Lehman Bros.: California home prices will fall 50% from peak

When it wasn't fighting for its life this morning, Lehman Brothers was dropping a bit of a bombshell on housing prices: It believes the total decline in California will be 50% from the peak, and that we're roughly halfway there.

From Calculated Risk, which also offers a link to the Lehman conference call:

"[The Lehman] base case assumes national home prices drop 32% peak to trough, vs. 18% to date, with California down 50% vs 27% to date."
Ian T. Lowitt, Lehman CFO

... In other words, Lehman's base case assumes that house prices have fallen just more than half way from the peak.

These aren't quite apples-to-apples numbers, but I will offer them anyway. MDA DataQuick's tracking has Southern California home prices down 31.1% from their July 2007 peak. The peak median sales price was $505,000, the August level was $348,000. Lehman's call suggests median prices will fall to the $250,000 range.  The price levels in Los Angeles County are slightly higher.

--Peter Viles

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Comments

[upthecreek]

ask me if I believe Anything Lehman Brothers LEH has to say.. they sound like a bunch of idiots...

[Happily renting Kevin]

This is not surprising. The prices shot to levels more than twice as high as fundamentally supported levels are.

I'm thinking the backlash from the bubble might even drive prices below fundamentally supported levels. Enough people have been dried out of their savings that this could spiral downward significantly.

[Tim]

Remember a 50% loss negates a100% profit

[J.W.]

And they would be correct.
I told a lot of my friends this same thing back in 2004 and most of them thought I was crazy..................but you only had to complete a 5th grade math class to recognize that there was a huge Ponzi scheme going on in the real estate market in California. We sold our home in early 2005 and left the state. Although we miss many things about SoCal, we just thought it would be better to sell high and move to another market where prices were sensible. Several of my friends did the same thing (or became renters). Those that didn't believe me are crying the blues. Such is life.

[Mike]

Sales at current prices are still very slow and inventory is still high in the 90016: prices will have to fall.

One of the old-school rules of property in LA is that the average house should cost about 6x the average income for a zip code. It was running about 11x at the peak. So, I believe it.

[Bobsuruncle]

That sounds about right

[IToldu2CashOut]

Yup, even on the Westside, where most of the future losses are coming.

[Nott A. Realturd]

All I ever read on blogs like this is bad news about the housing market. How come in my modest neighborhood in the Valley (Chandler and Woodman) I see houses with multiple offers and selling for the asking price? Is all this bad news a joke or is my little neighborhood somehow immune to all the bad news you people seem to always find. I know places like the High Desert are suffering, but I just ain't seeing it around here. Just MHO.

[dclogang]

No no no... It's going to be far more than 50% from peak. It's going to be much worse. (I should say better for those who have waited to buy).

I think between the gas prices, food prices, job losses, the states budget crisis, investments and bank problems we haven't seen the worst of it. I bet it will be down 75% from peak as average, at least in the SFV.

Look at what happened to Japan...

Anyone care to dispute?

[ToadB]

Yup, sounds about right.

[Nick]

I will dispute the 75% from peak hypothesis, with some regret. I doubt the idiot politicians both currently in office and probably about to be elected would allow more than a 50% reduction in housing prices. I bet we'd have outright socialism (in practice if not in name) and some sort of government control of pricing before that happens. Remember, prices are only relevant to currency value; if the government gives everyone 50% towards the purchase price of a house (through whatever means), that causes prices to double in numerical value. It's already started, and it's only going to get more extreme with whatever new New Deal programs are adopted by the next administration to "help" the poor people who need big brother to take care of them. No chance California sees a 75% drop from peak, no matter how much us "old timer" free market people lament the new USSA order.

[Wilson]

Hey Nott A.,
Your zip code is doing great in the valley, if you don't consider the 382 foreclosures/soon-to-be foreclosures surrounding you. Only 382 in your small zip.
W

[socalinvestor]

I would say more like 40%. Avg home prices in LA at 250K sounds way to low. If avg prices do somehow go that low, speculators will jump right back in and it will go up in a matter of weeks.

[Rational Renter]

Assuming Nott A is telling the truth, that he's not an obnoxious realtor troll, I will answer him without any sarcasm. Nott A, the majority of the losses are happening invisibly. There will still be homes that sell. And usually those that sell will have multiple offers. Why? Because there are so few houses out there priced low enough these days that anything that is below the rest of the market will immediately draw the attention of all those desperate to buy a house.

[mbob]

Just a second while I park my walker and adjust my respirator...there, that's better. Having sat out the 90-94 freefall, bought and continued to "lose" equity until '96, I think we still have a lot more to drop.

Unemployment has only started to creep up, not surge. And we all know that surges are valuable tactical tools that can turn the tide.

Sarcasm aside, lost savings, lost jobs, rising food & energy costs etc. are all joining to make an imperfect situation.

[Amazing_Happens]

If you really think there are bargains and steals galore out there right now, you haven't actually tried buying a house lately.

But maybe you aren't saying that, you're just saying there WILL be bargains and steals galore in the future.

So, when are all the nice homes in nice neighborhoods going to start foreclosing? In the next wave of resets?

[MyLessThanPrimeBeef]

I don't really mind that much whether it's 50% or 75% off the peak...really.

I just want to know if it will get there on its own pace, or if interventionists would put up road blocks, rearguarding for their rich comrades, that will drag out this process for decades.

[amir]

I guess they're been reading the blog. However, they're behind the curve again. It's AT LEAST 50%. Many areas will drop more than 50%.

Here's why:

Riverside county is already at 50%. What happens when SFV drops 50%? You think Riverside stays fixed? I don't think so. When SFV drops 50%, Riverside drops another 15-20%.

And when West Hollywood drops 50%, why should SFV stay at only 50% drop?

You get the picture. It's a self feeding cycle.

[MyLessThanPrimeBeef]

NottA, have you considered the possibility that you are surrended by body snatchers from outer space? Do any plants look abnormal in your zip code?

[Michael Snyder]

Aren't these the same bunch of "experts" that were calling for oil at $210 by November? OPEC's cutting production to maintain pricing ant Brent crude dipped below $99 before retreating to $102 on the OPEC news. And this is with Ike at Cat 3 and heading right through the gulf to Galveston.
Granted, to be sustainable housing prices have to come in line with incomes. But with another major lender set to tank and the Freddie/Fanny debacle rocking the derivatives market, I'm wondering just how many blank cheques Paulson has left.
From www.bloomberg.com this afternoon: " Sept. 10 (Bloomberg) -- The cost to protect against a default by banks and securities firms rose to the highest in six months as Lehman Brothers Holdings Inc. reported the biggest quarterly loss in its 158-year history and concern mounted that banks including Washington Mutual Inc. won't find buyers.
Credit-default swaps on Seattle-based WaMu, the biggest U.S. savings and loan, rose further into distressed levels and traded at a record high. Contracts on Lehman also traded at a record, signaling that investor confidence is deteriorating, after it reported a $3.9 billion loss and said it wrote down the value of mortgage and commercial real-estate assets by $5.6 billion amid the worst U.S. housing crisis since the Great Depression."
Shannon D. Harrington continues, "Banks and securities firms worldwide have reported more than $511 billion in writedowns and credit-market losses since the beginning of last year as home loan foreclosures rose to the highest on record and housing prices plunged."
With WaMu's stock now over 92% below peak real estate doesn't look so bad. At least you're not paying the likes of Kerry Killinger a $24,000,000.00 bonus for leading his concern into what will inevitably be some sort of Federal receivership.
So, what happened to gold at $1,600?

[Ace]

I just saw a new listing in my neighborhood. It was a brand new house that the owner bought in early 2007. They paid $1,290k for the house at pretty much the peak of the market.

How much did they list the house for? Only $1,590k! While all of the other houses in the Valley dropped 30 percent, this house magically increase in value by 23 percent.

It is as if they don't have a tv or internet access.

[Rational Renter]

Snyder, except this time Lehman is just agreeing with all of us here, learned academics, economic reasoning, and, well, common sense.

[smrr]

all you homeowners, all you conservative bears, all you realtors - should now be realizing that 50% off peak is conservative. 50% is conservative.

that's coming from lehman bros. not me, rational, e, or any of the left wing bears. and you know, even now, lehman needs to be putting the best spin on things. so if they say 50% in reality it's 75%.

remember when folks were predicting 2% drops in calif. and realtors said "soft landing." or your buddy the loan owner said - "it will slow down, but it won't go down."

yeah.

[CD]

OK next is Wamu, Downey, Wachovia, is Citi on the chopping block ? Too big to fail, too big to survive ? as a Calculated Risk bloggers said.

[smrr]

e.
please find listings that contradict this statement. i'm sure you can do it in a minute. forgive me, i don't mean to make it out like you're taking requests - but you're the man for the job.

All I ever read on blogs like this is bad news about the housing market. How come in my modest neighborhood in the Valley (Chandler and Woodman) I see houses with multiple offers and selling for the asking price? Is all this bad news a joke or is my little neighborhood somehow immune to all the bad news you people seem to always find. I know places like the High Desert are suffering, but I just ain't seeing it around here. Just MHO.

Posted by: Nott A. Realturd | September 10, 2008 at 02:12 PM