Tuesday, October 9, 2007

Cargo decline

Today's LA Times article, "Cargo decline is another sign of slowing economy" (including this great photo) begins:

Cargo containers crammed with foreign-made goods that were supposed to set a record in August at major U.S. ports took an unexpected turn, with imports sinking 1.4% in another sign of the slowing of the economy.

This is more evidence the end of the credit-induced housing bubble is spilling into the larger economy. Coming full-circle, I've been expecting a falling economy to be what finally deflates the Westside housing market.


Anonymous said...

the slow down in container volumes may not have anything to do with housing. it may have much more to do with the weak dollar.

Brad said...

i agree with anonymous... its the weak dollar... what this means is that our trade imbalance is starting to get better (which it should with the dollar in the toilet)...

I agree that the housing market is tanking but not everything is directly housing-related...

Westside Bubble said...

Not that the housing caused the slow-down in shipping (although the article notes that "Imports of building materials plunged 20% in the second quarter from year-earlier figures"), but that a slowing economy will hurt house prices, by reducing wealth available to buy Westside houses.

tony almonte said...

sorry westside. its a stretch.

Dan said...

I think this is just due to the dollar falling (should lead to more exports which, while it won't affect housing in absolute terms will lead to high prices in dollars...)

OTOH, I think that there may be a relatively protracted strike for the HW creatives next year. If it goes on for a few months, a lot of shows will move to Canada. That could have an impact on prices.

(I'd love to hear more from someone who knows more about the entertainment industry.)

Anonymous said...

potential strike would be writers and actors guilds...studios will not be able to employ writers or actors who are members of SAG or WGA whether they shoot in the US or Canada. It will simply mean less production, not less US production. Non-union projects could still shoot, but they would be very low-budget. It would have very damaging financial ramifications for all involved, so no one really wants the strike to happen. So yes, a lot of people would not be making any money next year, but there is a glut of production right now, so the flipside is that people are making more money than usual at the moment.

dan said...

Anon--do you think that helps explain why Westisde prices have fallen so little compared with other areas?

Anonymous said...

I couldn't say for sure, but I'd say that westside prices are not linked at all to the labor situation in the ent industry. Most people buying at Westside prices are doing well enough to be insulated somewhat from a stoppage. It might deter a few people from buying, but I'd imagine this proportion of potential buyers isn't large enough to really shift the market.

Anonymous said...

"It might deter a few people from buying, but I'd imagine this proportion of potential buyers isn't large enough to really shift the market."

Care to name another job sector in LA that has thousands of people making 300K+?

Don said...

Care to name another job sector in LA that has thousands of people making 300K+?

I would argue that there are more lawyers in L.A. making 300K+ than entertainment industry folks.

dan said...

Remember: Prices are set at the margin.

I suppose it's a matter of how many Westsiders
a) will be affected by a strike
b) don't have the reserve fund to weather it (or at least don't have the funds to buy a home during such a strike)

Do the guilds have big strike funds to keep them going?

While most Westisders make a lot of $, since the housing is also expensive, I don't have a sense of what sorts of reserve funds they have built up. Could most folks here afford several months without salary?

Sure, there are lots of people who can pay cash for a place N or Montana. But there also must be a bunch who are stretching to live here.

And, again, prices are set at the margin...

Anonymous said...

Lawyers, doctors, CPAs working on their own, many restaurant owners or other small business owners, even some insurance brokers can easily make 300k+. Note also that marriages in the same profession are quite common so there is quite a few professional families with AGI over 500, 600k at least in my experience in LA.

With the weaker $ expect higher incomes to be more prevalent with time. BTW with $ going down like it is -housing can be seen as "brick and mortar " and may not go much in $ terms or may nominally go up in $ terms. How much that wood from Canada will cost ??

Of course you can invest in gold or something like that, rent for 5-10 years then buy a house you may be better off - but it is a lot of trouble for an average mortal :-)

Anonymous said...

The entertainment industry generates a lot of large salaries, but really only for those at the top. Average salaries for those climbing the ladder are generally lower than other similarly competitive professional industries - i.e. laywers, bankers, other corporate types. It's not until you're a senior exec at a first tier company that you're going to be pulling in over 300k/year. Obviously the star creatives types and top execs / agents earn millions, but in reality it's a small proportion of the people working in the business. So certainly these people contribute to the high end housing market in LA, but no more so than investment bankers, lawyers, etc... I'd say the larger contribution to the LA economy is young execs straining themselves to make the lease payments on their BMWs and Mercedes while their bank accounts hover near zero.

Anonymous said...

Westside bubble,

I think you are stretching really thin it with your predictions of recession. That is what would be needed for the housing on the Westside to go down but I think fed will devalue $ some more instead. Elections are close and who cares about low $ - but people care about jobs and getting paid more - even if it is not really more. Many governments have done it before.

Anonymous said...

I work at a hospital and I'm around physicians and I can tell you that not every MD is making $300K+ a year. My best friend is a family practice MD and they don't make anywhere near that kind of money.

The notion that you have all of these rich people running around the westside who are going to buy all of these tract homes that once sold for $75,000 but are now on the market for over ten times that amount is ridiculous.

The 2000 Census data for Santa Monica gives an interesting picture. This is the household income data for two zipcodes:
number of households= 13,905
median income= $54,964
number households> $200k= 968

number of households= 4,931
median income= $118,553
number households> $200k= 1,634

90274 (Palos Verdes Peninsula)
number of households= 9,307
median income= 117,979
number of households> $200k= 2,414

So only in the most affluent zipcode of Santa Monica does a sizable proportion of the households make over $200k but it's not even 33%. And only about one quarter of the households on the PV peninsula make over that amount per year.

In the slums of Santa Monica (90403) the household income wasn't even $60,000/year.

When the median price of a 1200 square foot tract home in 90066 that originally sold for $12,000 in 1955 is now over $650,000, is anyone really serious about whether there are enough people in Los Angeles making physican salaries to afford these kinds of prices?

But even my family practice MD friend can't afford to buy a house right now, and don't tell start saying that households with $200,000+ incomes are common because they are not.

Anonymous said...

Yes I agree family practice MDs do not make so much but nearly all medical specialists such radiologists, cardiologists, surgeons even dentists etc make typically much more than that in their mid-careers.
Especially if they are in private practice. This field is booming with ageing population. And there are many other abundant well paying professions here on the Westside.

If these people work on the Westside where do you think they would like to live ? In Palos Verdes and commute 1.5 hours a day ?
In these days of doom and gloom there are currently 26 houses for sale in 90402 per ziprealty -hardly a huge inventory out of 6,087 housholds per 2005 LA ZIP code data book. There are maybe 5-10 other comparable "upscale" zipcodes in the whole of LA from where you could possibly commute to Westside. I doubt if the total house inventory is 200-300 houses in truly "decent" areas of LA - ie not by the highway, with good school district, no crime etc -with bearable commuting distance to Westside (with few hundered K jobs) Century City Beverly Hills, Westwood, SM etc)

If the house is small they can knock it down and build a nice one for a mere 500k or so.

People who lived there forever have much lower incomes usually but it does not matter-they are not moving. They paid for their house long time ago- even their taxes are quite affordable -thanks to the California government. Why should they move ? So the inventory remains scant and the median household number is meaningless in judging the fundamentals.

Serious recession is needed to affect prices on the Westside cutting all these high paying jobs -otherwise all is well here.

Anonymous said...

BTW 90402 zip code median was over 183 k in 2005. Probably in 2007 is over 200k. Not too high but this is median. 50% of households make more out of over 6000 households and there is 26 houses for sale in that zip. This is why prices are high. But draw your own conclusions. Source 2005 LA zip code data from www.unitedwayla.org

in truth said...

The truth lies somewhere in between. First of all, let's not make the mistake of thinking the Westside -- or even Santa Monica -- is one place. It is a loose amalgam of varying desirability and economic fundamentals. You can basically take 90402 and put it on a high shelf and forget it exists. No matter what caused the runup in prices, in that particular area you aren't even on the sidelines unless you've got barrels of cash and we all know that to be the case. OTOH, go one foot south of 90402, lift a rock, and in my opinion, you are quite likely to start finding middle class people who, no matter how adequate their income, probably (if statistics are correct) have little or no savings or even investments. Those folks who bought anything in 90403 or 90404 or 90405 over the past couple of years, god knows what those loans look like. We will soon find out. As far as incomes in the entertainment industry, the poster who said high incomes are actually rare is accurate. At almost every level except that of senior vice president and up (on the business side) or sought after, A-list talent on the creative side, the entertainment industry actually pays less than many other industries for comparable positions due to the glamor quotient and the brass ring phenomenon. I do think that attorneys, dentists, financial executives and doctors comprise the true upper middle class. Even there, though, the fact is that Los Angeles promotes such a high degree of conspicuous consumption, that it's hard to say how some of those gentry would weather even mildly troubled waters. With payments for private school, country club, two luxury cars, housekeepers, etc., it's conceivable -- and I know of some cases firsthand -- that more people are on the highwire without a net than one would expect; but there are also more people in the economic stratosphere than one would expect, as well.

Anonymous said...

Is a recession coming? Here's what I see in the automotive sector: Increased spending on advertising, but fewer qualified buyers coming in for that ad dollar (these are national figures). This can't last and I see things crashing hard by 1Q08.

Westside Bubble said...

Good discussion, everyone, especially about the entertainment industry.

Anon 5:17 (I think you are stretching really thin it with your predictions of recession. That is what would be needed for the housing on the Westside to go down but I think fed will devalue $ some more instead.):

My thinking, following Calculated Risk and Mish, is that many indicators point to recession, and there may be nothing the Fed can do to prevent an inevitable down cycle.

I could, of course, be wrong. You've heard the line about "predicting 8 of the last 3 recessions"?

I heard a few years ago that doctors, a staple of 90402, could no longer afford to buy there.

Anonymous said...

Sure - "average" doctor cannot probably afford 90402 these days even on 300k+ without significant previos equity but this is by far the most expensive zip code in the whole LA more than Beverly Hills for example in per square foot prices and there are only 26 houses there for sale. There are many more doctors working on the Westside not to mention other high paying professions. Some of them can still well afford it. You only need few percent of these high rollers to be able to exhaust the supply. They wont be renting for years to wait for the prices to come down.

It is still the supply and demand issue even looking on the whole SM including the "slums" as someone said -population of 90,000+
with 103 houses for sale -that is one/900
people - How many of these houses are in bad locations or otherwise uninhabitable - just check MLS ? There are condos of course but that is a different market altogether with more flexible supply - but families who are used to living in houses never want to live in condos if they can avoid it and house is worth much more to them.

If anything the spread between condos and houses may change as the premium for single family houses is not that high at this point considering the
miniscule supply.

The "unfortunate" truth is that middle class average income people are going to be pushed out of these few desirable areas because in LA there is severe shortage of decent areas to live compared to the number of high paying jobs.

Unless westside bubble is right about major recession specifically in LA this is not going to change anytime soon.

Anonymous said...

Thanks for the numbers, everyone. Very interesting.

I'm in the "I could only afford 90402 if I stretched too much" class, but would like to move there before I have kids...

Anonymous said...

You are talking about 4000 households making > $200,000 in two of the wealthier zipcodes on the westside in a county of 9,000,000 people.

This is in a county that has 3,172,000 households! You are looking at this with a electron microscope and believing that Westside is the HOLY LAND that will be immune from the wrath of the economic dust bowl that is engulfing the rest of the nation as we speak.

Sorry. I just don't buy it. This has already happened in Japan and the land there was far more scarce and more valuable.

Even new physicians who are finishing fellowships and becoming specialists are thinking twice about practicing in places like Los Angeles. And you have to remember that in medicine there are relatively few of the high price sub-specialties--$1,000,000 plastic surgeons on every street corner in Beverly Hills only happen on TV.

New neurosurgeons who have just spent the last 7 years in a grueling residency program, 4 years in medical school and have huge medical school and undergraduate school loans to pay and who are probably at least 32 years old are going to think twice about selecting a practice where mediocre houses start at $1,000,000. Especially when half that amount will get them a castle back home where they grew up.

Yes Virginia, not everyone is from Los Angeles!

Once the market starts to fall apart at the bottom, the whole thing will start to collapse. Why shouldn't it?

Anonymous said...

BTW, I got these income statistics from the US Census Bureau:


Just plug in the city, zip, or county and you will get the data. It is easy to read and detailed. It is very revealing. The number of "rich" folks in L.A. is much smaller than you probably think it is--it certainly isn't enough to sustain these kinds of prices.

Which begs another question--if this Westside real estate is so scarce, then why has it taken so long for the prices to get the levels that they are today?

The answer is, of course, the Emperor has no clothes on.

Anonymous said...

There are other ultra-wealthy zipcodes on the westside namely 90210-12, 90024 (excluding condos), 90049, 90077. Lets say 5-6.
Westside has a population of roughly 500,000 - if you do not count Venice and Culver City. However most of the population lives in apartments in condominiums and single family housing is limited.

There are few others others of course in LA county-unfortunately
commute is gruelling and frustrating and most people I know would rather live in a smaller house than spend 2 hours in traffic every day. It is not that Westside is so special it is average by most standards but it has good schools, is safe, has good weather and most importantly is very close to a lot of very good jobs. There is just not too many choices left for people working here.

I understand why people want to leave yet many fascinating opportunities in various professions are found here and it is not uncommon to have enough extra income compared to other places to compensate for housing costs. For example rich clients for doctors, lawyers etc are simply more plentiful here then in other parts of the country.

Some will leave of course -it is a logical choice in many cases. But many others will stay and yet others come here still and simply ask for more money/premium to be able to accept the job - it is a big thing in new recruitment negotiations. Companies often have allowances for this at certain level. Such is life of mostly every big city in the world.

Anonymous said...

Re: census data
The data is from 2000. This was a bad year for many high-end earners. Stocks tanked. Now we have 2007 -Dow almost doubled since then. The high-end incomes have increased significantly.
Median did not but this is the ongoing segregation of richer getting richer ... this is especially true in LA. I do understand why these caught in the middle sometimes want to leave.

Anonymous said...

I know the Westside well since my family settled in Venice in 1923. So I've watched the place grow from a place that no one wanted to live in to what it is today. Santa Monica until quite recently wasn't thought of as being a super special place.

My brother lives in Rolling Hills Estates--the schools and environment on the PV peninsula are in many ways much nicer than Santa Monica.

This hyperprice increase has occurred in the last few years. Nothing fundamental has changed in the geography, demographics or socioeconomic structure of California or the Westside in this short time period except for the availability of cheap credit and funny financing.

And the last time I looked, it seems that the mortgage business has hit some rather unfortunate rough skids.

This is a bubble pure and simple.

Anonymous said...

Fully agree Rolling hills and PV are much nicer -Just can't commute to these jobs on the Westside.

Nothing special just supply and demand. People want to live close to work. Financing played a part in this but who knows where the mortgage rates will do in the next couple of years. Anybody's guess. Good old jumbos are still available at 0 pts 6.5 % just like 1 year ago just from different sources check www.bankrate.com -the press has surely blown out this thing out of proportions it sells. Not many subprime loans were made here on the Westside and not many foreclosures compared to other places as you can see on foreclosure.com It is mostly supply and demand.

Anonymous said...

'Not many subprimes were made here on the Westside'

Read today's WSJ: The United States of Subprimes.


Anonymous said...

Check foreclosure.com - single family houses are not foreclosing in any significant numbers on the Westside.

I don't know who, making good money would go for suprime interest loans - why should they -but I guess you can always find some fool. Most people making > 300k know how to keep their credit intact and are generally smarter than that about their finances, hence lack of foreclosures here.

Anonymous said...

I agree with everything that has been posted above.

The average decent four bedroom house in 90402 may be on the market for $3 million today. The price of that house may fall a lot or it may fall a little. But it is *not* going to fall to the level where a normal upper middle class person (like a family doctor making $250k) can afford it.

Let's change the subject for a minute and focus on a person who has a very large ammt of cash saved up and who can afford to live anywhere in Los Angeles that they want. Let's say that they have a strong emotional attachment to the idea of sending their kids to public schools. They want extensive sidewalks so 13 and 14 year old kids can walk around the neighborhood without mom and dad having to drive them everywhere.

Let's assume mom and dad work in Westwood - The choices they can consider are the Palisades, Brentwood Park, BH, and 90402.

Let's walk through them

Palisades - very nice, family friendly, but a longer commute to Westwood (Sunset Blvd is hellish during rush hour)

Brentwood Park - Beautiful, but lacking in sidewalks - therefore mom and dad have to drive kids everywhere

BH and 90402 - nice sidewalks, good public schools, easy commute

It seems to me that the choice comes down to BH vs 90402. There is no right or wrong answer here but the "vibe" of BH is very different from 90402. The people in 90402 might have exactly the same ammt of wealth, exactly the same income, but they have a different style than the folks in BH.

You see tons of Prius's in 90402, not in BH. You see tons of 90402 people walking around in flip flops and tee shirts. Don't see that in BH. 90402 is just different than BH.

I believe things are different now than they were 20 years ago. 20 years ago if someone got a lot of money they wanted to live a stereotypical "moneyd" lifestyle by moving to BH. People that wanted to spend a huge pile on a house moved to BH, or perhaps to a private, quiet enclave North of Sunset.

Today, someone with a ton of money may not want that lifestyle - they may want the stereotypical Santa Monica laid back, ultra liberal, environmentalist lifestyle. I think the rise of 90402 reflects this.

again, i have no argument with people that think 90402 will fall a lot and i have no argument with people that think 90402 will fall a little, but i am curious as to whether people agree that many many more of the "new rich" want the 90402 lifestyle, where perhaps 20 years ago they would have automatically wanted the BH lifestyle.

Anonymous said...

Working in Westwood you could also consider single family houses right in Westwood also ultra-high end for the most part (say north of wilshire or sm blvd)-different style yet - maybe influenced more by academia, more laid back then BH. There are also sidwalks and very good schools up to grade 5 - But I guess 13-14 year old would have to go to private schools or get a permit. BH has the advantage of a good high school over SM. BH flats are very much influenced by the upscale persian community these days - it gives it a different style than SM.