Freddie Mac CEO: Home price decline 'halfway through'

Worth noting, and worth double-posting, from Tom Petruno's Money & Co. blog at LATimes.com: Richard Syron (pictured), the CEO of Freddie Mac, says we're only halfway through the decline in home prices:

Since the date of our first quarter call, recent data have prompted us to increase our estimate of future house price declines. Previously we said house prices would fall at least 15% nationally peak-to-trough. Today’s challenging economic environment suggests the housing market is far from stabilizing. As a result, we now believe that national home prices will fall 18% to 20% peak-to-trough. . . . The long and short of it is we now think we’re about halfway through the overall peak-to-trough decline.

More, from Tom Petruno: "Today, given Freddie Mac's second-quarter loss (which was more than three times larger than Wall Street had expected) and the company’s decision to slash its dividend at least 80%, investors again are bailing on the stock. It was down $1.48, or 18.4%, to $6.56 at about 12:25 p.m. PDT. The price had bounced as high as $10.80 in the weeks after the Treasury rescue plan was announced on July 14."

My back-of-the-envelope math: If Syron is correct, and if we are coincidentally also halfway through the price decline in Los Angles -- two very large ifs -- the numbers could fall like this:  Median sales prices peaked at $550,000 and have fallen to $415,000, a decline of 24.5%, according to DataQuick. If prices were to fall another 24.5%, median sales prices would bottom at $313,000 in Los Angeles County. Very big ifs, as I say.

--Peter Viles
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: Bloomberg News

Comments

[Bob]

Doing it the old fashioned way, with a lot of saving, scrimping, Netflix® for entertainment and bologna sandwiches for lunch, my $80k income might just get me a house at $313,000.

[The Electric Ant]

A 300K bottom for the LA RE mkt. would appear to be reasonable. At 313K a family would need $35K (10%dn + c/c) and gross $75,000. This simply is not enough; It needs to drop another 40% for the "have-nots" to have. IMO median home prices would have to get to $250,000 before anyone would claim a "bottom". And then home prices must track, at least reasonably, economic expanision and increased wages. If not, if a few years, well have yet another go around of ridiculous prices followed by massive amounts of foreclosures. Reform mortgage resets and HELOC's.

[firesale]

What "Big Ifs"?
It's in the bag, Peter.
Bet on it !

[VonWilhelm]

At $313k, the median would still be unaffordable in terms of it's relationship to the median income.

[MarkW]

Who cares what this guy thinks. Does he have any credibility what so ever? Why does he still have a job?

This is all you need to know. He was appointed Chairman of the Board and Chief Executive Officer of Freddie Mac in December 2003.

[Tim K.]

I'm not sure why the "big if" Peter - are you saying it will go lower or higher than 313K?

As far as median income vs housing prices, it's probably a better measure to check the median income of those who BUY houses already. Because there are a huge number of people who are very poor in LA and there is no way in the world these folks are buying houses (except for unusual funny money cases like 2002-2005). Since someone has said over 60% of LA are renters, perhaps what we should figure out is what the median income is for the upper 40%.

However, it is probably easier just to go with the equivalent rent metric, since that already has all income levels factored in.

[Tim K.]

Oops, and I meant to add, and in that case, 313K would probably match the equivalent rate situation quite well in many areas.

[CD]

800 Billion loss. That is 800 BILLION. What do you think will happen ? Money will be flowing as usual? It means tighten your belt another notch or two and get used to the dollar burger at McDonald. Buying a house now ? We have been saying it for a year : 50% off will be the minimum discount .
We will not buy the Sam Zell agenda and will not purchase his condos. Move on already !!!!!!

[weho19]

I said it yesterday and I'll say it again today. Electric Ant above is closer, but I still think we are going back to early-bubble days (2000-2001) when the median sales price hovered around $200-220k. Pre-2000, homes were increasing gradually on an annual basis - as they should have - and in line with income levels. An income of about $75k would qualify. I would venture that is close to an average income in this city.

[IToldu2CashOut]

I would call your "very big if" an unstoppable inevitable event, but for people who have lived in Los Angeles a long time this might be something hard to wrap your mind around. Considering many sellers are taking property off the market while it continues to tank as they sit on the sidelines and the coming Alt-A Armageddon, $313k still seems optimistically high.

[Cal]

Minor quibble, I think it should be 280k not 313k

24.5% * 2 = 49%
550k * (100%-49%)= 280k

For example if they thought the total decline was going to be 20% less than 100k, you wouldn't when you were halfway through (10% down) take 10% of 90k.

Well, either way I think we have much further to go and Fannie/Freddie need to tighten up their guidelines to stop taking on junk. Things are still far too loose (the broker boards always talk of backdoor Stated Income by getting income waivers through automated underwriting) and it is clear the taxpayers are the ones that will have to foot the bill not the companies themselves.

[Valley Renter]

If we are halfway down, then we should be going down another $135K in the median price to $280K. $313K as a median price would be optimistic.

What I am hearing from realtors is that banks are asking for 30% down in LA - 10% won't cut it!! How many people have $84K as a down payment? Even $280 K sounds overpriced unless down payment requirements come down.

[Laker]

Peter, unfortunately you are very wrong here.
There are no iffs sure not big iffs. It is more like WHEN not if.

I don't trust the scumbag from Freddie mac to tell us the truth since he wasn't doing that before, why would he do it now.
He is sure underestimating it, but you can take his between the lines "half way" of correction, and apply it to LA prices.
It would make perfect sense. Assuming values are now at 2004 levels, shaving another 25% will get us to 2002 levels.
As i said very optimistic, but that is the right direction.
Median in LA cannot be higher than $250,000-300,000.

Tim K,
I like how you take away 60% of the population as they are poor/renters and will not be buying any houses....
You disregard the important fact that the other 40% are home owners...they already own homes....they don't need to buy. IF they want to buy up, they need to find (a sucker) the sell their place to them....if your 60% are not buying...the 40% are stuck. End result, at first only specuvestors will buy, as soon as even these dumb people will recognized that they would not find buyers to unload their flips, they will stop buying too.

[firesale]

"Alt-A Armageddon"...
Thanks, IToldu2CashOut.
I love it !
I've used it twice, today, in a sentence.

All sellers out there need to practice in
front of a mirror, at least several times a
week.

[Laker]

Valley Renter,
If your Realtor is correct, 30% down requirement will automatically over correct price to 1997-1998 levels.
Why?
During normal times 20% was norm and if you had very good credit or down, you could get it with 10% down. Now, if the norm becomes 30%.....Median price will get less than $200,000. No way out of this...
I still think that the government will find a way to preheat the economy with massive inflation and massive dollar printing that will not make it possible to see NOMINAL declines to 1998 levels.... Real declines yes, but not in nominal dollars. That figure is pretty much floors at 2000-2001.

[prequal'd]

I met with a mortgage broker this morning who pre-qualified me for 300k. Me and my wife make 100k yearly, and we have 150k of student loan debt, but no other debt. I'm ready to buy one of these 313k houses, just wake me up when the prices are in line with reality.

[happy and not owner]

We are bunch of skeptical when reality sets in because first reaction i s DENIAL. Any way truth from the biggest mortgage company in world is there to back up. Just time will tell how and when the real prices will set in.

just ask your self can you afford to buy with 80,000 a year salary and market is full of only 500,000 homes? Well if not then stay over sideline and soon you will it same price you should buy.

[JK]

Okay Peter, how's this... No one is going to be buying a house on West Los Angeles, Santa Monica, Pasadena or any other safe, clean part of town for $300K. Politically correct enough?

[latesummer2009]

ALt-A and ARM resets will punish the Westside in the coming months. 280K median price sounds about right to me. Westside starter should be about 350-375K when all is said and done. How fast is anybodies guess. It depends on how long the Govt wants to string it out. The longer they wait the worse it gets.

Total Sales Volume in West Hollywood dropped 84.5% last June. Other Westside areas are now experiencing large drops as well. Beverly Hills, Malibu, Brentwood, and Santa Monica to mention a few.

www.westsideremeltdown.blogspot.com

[dude]

Further decline in our financial/credit market will mean more job losses. 70% of US businesses are driven by consumer spending. What's so good about an "affordable house" when you no longer have a job?

The stock market is already in the negative territory. If the word "recession" gets out, I think we will all have to start putting cash under the mattress to avoid another FDIC take over. I don't think everyone should be jumping for joy in a depressed economy.

[yingyang]

Optimistic (or are they pessimistic?) bottom callers should also factor in the worst inflation we have seen in decades when predicting the floor price. I suspect powers at be will try to inflate everything else to prop up real estate so that we all can sleep comfortably at night.

[My name is Steve and I am a permabear (tho I really wish I wasn't)]

For those folks who haven't yet taken a gander at the larger picture we're all in right now, this article and chart should be a treat. I can't get this out of my mind. The pain involved in getting back to the reversion to the mean will be mind boggling. Housing's just one deleveraging factor.

http://www.nakedcapitalism.com/2008/07/has-deleveraging-even-begun-not-for.html

[SoCalJim]

"I still think we are going back to early-bubble days (2000-2001) when the median sales price hovered around $200-220k."

I would have to agree.

But, it is human nature (at least here) to spend more than what you have - b/c of entitlement, insecurity / keep up w/Jones, whatever, so maybe the median will be a bit above that. Trends typically overshoot the opposite direction, and RE is no exception. The media is doing a fine job of programming the public with increasingly bad news, and the public eats it up - as is evident from so many RE blogs. (I wonder what such blogs cost in $ terms / productivity??). The herd runs one way, then the herd runs another afraid of the slaughter. Mass momentum can be difficult to change, particularly when the momentum is so extreme as is this RE market, but after years, the momentum has finally changed to the negative, and it will be that way for awhile. Six months ago, I really did not see significant price changes, but now they are more evident, and I see sellers dropping prices more often and by larger amounts, but houses still sit. People who bought in 2004 are now listing their houses below those prices and still they are not selling. Buyers are first to adapt/change, then sellers begin adapt, then you finally have the entire herd running in the same direction: DECLINES.... , which are necessary since an average 5th grader is still puzzled how s/he can afford something that costs 700 apples, and even more apples, if said 5th grader only make 75-85, or even 120 apples, per year. Good question... but not a good answer. Simple math, trends based on greed, and "me too" entitlement = not a good outcome and a ways to go to bottom.