Is a bottom close? Is it silly to ask?

Is it pointless to ask whether a bottom is near?

News reports have been seizing on data to raise the possibility of a leveling in house prices -- the tiny bump in new home sales reported this week is one example. Never mind that the 2.7% increase in new homes sold in September versus August was smaller than the bump in the same period last year.

Irvine real estate consultant John Burns, in an e-mail exchange with me, wonders why the idea of a bottom is getting so much play. "What's the expectation? That once a bottom is reached that housing prices will shoot back up ? Doubt it," he writes.

Here at The Times, we have avoided jumping on the "Is the bottom close?" question. We've quoted economists as stating that even when a bottom is hit, it will be a long time before home prices begin any meaningful appreciation. They include Christopher Thornberg, an economist who was one of the first to call the real estate boom a bubble, as well as the California Assn. of Realtors' Leslie Appleton-Young -- and when's the last time you heard a real estate agent not say this is the best time to buy?

As consultant Burns notes: "The bottom line is that the housing prices in L.A. are still over-inflated from all of the false appreciation from 2000-2006."

Indeed, home prices in Southern California have fallen more than 30% from their peak in 2007, and sales activity is picking up. But Los Angeles-area homes are still expensive compared to...

local incomes.

About 15% of homeowners could afford to buy a midpriced house in the Los Angeles market in the second quarter of 2008, according to a National Assn. of Homebuilders index. That's up from about 10% in the first quarter, and much higher than the 2% rate in 2006.

But it's still a long way from the late 1990s, when about 50% of L.A. area residents could afford a midpriced home.

The gulf between incomes and house prices suggests that we are not close yet to a "bottom" in the market. Declining house prices may have made some homes more affordable, but now unemployment is rising, meaning some people will not be able to buy a house at any price.

If the past is any guide, when prices start leveling they do tend to bounce along that floor for a long time. When the Southern California median home sales price began to bottom out at around $150,000 in January 1995, it took almost three years to climb back up even to $160,000.

During our most recent long run-up in housing prices, we often heard that double-digit annual percentage gains would not lead to a market crash because this cycle was different.

Now that we are in a downturn, is there any reason why it should not last as long as the previous one? Get ready for a round of news stories exploring why it is really different this time.

-- Peter Y. Hong

Comments

[latesummer2009]

There are no FACTS that point towards a bottom in todays RE market. Everyone should read the story today by Martin Weiss on his website Money and Markets, if you believe other wise. It is quite compelling for prices to drop over 70 to possibly 80%, from peak pricing.

We are just through Phase 1 (subprime meltdown) of this housing downturn, with phase 2 (job losses) and phase 3 (Deflation & Depression) still ahead. You can google it or hit the link on my website at:

http://www.westsideremeltdown.blogspot.com

It will blow you away....

[SoCalJim]

People, i.e., homeowners (or home renters that overpay the bank that actually owns the home) are desperate to think a bottom is here so that they can think they are no longer losing money and so that they can point to at least one asset that is going up in value. Thus, such home "owners" want to think RE will shoot up again when in fact it will not. People hate losing money and hate the thought of losing money on their largest single investment, but you can't change reality. Stocks will easily outpace housing gains in the short term since the general consensus is that stocks are way oversold and the credit crunch is slowly working itself out. Earnings are actually pretty good considering recent events, and P/Es are favorable, unlike housing. If you bought stocks just a few weeks ago, you are up on most if not all of them by 10-30%. Home "owners" still have more pain to come. You don't correct a historical housing bubble in just a year or so. Anyone who thinks that is the case is simply ignorant and needs to ignore what is really happening to maintain their sanity and to cope with their own bad decisions. Plus, the always fine media is doing well in spewing all of the negative news in their typical over dramatic fashion, scaring middle class Joe who doesn't know any better and accepts what that little glowing box says as gospel, thus losing out on future gains to come by cashing out his or her 401k at the worst possible time. Nice job media.

[Suzi]

According to a poll started at http://www.homepricetrend.com over 90% feel the market has not bottomed and over 75% feel it will take atleast 2010 before we see the beginning of the bottom.

[Keith]

"Here at the Times..."

Are you implying you have standards? Your joke of a newspaper couldn't field a single reporter able to identify the biggest housing bubble in US history before it had already started to pop.

Brilliant reporting.

[TrojanDLA]

The reason one asks that question is in order to decide whether to buy real property. During chaotic and unpredictable times, what's the rush? More property will come to market over the next 18 months. So even if we are at "bottom", prices are going nowhere so the likelihood of losing a great deal is low.

When it comes to "bottom", hindsight is 20/20. Every month it appears that a different "expert" is calling a bottom "nearing". The truth? Impossible to determine until the bottom has passed.

[dclogang]

Considering the economy.... um... yea, pretty darn silly to ask.

[Tim K.]

There are really only 3 parties who care about the market direction of real estate: buyers, sellers, and the realtors/banks who make money whenever anyone buys or sells.

For buyers and sellers, knowing when the market "bottoms" is largely not very critical. The market doesn't rebound rapidly as many have pointed out. It's good to know roughly where you are in the cycle, but for sellers, the timing is often dictated by external events, like job/marriage loss, or death. For buyers, they can wait.

The only group left that really wants to know EXACTLY when the bottom is hit is real estate agents. They make money only when people believe the market is going up because that's when transaction volumes are highest. So you'll see lots of "noise" from real estate agents because they are trying to get as many people "excited" about buying real estate so they can make their commissions.

[Tim K.]

Sorry, forgot my conclusion, after all that talk!

"Is it silly to ask?" YES, if you are a buyer of real estate, at least on the timelines of asking every month. NO, if you are asking about once every *year or two*.

"Is it silly to ask?" NO, if you are a real estate agent. You've got to ask often, and loudly, so that you can be the first to ensnare you next victim, er, I mean, customer before your competitors do!

[Tim K.]

Keith, I'm assuming your anger is directed mostly because of Peter Hong's use of the Royal We.

Frankly, I think Peter's reporting has been quite fair in terms of analyzing the situation without cheerleading it. Past reporters at the times are definitely guilty of the sins of reporting breathless "wow, look at those prices go up!" headlines without a single question of the analysis. They pretty much bought, and helped perpetuate the notion that "things really are different this time, and wow, isn't that NEWSWORTHY."

So as much as I realize you're trying to keep things honest with perspective, I'm welcoming the new guard and hope they will be able to do some bang-up analysis uncovering some of the mistakes of their past. Isn't it just as newsworthy when manias are uncovered?

[sheila]

uh, does anybody notice the NEWS?? this "consultant" you talked to wonders why people care about reaching the bottom? then talks about appreciation as the reason? WTF?

LENDERS WILL NOT LEND TO ANYONE, NOT JUST PROSPECTIVE HOMEOWNERS, UNTIL THEY KNOW WHERE THEY STAND AS TO EXISTING LOANS. WHICH IS WHY WE HAVE A GLOBAL FINANCIAL MELTDOWN COSTING TAXPAYERS A TRILLION DOLLARS OR MORE. HOW MANY MORE REASONS DO YOU NEED?

there, now that we've got that out of the way, are you still really wondering why people want to hear if we've hit the bottom? not everyone is trying to "time the market" for their stupid 3/2 in the valley. some of us consider the larger picture.

[TakeFive]

"What's the expectation? That once a bottom is reached that housing prices will shoot back up ?"

I know 4 people that are ready and qualified to buy. More inportantly, they WANT to buy, and they will, once prices stop falling or that property in a good neighborhood becomes too irresistable for the price.

These are not investors, so prices "shooting back up" is not an issure. Simply a matter of "why buy today when it will be cheaper tomorrow", and the property taxes will be lower.

[sfvrealestate]

I wondered if the departure of Peter Viles would have an effect on the comments at LaLand. Obviously, it hasn't -- the bubble bloggers and r.e. industry-haters are still the majority of commenters here. Peter Hong and Lauren, good luck with trying to create a balanced discussion on this blog.

[MyLessThanPrimeBeef]

The problem with asking that question now is that, first of all, because a little knowledge is a dangerous thing, therefore, drink deep or taste not the Pierian Spring, and when you combine that with human hubris, pretty soon, without even realizing it, you will have cut your hand trying to catch a falling knife by accident.

Just ask the Chinese about their investment in Blackstone.

And the Arabs about Citicorp, Lehman, etc.

And TPG about WaMu.

And Buffett about Kraft, Goldman and GE, though that 10% dividend is nice.

The sad truth is that we humans don't know nothing.

[TK Bruin]

Bottom?!? Here's an exercise sure to rip the blinders off those who ask this question:

Look at a chart of foreclosures in the Southland. We aren't even close to the end of this thing.

[Tim K.]

sfvrealestate wrote: "good luck with trying to create a balanced discussion on this blog."

Don't mistake "balanced" with truthful and accurate. Any opposing view is not worthy of printing just because it happens to be the opposite of something else. I mean, when was the last time we gave any of those Flat Earth Society folks equal time?

[srla]

Honestly, it IS different this time, Peter. For close to a decade, people were constantly indoctrinated by the NAR and the Fed through the press that housing never declined on a national level. In fact, as late as 2005, Ben Bernanke was reassuring homeowners that "We’ve never had a decline in housing prices on a nationwide basis" and that the price escalation was based on "strong fundamentals". Whereas the stock market is widely known to have peaks and valleys, the housing market remained largely stable until around 2000. People have never experienced a housing downturn like this one.

The net result will no doubt be a deep scar on the national psyche, and real estate will, for the first time, likely be seen as a less than safe investment. This will no doubt delay any eventual recovery in prices - for how long is anybody's guess.

Of course, many people (economists and otherwise) who failed to see this coming are still hoping against hope that prices will somehow begin to re-inflate. But as much as mass psychology (and idiotic pronouncements like Bernanke's) helped to inflate the bubble, these same psychological trends are now reversed and will likely cause prices to plunge below trend levels (and economically justified levels) for a number of years.

[Rational Renter]

SILLY TO ASK. We might - MIGHT - be near a bottom in terms of sales volume. But then we have all of this excess inventory to clear out, and let's just ignore the impending Alt-A meltdown. Sales will pick up, but prices will still fall for years. They will not stabilize until they equalize. That is, until they are affordable based on local incomes. Guess what? That means we're only halfway there!

[Rational Renter]

Agree 100% with Tim K. A "balanced" discussion doesn't mean indulging the ignorant and uninformed. If you ask me, this is a balanced discussion. We have taken the hypothesis - that a bottom might be near - and shot it to immediate shreds using facts, data, and logic.

Check back in a few years if you want the data to back up your argument that things are about to rebound.

[Bobarty]

"the bubble bloggers and r.e. industry-haters are still the majority of commenters here"

I agree, dang it, what is with all these people who have been speaking the truth coming onto these blogs? What is wrong with you people? Let me believe that I am entitled to a 20% yearly appreciation on my home. Let me believe a neighborhood with a $60,000 median household income can sustain a $600,000 median home price. Let me believe that the A in ARM means awesome and alright. Dang you truthtellers, have you no sympathy?

[Drew]

TakeFive sez: "I know 4 people that are ready and qualified to buy. More inportantly, they WANT to buy, and they will, once prices stop falling or that property in a good neighborhood becomes too irresistable for the price."

I know of 3, myself included.

[NewtoLA]

Not sure if minor up ticks in sales volume or downward trend in inventory is what will predict the bottom. But, increasingly posts on this blog have been dealing with lenders reworking bad loans for millions of customers. The question is, what impact will this trend have on housing prices?

SFV if you and your peers can deal with this question insigtfully and honestly and stop complaining about how median sales prices don't reflect the value of granite countertops your profession will regain my trust.

[E]

Silly to ask?

No...more like stupid.

[Todd in WeHo]

Is a bottome close? No. Silly to ask? No, but pointless at this time. I'll gladly stay in my beautiful rent controlled apartment and continue to invest in the stock market, which will bounce back at lightning speed compared to the housing market.

[Laker]

sfvrealestate wrote: "good luck with trying to create a balanced discussion on this blog."

Show me one RE agent that said this time last year that it was terrible time to buy.
I know one. But I'm sure, if you line up 1000 realtors, you will find 2 honest ones and 998 liars!

[Rational Renter]

Some hard numbers to show how far away the bottom is: median listing price fell again this week. It's now at $389,000. That means it's 32.9% down from peak. The fundamentally supportable median value is $275,000. That means prices will drop a further 29.3% before all is said and done. And they will probably overshoot on the way down. And the high-end will take longer to reach its bottom. Details on the numbers and calculations: http://findingbottom.blogspot.com

Bottom line: YEARS AWAY.