LA's Home Price Bubble & Historal Home Prices (Los Angeles, Burbank: for sale, appliances)

[SalParadise]

-How much further do you think LA County's home prices have to fall?

-What areas do you think have yet to fully deflate? What areas (if any) do you think have stabilized?

Here is some historical data on LA County's housing market:
1. Median Home Price
2. Ratio of Median Home Price to Median Income (so the higher the ratio, the MORE expensive homes are relative to incomes).

1Q 1991:
Price: $180,000
Ratio: 4.29

1Q 1995:
Price: $157,000
Ratio: 3.47

1Q 2000:
Price: $194,000
Ratio: 3.72

4Q 2006:
Price: $525,000
Ratio: 9.34 (the peak during last cycle)

3Q 2011
Price: $300,000
Ratio: 4.69

The above are NOT in constant dollars (adjusted for inflation) but they are still pretty pretty telling.

Either prices have farther to fall or incomes will have to rise...the former is more likely.

[JohnG72]

Originally Posted by SalParadise

-How much further do you think LA County's home prices have to fall?

-What areas do you think have yet to fully deflate? What areas (if any) do you think have stabilized?

Here is some historical data on LA County's housing market:
1. Median Home Price
2. Ratio of Median Home Price to Median Income (so the higher the ratio, the MORE expensive homes are relative to incomes).

1Q 1991:
Price: $180,000
Ratio: 4.29

1Q 1995:
Price: $157,000
Ratio: 3.47

1Q 2000:
Price: $194,000
Ratio: 3.72

4Q 2006:
Price: $525,000
Ratio: 9.34 (the peak during last cycle)

3Q 2011
Price: $300,000
Ratio: 4.69

The above are NOT in constant dollars (adjusted for inflation) but they are still pretty pretty telling.

Either prices have farther to fall or incomes will have to rise...the former is more likely.

You will get two groups of people arguing with you.

The first groups will tell you that prices don't matter so much because interest rates are so low. This is true in a sense. You can afford a payment on a more expensive house with the same income than if interest rates were higher. The problem is that this school of thought ignores what happens if home prices continue to fall and people go underwater(which as weve seen initiates a fairly vicious cycle).

The second group will argue that those prices never actually occurred, that they don't apply to whatever special area, that a particular area is different now, that homes often have lots of money in upgrades, etc. Of course thats nonsense and noise. All one needs to do is go to a site like Redfin or similar, click on houses for sale in a particular area of interest, and view the history of the home. It might take a few homes before you find one with a significant history. What you will find is that homes in areas like Burbank, Culver City, West LA, etc sold in the past 15 years for $200-300K. Factor in annualized rate of inflation and you will see that homes in these areas are still very over priced.

For instance, this home is an excellent example. No significant upgrades(not sure when the pool was put it). Notice no photos of bathroom or kitchen. I guarantee you theres a reason for that...they haven't been remodled since the house was built. Anyway, sold at the peak of the prior bubble in 1990 for $220K, probably would have gone for $190-205K in 1997, now listed at $460K. Just a tad overpriced?

1438 North AVON St, Burbank, CA 91505 | MLS# F11091397

Same thing with this home in Culver City(BTW are realtors wiping out the sales history here...its hard as heck to find any home in Culver City with a record going back more than 5-6 years). $225K in 1994, $593K now.

5342 BLANCO, Culver City, CA 90230 | MLS# F11099698

And West LA....$162K in 1998, $500K now:

11706 EXPOSITION, Los Angeles, CA 90064 | MLS# 12-577377

So yeah, I'd say homes are still quite overpriced in much of LA County.

[SalParadise]

Originally Posted by JohnG72

The first groups will tell you that prices don't matter so much because interest rates are so low. This is true in a sense. You can afford a payment on a more expensive house with the same income than if interest rates were higher. The problem is that this school of thought ignores what happens if home prices continue to fall and people go underwater(which as weve seen initiates a fairly vicious cycle).

.

I would add that during the formative bubble years (early 2000's), interest rates were pretty low as well (though not as low as today). And unemployment was also much lower than today.

Originally Posted by JohnG72

And West LA....$162K in 1998, $500K now:

11706 EXPOSITION, Los Angeles, CA 90064 | MLS# 12-577377

So yeah, I'd say homes are still quite overpriced in much of LA County.

$500k for less than 1,000 sf on Exposition Blvd....ridiculous.

[CA4Now]

Originally Posted by SalParadise

Either prices have farther to fall or incomes will have to rise...the former is more likely.

You're right, unfortunately. Home prices decline for a third straight month - latimes.com

[kettlepot]

Originally Posted by JohnG72

For instance, this home is an excellent example. No significant upgrades(not sure when the pool was put it). Notice no photos of bathroom or kitchen. I guarantee you theres a reason for that...they haven't been remodled since the house was built. Anyway, sold at the peak of the prior bubble in 1990 for $220K, probably would have gone for $190-205K in 1997, now listed at $460K. Just a tad overpriced?

1438 North AVON St, Burbank, CA 91505 | MLS# F11091397

I'm only going to argue one point with you, and it is a tangential one at that.

I would argue the idea that a bathroom remodel would increase the value of this home. There are a lot of people who would pay EXTRA money if the bathroom was in its original state as it was built in 1950 or 1941 or whichever earlier period. The same goes for an original kitchen as well. If the original was built well and maintained well, and if they have never been remodeled, this would ADD value to the house not diminish it. I have seen plenty of examples of people who have spent thousands of dollars remodeling these two rooms and have diminished the value of their property in the process.

People .... STOP THE (remodeling and stainless steel appliance) MADNESS!

[Fontucky]

Originally Posted by kettlepot

I would argue the idea that a bathroom remodel would increase the value of this home. There are a lot of people who would pay EXTRA money if the bathroom was in its original state as it was built in 1950 or 1941 or whichever earlier period.

So true. One of the highlights of this house when I first saw it was the never-remodeled 1943 bathroom and kitchen, and I plan to keep it that way. I'm so thankful the previous owners didn't get influenced by all those flipper shows and ruin the charm of this old place with that played-out trifecta of interior decorating lemming behavior that is travertine, granite and stainless steel.

Originally Posted by kettlepot

People .... STOP THE (remodeling and stainless steel appliance) MADNESS!

5000 years from now, archeologists are going to dig up an unbroken bedded layer of discarded travertine tile, broken granite counter tops, and stainless steel appliances. When that trend falls, it's going to fall hard due to oversaturation.

[guydude]

Perhaps L.A. isn't overpriced, and that the reason things are so expensive is because people constantly are moving to L.A., and demand is driven up?

[nick2006]

Originally Posted by JohnG72

You will get two groups of people arguing with you.

The first groups will tell you that prices don't matter so much because interest rates are so low. This is true in a sense. You can afford a payment on a more expensive house with the same income than if interest rates were higher. The problem is that this school of thought ignores what happens if home prices continue to fall and people go underwater(which as we've seen initiates a fairly vicious cycle).

The second group will argue that those prices never actually occurred, that they don't apply to whatever special area, that a particular area is different now, that homes often have lots of money in upgrades, etc. Of course thats nonsense and noise. All one needs to do is go to a site like Redfin or similar, click on houses for sale in a particular area of interest, and view the history of the home. It might take a few homes before you find one with a significant history. What you will find is that homes in areas like Burbank, Culver City, West LA, etc sold in the past 15 years for $200-300K. Factor in annualized rate of inflation and you will see that homes in these areas are still very over priced.

For instance, this home is an excellent example. No significant upgrades(not sure when the pool was put it). Notice no photos of bathroom or kitchen. I guarantee you theres a reason for that...they haven't been remodled since the house was built. Anyway, sold at the peak of the prior bubble in 1990 for $220K, probably would have gone for $190-205K in 1997, now listed at $460K. Just a tad overpriced?

1438 North AVON St, Burbank, CA 91505 | MLS# F11091397

Same thing with this home in Culver City(BTW are realtors wiping out the sales history here...its hard as heck to find any home in Culver City with a record going back more than 5-6 years). $225K in 1994, $593K now.

5342 BLANCO, Culver City, CA 90230 | MLS# F11099698

And West LA....$162K in 1998, $500K now:

11706 EXPOSITION, Los Angeles, CA 90064 | MLS# 12-577377

So yeah, I'd say homes are still quite overpriced in much of LA County.

its relatively simply.

1) use year 2000 as a baseline.

2) add 3% average value increase per year

3) assume as-is condition from year 2000 to year 2012 (no upgrades, etc). add $ value increases based on upgrades

4) consider interest rate

example
home in W LA sold for 520K in 2000. Add 3% per year increase = 740K. So it should be 740K currently. However, year 2012 price is 880K? Is it overpriced? First ask yourself if there are significant upgrades? Then take into consideration the interest rate...lets assume the interest in 4% 30 year fixed. If you were able to secure such a shockingly low interest rate, then 880K may not be overpriced, because over 30 years, you will be paying the same principle+interest as the 740K's principle+interest over 30 years (assuming typical 6.75-7.0 interest rate for 740K).

what is leaving your pocket over 30 years will be close to the same amount..