Current Economy in L.A. (Los Angeles, San Gabriel: appointed, to rent, HOA fees)

[Joseph Marnix]

I'm still employed in the same company for 8 years now.
My house value went down, but I'm not going anywhere soon.
My sub-prime mortgage reset to the adjustable rate.
Wife will start looking for a part-time job as soon as D4 settles into school.

[John23]

No offense to Anderson, but I dont believe from any of those people.

These are the same "experts" that told us there was no housing bubble, housing can't crash, housing has never declined nationally, there's no recession, there's a little recession. The experts have been way behind the curve of whats happening on the ground. I think its part of the reason why people cant really grasp the situation.

The LA economy has been flipped upside down this entire decade. I think when housing settles down and gets back in line with incomes, people will be able to get a better read on things. I've seen a ton of for rent signs in west la areas. The same homes a few years ago everyone was racing to buy, thinking they'll go up forever.There's a major hangover in LA that will take a long time to subside. Real estate could be flat for another 5-8 years when you consider the different mortgages/loans resetting, weak/flat job growth, and potentially higher interest rates (higher mortgage rates) with the govt printing so much money.

[Charles]

Originally Posted by John23

I think when housing settles down and gets back in line with incomes, people will be able to get a better read on things. I've seen a ton of for rent signs in west la areas. The same homes a few years ago everyone was racing to buy, thinking they'll go up forever.There's a major hangover in LA that will take a long time to subside. Real estate could be flat for another 5-8 years when you consider the different mortgages/loans resetting, weak/flat job growth, and potentially higher interest rates (higher mortgage rates) with the govt printing so much money.

What's your gut feeling on where housing prices are now? Are they close to being in line with incomes for example? Farther to fall? Flat but not increasing?

[Mike121]

I know that all my single friends that are making ~$70k have bought or are trying to buy condos now. I don't know what will happen to housing prices in the future, but, they appear to be low enough to entice the people I know.

[John23]

Originally Posted by Charles

What's your gut feeling on where housing prices are now? Are they close to being in line with incomes for example? Farther to fall? Flat but not increasing?

I haven't studied it real closely. In west la, there's still a ton of houses at $600 k to a mil (say mar vista). The homes at $600 k or $650 k were $250 k at the bottom in the 90's. Have incomes gone up by 100 or 150% to support these prices?

-What happens when older home owners start retiring, trading down? Say age 55 or older. You didnt have the retirement of the baby boomers in the 90's to suppress prices. It was a dip from 91 to 95/96, but it was still part of a larger economic upswing.

-I dont see how typical job security and benefits can support so many expensive homes.

-I think there will be another 2 or 3 downwaves this decade...when ALL the funny/no doc, alt loans reset. All the weak hands will eventually get flushed out of the market. A huge spike in mortgage rates is almost inevitable. Are interest rates going to be at the same rate or lower a decade from now? Probably not. On top of another downwave in the economy. Too many cross currents that we didnt have in the 90's. The 90's bubble took 5 or 6 years to hit bottom. This one was far bigger, so it will probably take longer.

-San Bernardino, Riverside, inland empire, probably close to bottom. Those have crashed 60-70%.

-Theres probably a chart somewhere on the internet that shows home prices to income over 20 or 30 years. I think in every crash, it eventually gets back to income.

[Thawor]

Originally Posted by John23

-Theres probably a chart somewhere on the internet that shows home prices to income over 20 or 30 years. I think in every crash, it eventually gets back to income.

Good point, but how would you then calculate the "real", median or uninflated house price?

[Charles]

Originally Posted by Thawor

Good point, but how would you then calculate the "real", median or uninflated house price?

I would think it would be the house price that can be sustained by that income, which has traditionally been between 3 and 4 times the income.

Let me add a neat tool that shows income by zip code:

Moderator cut: link removed, linking to competitors sites is not allowed

[JohnG72]

Originally Posted by jc76

So 6 months ago the gloom and doom was heavy on this forum about the un-employment rate in L.A. and everyone losing their homes etc.

Factual information isn't gloom and doom. It's facts.

It is what it is.

[John23]

Originally Posted by Thawor

Good point, but how would you then calculate the "real", median or uninflated house price?

I think in boom/bust cycles, real estate eventually gets back in line with income because the banks overlend fueling the boom. Then when the market crashes they underlend to protect their capital (or what's left of it). So it eventually gets back in line with income as all the overlending gets washed away.

I didnt study this bubble real closely, but I know it was layer upon layer of overlending. Much more than the 90/91 bubble.

[drshang]

Originally Posted by Charles

What's your gut feeling on where housing prices are now? Are they close to being in line with incomes for example? Farther to fall? Flat but not increasing?

LA county, in general, is vastly overpriced. You should see median real estate valuations 3-5x median incomes (3-4x is the historical norm but LA has often seen a 5 multiple historically). In most "upscale" neighborhoods you are seeing values around 6-10x median incomes still. Foreclosure moratoriums, shadow inventory, etc. are much more of a factor in upper end neighborhoods...banks seem to be more willing to "let go" of housing in other areas, such as the Inland Empire, which IMO is at bottom levels or very close in either direction (it may have bottomed already we will see).

Real estate cycles can take decades to correct, see Japan and to a lesser degree Taiwan. It's unlikely it will take this long in LA county, but so much of the wealth created in Southern California over the last 20 years is real estate related. People are unwilling to let go of this idea that "real estate is the golden ticket to great wealth." This housing bust is not a recession, it is a paradigm shift. Real estate, as an asset class, historically appreciates with inflation. Due to the massive amount of leverage you can apply to it (think 10-20% down with inflation level returns) it is an excellent asset class/investment in general. But when you are leveraging an asset it is VERY important, critical, that the underlying price of the asset stays stable in value.

Historically real estate bottoms occur when prices reach cash flow levels (i.e. cost to own is lower than the cost to rent). One thing to keep in mind is that as the economy recovers, interest rates will increase substantially, further depressing prices, and possibly putting more pressure on areas close to a bottom (i.e. Inland Empire). The fed is purchasing MBS (mortgage backed securities) which is depressing interest rates beyond their equilibrium point. This program is slated to end in the next few months, and interest rates will likely increase 50-100 basis points. Combine that with the fed funds rate increasing and you will see higher mortgage rates within the next 2-3 years, probably quite a bit higher. Keep in mind, due to the high default rates on mortgages in this recession, you will see a higher "spread" needed to justify the risk of mortgages, which will likely cause rates to increase semi-permanently compared to the overall interest rate. Understand that mortgages are not a huge profit center for commercial banks.

What matters when evaluating buying vs renting is your cost of renting vs buying. Generally buying makes sense if the cost is similar to renting or lower. Historically this the equilibrium point and the cost to own and cost to rent should be within 10% of each other (in either direction). Occasionally you will see outliers in this regard (if income is brought from outside the geographic area where the house is located).

There are some areas where I think it makes sense to buy, areas which are generally far from the city. If prices do exhibit further declines I don't think they will be really significant, and a lot of that will be due to the effective monthly payment/dollar of housing value increasing due to rates rising. Touching real estate in higher dollar/income neighborhoods in the next 2-3 years seems to be somewhere between risky and foolish. As a general rule, if you can purchase a property for the similar cost to rent it, you should buy. One further variable is the drop in rents in Los Angeles, which is putting even more downward pressure on prices as well, in addition to all the other factors above. You are also generally better off purchasing when interest rates are high, as it's very easy to refinance and the price of the asset will increase as rates drop since the effective monthly payment on the loan will drop. You have a double advantage in that regard - you can take advantage of the lower rates AND the price increase that results.