way overpriced ones to buy another new low priced one, then dump the first house to foreclosure.
I have a far relative member that is doing just that. I talked to her about it, and she told me ALL her neighbors are doing that, so she is doing that too.
Basically, she has perfect credit, but bought a house with no down in 2004 for $350,000. Now she can buy bigger house, newer house for $120,000. So, she will put 10% down (the whole $12,000) and buy the new nice house for $120,000, then let the old expensive $350,000 to go to foreclosure....She will save about $1500 every month....
Again, let me repeat, ALL her neighbors are doing that....
Expect foreclosure rates in IE to continue to climb. Expect prices to be lower and not rise for at least 10 years.

[some investor guy]

For LA County you will know you are close to the bottom when you get to 42% off, if we aren't in a recession at the time. 50-55% off peak if it happens during a recession. If we come out of the current likely recession before hitting bottom, use the 42% number.

At 42% off, we would be in early 2003 pricing.

If interest rates go over 8%, the bottom will be even lower.

How long will take to get there? Not that long. Early 2010 is my guess.

[It All Happens on the Margin]

Laker & latesummer2009:

Check my comment on 7/16/2008 @ 10:53am on this post:
http://latimesblogs.latimes.com/laland/2008/07/
southern-cali-1.html

I saw this taking place months ago in the IE -- it has become a cliche...

[Jeremy R]

Am I really confused.

By my analysis, Peter is predicting that the bottom will hit in 2011 if history repeats itself.

What is everyone complaining about?!

[Keith]

Arti, the expensive areas are getting nailed. Why did you say they aren't? It is not true. I have seen homes in the South Bay discounted $500k and $600k. I talked to a woman yesterday who lost $1.5 million selling a home on the Palos Verdes Peninsula recently.

The analysis of the timing of the last bubble is right on, and very useful because it gives us an idea of how slowly these things move. Be patient. Just because prices have fallen, doesn't mean prices are cheap.

But stop depending on tea leaves to look at what is going on now. Everyone insists on lumping things like this into the "too complicated to understand" category, and then we're stuck with making comparisons about the last time a democrat won office, or the last time the American League took the pennant, blah blah blah.

Are houses affordable? Don't answer yet. Look at the long term graphs of house price vs. earnings. Have they returned to normal? NO. Buying a house takes way too much of an annual income, historically.

Now look at the long term average ratio of the cost of renting vs. the cost of buying. Are they back to where they should be? NO. Renting is still much cheaper than buying.

Forget everything else. Forget "people like California", forget "tax benefits", forget everything else. It's noise, and irrelevant. These things havent changed in 20 years so why did prices go up, and why are prices going down? Not for these reasons.

Home prices are much easier to come to grips with than stock prices.