So. CA Medium House Prices Fall $550K to $308K

[KCfromNC]

To back up what Humanoid is saying, here's Case Shiller price data for LA, inflation adjusted, broken up into three price ranges.

http://bp1.blogger.com/_pMscxxELHEg/...iceNominal.jpg

This data is several months old, so you can probably add another 5-7% in to the declines, but the trend is more important than being 100% up to date. Also, it's just for LA so it's not exactly the same as the Southern CA area measured by DataQuick, but again, for a rough idea it's still useful.

I believe prices for each individual line have been normalized to 100 in Jan 2000. So the blue line shows that prices rose by roughly 3.5x for low priced homes from then to the peak, but that doesn't mean that low priced homes were more expensive than higher priced homes at that point. It just shows that higher priced homes increased less from their (higher) starting point than the lower priced ones did.

Seeing real prices jump 3.5x in 6 years is a good indication that a 70% drop is possible. That would put them back to 2000 real prices plus a small bit. If they head back to prices at the bottom of the last CA real estate bust, it could be more like 75%.

This chart does seem to provide some support to the idea that the median price data is being driven by bigger drops in lower priced homes. The low priced ones dropped roughly 40% so far while the upper end "only" dropped about 20%. Then again, you could argue that if the lower priced homes are selling so much more frequently that they are distorting the median, then that's where the market really is and the high end is just slow to catch up.

On the other hand, it looks like real prices haven't even fallen to the peak of the previous bubble. I don't see that as encouraging for calling a bottom to housing in the LA area. It looks like they are only half way to the bottom based on what's happened in the past.

[Humanoid]

Originally Posted by fairmarketvalue

Do you know what the forcasted total % is expected in drops from peak prices in CA? I think they are down 25-40%, overall, depending on the area. For the ones that have fallen 40%, is it because they were that overprice to begin with? (I agree it probably was) and if so, do they have another 20-30% to go as predicted? If so, this would mean many homes at 70% off of peak by the time it's over. Is this realistic and were prices really 70% off from norms? I am honestly just curious, not argueing as I don't know. I only know that CA was way out of wack where prices were concerned so am wondering what you think.

The areas that have declined 40% are the areas that are really heavy with foreclosures. The foreclosures have forced prices down faster than areas with less foreclosure activity. These areas should decline another 20% or so, where as some of the more high end stuff will decline another 20~25%. That is what is required to get us back to inflation adjusted 2000 prices. But if the recession gets bad it could very well decline further. California's unemployment rate is one of the worst in the union, some areas like the Inland Empire are seeing 10% unemployment. Most of the job loses are related to housing and banking though.

And yes, its realistic that in some cases houses will be 60~70% off peak. You'll see this in the areas that were over built (such as the Inland Empire) and in some older areas where most buyers used subprime loans. Not many areas of Los Angeles will see that sort of decline though, not unless the economy gets really bad.

The problem with California in general is that the home prices weren't justify by anything at all. Where as at least in some other areas of the country you had a lot of economic growth and a lot of in-migration. Businesses keep leaving California because the high costs of doing business in the state. The bubble in real estate (which effected commercial real estate too) just made a bad situation worse.

[Humboldt1]

Humanoid,

You and I clearly have our differences. Just as I know the Illinois market (FMV and I do not agree on price declines), you seem to know the California market.

If I were looking to buy a place in California, single family in an area like LA for $500K, when would be a good time to buy?

When do you see Southern California bottoming out price-wise and when do you see prices starting to go up again?

I am forecasting early to mid 2010 for price bottom in Chicago, with prices starting to go up slowly after 2012 (I know this forecast keeps getting pushed back).

I will always be looking to buy investment real estate, regardless of market conditions. This is the way I am wired and my family has investment real estate in addition to farms (all paid for). I have been interested in real estate and real estate development since an early age.

[Humanoid]

Originally Posted by Humboldt1

If I were looking to buy a place in California, single family in an area like LA for $500K, when would be a good time to buy?

When do you see Southern California bottoming out price-wise and when do you see prices starting to go up again?

As I've said before I don't do the whole "when will such and such...". I have no real way of predicting when the market will bottom, there are just far too many variables that are currently in flex. Although, I do think in the next 2-3 years house prices will become fairly reasonable in price. But they may not be particularly attractive investments.

Real estate in California should remain weak for a long time. Its economy has been hollowed out and rents are inflated. Rents have gotten so bad in California that you pretty much have to be college educated to afford a 1-bedroom apartment in any decent community. I don't think California is going to be a good place to purchase investment properties for a long time. The time to invest in California real estate was years ago, in fact decades ago. I think a lot of younger California's see how successful some of the old timers were and get in on the investment property gig, but they were successful because they purchased back when real estate in California was dirt cheap.

Prices in California started to go up a bit after Prop 13 was passed (in 1978), I can't help but think it is major contributor to the rapid inflation in house prices since. Prop 13 basically limits your property tax to 1% of the value of your house and can go up at most 2% a year. You can also transfer your tax rate once when you buy a new house. So, the only way the state can increase its property tax revenue is when house prices appreciate. Naturally the state (and local governments) will then pursue policies that prop up house prices. Where as in other areas this isn't required you can just change the tax rates.

Regardless, I think you're strategy is all wrong. You should be looking to invest in areas that are dirt cheap but likely to grow in the future. Not areas that are expensive and likely to decline in the future (I don't think Chicago...is much better off than Los Angeles).

[fairmarketvalue]

Originally Posted by Humanoid

The areas that have declined 40% are the areas that are really heavy with foreclosures. The foreclosures have forced prices down faster than areas with less foreclosure activity. These areas should decline another 20% or so, where as some of the more high end stuff will decline another 20~25%. That is what is required to get us back to inflation adjusted 2000 prices. But if the recession gets bad it could very well decline further. California's unemployment rate is one of the worst in the union, some areas like the Inland Empire are seeing 10% unemployment. Most of the job loses are related to housing and banking though.

And yes, its realistic that in some cases houses will be 60~70% off peak. You'll see this in the areas that were over built (such as the Inland Empire) and in some older areas where most buyers used subprime loans. Not many areas of Los Angeles will see that sort of decline though, not unless the economy gets really bad.

The problem with California in general is that the home prices weren't justify by anything at all. Where as at least in some other areas of the country you had a lot of economic growth and a lot of in-migration. Businesses keep leaving California because the high costs of doing business in the state. The bubble in real estate (which effected commercial real estate too) just made a bad situation worse.

Wow, Thanks for the info. That's alot. And I understand now, how you seperate the differences between the "actual expensive homes" and the ones who tried to be "expensive". That makes more sense. I talked to my friend the other day (we talk about every other week-business) and he said a home just sold in thier gated community (Calabasas) for 1.8mil. They are not even toying with the idea to move but he was interested in this because he is trying to figure out the value of their home, in real numbers, not appraisals or forecasts. The original owners paid 2.1 in 2004 so they did sell for a loss. My friend paid (built) for 1.3 in 2002. I think he'd be happy if they decided to sell and got 1.8. It's every bit as "comprabable" as the one that just did. And it was only on the market for 2 1/2 months. They did start at 1.99 mil, though, so sold for 200,000 less than asking. Anyway, thanks again for the info.

[goodbyehollywood]

SoCal statistics are pretty meaningless. It's much too large and diverse a geographic area for one statistic to fit all.

Some neighborhoods on L.A.'s Westside have seen minimal price declines, though DOM are way up. In one neighborhood I'm watching, tiny starter homes that sold in the $350K range back in 2002 are still selling in the $600Ks. That eclipses the earning power of most households. Take no-doc and Alt-A loans out of the mix and the buyer pool shrinks.

I can remember nice homes in Brentwood and BHPO reduced to $399K back in 1996 and sitting vacant for a year at that price. Fast forward a decade and they're north of $1M. If history repeats, there's a long way to fall. It doesn't seem possible, especially when the government seems determined to keep homeowners in their homes at any cost.

[Humanoid]

Originally Posted by goodbyehollywood

If history repeats, there's a long way to fall. It doesn't seem possible, especially when the government seems determined to keep homeowners in their homes at any cost.

The government will at best be able to slow down the decline in the market. A lot of the foreclosures can't be stopped because the people had no intention of staying in the place, they were speculative purchases. The true problem is that the houses aren't affordable and there is only one way to solve that.

But some areas have Los Angeles are more desirable today then they were 10 years ago, so you have to factor that in. This isn't the case for the majority of California though.

[scimitar12]

Originally Posted by ArizonaBear

Next door here in Arizona the market has imploded as well----------well over 25% down thus far.

Same here in the D.C. area; prices have dropped a minimimum of 30% over the last two and half years. Some areas with heavy foreclosures have seen declines well over 50%.