Wednesday, October 17, 2007

LA Times lead today

Hope you saw the lead story in today's LA Times: "Home salesdive; outlook dim into '09". They have been covering this story well, not just blaming it on the summer's subprime meltdown, not just quoting the NAR.

Deja vu from c.1990, here is its beginning and other strong quotes (emphasis added):

Home sales in Southern California plummeted in September to a two-decade low, and a rash of grim housing-market assessments Tuesday suggested the worst is yet to come.

"We're on our way down and still picking up speed," said Christopher Thornberg, a Los Angeles-based economist who four years ago warned that the pace of housing price gains in the region couldn't be sustained.
...

Garden Grove real estate broker Patrick Schwier ... said he saw two more years of falling sales and prices.

"Prices were too inflated when credit was easier," he said, and now home prices, though they've been slipping, still "don't make sense. And they will drop until they make sense."
...

Thornberg discounted the overall credit squeeze's effect on the housing market. He said housing prices, pumped up for years by questionable mortgages, had to drop considerably.

The median income of L.A. County homeowners, he said, is at 60% of what's required to buy a median-priced home in the county, assuming a housing budget of 35% of gross income.

Many people have mortgages they can't afford, such as those that start with a very low "teaser" interest rate that rises dramatically over time. When those loans reset at higher rates -- as many are scheduled to next year -- the market could be in for another shock as more over-extended homeowners go into foreclosure.

"This thing's going to get worse when the peak of resets occur next year," Thornberg, the L.A. economist, said. His prediction: Southern California sales and prices will decline into 2009.
...

"When investors are relieved of the cost of bad decisions, they are more likely to repeat their mistakes," [Treasury secretary] Paulson said in a speech at Georgetown University Law Center. "I have no interest in bailing out lenders or property speculators."
...

28 comments:

Anonymous said...

What, not a peep about the invincible Westside housing prices?

Of course prices in Santa Monica will not be affected like the rest of Los Angeles County or the rest California or the rest of the nation.

It's all about supply and demand. There are only 12 nice houses left and there are 15 rich people who want them!

Don said...

Ya, not only is the westside immune to the laws of economics, it's also immune to the laws of physics. Look at me! I'm flying over third street promenade and posting telepathically! Weee!!!!

rosebud said...

While I respect your theories that SM is headed for a crash, you have to acknowledge that it hasn't been keeping in line with all of the US, or SoCal, or LA, right?

Are you suggesting it's just a matter of time, or are their specific events that will precipitate the fall? The volume you mention is actually accurate, with most of the homes coming on the market in 90402 in the Canyon now.

So how does it happen? What's going to make more people need to leave? How many homeowners in SM would be subject to the risky loans of the past few years if sales volume is so low? Easier question: what's the total number of housing units in SM, and the total SFR's in Northern SM?

And speaking of the Promenade... when's the last time one of those buildings changed hands??

Anonymous said...

It's all about perception. Houses in Santa Monica aren't worth THAT MUCH MONEY! Simple.

On Santa Monica Distress a cracker box of a house is featured for $1,975,000. Is a wealthy person today going to want to live in a tiny shack that once sold for $12,000 after World War II? A house that was meant for plain and ordinary middle class people?

Give me a break!

Not so long ago the houses on the westside could be afforded by a large slice of the population who had good jobs.

Now virtually none of the population can afford to live there. In fact, most of the population living in Santa Monica could not afford to buy their own homes today.

The market cannot sustain the current prices--it is that simple. We shall wait and see what happens.

Anonymous said...

The earthquake will shake them into submission.

rosebud said...

I believe you, that these homes weren't built to be multi-million dollar homes for the wealthy... but I don't know if original intent factors into it. For instance, look at flats in London. If you think Northern SM is bad, try spending our worthless dollars there!

I'm surprised that supply and demand theories are being slammed in regards to this pocket, when they are espoused when speaking of the broader national market's inventory.

I do agree that few could afford the homes in which they live (in SM), but that also points to the fact that perhaps few are subject to the resetting interest rates and other risky loans... which again leads to continued low volumes on the market (i.e. people in Northern SM aren't being forced to sell). Most will be in the same boat as the folks that bought pre-1988: while their homes didn;t maintain all-time highs, they still doubled in value from '88 to '94... right?

Yeah, a natural disaster could do it... but is there anything else that you think will cause people to put their homes on the market here? With the lower volumes this year in Northern SM, it seems people are consciously not putting their homes up. If you're so certain of the impending doom, why don't we see it yet? and when precisely, will we?

Anonymous said...

"I'm surprised that supply and demand theories are being slammed in regards to this pocket, when they are espoused when speaking of the broader national market's inventory."

Please explain what changed between 2001 and now that affects supply and demand with respect to 90402.

Anonymous said...

What happened between 2001 and 2007 was called cheap credit. I think that the cause of the unprecedented price increases is obvious.

Nothing changed in the demographics or the market that justified the real estate bubble. The bubble happened everywhere and everyone knows all of the reasons. And all of those reasons apply to the Westside and Santa Monica.

The Westside and Santa Monica do not operate independently from the rest of the real estate markets in the region or the country. To suggest that they do is ridiculous.

Anonymous said...

"What happened between 2001 and 2007 was called cheap credit. I think that the cause of the unprecedented price increases is obvious."

No kidding. I was asking the real estate cheerleader to defend his/her ridiculous position.

Anonymous said...

I know you were directing your question to the RE cheerleader. My post wasn't directed at you.

rosebud said...

Anon, certainly don't mean to ruffle your feathers like that. I definitely wouldn't characterize your position as ridiculous, or refer to you in any derogatory way.... usually healthy in debates to have at least 2 sides arguing; sound good?

To answer, supply is down this year and last, and down 'dramatically' since '01. (Dramatically in quotes because the volume would be considered low in '01 as well). Total units are the same (9400), but units for sale is down.

In addition, on the demand side, SM has seen an 8% population increase since 2000, an unemployment rate go from 7.4% to 4.2%, and aggregate business receipts go from $7.7B in '02 to over $9B in '05 (they're even higher now, though not reported). The office vacancy rate has gone from over 12% in '01 to under 7% in '06. SM's schools' API's are now through the roof, with the 2 Northern SM elementary schools some of the best in the state. That's very material when considering buying a home in another neighborhood, but then tacking on $1000 per child to go to private school. (I know it doesn't apply to you singles).

But that brings up the last and most interesting point, changing demographics. More than 60% of SM's workforce are in executive, management, or professional jobs... And this rate has been increasing at more than 10% per decade since 1980. Couple that with the huge influx of software and technology companies over the last 6 years, and you have some decent demand indicators on top of the hard facts from above.

What do you think?

Anonymous said...

ROSEBUD,

I think. Hum. You are delusional or in denial. Perhaps in the real estate business or a homeowner (either past 3 years or did a big refi). Only time will tell. But the market today (actually all this week) may be signs of what is ahead. Again...only time will tell.

Pat said...

Yahoo creative (one of the tech employers in Santa Monica) just recently imploded.

Anonymous said...

ROSEBUD,

I never promised you a rose garden?
sincerely...Uncle Sam

Anonymous said...

Hey all doom wishers,

Your wishes are coming true. There is as of now 1 foreclosure and 2 preforeclosures in 90402 (per forclosure.com). 90402 is not immune to the subprime meltdown-how can it be - it would defy well known laws of physics.

Prices are going down 120% at least this year. Patience will be well rewarded. Enjoy.

Mikey said...

"But, I wore the juice, man. I wore the juice."

Tony said...

i think you are being a bit tough on rosie...just a debate....and to rosie's credit, some hard facts to back up the argument. While I too think the prices will come down and look forward to it, particularly in pac pal, which is so far over the norm, at the least we are all smarter with rosie's info. Keep the comments smart please, no need to be insulting.

Anonymous said...

TONY

Sorry. I was a little harsh. Came home last night riled up...I saw 3:10 to Yuma...which I do recommend. This may sound far fetched but follow me. I hire people at our firm and have access and look through 100's of resumes on hotjobs. It tells me a lot about people's salaries (or asking salaries...normally higher than they made in their previous job as people hope to advance) and their job titles. We hire senior level people. There are not a lot of people making over 200k a year. That being said...you can't get a 1500 sq ft plus 3br house on the westside for under 800k (that's being generous). Now add the fact that if you can get that house...the public schools are not the kind you want to send your children to if you make that kind of money. Add cost of private schools! The numbers don't add up...but they don't have to...why? DEBT. HOME. CAR. CREDIT CARDS. It can't last. Rosebud needs to realize there are thorns out there.

Anonymous said...

i'm going to back rosebud up a little here.

i'll be totally honest and put all my cards on the table first (as seems to be a prerequisite to be taken seriously). i own in 90403, but i bought my house in 1996 for under 200,000. i want to see prices fall because i'm having another kid and would like to be able to move up to something with four bedrooms.

that said, no matter what i see in this and warchestsm's blog, i can't see how that is going to happen. sm just isn't part of the same calculation as the rest of los angeles county. santa monica is no longer the spot where the debris meets the sea, it's a prestige community with some of the best public schools in the country (as well as the best preschools in the state, and two of the best progressive private schools for folks who like to throw money around).

there are other, less tangible, incentives, like always driving against the flow of traffic (moving here eleven years ago reversed my commute in and out of the valley and saved me, no joke, twelve hours a week in travel time), better comminity support institutions, a more liberal understanding of the soft drug laws, better churches and synagogues, a community forest program with a ambitious vision for a green city, solar conversion support, and so on... this is just a better place to live.

selling real estate in california has always been wrapped up with "the dream of endless oranges." there's always an air of fantasy involved with buying a house here. for people with resources sm has become the place to throw that money around.

as long as a sufficient number of those buyers are in the market (in this case, in the country, period), they prop things up to an extent. there's a great piece in slate this week about the bulletproof ecomomics at the luxury end of the market. the more that wealth is consolidated in the hands of a smaller and smaller elite, the harder it is for the moderately wealthy to swim in the deep end.

in regards to real estate they argue:

In many markets, home-builders are throwing in extras or holding fire sales to get rid of excess inventory. But as New York real estate maven Jonathan Miller notes, the Manhattan market is holding up just fine, especially the higher end. Miller says that in the 2007 third quarter, prices for studio apartments fell from 2006, while prices for one-bedroom and two-bedroom apartments rose at slightly above the rate of inflation. However, the average price of a three-bedroom apartment in Manhattan ($4.4 million) rose 17.9 percent, while the average price of a four-bedroom apartment ($8.5 million) rose 16.4 percent. "The top six percent of the market is still going at a housing boom pace," Miller notes.

In the trading-up mentality, the key to successful luxury retailing was pricing the product at a high point—but not so high that it pushed aspirational customers away. Now, high-end retailers are sending the message that people who don't come heavy shouldn't come at all.

Anonymous said...

Let's assume that there are two people in the social class that has tons of cash. Let's assume that both are sitting on a ton of cash. Let's say that the first person will only consider buying a house in the three or four places in the world he considers to be world class. If he narrows his list to London, Manhattan, or 90402, he will come to the conclusion that 90402 is a bargain and be happy to pay the current prices in 90402.

Let's assume that there is another person sitting on a pile of cash. This other person just wants to be somewhere in the Los Angeles region and doesn't feel Santa Monica is that special. This person will compare Santa Monica prices to Calabasas, Pasadena, Palos Verdes. This person will conclude that Santa Monica is too expensive and will refuse to buy at today's prices.

There are plenty of people in both of the above categories, however I postulate that there are more people in the FIRST category than you realize

Most people on this board remember 90402 from years ago and emotionally associate 90402 with a certain type of person living there. Most people on this board don't seem to want to consider the possibility that very few people living in 90402 have to sell, very few want to sell, small numbers of houses will hit the market, and it only takes a small number of people with plenty of cash to jump in and keep prices in 90402 from collapsing

I think it is very emotionally difficult for many people reading this board to realize that places change, and that some neighborhoods just move out of reach for the type of people that used to live there.

If you were a manufacturing worker in Los Angeles, things changed, your kids couldn't afford Los Angeles and they now live in Arizona or some other cheap place.

Now the same thing has happened in 90402. If you sent your kids to medical school you always assumed that if they worked hard they could eventually afford 90402. But the same way the manufacturing worker has been priced out of all of LA, the young doctor has been priced out of 90402. It is sad, but sometimes in some neighborhoods it happens. People on this board often act bitter the way the manufacturing workers did - people on this board don't like that "outsiders" people who they dont feel "deserve" to live in 90402 are moving in and taking space away from those that deserve to live in 90402.

Look logically at the possibility that there is a social class with plenty of cash that is moving in to 90402 and the traditional classes that used to live there will never be able to get in again.

Again, there are thousands and thousands of people rushing to pay more than $5 million for homes in London and thousands and thousands rushing to pay more than $5 million in Manhattan.

If there are readers of this board that personally talk to and know the people happy to pay $5 million in London and Manhattan, please *ASK* them what they are willing to pay in 90402

I put forth the proposition that many people who pay more than $5 million in Manhattan or London really love 90402 more than any other place in Los Angeles region.

However, I will listen carefully and respectfully to anyone with first hand honest knowledge of the social group that pays much more than $5 million for residences to learn what they think about 90402.

With much respect, the fact that no "normal" people can afford to move in to 90402 today may just not be relevant.

we all agree that there are millions of people in the world that an afford $5 million and up for a house and are happy to pay that. The only open issue is, do many people in that category love 90402 so much that they will happily buy in even at today's prices.

tony said...

Interesting theory for sure. 90402 just might be the best value between London, NY and here. But unless someone has no concerns about their money, or so much money that they don;t care if they overpay, I have a hard time understanding how anyone could purchase a 5 million dollar home today. With Main Stream Media screaming that prices are going to continue falling through 2009, who would want to buy into a buzzsaw?
I sold my Pac Pal home in summer 2004, leaving some money on the table for sure. I can't personally justify jumping back in at these prices. The rental I had sold in August of '05 for 2575 and the new owner put about $125 into it. It was listed in May of '07 for 2895 and after 3 price cuts and a new agent, it sits at 2395. With clear cut examples like that, even with $5.0 million in my pocket for housing, why buy now?

dwr said...

"There are plenty of people in both of the above categories, however I postulate that there are more people in the FIRST category than you realize"

A very appropriate use of the word "postulate": "to assume without proof, or as self-evident; take for granted."

"Most people on this board remember 90402 from years ago and emotionally associate 90402 with a certain type of person living there."

Yes, from years ago, i.e. 4-5 years ago.

Anonymous said...

"certainly don't mean to ruffle your feathers like that. I definitely wouldn't characterize your position as ridiculous, or refer to you in any derogatory way"

Lost cause. They don't like to be contradicted and get very defensive.

Anonymous said...

"we all agree that there are millions of people in the world that an afford $5 million and up for a house and are happy to pay that."

No, we all don't agree that there are millions of people who can afford $5 million homes.

Your entire post is hogwash.

Richard Mason said...

According to the Current Population Survey by the Bureau of Labor and the Census Bureau, there are 2.24 million households in the United States with household incomes above $250,000. The mean household income of this group is $449K.

Assuming they follow a Pareto distribution, probably somewhere on the order of 1% of this group or about 20,000 households, give or take, have an income over $1.5 million and could afford a $5 million house.

Of course these are only households in the United States. But households outside the United States don't maintain their primary residences here, by definition.

Anonymous said...

"Interesting theory for sure. 90402 just might be the best value between London, NY and here."

Why would anyone interested in a world class city like London or NY be interested in 90402? It's hardly world class or even very interesting.

It's precisely this sort of delusion that's going to make the high-end crash worse than expected.

Anonymous said...

Let's pretend that there are 1000 people today in Los Angeles that plan to spend $5 million on a house in next 12 months. They can afford to buy anywhere they want.

Obviously, a certain type of person prefers Manhattan beach, a certain other type prefers Bev Hills, a certain other type prefers 90402.

What % of those people truly honestly prefer 90402 and will be willing to pay a premium for 90402 vs all the other locations?

How attractive to that group is 90402 vs the other places?

Anonymous said...

It seems that many of the posters here love 90402 more than they love Manhattan Beach or Bev Hills - most people reading this board would like to be given a free house in 90402 vs being given a free house anywhere else in California -

so the preference on this board is for 90402

my question is- is that preference also present among the people who plan to spend $5 million

(put aside the issue of how many people there are that plan to spend $5 million)

Do people agree that 20 years ago, of the people who wanted to spend a ton on a house, VERY VERY VERY few would choose 90402. So many neighborhoods were considered better than 90402 like San Marino, Palos Verdes, Bev Hills, Bel Air, Holmby Hills, Manhattan Beach

Today, a greater % would prefer 90402 over San Marino, Palos Verdes, Bev Hills, Bel Air, Holmby, Manhattan Beach.

Prices in all these neighborhoods may go down massively, it is just that 90402 could go down less than the others. The others could all go down 80% and Santa Monica could be down70%