How Low Will California Home Prices Go? (Los Angeles, San Diego: real estate, housing)

[justsomeguy]

My prediction: Median Home Price Troughs in mid-2009 - around $370k

I posted this on the San Diego board, but just substitute "L.A." or "OC" or "California" in place of San Diego since the market is sort of similar in all these places.

There seems to be some debate here about the housing market here in San Diego. We can all agree it is in decline, or at least stagnant, but how much further it can fall and when home prices will appreciate again seems to be up for debate.

Personally, I think the people saying home prices are done declining or will decline by only 5% or 10% more or wrong. They use examples from previous housing boom/busts cycles to say that housing won't fall further than 10% or 20% and most of that decline has already happened.

These people aren't looking at all the facts though. It is wrong to extrapolate from a few historical examples as a sign of what will happen without looking at the "big picture" and putting things in context.

My argument is that in the previous boom/bust cycles, while home prices were high, they weren't so far out of whack with median incomes as they were in the boom of the last 5 years. Because prices are so far removed from incomes and affordability, the % decline will be much further than in the previous cycles.

There are also other issues to consider - the lending industry is tightening standards and the risky credit that was available that allowed these homes to keep being built and sold to people who couldn't really afford them will soon be drying up. Did this happen in the other boom/bust cycles? I didn't live here then so I don't know. But I do know the prices of goods and services operate on a very fundamental principle - the law of supply and demand. With credit tightening, and homes still being too expensive for an estimated 90% of San Diegans, expect demand to slack off. Furthermore, supply should continue to increase because so many people were buying houses they couldn't afford in the first place, many of these homes will likely be foreclosed on, putting even more homes than are necessary onto the market. In addition, San Diego has seen net population decrease the last few years and should continue to see this trend continue, because of the near impossibility of affording a home here. This will further depress housing demand, and further depress home prices.

But wait, there's more. The slowdown in home building and real estate and home depreciation will lead to fewer jobs and a higher unemployment rate here and less cash from home equity to finance spending. Fewer jobs=Fewer Income Dollars=Fewer Goods and Services Purchased=RECESSION. Yes, folks, San Diego could quite possibly head towards recession in the coming years ahead. What will recession do for home prices? You guessed it, further deflate their value (in addition to lowering incomes, which will even FURTHER erode housing prices). All one big snowball effect.

One wildcard in all of this is long-term interest rates, which increasingly have less to do with the Fed's decisions to cut or raise short-term rates, and more to do with the willingness of foreign countries such as China and Japan to buy our debt. If our federal deficits continue to balloon, one might expect some of these foreign buyers of our debt to get a little spooked. I know I might get a little antsy if the guy I kept loaning money to was making no effort to fix his spending habit and kept wanting to borrow money from me. The result? If demand for U.S. debt (T-bills) drops, expect long-term interest rates to possibly rise, FURTHER decreasing affordability of SoCal housing for the average citizen. However - they might also stay low or drop lower, which should increase housing demand and soften any further price depreciation. Like I said - a wild card.

Here are my predictions:
Median Home Price Troughs in mid-2009 - around $370k
Recession Begins - March 2008


Let the debate begin.

(Welcome discussion, as I hope this thread will be informative and educational for everyone, myself included.)

[Axiom]

You might want to throw the nonsense going on with jumbo loans into the mix as well, I know you touched on it when you mentioned tightening credit standards and rising interest rates, but since we're talking CA housing costs... I think it merits a closer look specifically.

Part of the game plan for Countrywide is to cut jumbo loans to 10% of their overall home lending. Just a couple of months ago that number was closer to 50%
I'm guessing smaller players will follow suit, if they haven't already. Many of them won't fund anything they can't sell to Fannie Mae/Freddie Mac, so no non conforming loans.
Looks like money for those high price homes is going to be much tougher to get.

Then, assuming folks can find someone to fund a loan above the $417,000 cap, they're going to have to pay plenty for it. Bankrate showed 30 year fixed rate coforming loans averaging 6.68% but 30 year fixed rate jumbo loans averaging 7.43%
That's definitely a larger spread than is typical.

So lets say you have excellent credit, plenty of money for a down payment, and the income to qualify to buy that million dollar home. In the past you'd expect that to mean something and you'd be looking to get a decent interest rate, right? Not now - you're still an excellent risk, but now you're being asked to pay a premium. Why? Because of the mess lenders got themselves into IMO

I know I'd have to think long and hard before I signed for a jumbo loan right now.

Personally I think these conditions could sideline even more buyers, especially in expensive areas where a typical middle class family home easily requires a jumbo loan
(anyone know of a place like that )

[Humanoid]

To add to the above. Its not just non-conforming loans (Jumbo etc) that are going to but standard loans too. What most people don't realize is that when you get a loan from the bank its not the banks money per se, rather mortgages are packaged and sold to wall street (e.g., Frannie mae does this for conforming loans). But wall street isn't interested in buying up the mortgage backed securities anymore and when they do buy them they want a high rate of return. So its not that the banks are coming to their senses rather that wall street isn't buying anymore securities, thus creating a credit crutch.

Also, it should be noted that its a very real possibility that Countrywide goes bankrupt within months.

Anyhow, my prediction is that home prices return to fundamentals, which would mean roughly that median house = median income * 3.5. This translates into a 30~50% haircut for most California areas.

[Greenchili]

Im hoping they go lower, so I guess my prediction is that too We
want to stay here in Lompoc, and hope the prices go low enough that
the profit from the recent sale of our home will be enough to make a
20% downpayment. Fingers and toes crossed plus many prayers. Sorry
for those who have to lower their prices, but we did too. Its the way
of things

Greenchili

[YOU-CANT-EAT-SCENERY]

For those that can ride it all out, they will be the ones that will come out ok in the end I think. For me, I am liquidating all of my non neccessary assets (65 Corvette, tractor, horses, etc) to pay off debt, and only have a mortgage to deal with. I then plan to buy some property out of state (ID), as these places will follow suit shortly (I hope) as far as price drops are concerned.
Trying to get myself setup for old (er) age.
I agree that we will see a lot more of a drop...it's just getting started.

[goodbyehollywood]

Well, one big difference between San Diego and L.A. is that L.A. prices ROSE 2.9% in 2Q 07, according to the stats just released this week. In the more desirable Westside areas, the prices rose more than that. So L.A. RE prices have yet to fall, except in the outer fringes and the less desirable locales.

While we are headed for, and are already in, a RE quagmire in much of the country and in much of CA, my guess is that L.A. is going to become more and more like SF and NYC-- permanently divorced from economic fundamentals. In other words, because of the extreme wealth and the desire to live here at any price, L.A. has become an artificially inflated market, with a floor held up by the uber rich, wealthy foreign transplants and working professionals who are more than willing to allocate 50%-60% of their considerable income to housing. SF and NYC are already there; I believe L.A. has joined them. The people who can afford to, flock there or stay. The people who can't, leave. That is L.A.'s new reality.

Will L.A. RE prices fall? Yes, probably, some. By as much as they should... or as much as people hope? I bet "no."

[Humanoid]

Well, one big difference between San Diego and L.A. is that L.A. prices ROSE 2.9% in 2Q 07, according to the stats just released this week.

Without knowing the distribution of sales , figures on the median price increase/decrease aren't very useful. Its possible that home prices are going down yet median prices are going up. In most areas low end homes aren't selling, so the majority of the sales are from the higher end homes. As a result the median moves up because the distribution of sales as changed, not prices.

Also, LA is nothing like SF and NYC. Firstly the majority of LA proper is filled with crime, the areas that are nice are outside of LA. LA is not a well defined city, do you know the city limits? On the other hand LA county as a whole is nothing like NYC etc. Do you seriously suggest cities like Chatsworth and Norwalk are going to be divorced from fundamentals? Also, the prices in NYC and SF are going to drop too, but they will always be high. But that is because there is real scarcity, with the exception of select areas there is no scarcity in LA. In this sense the historic prices in NYC and SF aren't really divorced from fundamentals (It would seem odd not to include issues of scarcity in a lands fundamental value).

[goodbyehollywood]

Humanoid, I don't agree with you any more than you agree with me. And that's fine, because the experts don't agree, either.

Do I think L.A. deserves to be grouped with elite cities like SF and NYC? No. L.A. is going downhill a little more every day, but as long as the eternal sun, the beaches and the power and glamour of Hollywood beckon, it will retain an allure that defies fundamental-based pricing. And now that prices have shot up so high so fast, it's going to be very, very difficult to bring them back in line. A Fed rate cut-- a virtual certainty next month-- will pretty much eradicate any chance of that.

I do believe that L.A. prices will fall. I said it in the post. I believe SF and NYC prices will fall, too. But will L.A. prices come back in line with the fundamentals-- a 40-50% drop? I say, " no way." You say whatever you like. Neither of us know, and time will tell.

[Sorcerer68]

Los Angeles city limits include mansion filled Los Feliz where I live and more mansions that go miles to the west through the Hollywood Hills. Gentrification has been the key word in the rattier areas. The exception has been Lincoln Heights and South Los Angeles. The trickle of gentrification is just starting in El Sereno so prices are still cheap. Silverlake is included which has seen a huge jump in prices lately as has Mt. Washington. Echo Park has been the price increase king, the last number I heard was up 29% over last year. Don't kid yourself into thinking that was 5 houses. Good houses sell in a couple weeks or less. Some buyers with crappy ones are utterly divorced from reality and price their houses even above 2005 boom levels. Hancock Park, another mansion filled district is in LA as is Miracle Mile, Brentwood, West Adams, Beverlywood, Baldwin Hills, Century City, Fairfax Village, Studio City, Toluca Lake, Angeleno Heights...I could go on and on. LA is made up of 173 communities, most of them very nice places to live...the few bad ones seem to get more press these days and yes, South L.A. is big. Even the northeastern part of South LA (Jefferson Park) is undergoing gentrification.

My point is that I've been following this market closely as my livelihood depends upon it. I do continuous, detailed, far-reaching analysis of not only this market but many others in this country and other parts of the world. I'm starting to wonder if I waited to long in Victoria, Australia...anyway, Long Beach has seen the biggest drop in prices, probably 20%. I think LB will continue to drop until next fall when I start buying it up again (small multi-unit properties, not single family homes)...High-end luxury homes were sitting on the market from about the end of 2005 but guess what...they're selling like hotcakes again on the west side. From neighborhood to neighborhood in Los Angeles we're seeing different numbers...up here, down there, unchanged over here. Sales numbers are down but I see that as more of a return to normal. The "boom" sales numbers were just that. The ones that have done nothing but increase are areas that have been recently gentrifying i.e. "hot" areas like Echo Park. The median price in Mt. Washington for a single family residence is now over a mil as of last quarter. Condominiums have been dropping across the board. This is for two reasons, one being the market is flooded with new units and they're STILL BUILDING THEM! Never fear, as we speak, billions of dollars are being invested into beefing up some of our existing industries, the harbor is one. A plethora of people will move here to fuel the expansion of global commerce. They'll all have to live somewhere. This is so huge that we may see 20% more people here in less than 10 years. We're also seeing a huge shift in lifestyle. The younger generation that's just old enough to buy real estate mostly reject their parent's ideas of car based suburbs and gated communities. They want to walk to everything (this includes me). Urban cores all over the country are reflecting this change. Silverlake, Echo Park, Angleno Heights, Mt. Washington...all close in. Youngsters are flipping over the same areas that their parents turned their noses up at. Prices in car bases suburbs will fall until the end of this cycle and people will start to move out as the population ages. Traffic has worsened in Los Angeles which makes places like Agoura Hills far less attractive as well as the probability that gas is going to keep going up until it stablizes at (my prediction is $5 a gallon within 2 years).

I don't see prices plummeting in L.A. but what I see is more people renting. Manhattan sees 87% of it's residents in rentals. People will have to work hard and smart to buy homes here. I remember this in the 80's boom as well before we flatlined in the 90's for a while. A few people in the 80's bailed out of our Redondo Beach neighborhood because of horrific mortgage payments. I remember in the early 80's they needed to make over 100k a year to live in our neighborhood. They were instantly replaced by people grateful to be there. My old 4 bedroom, 2 bath split level tract home in Redondo is on the market for 996k. I think they may have it sold...

[PasadenaGuy]

I've owned SoCal RE since the mid 1980's. The housing price drop in the 90's was extreme - recession, defense industry meltdown, entertainment hiccup, rising rates, tremendous overbuilding, etc. I don't see anywhere near the problems today as we had 15 years ago.

Rates are low (historically) and probably headed lower. Unemployment is tiny. All the overbuilding is in Las Vegas and Inland Empire. Entertainment industry is strong. Overall economy is more diversified. Poor loan decisions were made, but that happens at the top of every housing cycle. These days, people are moving back INTO the cities, not rushing out.

Sure prices will probably drop. But those of you looking for more than a 10-20% reduction are probably going to be disappointed. And even that much (20% if it happens) will take years to be seen. People will not rush to cut their asking price.

For those that think LA is nothing but a crime ridden hole, you need to get out more often. LA has it's problems for sure, but as long as Hollywood keeps selling the tinsletown dreams and the sun keeps shining, people will keep flocking here.