Long read, but quite tasty, taken from:
SoCal home woes could mean 50% price drop - Lansner on Real Estate - OCRegister.com
The one Toluca Lake RE agent's personal experience as well as the OP's aside, you ain't seen nothing yet. LA prices are going to get bludgeoned and then some, and yes, that includes the good areas.
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“Every place takes the hit in the long run,” said Christopher Thornberg of Beacon Economics, a consulting firm in L.A.
If prices in high-end markets do not bend while prices fall in adjacent areas, many buyers will at some point choose the cheaper neighborhood, he said.
“If the gap between Riverside and Orange County becomes too great, a person will say, ‘Forget it, I’m not going to live in Orange County,’ ” he said.
“If prices get too high in Beverly Hills, it drives demand to Santa Monica.” Such movement eventually drags top-end prices down, he said.
Data gathered by Edward E. Leamer of UCLA’s Anderson Forecast back that up. Since 1989, Leamer has tracked housing prices in the 20 least expensive and 20 most expensive ZIP Codes in Los Angeles County.
He found that all areas fell by about the same percentage when they hit bottom in the 1990s downturn.
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CALIFORNIA DISTRESS EPICENTER
A snapshot of home foreclosures exposes the continuing nightmare, nowhere near end, with California at the epicenter. On an annual basis, foreclosures ran at 112% above 1Q2008 versus Q1 of last year. The pace continues, as May national foreclosures rose by 48% versus a year ago. One might expect the pace to level off, but the increases continue. According to RealtyTrac, almost 650k properties were in some stage of foreclosure during the first quarter of 2008, an astounding ratio of 1 of every 194 households nationally. Nevada suffers a ratio of 1 in every 54 households in foreclosure. For California, the rate is 1 in every 78 households, and for Arizona 1 in every 95 households. This is a national tragedy. The rise in home foreclosures is truly frightening. A national catastrophe is unfolding. In California alone, lenders sent out 113,676 default notices in 1Q2008, up 39% from 4Q2008, and up 143% from 3Q2007. The number of California homes lost to foreclosure in 1Q2008 was 327% above that of Q1 a year ago!!!
In the month of April, foreclosure filings were reported on more than 243,000 properties, a 65% increase compared with April 2007, according to RealtyTrac. In San Bernardino California, a friend told me that 800 foreclosures per day are being filed in the area. By the way, towns dominated by military bases suffer foreclosure rates four times worse than the national rate. California has more than its share of military base towns. This does not sound like support of troops. California generally saw home prices fall by 32% in April, versus the same month in 2007. Sales in the Golden State actually increased by 2.5%, but with heavy price cuts. Again shockingly, one in every 204 US households is in some stage of the foreclosure process, by latest figures available. Bank owned properties are soaring in number. In January 2007 they totaled 231k homes, in January 2008 it was 493k homes, and in April 2008 it was 660k homes.
Freelance credit analyst Jas Jain said of California, “Since the credit crisis began in August 2007, home prices (on a price per square foot basis) have been steadily dropping at a 20% to 40% annual rate, depending upon region. There could be some leveling off in prices for a few months before the second leg takes [housing] prices down more than 50% from their peaks in most areas by year-end. California has been in a recession since July 2007 based upon employment data, and should enter a depression in 2009. The housing bubble kept Silicon Valley out of the depression after the tech bubble burst, causing employment to fall by 20% in 2001 to 2003. That is a depression by any definition. This time there is nothing to save the California economy.” Wow! Ouch! Batten the hatches on the Left Coast !!!
The $4.8 state billion budget cut by Gov. Schwartzeneggar in educational funding this year has hit hard, cutting 20 thousand jobs among teachers and other school employees. Many wealthier communities in California have begun initiatives to solicit private funding to aid the schools, even a separate tax levy proposed in Alameda County outside San Francisco. Home values in California are already down by 29%, from March 2008 versus last year March. That translates from median value $582k last March to $414k this March, a median average drop of $168k per home. Conditions are worse with bigger losses in Monterey, Riverside, Sacramento, High Desert, and Santa Barbara. Rick Sharga of RealtyTrac said, “California still has not hit bottom. We have a lot of California homes that are in early stages of default that may not be salvageable, because either there is no market or financing available, or both.”
The national housing inventory problem grows worse, not better. Pollyanna analysts continue to miss the direction toward more bloated, as prices are threatened continually. The inventory for existing homes was high in March, at 9.9 months supply, and went to 11.2 months in April, a record covering 23 years. In California, the existing home inventory is at least two months greater supply than the national figure. On the existing home side, foreclosures relentlessly flood the market, aggravating supply, serving as the most significant factor weighing down housing price. In fact, fully 40% of all sales in California come from bank & lender foreclosures. And the condominium picture is worse, as pressure comes from rising condo fees.
The median national housing price has fallen to $202.3k, down 8% from a year ago. Sales activity has fallen for eight of the last nine months. A key data point is seen in the West, where sales activity rose by 6.4% but where prices fell the largest amount. Prices fell in 43 states, with California and Nevada registering the biggest declines. An opportunity for price stability might come out West where prices came down hard to encourage buyers, but it is early to conclude stability. The foreclosure process still drives the process out West. My belief is that the foreclosure process generally will continue to pressure inventory for another year at least, and push prices down further. Lending institutions are dumping their inventory, lowering price, and achieving some sales. Just because price has fallen, and sales activity has risen, does not mean that price will stabilize. Lending institutions are not seeing any reduction in their inventory, the key point! They incur costs from insurance, property tax, and maintenance, plus legal fees. They bribe homeowners to leave quietly without damage to the property, as in sabotage. Banks even call the cost ‘Anger Escrow’ in their financial reporting. So time to hold properties on the books costs money, an inducement to cut price for distressed or auction sales.
The Standard & Poor Case Shiller composite index provides broad aggregate price data, but two months old. Its index of 20 metropolitan areas showed prices of existing homes fell 2.2% in March, accelerating to worse than a scary 20% annualized decline. The venerable serial bubble engineer Greenspan estimates that house prices will decline by another 10% from February levels, and perhaps 5% worse than that if the USEconomy remains weak. He expects a peak to trough total decline of 25%. Economist Paul Krugman uses a different reasonable measure, a ratio of home prices to rental rates, to arrive at a 25% overall home price decline in the overall correction. Goldman Sachs keeps its simple, stating home prices will fall 15% without a recession, and 30% with a recession. Yale Univeristy professor Robert Shiller expects a shocking 50% home price decline in the formerly hot property zones, like California, Las Vegas, south Florida, and parts of Arizona. My forecast is for a national housing price decline to the levels seen in 1990, plainly put, a double housing recession since no housing recession was permitted in 2000-2002.
In year 2005, a very intriguing sequence of events occurred. California state contractors were not properly paid in cash and instantly redeemable checks issued by the state. The state was actually in severe arrears on payments and at risk of losing contractor work. So California issued state coupons, like IOU on pieces of paper. It is unclear to what extent state employees received such coupons. Of itself, this is not so important. What struck legal and political scholars was how the state coupons were used. THEY WERE REDEEMABLE AS CASH, AS IN LEGAL TENDER, AT SUPERMARKETS AND UTILITY FIRMS. The coupons were essentially cash in restricted usage. They were a bizarre form of money created by the State of California, inflation to be sure, but money printed illegally outside the realm of the federal USGovt. Only the USGovt has the privilege of inflating the money supply and destroying the currency! The problem resolved itself in the ensuing months. Fast forward to today. Gov Schwartzeneggar announced a 10% budget cut a few months ago, with additional budget cuts in progress.
California is under great distress. Its economy is probably in a mild depression, much like Michigan and Ohio. The Governor recently announced the inability to float a state bond to cover ongoing expenses to run the state. So they resorted to floating some emergency measure bonds, using state lottery income as collateral. Gambling income is the only reliable income stream to the state, WOW! Watch for future attempts to print money via the back door, if desperation runs thick. Look for challenges to the federal privilege to print money. The implications could actually work toward strain in the union, as in USA. That is not my forecast, but one should expect strains to individual states to become acute. Some will want to print money. Imagine a California Dollar with a golden bear on it. Oh yes, the Governator declared a state of drought, which forced an emergency order of resource sharing for water, and some conservation measures. The state has enough problems, let alone drought. What is next, locusts? How about rising salinity levels in irrigated water?
If California is forced to inflate with state coupon devices, or receive massive federal emergency funds, or faces widespread defaults and bond failures, conditions might arise for broad movement into gold as refuge. Vallejo already declared bankruptcy at the town level. The process is degenerating.
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California distress epicenter
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