CR wrote: "all three price ranges saw similar appreciation and price declines during the previous bubble. This suggests this bubble was different than the earlier bubble. . "
Could this also be because of driving distances? It seems that the further the distance from the two primary points of business, the greater the depreciation. Fuel prices would be a factor.
I don't know what area very well, but the areas around Irvine might be commuting communities or neighborhoods that feed into LA and SD?
MiTurn, gas prices could be a factor too. Now that the three price ranges are fairly close on the Case-Shiller index (low is still higher), it will be interesting to see if they all decline at the same rate.
jg, thanks. I've seen data for the previous bubble / bust by zip code that showed the bubble started in the better areas - and then spread to the outlying areas - with the better areas then bursting first.
It was kind of like a fire spreading, with the oldest part of the fire burning out first.
You can kind of see that in the first graph - the red line rose quicker, and then fell sooner. The dynamics of this bubble are different with the weaker areas appreciating faster - and now seeing faster declines.
US home prices falling faster than in the Great Depression.
Robert Shiller, creator of the Case-Shiller home price index, compiled a version of the index that goes back to the 1920s. Currently, nominal home prices are deflating at a 14.1% YoY rate. That is worse than what we saw at the worst point in the Depression; home prices at their worst, were falling at 10.5% YoY. And, on a real basis, the situation today is even more dire. Since the early 30s were a period of deflation, home prices declined less so on a real basis. Today, that is
not the case and home prices are falling at an even faster pace on a real basis.
Yankee: I just saw a $3M listing in Tarzana. Everything around it is valued at about $1M. If you throw in a declining market factor, it should be "reasonably" listed at about $1M or less (I would not presume to tell the seller what their market value is currently). They bought it for $1M in 2006, somehow got a $1.8M construction loan in 2007, did the flipper tapdance, and here we are mid 2008 with a $3M asking price. Why do these people bother? Maybe they're doing drugs? Just bite the blithering bullet. SFV high end is a comin' tumblin' down. Not SFV, noth earthshaking, but promising: my friends just got themselves a pretty little pasadena craftsman for $350k.
Forgot to include this. It's a link to a recent article on the status of various types of projects (137) in Downtown LA. Keep in mind the blurbs are hype--some of them are on hold. Downtown News
The lending frenzy provided great sums of mortgage money to a lot of people that either shouldn't have gotten any, or shouldn't have gotten that much. There's no other explanation for the ridiculous prices on small, non-descript homes far from anything.
Also looking at the first graph, it appears all three price ranges are close to the same level, and they will probably now start to decline at about the same pace. CR
Hey CR... Can you clarify that - do you mean they you expect they will fall at the same absolute rate (say each declines at X points per period so the spread remains the same) or do you expect them to eventually 'converge' but that rate of decline for the low & mid priced cohorts will slow so that they all eventually 'blend in' at some future bottom?
Also do you think it possible that the lower priced cohorts could blow through the mid & high priced such that the lines relationships invert with lower priced lower, mid priced next & higher priced highest - at least temporarily before 'converging' somewhere?
Lastly do you have a 'model' in your mind that would cause/explain this behavior (a counter part to the model of 'loose sub-prime lending standards' on the way up driving low priced cohorts higher/faster).
Not trying to put you on the spot but when I see analysis like that my mind starts to think 'what if' - 'what next' - 'why'? I'm just not clever enough to venture answers to those questions.
Or, the guy from FiServ is right: we're seeing a quality separation in the market. The trash is getting marked down and the quality stuff will retain its value. Some aspects of quality relate to central location, but there are a lot of other subtle qualitative factors that count as well: schools, "cuteness" of neighborhood, well-aged tree-lined streets, historic construction, lack of gangs, etc...
It's certainly the case in SF Bay Area, which, by the way, is NOT down 20%+.
Case-shiller's data is a complete fraud and I can't wait for someone to tell the story...
Look at certain of those "high end areas" that won't drop too much. The number of homes that were HELOC'd or flipped is amazing in the "Hollywood Riveria," area and certain parts of Redondo beach. Even 90275 is hurting (but not yet 90274).
I've looked at the homes in the "nice areas." They're dropping fast since mid 2007. Very fast.
Where I would want to buy will see sharp declines in 2009. I still recall 90275 losing 40% in the 90's. Neighbor's crying on my folk's couch. Sadly, we'll see that again.
Nice areas lag in the depreciation. Bearmaster has the definitive history of the LA beach cities during the last downturn.
Denninger at MarketTicker quotes from a Plumas County (CA) article:
While the state is more than $17 billion in the hole, Ingstad believes that figure will continue to rise. He also anticipates the state will be out of money by August. Bankruptcy for the state looms; a few counties and cities scattered around the state are close to declaring it or have arrived.
"The state treasurer is telling the state they will run out of cash this August if something isn't done. As a former member of a state Senate appropriations committee I know what that means. We could be bankrupt. They better stop the partisan games and deal with the crisis at hand," Ingstad said.
(Ingstad is chief financial officer for Plumas County)
Oh, boy. California declares bankrupcy--there's a headline that might illuminate the reality of what we face.
In the end it all comes down to incomes & demographics. If the incomes at a given cohort are sufficient to support prices at that cohort then the prices & spreads will remain... if those incomes aren't sufficient then the spreads will converge or possibly invert.
There really is no magic involved. I'd guess at least part of the reason the lower cohorts are falling faster in LA is that a lot of those outer ring suburbs are not only experiencing credit tightening in the sub-prime area but also greater job loss in the lower cohort from the decline in home building.
Meanwhile better healed higher priced cohort in the city have more resources, generally better jobs and haven't been squeezed anywhere near as hard - at least not yet.
The trash is getting marked down and the quality stuff will retain its value.
The "value" was the pre-boom levels to which the quality stuff will return; the rest was all hot air, which is quickly deflating from this bubble. The trash? It was never anything but hot air.
I agree with the comments that stipulate that the trash is getting marked down and the quality will retain most of its value. LA is very geographically priced. The closer to the beach the more likely a house is to retain more value.
There is a difference between real money buying real estate and subprime money buying real estate.
Oh, boy. California declares bankrupcy--there's a headline that might illuminate the reality of what we face.
California can't declare bankruptcy, FYI. Bankruptcy is specific protections afforded under state or federal law to specific types of entities, and states are not one of them. There's no federal statute which allows states to discharge their debts (the point of bankruptcy); they can run out of money, but they can't go bankrupt.
Which is not to say they cannot default on their debts... after all, state municipal bonds are only as valid as the state's promise to make payments on them. California has been quietly ceasing to insure their municipal debt, presumably so that they don't have to pay increasing insurance rates as they get increasingly insolvent, which would be a tip-off to savvy investors.
However, there's no good reason why they couldn't put off running out of money a good bit into the future, by just selling more bonds and borrowing more against the future, while continuing to spend without bound. There's no reason to believe it won't continue working; it's a time-tested tradition of our government, and especially of liberal politicians. As much as I'd love to see all the partisan and financially irresponsible morons thrown out of California's legislature, I just don't see them running out of ways to screw future generations and continue to spend. At worst they'll just tax people more; it's not like taxes aren't really high already, and it'll probably get lost in the noise of Obama's massive tax increases by then.
For most properties there doesn't appear to be any justification for price levels beyond those reached in 2002, if not earlier. IMHO "retaining value" means not falling too far below historical norms. That still has LA's best areas falling 50+%.
In the Inland Empire ( South/West Riverside Co.) i.e. Murrieta, we just saw an outstanding auction take place two weeks ago on the court steps. 34094 Pamplona Ave. cross of Keller this 4 Bd, 5Bth, 3Car, 3235 sf home with a Country Wide loan of $638K Purchased for $530 in June of 06, home built in 05 auctioned off for $199K + fees. Most other banks in the I. E. are holding out and taking back foreclosed property. All this property needed was landscape and carpet cleaning. I inspected the home the day it was auctioned off. The people were still living in the home at the time of auction. Over $420K debt forgiven by the lender. WOW!!! New Comp resets are just now starting to show up. This home will be flipped for approx. $240 - 250K and even so, the buyers were a little nervous about this one
It's always harder to hit a moving target. Rents are much more economy-sensitive, so just as prices start to reflect reasonable rent multiples the rents will drop.
Great graph. My theroy is, I think, consistent with yours. I think that the Socal market experienced the biggest bubble at the low end primarily because the bubble was driven by speculator loans, and appraisal fraud on speculator loans. The lower end is the logical target market for honest (but ultimately misguided) speculators that are 'planning' to rent the investment out for a couple of years. From the perspective of the dishonest speculators, it is easier to fluff an apprasial on a $400,000 property than it is to fluff an appraisal on a $900,000 property. A modest percentage of properties sold at 130% of market value to dishonest speculators will ultimately drive the market upward for all properties if the market is otherwise solid.
This article indicates the prices in the exclusive areas in LA are dropping NOW. It seems to take awhile for the price drops to hit the urban core.
CA mansion for sale, cheap. OK, cheaper. - Los Angeles Times
From the Los Angeles Times
At the luxury end, home prices are falling
The region's most exclusive neighborhoods suffered big drops in April, data show. Median sale prices fell 13% in Beverly Hills, 34% in one area of Newport Beach.
By Peter Y. Hong
Los Angeles Times Staff Writer
May 20, 2008
The rich may indeed be like the rest of us. Prices of their homes are now falling too.
Gated mansions and hillside estates have held their own through most of the real estate slump, but data released Monday showed big drops in the region's most exclusive neighborhoods.
Median sale prices fell by 13% in Beverly Hills in April, compared with the same month last year. Rancho Palos Verdes dropped 18% over the same period, while Newport Beach's 92660 ZIP Code took a 34% hit, according to DataQuick Information Systems.
Experts say these areas and others are catching up with price declines that struck first in outlying suburbs such as the Antelope Valley and the Inland Empire, where many first-time home buyers purchased their properties with sub-prime loans.
That the lowest priced houses experienced the highest percent appreciation/depreciation makes sense to me.
If you include investors, then the pool of potential buyers for lower priced properties is largest.
Although I can't articulate a single, specific reason, it also seems like looking purely at percent changes may have something to do with the pattern. If you look at the declines and calculate percent decrease less a constant ($40,000), the declines would be much closer. That would knock maybe 10% off the increase/decrease in the lower priced houses.
It might have something to do with the fact that the low priced segment involved real buy vs rent decisions, etc.
SK said:
This home will be flipped for approx. $240 - 250K and even so, the buyers were a little nervous about this one
Let's assume 15% downpayment.
Auction sale price translates to a mortgage of $1050... doesn't seem too bad. If they flip this for $425k that translates to a mortgage of $2225.
Of course none of this includes taxes and insurance and whatever maintenance (does that add 10% to a monthly payment or more, I rent so I'd have no clue).
Also, I'm sure the energy bills on a 3000 sqft home are also fun.
Another way of looking at it. Auction price was $62/sqft, and you think it will get $131/sqft, and it sold originally for ~ $200/sqft. I'd like to think your a little high, but I'm just some random guy on the Internet.
Regardless, I think the problem is finding people who have the money for a downpayment... I mean real money and not retirement money loaned back to themselves...
Maybe we should start pricing in Euro/sqft as well... wonder what that sales history looks like...
Sorry, got typing and lost the thread of my thought.
Hoyt also commented on the fact that outlying property had the biggest swings. The swing in values to me most represents what you see in buying out of the money options with the pps being replaced by the general demand for real estate.
Oh, boy. California defaults on its debts--there's a headline that might illuminate the reality of what we face.
By the way, what with the stealthy insinuation that liberals are to blame for this mess? Republicans, who purport to be conservative, have controlled Congress for fourteen years and the executive branch since 2000. The last three Republican Presidents have accumulated far more debt than every other Presidency combined (despite fighting no major wars or depressions), while asserting that they wanted to cut government.
Sure, the California legislature may be "liberal." But if you believe for a second that history won't lay the consequences of these mammoth debts at the doorstep of the Republican Party, you're deluded.
CR, It appears to me that lower priced houses (in bubble areas) were typically bought with subprime loans which tend to have 2/3 year resets.
On the other hand many (at least 30% according to business week) expensive houses were bought with OptionARMs in bubble areas which tend to blow up after 4-5 years.
This difference can be a major reason why the upper end has been declining slower- but i guess we wont know for a couple of years according to the CreditSuisse chart showing that the OptionARMs (prime/AltA) will hit peak resets around 2009-2010
As far as i have read there's upwards of ~300b dollars worth of OptionARMs done in the last 3-4 years done in california alone. If any of this inventory gets dumped on the market as a result of resets, it might get interesting...
This graph is easy to parse from a basic level - supply and demand. Supply surged to meet, or make, demand in the outlying areas due to easy credit, cheap(er) land, and fraud. In the more urban areas of LA this imbalance was not as common - very few core urban areas in LA saw a huge run up in supply, due to lack of cheap or unbuilt land. Demand on the other hand increased dramatically, and artificially, due to easy credit and lemming mentality. That has now been erased. So those that bought high in the urban areas are standing pat, unless they have to sell - but they key here is that many don't have to , since jobs (except real estate!) and the local economy are relatively stable. So what we're seeing is a savage swing in supply/demand in the outlying areas, for those that have to sell, versus those that don't necessarily have to.
What throws everyting I just wrote out the window is downtown LA, where no price declines are showing. This is the one area where a huge supply entered the market, well ahead of demand. Prices are definitely falling there, and surely have farther to go. The same will happen to pockets of other areas, say Weho or West LA, where prices increased beyond, in my opinion, sustainability. But at the end of the day your home is worth what someone will pay for it, and in LA, there are quite a few neighborhoods, and quite a few wealthy individuals, where demand sill stay strong, even in this market, Prices will not come down much because supply has not been increased (Ie BH or Brentwood).
I write all this as a multi family developer here in the city with projects coming on line. (Yes, I'm nervous, but no, not that much because I proforma'd sales prices based on 2003/4 levels). I think it's important, and often missed in the media, to go back to what drives value - supply and demand. In many areas it is dramatically negative, but not all. I think this graph shows, not perfectly, part of this.
In the Inland Empire ( South/West Riverside Co.) i.e. Murrieta, we just saw an outstanding auction take place two weeks ago on the court steps. 34094 Pamplona Ave.
Now there's an allegory for you. What happens to the bulls after they run down the streets of Pamplona?
I wonder if one of the implications of the effects of high oil / commuting costs will be to effectively remove large amounts of housing stock from the pool of inventory. That is to say, values for housing closer to work will reach a bottom much faster than we expect -- and that some housing developments in distant suburbs will become weird ghost towns (or orphanages or religious communes or some other low-value economic activity).
EL - about Brentwood etc... - just give it some time. There are chain reactions that are very very slow with many bufferes in the process so it will take time before the starin will be felt there - but rest a sure it will.
Yal - I agree to some extent. The $3MM 3000 sf home that needs work is going to take some heat. I'm thinking $800/ft for fully remodeled home is where Brentwood should end up after the dust settles, but based on location I'm not holding my breath.
"That is to say, values for housing closer to work will reach a bottom much faster than we expect -- and that some housing developments in distant suburbs will become weird ghost towns (or orphanages or religious communes or some other low-value economic activity)."
Just check out Paris, or for that matter most European cities, where gas has been well above $4/gallon for decades. The well-off live in the center city and close in suburbs, while the poor live in "banlieus", though at least there the banlieus are served by commuter trains. So, maybe Paris, Texas and Paris, France will become more alike than we thought.
FWIW, in my neighbourhood, a close-in, well-established suburb with top-notch schools, a house came on the market Tuesday and had a "Sold" sign on Friday. Few stay on the market more than a month.
The incomes in California tacitly accept the level of government services that are even more unsustainable than the Federal government's. The resulting level of borrowing by the Debtinator et al. is Latin-America-in-the-80's-esque.
Yes incomes are higher in "better" areas, but gas, food, and soon, all those services bought on borrowed money are going to get much more expensive. Taxes must go way up and/or lots more than just a few thousand teachers will be sacked.
The income you make that gets you a bungalow in Santa Monica won't be enough to maintain the debt-fueled lifestyle you're used to (aka the lifestyle you deserve.)
Sure, the California legislature may be "liberal." But if you believe for a second that history won't lay the consequences of these mammoth debts at the doorstep of the Republican Party, you're deluded.
unirealist | 05.31.08 - 3:34 am | #
Of course history will, don't worry.
With the MSM solidly entrenched as a liberal organ, there is no other way it could go down.
Heh. The MSM is a corporate organ. Sure, they will try to write history, and some will believe them. (Housing Prices Never Go Down!) However, historians do more than read newspaper clippings. Perhaps you should too.
One wonders how the impending peaking of resets in Alt-A and other prime ARM will affect the curve.
Could one postulate that the rapid descent in low-end valuations was due to the concurrent resets in sub-prime, and that the upcoming resets in prime ARM will have a similar effect on the high end?
In which cse, one might see a crossover of these curves as the rate of low-end reduction decreases while that of the high-end increases.
In the rest of the country, except for places in Manhattan and Boston,
that will buy a solidly mid middle class house, and in some places a palace. You could get something really nice for that amount in Miami even at the peak of the bubble. Now, you can get something upper middle class for that amount.
Out here in PHX, the outlying areas went down 1st, but now they're stabilizing and it's the high end that's dropping and dropping quickly. Many folks don't have to sell, but the ones that do are seriously distressed which is killing comps. If serious economic distress were to hit you could see a bunch of underwater people liquidate en masse.
Out here in PHX, the outlying areas went down 1st, but now they're stabilizing and it's the high end that's dropping and dropping quickly. Many folks don't have to sell, but the ones that do are seriously distressed which is killing comps. If serious economic distress were to hit you could see a bunch of underwater people liquidate en masse.
I'm seeing what people are describing here re: downtown and inner ring suburbs that are close to work centers selling much faster than the outer suburbs. In my neighborhood, we are next to a big and still growing UC medical complex and a number of government offices, plus we have a light rail line into downtown. Prices here have not dropped as much as they otherwise should have (this is in Sacramento, after all). Everything that's priced within 15-20% of peak gets sold quickly. Others still priced at peak or more (there's a 4br remodel in my area listed for $1.05M - an insane price, and 2br around $400K) will sit with no takers. Any rentals go in weeks, usually at $1400/mo for 1200sf two bedroom (the standard size around here).
My friends in outlying communities (Elk Grove/Laguna, Rocklin) who bought from 2003 and later are hurting badly and upside down on their loans, and now the cost of going to work is now eating into their income as well (most own big vehicles). Many moved because they (in their words) hated living in the city and considered it dangerous, especially around downtown. Haven't asked them how they feel about it now.
Good stuff, and I've got little to add. Here goes--
As to the start and duration of a downturn in any market segment, I think it's important not to assume that, regardless of starting time, a downturn will last the same length of time for each segment. My question, by accounting analogy, is whether downturns are LIFO or FIFO. Sales shills be always try to tell you it's first in, first out, but my gut tells me that we may be in a last-in-first-out scenario. But who knows until it's over.
Second, I think driving distance from employment centers may be a good proxy for desirability for single family dwellings. However, in Portland, Oregon, at least, the overhang for downtown luxury condos is spooky (the supply at current absorption rates in twice that for single family dwellings), and the tail end of the boom projects are being converted to luxury rentals (?). Now Oregon is a pleasant and comfortable place, but it's not a high-energy wealthy economy like SCal (we are Wisconsin by the sea, and I suspect the demand for high rise apartments with a Mt. Hood view in Portland is roughly comparable to Milwaukee's 'need' for high rises with a Lake Michigan view). Conclusion--how this hits the high end is going to take some sorting out.
Something to consider, if the green areas of LA/OC hold (by the way many of those green areas in LA have some pretty rough gangs) then you are looking at a map of Third World City. If this current trend holds, we are talking a pretty massive wealth disparity. I think it is common sense that the more desirable areas will hold more of their value but these areas are also the last places to fully feel the impact. The housing food chain is broken, it may take some time but IMO there will be no area that will be left untouched. We'll see.
linear,
actually in portland and oregon its alway been last in and last out. its interesting that for the past 6 months inventory for single family residences has been accumulating FASTER than condos. speculators are starting to bail. condos were just "first".
"LA is very geographically priced. The closer to the beach the more likely a house is to retain more value."
This is true, yet people in LA are still in massive denial about the capacity for nice areas to lose value quickly. I have a buddy who lost over 400K in a matter of months back in the mid-90s when he purchased the house next door to his in Pacific Palisades, then had to sell his own home, and couldn't. At least, not at a price that was anywhere near what he had paid.
I have numerous friends in the Palisades now who have overpaid for their homes and are very, very dependent upon film and TV for their work. That business can whipsaw in spectacular fashion. Outside of regular film and TV work, what sustains many in West LA is commercial work, because it has been so steady over the last few years. If the recession takes hold, that business will dry up very, very quickly, as it did in 2001. Suddenly people earning 6 and even 7 figures are earning 0. Prices will come down in ways that will surprise even people who read this blog.
Couldn't quite figure out which areas are which. Red area in the upper left is Oxnard/Port Hueneme. The long district is Malibu. The red island around the valley (can't tell if its mid or north), with the bloody top Palmdale/Lancaster. The red area down near Irvine is Santa Ana/Garden Grove and maybe even south Anaheim.
This is my best correlation with Google Maps. Green area is Santa Monica, Marino Del Rey, manhattan Beach, Redondo Beach and Rancho Palos Verdes...
Lionel writes:
... If the recession takes hold....Prices will come down in ways that will surprise even people who read this blog.
Lionel | 05.31.08 - 12:16 pm | #
I think nothing short of California falling into the ocean would surprise some of the Bears that post here regularly. You may or may not be surprised to learn that people outside of the entertainment industry also would like to live near the beach, some of them with a lot of cash. My point being that just because the entertainment industry goes into recession, it does not follow that coastal house prices will go into freefall.
It's my beleif that this time around, measuring price declines in percentage terms is misleading. With all the zero-down, HELOCs, neg-am loans etc, home purchase activity closely resembles options trading, where the marginal price moves in dollars are the basis for tossing the keys. Declines should be measured in dollars - period.
Maybe CR should do a post on how the government of California works. Like reminding everyone who lives here as well as those who don't that we are a Referendum and Recall State.
The people of California have taken away a lot of the flexibility of the legislature to deal with spending via referendums that mandate certain spending levels.
Also people should know that passing budget takes a super majority so the republicans in the legislature have quite a bit of power to affect spending.
Maybe CR could post on the budget the legislature controls and how big that is relative to the overall budget.
I won't hold my breath that a post like this would change anyone's mind about who is and who is not at fault for the state deficit. The fact is we, the citizens of Califronia, and our politicians are all responsible for the mess.
I think the answer is to look at who was buying. Flippers were more likely to be buying in the mid to high price range areas. Nice areas with decent schools. People who ran up prices in "starter" low price neighborhoods like mine were mainly investors who were looking to rent the houses while the prices appreciated for resale. My coastal CA neighborhood is full of 900 sq ft starter homes that went from $200k in 2002 to $500k in 2006. 20% of the houses on my block are empty and foreclosed right now - most of them "investor" properties that were purchased 2004-2006 and rented out. Average price in the neighborhood is currently hovering around $350-380k.
My bet (based on local observation) would be that in the low price areas, very few of those homes were owner occupied - they were all "investment" properties purchased with liar loans.
I live in a smaller urban area where drive time is not a huge issue, compared to LA or even Seattle. But here too, the price runup in percentage terms seemed to be biggest in low-end homes, many but not all of which are in outlying areas. These are also the areas that seem to account for more than their share of local foreclosures. (Some of these areas were subdivisions envisioned as a place for small "second homes" in the 1970s. They eventually evolved into low-grade starter homes.)
Tentative explanation: As lending standards eased and more lower-middle income people qualified for loans, the price of the homes in their range got bid up, and there was panic buying among those who thought they were going to be priced out of the market forever. Now a lot of those people are overextended, refinance is difficult or impossible, and prices are coming down.
That's a good buy for Temecula..Just need to work in town..the commute will now begin to eat into that market..My mom bought at top their in 90 debacle and saw huge price drop..very similar..lot less traffic..
Couple comments ment'd beach cities and how it happend in 90's, it's coming around again..I've been tracking this area
"You may or may not be surprised to learn that people outside of the entertainment industry also would like to live near the beach, some of them with a lot of cash. "
Neighborhood I grew up in, the low-end houses are listed for over 3 million. Outside of entertainment people, who can swing that?
And you're right, I don't think we'll need entertainment to go into recession for a freefall to occur. The outrageous, unattainably high prices will go into a freefall all by themselves. It's just starting now, and I think by fall, there will be a significant change in attitudes toward the west side. It absolutely staggers me how blind people are to this. The mid-90's wasn't that long ago. My friend who bought the house in the Palisades isn't an idiot, he just got caught up in the same BS that's returned and permeated the west side for the last 6 years.
Had dinner a few weeks ago at a trendy Japanese restaurant on Main Street in Santa Monica/Venice (roughly at the intersection of Abbott Kinney). Standing next to the hostess as we entered was a rent-a-cop equipped with bullet-proof vest and 9-mm pistol. Venice Beach used to be amusing in an exotic, offbeat kind of way. Now it's just scary. Hipsters in The Industry who have poured megabucks into cutting edge architecture must now consider whether razor wire can be considered an authentic accoutrement to the midcentury modern meme . . .
CA is the center of the universe for HELOCs. People are getting destroyed, because they are tapped out of their HELOCs and have negative equity while the mortgage payment plus the enormous HELOC payments (interest only BTW) are overwhelming. You can live off your house during a bubble, but, when the bubble bursts and the ATM disappears, you suffer the consequences of financial death. I'm telling you, this has a long way to play out. We are still years away...
I was recently in LA, and I saw ALF begging for food. You know things are tough when a lovable alien can't feed himself. If I looked hard enough, I probably would have seen Air Bud and Barney doing the same. Sad really.
The interesting thing about the Case Shiller index showing S. California is that it reflects the second half of 2007. In that regard the green/blue areas are not that surprising. The credit crunch occurred in August and really wasn't felt in housing until Sept/Oct. I live in Redondo Beach and the striking thing the beach areas are dealing with through 2008 is very very low sales volumes which are generally a pre-curser to falling prices. In fact conventional wisdom around here is that home prices are indeed falling and falling quite a bit, that includes the almighty Manhattan Beach. It will be interesting to see what that map looks like when it shows the first half of 2008 and the full impact of the credit crunch. I think you will see a confirmation of the trend from Blue/Green to Orange/Red that started in San Diego, Inland Empire moved into the OC and finally LA.
Keep in mind that this is just a snap shot. It would be great if you could show a time lapse animation of these colors throughout California, IMO you would see how the Orange/Red areas are expanding and encroaching on the all areas.
California is not going bankrupt this week nor is is scheduled to fall into the ocean yet. I do remember when they were issuing IOUs instead of checks for some workers in the early 90s though.
Look at the map. We have about 12,000,000 people there. It doesn't have the 4,000,000 in Riverside and San Bernardino where the real wipe out is. And the only thing between this map and 3,000,000 more in San Diego County (one of the first to crash) is a nuke plant/marine base. This is a big part of the US economy.
We can see that the wealthier areas of West Los Angeles, and North Los Angeles (Pasadena), and coastal South Orange County (Newport) are still holding. We mostly have anecdotes about weakness in these places, not much in the data.
But the power of the anecdote is knowing a mortgage broker clearing $50k a month doing mortgages for immigrants who don't speak English. So what is really going on in West LA?
The tale of three cities graph is exactly what I would expect to see in the market we have experienced.
Buyers of lower priced and entry level homes are totally credit dependant, while buyers of high end homes are less dependent on credit to buy.
To the extent that unusually looser lending standards (subprime lending) were a factor in the bubble run-up, I would expect the lower-priced homes to be affected the most by the easier credit. Thus, the faster appreciation. As the easy money is withdrawn I would expect the lower priced homes to again be more impacted on the way down as many potential buyers can no longer get a loan.
In prior cycles the credit standards did not shift as much.
First off, it's probably the largest physical MSA in the country. Because of this, I find the Greater Los Angeles Shiller data (which the LAMap.jpg references) to be of little use. The Metro Shiller data is more relevant.
2.) The city core of Los Angeles in terms of deisrable areas is pretty much represented by the green shading. See my google map here: LA Core - Google Maps (I had made this map a while ago, but it seems to overlay pretty well with the 'green' areas. This is not coincidental. People still want to live in those areas, more and more so since 2000.
Most of the high-end jobs are located near either West LA or Downtown on the map.
3) The area not in the map above is the none core area of Los Angeles and general considered the 'greater LA area'. Once you get into the 'greater' Los Angeles area, there is/was plenty of undeveloped land to build more and more suburbs (all the area in orange and red). The areas in red, to the north of downtown (excluding Orange County, which is it's own area and market) are lots of new construction of SFR or very recent construction.
4) Sometime in the late 90's/early 2000's Los Angeles was 'discovered' by people in the rest of the country. It used to be that people left Los Angeles after college and went elsewhere. Now, people move to LA from other places. This is a fundamental shift in the demand side of the curve in the 'good areas'. (Young urban professionals moving to LA general gravitate towards the areas they've read about or heard about, Santa Monica (West LA), Mid City, or the Eastside/Downtown (Los Feliz/Silverlake/Downtown).
The influx of New Yorkers (in particular) and San Franciscans in the early 2000s started pushing up rents and price in the 'good core' as they seemed undervalued to somebody used to paying 2500 for a 600 sq/ft co-op in NYC.
That plus the rising real estate bubble pushed values in the core up astronomically. Drive till you qualified started occurring mixed with "if I don't buy now, I'll miss out mentality"
5) Now that we're post 'mania', the outer areas are collapsing into the core like a super nova. People in the desirable area who might have over paid and gotten in trouble have been able to sell to somebody 'new' who still want's to live in that area. This is not the case in the outer burbs. There are areas within the LAmap.jpg that have seen 0% declines and even increases. (much to my surprise. I'm not a housing bull or an agent.)
What we're going to see on the first chart is an over shoot by both the lower and middle tiers. I think the upper tier will continue to fall as well, but the demand in the core area will prevent it from falling as far as the middle and lower tiers will.
They will not move in unison from this point. The lower and middle tiers still have a lot further to go with the lowest tier suffering the most.
I know predictions are asking for trouble but I'm going to say a low of 100 on the lower tier, 120 on the middle and 125 on the upper. Additionally, the lower tier will get there faster, the higher tier will take the longest to bottom out. In the outer areas, prices will fall to match net rent equivalents (meaning low enough to entice landlords to buy SFR as rentals, deal with the hassles of renting, and still cover the mortgage with what's left over. That's still a ways off, even after the declines so far.)
The reason for my predictions not totally mean reverting on the higher tier is the change in fundamentals regarding LA as one of the major cultural cities of the country.
Sometime in the late 90's/early 2000's Los Angeles was 'discovered' by people in the rest of the country.
Phil,
Hadn't heard that before, and I've lived here for 20+ years (with friends in all the major economic sectors). Do you have any objective data illustrating this change?
It's an important consideration, because absent any new demand there's no reason for LA not to mean revert everywhere.
Itulip had a good map of real estate drops. The real estate drops move outward in toward the center and then starts to recover in to out. Made since as the outer individuals struggled to make the payment and drove out to where they could afford the house. As their commute and other expenses rise, they let the house go. As the real estate drops, it starts to move into the center. The center gets hit but not as much as outer ends.
I'd be willing to bet you moved here from somewhere else in the mid to late nineties, because you obviously you know absolutely nothing about Los Angeles or it's history. It was not "discovered" in the late nineties. If you knew anything about L.A. you'd know we've had a much higher inflow of people than outflow for every one of the last fifty years, not only those oh-so-trendy transplants, but immigrants from all over the world. L.A. is now and has for a very long time been a "dream" destination for a large number of people. And even though Gertrude Stein once famously said of L.A.: "There's no there there", there has always been a "there" here. It's just not all in one place.
As for Angelenos leaving after college: what planet are you from? As a third generation native I can tell you you're full of it. Most natives will do everything they can to continue to live here.
And ALL areas of Los Angeles will eventually revert to the mean. Including those trendy areas. Including the wealthy areas. How do I know this for sure? Because if I had a dollar for every moron who felt their little corner of the L.A. world was "special" in every one of the four boom and busts I've witnessed in my life, I'd be able to buy the Getty. For cash.
In every boom and bust of the last seventy years in the greater L.A. period EVERY area has eventually reverted to the mean after a huge run up. Some of the fortress areas will just take longer to fall. As they say, those who do not know their history are doomed to repeat it.
Submitted from the heart of one of those "trendy $ wealthy" areas, Fortress South Pasadena. Google it
I cycled back from downtown LA last week. Every single block had a new condo/appartment building either 'now leasing', being built, or in a few cases, quietly abandoned. (One such close to where i live hasn't had any work done on it since last August, and has just been standing there as a wooden frame.) This not withstanding, ground has been cleared and building started on 3 others in the last 2 months.
The number of for rent signs in my neighbourhood (west end LA), has been going up every month, and there are at least 8 houses within a 3 block radius, both for sale - and clearly empty.
You can say what you want but the beach cities are next on the mark down list. Look at Laguna Beach as an example. 2004-2006 unit sales averaged 50/60 per month. October 2007 through April 2008 dropped to 15-17/month. The last data I saw said only 4 homes sold/closed in May.
There are a lot of "super" rich people here. They dont have to sell...they are dwarfed (in numbers) by "investors" who will have to sell over the next few years. ABH is a great indicator of where we are headed. A 50% correction from the high is nut unreasonable.
Gertrude Stein's quote was about Oakland, not Los Angeles.
I agree that people have always come to LA. Having gone to college here, (late 80s) I can say that many of my classmates left LA afterwards for jobs and opportunities else where. I'll accept that this is anecdotal evidence. I have also witnessed an influx of college graduates starting in the Mid 90s/Late 90s, many from other areas that they normally would have stayed in. (NYC & SF in particular)
It seems like the fundamental difference between your opinion and mine is that you believe Los Angeles as a 'city' is the same fundamentally as it historically has been. Under this view, then it would be correct to assume a regress to the mean.
I believe that Los Angeles as a 'city' is on the rise. Do you think Detroit is the same city as it was 30 years ago? How about Seattle? If you change the fundamentals of a place, then you can either support a higher valuation or decline to a new low.
As to your predictions, I guess we'll see. I don't think I was suggesting the 'fortress' areas aren't in for a decline.
CR wrote: "all three price ranges saw similar appreciation and price declines during the previous bubble. This suggests this bubble was different than the earlier bubble. . "
Could this also be because of driving distances? It seems that the further the distance from the two primary points of business, the greater the depreciation. Fuel prices would be a factor.
I don't know what area very well, but the areas around Irvine might be commuting communities or neighborhoods that feed into LA and SD?
all I know is SFV is still Way overvalued....
MiTurn, gas prices could be a factor too. Now that the three price ranges are fairly close on the Case-Shiller index (low is still higher), it will be interesting to see if they all decline at the same rate.
Best to all.
Very nice work, CR.
jg, thanks. I've seen data for the previous bubble / bust by zip code that showed the bubble started in the better areas - and then spread to the outlying areas - with the better areas then bursting first.
It was kind of like a fire spreading, with the oldest part of the fire burning out first.
You can kind of see that in the first graph - the red line rose quicker, and then fell sooner. The dynamics of this bubble are different with the weaker areas appreciating faster - and now seeing faster declines.
Best Wishes.
Downtown LA is significantly overpriced and prices are dropping.
The developers chased the luxury market and the banks never thought to say no.
For example, 1010 Wilshire
Rents are steep, from $3,000 to more than $11,000 per month at the introductory rate, which will likely rise after the first six months.
US home prices falling faster than in the Great Depression.
Robert Shiller, creator of the Case-Shiller home price index, compiled a version of the index that goes back to the 1920s. Currently, nominal home prices are deflating at a 14.1% YoY rate. That is worse than what we saw at the worst point in the Depression; home prices at their worst, were falling at 10.5% YoY. And, on a real basis, the situation today is even more dire. Since the early 30s were a period of deflation, home prices declined less so on a real basis. Today, that is
not the case and home prices are falling at an even faster pace on a real basis.
https://www.gpcresearch.ml.wallst.com/common/emaillink/pdf.asp?SSS_4CB3597F2FACD3969F9BFB40EB33A0AD&pdf=pdf/North_America_Morning_Market_M.pdf
Yankee: I just saw a $3M listing in Tarzana. Everything around it is valued at about $1M. If you throw in a declining market factor, it should be "reasonably" listed at about $1M or less (I would not presume to tell the seller what their market value is currently). They bought it for $1M in 2006, somehow got a $1.8M construction loan in 2007, did the flipper tapdance, and here we are mid 2008 with a $3M asking price. Why do these people bother? Maybe they're doing drugs? Just bite the blithering bullet. SFV high end is a comin' tumblin' down. Not SFV, noth earthshaking, but promising: my friends just got themselves a pretty little pasadena craftsman for $350k.
Forgot to include this. It's a link to a recent article on the status of various types of projects (137) in Downtown LA. Keep in mind the blurbs are hype--some of them are on hold.
Downtown News
The lending frenzy provided great sums of mortgage money to a lot of people that either shouldn't have gotten any, or shouldn't have gotten that much. There's no other explanation for the ridiculous prices on small, non-descript homes far from anything.
Mortgage Insider:
No more lying about your income?
50 Cent - Window Shopper
YouTube
- Broadcast Yourself.
Also looking at the first graph, it appears all three price ranges are close to the same level, and they will probably now start to decline at about the same pace. CR
Hey CR... Can you clarify that - do you mean they you expect they will fall at the same absolute rate (say each declines at X points per period so the spread remains the same) or do you expect them to eventually 'converge' but that rate of decline for the low & mid priced cohorts will slow so that they all eventually 'blend in' at some future bottom?
Also do you think it possible that the lower priced cohorts could blow through the mid & high priced such that the lines relationships invert with lower priced lower, mid priced next & higher priced highest - at least temporarily before 'converging' somewhere?
Lastly do you have a 'model' in your mind that would cause/explain this behavior (a counter part to the model of 'loose sub-prime lending standards' on the way up driving low priced cohorts higher/faster).
Not trying to put you on the spot but when I see analysis like that my mind starts to think 'what if' - 'what next' - 'why'? I'm just not clever enough to venture answers to those questions.
Or, the guy from FiServ is right: we're seeing a quality separation in the market. The trash is getting marked down and the quality stuff will retain its value. Some aspects of quality relate to central location, but there are a lot of other subtle qualitative factors that count as well: schools, "cuteness" of neighborhood, well-aged tree-lined streets, historic construction, lack of gangs, etc...
It's certainly the case in SF Bay Area, which, by the way, is NOT down 20%+.
Case-shiller's data is a complete fraud and I can't wait for someone to tell the story...
NAR trying to discredit Case-Shiller...
Getting Case-Shillered
.
Look at PropertyShark - Real Estate Maps, Foreclosures, Property Reports and Comparables
Look at certain of those "high end areas" that won't drop too much. The number of homes that were HELOC'd or flipped is amazing in the "Hollywood Riveria," area and certain parts of Redondo beach. Even 90275 is hurting (but not yet 90274).
I've looked at the homes in the "nice areas." They're dropping fast since mid 2007.
Very fast.
Where I would want to buy will see sharp declines in 2009. I still recall 90275 losing 40% in the 90's. Neighbor's crying on my folk's couch. Sadly, we'll see that again.
Nice areas lag in the depreciation. Bearmaster has the definitive history of the LA beach cities during the last downturn.
Got Popcorn?
Neil
Denninger at MarketTicker quotes from a Plumas County (CA) article:
While the state is more than $17 billion in the hole, Ingstad believes that figure will continue to rise. He also anticipates the state will be out of money by August. Bankruptcy for the state looms; a few counties and cities scattered around the state are close to declaring it or have arrived.
"The state treasurer is telling the state they will run out of cash this August if something isn't done. As a former member of a state Senate appropriations committee I know what that means. We could be bankrupt. They better stop the partisan games and deal with the crisis at hand," Ingstad said.
(Ingstad is chief financial officer for Plumas County)
Oh, boy. California declares bankrupcy--there's a headline that might illuminate the reality of what we face.
In the end it all comes down to incomes & demographics. If the incomes at a given cohort are sufficient to support prices at that cohort then the prices & spreads will remain... if those incomes aren't sufficient then the spreads will converge or possibly invert.
There really is no magic involved. I'd guess at least part of the reason the lower cohorts are falling faster in LA is that a lot of those outer ring suburbs are not only experiencing credit tightening in the sub-prime area but also greater job loss in the lower cohort from the decline in home building.
Meanwhile better healed higher priced cohort in the city have more resources, generally better jobs and haven't been squeezed anywhere near as hard - at least not yet.
The trash is getting marked down and the quality stuff will retain its value.
The "value" was the pre-boom levels to which the quality stuff will return; the rest was all hot air, which is quickly deflating from this bubble. The trash? It was never anything but hot air.
I agree with the comments that stipulate that the trash is getting marked down and the quality will retain most of its value. LA is very geographically priced. The closer to the beach the more likely a house is to retain more value.
There is a difference between real money buying real estate and subprime money buying real estate.
Oh, boy. California declares bankrupcy--there's a headline that might illuminate the reality of what we face.
California can't declare bankruptcy, FYI. Bankruptcy is specific protections afforded under state or federal law to specific types of entities, and states are not one of them. There's no federal statute which allows states to discharge their debts (the point of bankruptcy); they can run out of money, but they can't go bankrupt.
Which is not to say they cannot default on their debts... after all, state municipal bonds are only as valid as the state's promise to make payments on them. California has been quietly ceasing to insure their municipal debt, presumably so that they don't have to pay increasing insurance rates as they get increasingly insolvent, which would be a tip-off to savvy investors.
However, there's no good reason why they couldn't put off running out of money a good bit into the future, by just selling more bonds and borrowing more against the future, while continuing to spend without bound. There's no reason to believe it won't continue working; it's a time-tested tradition of our government, and especially of liberal politicians. As much as I'd love to see all the partisan and financially irresponsible morons thrown out of California's legislature, I just don't see them running out of ways to screw future generations and continue to spend. At worst they'll just tax people more; it's not like taxes aren't really high already, and it'll probably get lost in the noise of Obama's massive tax increases by then.
dryfly, I'm still puzzling over the data too! I'm sure I'll post more on this.
Best Wishes.
Tom,
What's your definition of "value"?
For most properties there doesn't appear to be any justification for price levels beyond those reached in 2002, if not earlier. IMHO "retaining value" means not falling too far below historical norms. That still has LA's best areas falling 50+%.
In the Inland Empire ( South/West Riverside Co.) i.e. Murrieta, we just saw an outstanding auction take place two weeks ago on the court steps. 34094 Pamplona Ave. cross of Keller this 4 Bd, 5Bth, 3Car, 3235 sf home with a Country Wide loan of $638K Purchased for $530 in June of 06, home built in 05 auctioned off for $199K + fees. Most other banks in the I. E. are holding out and taking back foreclosed property. All this property needed was landscape and carpet cleaning. I inspected the home the day it was auctioned off. The people were still living in the home at the time of auction. Over $420K debt forgiven by the lender. WOW!!! New Comp resets are just now starting to show up. This home will be flipped for approx. $240 - 250K and even so, the buyers were a little nervous about this one
"There is a difference between real money buying real estate and subprime money buying real estate."
give it more time and this will be proven false. in fact decline in "low price' should stop as mortgage hits rent prices.
$420K debt forgiven by the lender
Wasn't there a recent article that just spelled out those borrowers now owe income taxes on the amount of debt forgiven?
Yal,
It's always harder to hit a moving target. Rents are much more economy-sensitive, so just as prices start to reflect reasonable rent multiples the rents will drop.
Great graph. My theroy is, I think, consistent with yours. I think that the Socal market experienced the biggest bubble at the low end primarily because the bubble was driven by speculator loans, and appraisal fraud on speculator loans. The lower end is the logical target market for honest (but ultimately misguided) speculators that are 'planning' to rent the investment out for a couple of years. From the perspective of the dishonest speculators, it is easier to fluff an apprasial on a $400,000 property than it is to fluff an appraisal on a $900,000 property. A modest percentage of properties sold at 130% of market value to dishonest speculators will ultimately drive the market upward for all properties if the market is otherwise solid.
SK,
$250K sounds almost sane for that property.
This article indicates the prices in the exclusive areas in LA are dropping NOW. It seems to take awhile for the price drops to hit the urban core.
CA mansion for sale, cheap. OK, cheaper. - Los Angeles Times
From the Los Angeles Times
At the luxury end, home prices are falling
The region's most exclusive neighborhoods suffered big drops in April, data show. Median sale prices fell 13% in Beverly Hills, 34% in one area of Newport Beach.
By Peter Y. Hong
Los Angeles Times Staff Writer
May 20, 2008
The rich may indeed be like the rest of us. Prices of their homes are now falling too.
Gated mansions and hillside estates have held their own through most of the real estate slump, but data released Monday showed big drops in the region's most exclusive neighborhoods.
Median sale prices fell by 13% in Beverly Hills in April, compared with the same month last year. Rancho Palos Verdes dropped 18% over the same period, while Newport Beach's 92660 ZIP Code took a 34% hit, according to DataQuick Information Systems.
Experts say these areas and others are catching up with price declines that struck first in outlying suburbs such as the Antelope Valley and the Inland Empire, where many first-time home buyers purchased their properties with sub-prime loans.
.
CR.... Good analysis.
That the lowest priced houses experienced the highest percent appreciation/depreciation makes sense to me.
If you include investors, then the pool of potential buyers for lower priced properties is largest.
Although I can't articulate a single, specific reason, it also seems like looking purely at percent changes may have something to do with the pattern. If you look at the declines and calculate percent decrease less a constant ($40,000), the declines would be much closer. That would knock maybe 10% off the increase/decrease in the lower priced houses.
It might have something to do with the fact that the low priced segment involved real buy vs rent decisions, etc.
Just something to think about.
SK said:
This home will be flipped for approx. $240 - 250K and even so, the buyers were a little nervous about this one
Let's assume 15% downpayment.
Auction sale price translates to a mortgage of $1050... doesn't seem too bad. If they flip this for $425k that translates to a mortgage of $2225.
Of course none of this includes taxes and insurance and whatever maintenance (does that add 10% to a monthly payment or more, I rent so I'd have no clue).
Also, I'm sure the energy bills on a 3000 sqft home are also fun.
Another way of looking at it. Auction price was $62/sqft, and you think it will get $131/sqft, and it sold originally for ~ $200/sqft. I'd like to think your a little high, but I'm just some random guy on the Internet.
Regardless, I think the problem is finding people who have the money for a downpayment... I mean real money and not retirement money loaned back to themselves...
Maybe we should start pricing in Euro/sqft as well... wonder what that sales history looks like...
CR:
Homer Hoyt (summarized by Larse Tvede) (in part):
8.The new building absorb vacant land.
12.All real estate is at full tide: the peak.
13.The reveres movement begins: the lull.
15.The stock market debacle and the onset of the depression in general business.
Hoyt was talking about the property cycle, and noted that the cycle does not coincide with the equity and commodity markets.
It's not a bust; it's a buying opportunity.
YLSP,
SK didn't say they'd flip it for $250K profit, he said they'd flip it for $250K total.
Sorry, got typing and lost the thread of my thought.
Hoyt also commented on the fact that outlying property had the biggest swings. The swing in values to me most represents what you see in buying out of the money options with the pps being replaced by the general demand for real estate.
There are multiple offers...usually more than 20 offers per home.
We must be doing well. It's great to buy a home now. Buy now before it's too late.
California can't declare bankruptcy
Point taken, Nick. Let me rephrase:
Oh, boy. California defaults on its debts--there's a headline that might illuminate the reality of what we face.
By the way, what with the stealthy insinuation that liberals are to blame for this mess? Republicans, who purport to be conservative, have controlled Congress for fourteen years and the executive branch since 2000. The last three Republican Presidents have accumulated far more debt than every other Presidency combined (despite fighting no major wars or depressions), while asserting that they wanted to cut government.
Sure, the California legislature may be "liberal." But if you believe for a second that history won't lay the consequences of these mammoth debts at the doorstep of the Republican Party, you're deluded.
CR, It appears to me that lower priced houses (in bubble areas) were typically bought with subprime loans which tend to have 2/3 year resets.
On the other hand many (at least 30% according to business week) expensive houses were bought with OptionARMs in bubble areas which tend to blow up after 4-5 years.
This difference can be a major reason why the upper end has been declining slower- but i guess we wont know for a couple of years according to the CreditSuisse chart showing that the OptionARMs (prime/AltA) will hit peak resets around 2009-2010
As far as i have read there's upwards of ~300b dollars worth of OptionARMs done in the last 3-4 years done in california alone. If any of this inventory gets dumped on the market as a result of resets, it might get interesting...
This graph is easy to parse from a basic level - supply and demand. Supply surged to meet, or make, demand in the outlying areas due to easy credit, cheap(er) land, and fraud. In the more urban areas of LA this imbalance was not as common - very few core urban areas in LA saw a huge run up in supply, due to lack of cheap or unbuilt land. Demand on the other hand increased dramatically, and artificially, due to easy credit and lemming mentality. That has now been erased. So those that bought high in the urban areas are standing pat, unless they have to sell - but they key here is that many don't have to , since jobs (except real estate!) and the local economy are relatively stable. So what we're seeing is a savage swing in supply/demand in the outlying areas, for those that have to sell, versus those that don't necessarily have to.
What throws everyting I just wrote out the window is downtown LA, where no price declines are showing. This is the one area where a huge supply entered the market, well ahead of demand. Prices are definitely falling there, and surely have farther to go. The same will happen to pockets of other areas, say Weho or West LA, where prices increased beyond, in my opinion, sustainability. But at the end of the day your home is worth what someone will pay for it, and in LA, there are quite a few neighborhoods, and quite a few wealthy individuals, where demand sill stay strong, even in this market, Prices will not come down much because supply has not been increased (Ie BH or Brentwood).
I write all this as a multi family developer here in the city with projects coming on line. (Yes, I'm nervous, but no, not that much because I proforma'd sales prices based on 2003/4 levels). I think it's important, and often missed in the media, to go back to what drives value - supply and demand. In many areas it is dramatically negative, but not all. I think this graph shows, not perfectly, part of this.
In the Inland Empire ( South/West Riverside Co.) i.e. Murrieta, we just saw an outstanding auction take place two weeks ago on the court steps. 34094 Pamplona Ave.
Now there's an allegory for you. What happens to the bulls after they run down the streets of Pamplona?
I wonder if one of the implications of the effects of high oil / commuting costs will be to effectively remove large amounts of housing stock from the pool of inventory. That is to say, values for housing closer to work will reach a bottom much faster than we expect -- and that some housing developments in distant suburbs will become weird ghost towns (or orphanages or religious communes or some other low-value economic activity).
" the effects of high oil " - more work from home.
EL - about Brentwood etc... - just give it some time. There are chain reactions that are very very slow with many bufferes in the process so it will take time before the starin will be felt there - but rest a sure it will.
Yal - I agree to some extent. The $3MM 3000 sf home that needs work is going to take some heat. I'm thinking $800/ft for fully remodeled home is where Brentwood should end up after the dust settles, but based on location I'm not holding my breath.
"That is to say, values for housing closer to work will reach a bottom much faster than we expect -- and that some housing developments in distant suburbs will become weird ghost towns (or orphanages or religious communes or some other low-value economic activity)."
Just check out Paris, or for that matter most European cities, where gas has been well above $4/gallon for decades. The well-off live in the center city and close in suburbs, while the poor live in "banlieus", though at least there the banlieus are served by commuter trains. So, maybe Paris, Texas and Paris, France will become more alike than we thought.
FWIW, in my neighbourhood, a close-in, well-established suburb with top-notch schools, a house came on the market Tuesday and had a "Sold" sign on Friday. Few stay on the market more than a month.
The incomes in California tacitly accept the level of government services that are even more unsustainable than the Federal government's. The resulting level of borrowing by the Debtinator et al. is Latin-America-in-the-80's-esque.
Yes incomes are higher in "better" areas, but gas, food, and soon, all those services bought on borrowed money are going to get much more expensive. Taxes must go way up and/or lots more than just a few thousand teachers will be sacked.
The income you make that gets you a bungalow in Santa Monica won't be enough to maintain the debt-fueled lifestyle you're used to (aka the lifestyle you deserve.)
Then prices will drop more.
Sure, the California legislature may be "liberal." But if you believe for a second that history won't lay the consequences of these mammoth debts at the doorstep of the Republican Party, you're deluded.
unirealist | 05.31.08 - 3:34 am | #
Of course history will, don't worry.
With the MSM solidly entrenched as a liberal organ, there is no other way it could go down.
Heh. The MSM is a corporate organ. Sure, they will try to write history, and some will believe them. (Housing Prices Never Go Down!) However, historians do more than read newspaper clippings. Perhaps you should too.
CR
One wonders how the impending peaking of resets in Alt-A and other prime ARM will affect the curve.
Could one postulate that the rapid descent in low-end valuations was due to the concurrent resets in sub-prime, and that the upcoming resets in prime ARM will have a similar effect on the high end?
In which cse, one might see a crossover of these curves as the rate of low-end reduction decreases while that of the high-end increases.
Your thoughts?
417 is a low priced house? Really?
In the rest of the country, except for places in Manhattan and Boston,
that will buy a solidly mid middle class house, and in some places a palace. You could get something really nice for that amount in Miami even at the peak of the bubble. Now, you can get something upper middle class for that amount.
I was trolling for a 30 year fixed & mr mortgage maker offers me a "5 year fixed" 30 yr mtg.
"so it's a 5/25 ARM?"
"yes"
"did I ask for an ARM?"
"no"
"Can you get a quote for a 30 yr fixed jumbo?"
"no"
"THEN WHY THE F ARE YOU WASTING MY EFFING TIME?"
-click-
Sorry for that, had to get it off my chest.
Out here in PHX, the outlying areas went down 1st, but now they're stabilizing and it's the high end that's dropping and dropping quickly. Many folks don't have to sell, but the ones that do are seriously distressed which is killing comps. If serious economic distress were to hit you could see a bunch of underwater people liquidate en masse.
Sorry for that, had to get it off my chest.
Out here in PHX, the outlying areas went down 1st, but now they're stabilizing and it's the high end that's dropping and dropping quickly. Many folks don't have to sell, but the ones that do are seriously distressed which is killing comps. If serious economic distress were to hit you could see a bunch of underwater people liquidate en masse.
I'm seeing what people are describing here re: downtown and inner ring suburbs that are close to work centers selling much faster than the outer suburbs. In my neighborhood, we are next to a big and still growing UC medical complex and a number of government offices, plus we have a light rail line into downtown. Prices here have not dropped as much as they otherwise should have (this is in Sacramento, after all). Everything that's priced within 15-20% of peak gets sold quickly. Others still priced at peak or more (there's a 4br remodel in my area listed for $1.05M - an insane price, and 2br around $400K) will sit with no takers. Any rentals go in weeks, usually at $1400/mo for 1200sf two bedroom (the standard size around here).
My friends in outlying communities (Elk Grove/Laguna, Rocklin) who bought from 2003 and later are hurting badly and upside down on their loans, and now the cost of going to work is now eating into their income as well (most own big vehicles). Many moved because they (in their words) hated living in the city and considered it dangerous, especially around downtown. Haven't asked them how they feel about it now.
Good stuff, and I've got little to add. Here goes--
As to the start and duration of a downturn in any market segment, I think it's important not to assume that, regardless of starting time, a downturn will last the same length of time for each segment. My question, by accounting analogy, is whether downturns are LIFO or FIFO. Sales shills be always try to tell you it's first in, first out, but my gut tells me that we may be in a last-in-first-out scenario. But who knows until it's over.
Second, I think driving distance from employment centers may be a good proxy for desirability for single family dwellings. However, in Portland, Oregon, at least, the overhang for downtown luxury condos is spooky (the supply at current absorption rates in twice that for single family dwellings), and the tail end of the boom projects are being converted to luxury rentals (?). Now Oregon is a pleasant and comfortable place, but it's not a high-energy wealthy economy like SCal (we are Wisconsin by the sea, and I suspect the demand for high rise apartments with a Mt. Hood view in Portland is roughly comparable to Milwaukee's 'need' for high rises with a Lake Michigan view). Conclusion--how this hits the high end is going to take some sorting out.
Something to consider, if the green areas of LA/OC hold (by the way many of those green areas in LA have some pretty rough gangs) then you are looking at a map of Third World City. If this current trend holds, we are talking a pretty massive wealth disparity. I think it is common sense that the more desirable areas will hold more of their value but these areas are also the last places to fully feel the impact. The housing food chain is broken, it may take some time but IMO there will be no area that will be left untouched. We'll see.
linear,
actually in portland and oregon its alway been last in and last out. its interesting that for the past 6 months inventory for single family residences has been accumulating FASTER than condos. speculators are starting to bail. condos were just "first".
"LA is very geographically priced. The closer to the beach the more likely a house is to retain more value."
This is true, yet people in LA are still in massive denial about the capacity for nice areas to lose value quickly. I have a buddy who lost over 400K in a matter of months back in the mid-90s when he purchased the house next door to his in Pacific Palisades, then had to sell his own home, and couldn't. At least, not at a price that was anywhere near what he had paid.
I have numerous friends in the Palisades now who have overpaid for their homes and are very, very dependent upon film and TV for their work. That business can whipsaw in spectacular fashion. Outside of regular film and TV work, what sustains many in West LA is commercial work, because it has been so steady over the last few years. If the recession takes hold, that business will dry up very, very quickly, as it did in 2001. Suddenly people earning 6 and even 7 figures are earning 0. Prices will come down in ways that will surprise even people who read this blog.
tj&bear @ 225,
Oh, thanks. That's reasonable.
Couldn't quite figure out which areas are which. Red area in the upper left is Oxnard/Port Hueneme. The long district is Malibu. The red island around the valley (can't tell if its mid or north), with the bloody top Palmdale/Lancaster. The red area down near Irvine is Santa Ana/Garden Grove and maybe even south Anaheim.
This is my best correlation with Google Maps. Green area is Santa Monica, Marino Del Rey, manhattan Beach, Redondo Beach and Rancho Palos Verdes...
Lionel writes:
... If the recession takes hold....Prices will come down in ways that will surprise even people who read this blog.
Lionel | 05.31.08 - 12:16 pm | #
I think nothing short of California falling into the ocean would surprise some of the Bears that post here regularly. You may or may not be surprised to learn that people outside of the entertainment industry also would like to live near the beach, some of them with a lot of cash. My point being that just because the entertainment industry goes into recession, it does not follow that coastal house prices will go into freefall.
It's my beleif that this time around, measuring price declines in percentage terms is misleading. With all the zero-down, HELOCs, neg-am loans etc, home purchase activity closely resembles options trading, where the marginal price moves in dollars are the basis for tossing the keys. Declines should be measured in dollars - period.
Maybe CR should do a post on how the government of California works. Like reminding everyone who lives here as well as those who don't that we are a Referendum and Recall State.
The people of California have taken away a lot of the flexibility of the legislature to deal with spending via referendums that mandate certain spending levels.
Also people should know that passing budget takes a super majority so the republicans in the legislature have quite a bit of power to affect spending.
Maybe CR could post on the budget the legislature controls and how big that is relative to the overall budget.
I won't hold my breath that a post like this would change anyone's mind about who is and who is not at fault for the state deficit. The fact is we, the citizens of Califronia, and our politicians are all responsible for the mess.
I think the answer is to look at who was buying. Flippers were more likely to be buying in the mid to high price range areas. Nice areas with decent schools. People who ran up prices in "starter" low price neighborhoods like mine were mainly investors who were looking to rent the houses while the prices appreciated for resale. My coastal CA neighborhood is full of 900 sq ft starter homes that went from $200k in 2002 to $500k in 2006. 20% of the houses on my block are empty and foreclosed right now - most of them "investor" properties that were purchased 2004-2006 and rented out. Average price in the neighborhood is currently hovering around $350-380k.
My bet (based on local observation) would be that in the low price areas, very few of those homes were owner occupied - they were all "investment" properties purchased with liar loans.
I live in a smaller urban area where drive time is not a huge issue, compared to LA or even Seattle. But here too, the price runup in percentage terms seemed to be biggest in low-end homes, many but not all of which are in outlying areas. These are also the areas that seem to account for more than their share of local foreclosures. (Some of these areas were subdivisions envisioned as a place for small "second homes" in the 1970s. They eventually evolved into low-grade starter homes.)
Tentative explanation: As lending standards eased and more lower-middle income people qualified for loans, the price of the homes in their range got bid up, and there was panic buying among those who thought they were going to be priced out of the market forever. Now a lot of those people are overextended, refinance is difficult or impossible, and prices are coming down.
SK,
That's a good buy for Temecula..Just need to work in town..the commute will now begin to eat into that market..My mom bought at top their in 90 debacle and saw huge price drop..very similar..lot less traffic..
Couple comments ment'd beach cities and how it happend in 90's, it's coming around again..I've been tracking this area
http://www.realtytrac.com/MapSearch/MapSearch/MapSearch.aspx?zipcode=92646&zipOnly=true&#search
the color has been filling in fast over last 4 months and looks like parting green....repo's and comps will take down beach cities..
"You may or may not be surprised to learn that people outside of the entertainment industry also would like to live near the beach, some of them with a lot of cash. "
Neighborhood I grew up in, the low-end houses are listed for over 3 million. Outside of entertainment people, who can swing that?
And you're right, I don't think we'll need entertainment to go into recession for a freefall to occur. The outrageous, unattainably high prices will go into a freefall all by themselves. It's just starting now, and I think by fall, there will be a significant change in attitudes toward the west side. It absolutely staggers me how blind people are to this. The mid-90's wasn't that long ago. My friend who bought the house in the Palisades isn't an idiot, he just got caught up in the same BS that's returned and permeated the west side for the last 6 years.
Had dinner a few weeks ago at a trendy Japanese restaurant on Main Street in Santa Monica/Venice (roughly at the intersection of Abbott Kinney). Standing next to the hostess as we entered was a rent-a-cop equipped with bullet-proof vest and 9-mm pistol. Venice Beach used to be amusing in an exotic, offbeat kind of way. Now it's just scary. Hipsters in The Industry who have poured megabucks into cutting edge architecture must now consider whether razor wire can be considered an authentic accoutrement to the midcentury modern meme . . .
CA is the center of the universe for HELOCs. People are getting destroyed, because they are tapped out of their HELOCs and have negative equity while the mortgage payment plus the enormous HELOC payments (interest only BTW) are overwhelming. You can live off your house during a bubble, but, when the bubble bursts and the ATM disappears, you suffer the consequences of financial death. I'm telling you, this has a long way to play out. We are still years away...
I was recently in LA, and I saw ALF begging for food. You know things are tough when a lovable alien can't feed himself. If I looked hard enough, I probably would have seen Air Bud and Barney doing the same. Sad really.
The interesting thing about the Case Shiller index showing S. California is that it reflects the second half of 2007. In that regard the green/blue areas are not that surprising. The credit crunch occurred in August and really wasn't felt in housing until Sept/Oct. I live in Redondo Beach and the striking thing the beach areas are dealing with through 2008 is very very low sales volumes which are generally a pre-curser to falling prices. In fact conventional wisdom around here is that home prices are indeed falling and falling quite a bit, that includes the almighty Manhattan Beach. It will be interesting to see what that map looks like when it shows the first half of 2008 and the full impact of the credit crunch. I think you will see a confirmation of the trend from Blue/Green to Orange/Red that started in San Diego, Inland Empire moved into the OC and finally LA.
Keep in mind that this is just a snap shot. It would be great if you could show a time lapse animation of these colors throughout California, IMO you would see how the Orange/Red areas are expanding and encroaching on the all areas.
the outlying areas went down 1st, but now they're stabilizing
I don't believe that for a second. I think what you're seeing is the classic dead cat bounce as people go after the perceived deals in foreclosures.
The Inland Empire is up on sales volume this month but still heading down on price. Falling values will continue to feed the foreclosure beast.
As day follows night, foreclosures follow decreasing values.
California is not going bankrupt this week nor is is scheduled to fall into the ocean yet. I do remember when they were issuing IOUs instead of checks for some workers in the early 90s though.
Look at the map. We have about 12,000,000 people there. It doesn't have the 4,000,000 in Riverside and San Bernardino where the real wipe out is. And the only thing between this map and 3,000,000 more in San Diego County (one of the first to crash) is a nuke plant/marine base. This is a big part of the US economy.
We can see that the wealthier areas of West Los Angeles, and North Los Angeles (Pasadena), and coastal South Orange County (Newport) are still holding. We mostly have anecdotes about weakness in these places, not much in the data.
But the power of the anecdote is knowing a mortgage broker clearing $50k a month doing mortgages for immigrants who don't speak English. So what is really going on in West LA?
Vamos a la playa.
The tale of three cities graph is exactly what I would expect to see in the market we have experienced.
Buyers of lower priced and entry level homes are totally credit dependant, while buyers of high end homes are less dependent on credit to buy.
To the extent that unusually looser lending standards (subprime lending) were a factor in the bubble run-up, I would expect the lower-priced homes to be affected the most by the easier credit. Thus, the faster appreciation. As the easy money is withdrawn I would expect the lower priced homes to again be more impacted on the way down as many potential buyers can no longer get a loan.
In prior cycles the credit standards did not shift as much.
There were a lot more mortgage brokers and construction workers than employed entertainment industry chumps in So Cal. A long way down from here.
Couple of things about Los Angeles.
First off, it's probably the largest physical MSA in the country. Because of this, I find the Greater Los Angeles Shiller data (which the LAMap.jpg references) to be of little use. The Metro Shiller data is more relevant.
2.) The city core of Los Angeles in terms of deisrable areas is pretty much represented by the green shading. See my google map here: LA Core - Google Maps (I had made this map a while ago, but it seems to overlay pretty well with the 'green' areas. This is not coincidental. People still want to live in those areas, more and more so since 2000.
Most of the high-end jobs are located near either West LA or Downtown on the map.
3) The area not in the map above is the none core area of Los Angeles and general considered the 'greater LA area'. Once you get into the 'greater' Los Angeles area, there is/was plenty of undeveloped land to build more and more suburbs (all the area in orange and red). The areas in red, to the north of downtown (excluding Orange County, which is it's own area and market) are lots of new construction of SFR or very recent construction.
4) Sometime in the late 90's/early 2000's Los Angeles was 'discovered' by people in the rest of the country. It used to be that people left Los Angeles after college and went elsewhere. Now, people move to LA from other places. This is a fundamental shift in the demand side of the curve in the 'good areas'. (Young urban professionals moving to LA general gravitate towards the areas they've read about or heard about, Santa Monica (West LA), Mid City, or the Eastside/Downtown (Los Feliz/Silverlake/Downtown).
The influx of New Yorkers (in particular) and San Franciscans in the early 2000s started pushing up rents and price in the 'good core' as they seemed undervalued to somebody used to paying 2500 for a 600 sq/ft co-op in NYC.
That plus the rising real estate bubble pushed values in the core up astronomically. Drive till you qualified started occurring mixed with "if I don't buy now, I'll miss out mentality"
5) Now that we're post 'mania', the outer areas are collapsing into the core like a super nova. People in the desirable area who might have over paid and gotten in trouble have been able to sell to somebody 'new' who still want's to live in that area. This is not the case in the outer burbs. There are areas within the LAmap.jpg that have seen 0% declines and even increases. (much to my surprise. I'm not a housing bull or an agent.)
What we're going to see on the first chart is an over shoot by both the lower and middle tiers. I think the upper tier will continue to fall as well, but the demand in the core area will prevent it from falling as far as the middle and lower tiers will.
They will not move in unison from this point. The lower and middle tiers still have a lot further to go with the lowest tier suffering the most.
I know predictions are asking for trouble but I'm going to say a low of 100 on the lower tier, 120 on the middle and 125 on the upper. Additionally, the lower tier will get there faster, the higher tier will take the longest to bottom out. In the outer areas, prices will fall to match net rent equivalents (meaning low enough to entice landlords to buy SFR as rentals, deal with the hassles of renting, and still cover the mortgage with what's left over. That's still a ways off, even after the declines so far.)
The reason for my predictions not totally mean reverting on the higher tier is the change in fundamentals regarding LA as one of the major cultural cities of the country.
Sometime in the late 90's/early 2000's Los Angeles was 'discovered' by people in the rest of the country.
Phil,
Hadn't heard that before, and I've lived here for 20+ years (with friends in all the major economic sectors). Do you have any objective data illustrating this change?
It's an important consideration, because absent any new demand there's no reason for LA not to mean revert everywhere.
Itulip had a good map of real estate drops. The real estate drops move outward in toward the center and then starts to recover in to out. Made since as the outer individuals struggled to make the payment and drove out to where they could afford the house. As their commute and other expenses rise, they let the house go. As the real estate drops, it starts to move into the center. The center gets hit but not as much as outer ends.
Phil, I took your map and overlaid the Case-Shiller map on it.
http://i51.photobucket.com/albums/f380/SFstuff/LAREMap.jpg
Hey Phil Glau,
I'd be willing to bet you moved here from somewhere else in the mid to late nineties, because you obviously you know absolutely nothing about Los Angeles or it's history. It was not "discovered" in the late nineties. If you knew anything about L.A. you'd know we've had a much higher inflow of people than outflow for every one of the last fifty years, not only those oh-so-trendy transplants, but immigrants from all over the world. L.A. is now and has for a very long time been a "dream" destination for a large number of people. And even though Gertrude Stein once famously said of L.A.: "There's no there there", there has always been a "there" here. It's just not all in one place.
As for Angelenos leaving after college: what planet are you from? As a third generation native I can tell you you're full of it. Most natives will do everything they can to continue to live here.
And ALL areas of Los Angeles will eventually revert to the mean. Including those trendy areas. Including the wealthy areas. How do I know this for sure? Because if I had a dollar for every moron who felt their little corner of the L.A. world was "special" in every one of the four boom and busts I've witnessed in my life, I'd be able to buy the Getty. For cash.
In every boom and bust of the last seventy years in the greater L.A. period EVERY area has eventually reverted to the mean after a huge run up. Some of the fortress areas will just take longer to fall. As they say, those who do not know their history are doomed to repeat it.
Submitted from the heart of one of those "trendy $ wealthy" areas, Fortress South Pasadena. Google it
I cycled back from downtown LA last week. Every single block had a new condo/appartment building either 'now leasing', being built, or in a few cases, quietly abandoned. (One such close to where i live hasn't had any work done on it since last August, and has just been standing there as a wooden frame.) This not withstanding, ground has been cleared and building started on 3 others in the last 2 months.
The number of for rent signs in my neighbourhood (west end LA), has been going up every month, and there are at least 8 houses within a 3 block radius, both for sale - and clearly empty.
I somehow don't think this is going to end well.
You can say what you want but the beach cities are next on the mark down list. Look at Laguna Beach as an example. 2004-2006 unit sales averaged 50/60 per month. October 2007 through April 2008 dropped to 15-17/month. The last data I saw said only 4 homes sold/closed in May.
There are a lot of "super" rich people here. They dont have to sell...they are dwarfed (in numbers) by "investors" who will have to sell over the next few years. ABH is a great indicator of where we are headed. A 50% correction from the high is nut unreasonable.
Trishyla
I moved to Los Angeles in the mid 80's
Gertrude Stein's quote was about Oakland, not Los Angeles.
I agree that people have always come to LA. Having gone to college here, (late 80s) I can say that many of my classmates left LA afterwards for jobs and opportunities else where. I'll accept that this is anecdotal evidence. I have also witnessed an influx of college graduates starting in the Mid 90s/Late 90s, many from other areas that they normally would have stayed in. (NYC & SF in particular)
It seems like the fundamental difference between your opinion and mine is that you believe Los Angeles as a 'city' is the same fundamentally as it historically has been. Under this view, then it would be correct to assume a regress to the mean.
I believe that Los Angeles as a 'city' is on the rise. Do you think Detroit is the same city as it was 30 years ago? How about Seattle? If you change the fundamentals of a place, then you can either support a higher valuation or decline to a new low.
As to your predictions, I guess we'll see. I don't think I was suggesting the 'fortress' areas aren't in for a decline.