Monday, November 26, 2007

Why Westside prices will fall

The Dow is back to February levels today (MarketWatch chart, above).

Here are some reasons even Westside prices will fall*, despite the desirability of our close-in, nice-climate location, even without distress sales adding to supply:

  • Likely recession (Roubini, LA Times on bears) will impact stock values (already) and upper-income compensation used by buyers. And don't forget impacts of the writers strike (thanks, iluvwestsidebubbleguy)!

  • Jumbo loan terms and rates are rising as credit markets tighten. See New York Times (via Calculated Risk). We established that even buyers of >$4M houses financed 50-80%.

  • Prices fell 25% (low-end north of Montana) from 1990-1995.

  • When rent is so much less than a mortgage payment on an equivalent house, there's no financial reason to buy in a flat or falling market.

  • Most existing listings (north of Montana, Sunset Park, Ocean Park) already have a pattern of reducing prices.

  • Flippers and spec builders exit the market during a downturn.

  • Most move-up buyers have another house to sell that is in a weaker market, or are selling to a buyer having to sell in a weaker market.

  • Some buyers will select a near-by bargain over an overpriced prime Westside house.

  • Owners of properties that been held off the market waiting for more appreciation or a recovery will seek to sell quickly when they fear a long downturn, or can't wait any longer.

*With the obligatory disclaimer that what seems pretty likely to me could turn out otherwise. Which some of you will argue in the comments....

31 comments:

Anonymous said...

Westside bubble - you may be right - the West Side may fall a lot due to the factors you laid out.

i personally feel strongly that houses outside 90402 are going to fall.

I am still searching for answers about 90402 however - i just was up around 20th and Carlyle - there are five houses under construction there -

one thing that is very intersting - on 20th between Carlyle and Alta the developer has decided to combine two lots in to one giant lot and build a house twice the size of the neighbors.
The resulting lot is 120 x 150 and i believe that the zoning laws today will allow a house larger than eight thousand square feet to be built there.

I do not know for sure what the ultimate all in cost will be, but the builder had to pay more than $3.5 million just for the land - i would guess he will have to get $7 mil for the finished product just to break even -

i encourage others with an interest in the real estate market to stop by and take a look - the huge open piece of land is a sight to behold

This is not evidence that 90402 will go up or down, just very interesting to see

Blondie said...

Hi Westside: Love your blog!

Adding to the debate about the fate of 90402 and stirring the pot...I think I've identified the individuals who will prop-up 90402 values: the Santa Monica hedge fund guys who shorted subprime debt this year.

Check our Luskin's comments on Lahde Capital, based in SM, who netted 1000% on an investment made THIS year. Now, these guys really will be price insensitive and let's hope that the partners sharing this jack will be more than the 5 people who typically populate smallish hedge funds!

Link: http://www.poorandstupid.com/2007_11_25_chronArchive.asp#3310521969837838645

WarChestSM said...

I saw this post and thought I would jokingly post that the comments would immediately come back to 90402...but it already got there!!

Anyways, here is how things have progressed so far:

1. There is no housing bubble...anywhere!!
2. Ok, some states/cities may be in for a bit of pain but not coastal southern California.
3. Ok, the OC and San Diego might fall but not LA...our median has held up!
4. Ok, the "inland" areas of LA might suffer
5. West LA is showing signs of weakness but Santa Monica will be fine.
6. Marginal locations and condos in Santa Monica will suffer but not houses.
7. Everything is screwed...except for 90402

and then finally acceptance...
8. Even 90402 is subject to market forces...who would have known??

anon, yes construction is happening at a brisk pace even now...but try asking some of the spec homes on 14th that can't sell how the market is treating them. I would imagine there are some nervous investors out there right now. And a lot of folks are still remodeling...I know a few family friends who are in the process right now.

Anonymous said...

And what about rents on the Westside? Will they keep going up?

felix said...

When a blog is named 'Westside Bubble' I'm guessing it's not the place to get impartial analysis...

Disclosure - I just bought a million dollar home in west LA. Am I an idiot? Possibly, but here's why I think not:

1) If everybody is waiting for the price to drop before they buy - what happens when the prices do drop? Everybody buys and the prices go back up.

2) LA house prices are still a *lot* cheaper than the equivalent in Manhattan. Prices could go a lot higher.

3) Westside LA has a limited size and is a great place to live. Hence the demand.

4) People have been waiting for the bubble to burst for around 10 years. My brother for example - he reads 'The Economist' every week and is obsessed with the housing market collapse. Therefore he has never bought a house. Will he ever?

5)Say you buy now and the bubble does 'burst'. Every body else's house price will go down by the same percentage as yours, so in effect you haven't lost anything.

My 2 cents.

Anonymous said...

felix said:
"...5)Say you buy now and the bubble does 'burst'. Every body else's house price will go down by the same percentage as yours, so in effect you haven't lost anything."

Gee you are an idiot. My parents bought their house in 1954 for $12,500 on the Westside. It is now currently worth a lot more than that.

If the bubble bursts now (your words), they would still be ahead of the game.

You would still be an idiot.

BTW, how many people can commute each day from the Westside to Manhattan? Or from Manhattan to the Westside?

Or how many people commute from Santa Monica to London daily?

Answer: None.

What the price of real estate is in a city 3,000 miles away or 7,000 miles away is irrelevant to the values of property that are mentioned on this board.

Here's a question for you: How many angels can dance on the head of a pin?

felix said...

> "My parents bought their house in 1954 for $12,500 on the Westside. It is now currently worth a lot more than that. If the bubble bursts now (your words), they would still be ahead of the game."

True - but not sure what that has to do with my point.

> "What the price of real estate is in a city 3,000 miles away or 7,000 miles away is irrelevant to the values of property"

Ever heard of people moving between cities? You think if real estate was half-price in some new city, lots of people wouldn't move there?

Anonymous said...

Don't be so mean to Felix! It seems that he is conceiving housing as a closed market: my house goes down in value, but so does the one I may want to move into in a few years ergo. . . Not that housing is a closed market, of course, but there is a kind of logic there. And he has a very good point about a blog called "Westside Bubble."

iluvwestsidebubbleguy said...

Felix. First. If you found a house you love, it doesn't matter if it goes down. You have a home. You can still be there on the next upswing. You're in a good place. Congratulations.

However, I have a couple of thoughts after reading your post.

1) We never know when we we're at the bottom, so not "everyone" will rush out at any one time. "Many" will keep waiting to see how much lower we'll go. It could take years.

2) Even if "Everyone" decided to buy a house "after" the market creashes, not "everyone" will get approved for a loan.

And. Not relevant to Felix, but wondering why westside bubble hasn't brought up the writer's strike and pending actor's strike and how it is slowly, but surely affecting the westside marketplace. It's not just the length of the writers strike either. The movie industry is on the verge of a bust (a la music industry) because of DVD/download pirating. This surely will impact those in 90402 when those big studio contracts aren't renewed.

Anonymous said...

---"Ever heard of people moving between cities? You think if real estate was half-price in some new city, lots of people wouldn't move there?"----

That's exacty what is happening--lots of people are leaving California for cheaper cost of living states. Companies are finding it extremely difficult to recruit professionals to Los Angeles, the Bay Area and San Diego.

And I'm not talking about the 3 high priced lawyer jobs or the 4 high priced specialist MD positions that opened last year in L.A. I'm talking about engineers and other rank and file professionals who make less than $100,000/yr.

Nissan left Torrance for a cheaper state. I believe they're in Smyrna, TN now. I know physicians who won't consider L.A. because of the outrageous costs of living here.

And here's a fact that will stun you, not every doctor in America is from L.A. nor do they all want to live in L.A.!

So sit back and watch the migration of people out of L.A. That is, the out migration will be those Americans who have professional jobs and can get high paying jobs in other less expensive cities.

The IN migration to L.A. is coming from Mexico in the form of illegal aliens. They tend to make less than UCLA graduate engineers and lawyers.

The entire increase in population in California is due to the baby boom occurring to illegal Mexicans and the flood across the borders of their parents.

Let's see, in-migration of illegals, out-migration of professionals who can get better jobs out of state.

That makes the future of L.A. look bright!

Anonymous said...

and Felix also has a point about that type of person who lives in a years-long fever dream of a catastrophically collapsing market which never quite comes-- at least, not enough to fundamentally change the socio-economics of a given neighborhood. The market is obviously going down, but I don't think anyone knows how much or for how long. And to the degree that people follow the advice of this blog, rents are definitely going to go way up.

appalled said...

Disclosure - I just bought a million dollar home in west LA. Am I an idiot?

Yes. See below. But thanks for posting. And by the way, if you're planning to live in this place for at least 8 or 10 years, and you got a decent fixed rate or at least 10/1 mortgage that you can actually afford, and you simply WANTED to buy a house, then you're not an idiot. You'll come out fine, although you would have maximized your utility by waiting longer.

1) If everybody is waiting for the price to drop before they buy - what happens when the prices do drop? Everybody buys and the prices go back up.

You're completely missing the point. Prices have been artificially and temporarily inflated first by negative real interest rates and then by "affordability" mortgage products (neg am loans, 80/20 piggybacks, etc.). Now interest rates are at least at historic norms, and mortgage credit has significantly tightened. Bubble prices have started to correct slightly on the westside -- slightly! Meanwhile, in the Inland Empire, prices are already off 30% and falling. This real estate correction will happen like they all do, from the exurbs to most desireable urban or suburban neighborhoods.

2) LA house prices are still a *lot* cheaper than the equivalent in Manhattan. Prices could go a lot higher.

Manhattan is an island. You literally cannot build past the borders. Plus Manhattan is even tougher to build in than West LA -- there were literally no additional units added for nearly 20 years during the 60s and 70s b/c it was so hard and uneconomic to build. Finally, Manhattan is primarily a rental market with a very thinly traded market of apartments "for own." Thin markets always exhibit outsized volatility. And really finally, Manhattan has almost nothing to do with West LA.

3) Westside LA has a limited size and is a great place to live. Hence the demand.

Wait, I thought you said you bought in "West LA" which I take it is not Santa Monica or Brentwood. West LA is a pit.

4) People have been waiting for the bubble to burst for around 10 years. My brother for example - he reads 'The Economist' every week and is obsessed with the housing market collapse. Therefore he has never bought a house. Will he ever?

10 years? There was a bubble in 1997? Hardly. The "bubble" in LA dates from about 5 years ago, maybe 6 (back to when those real interest rates were cut to below zero).

5)Say you buy now and the bubble does 'burst'. Every body else's house price will go down by the same percentage as yours, so in effect you haven't lost anything.

Didn't you make a downpayment? If values go down, you just lost that money. The point you are trying to make is that your relative house purchasing power is declining along with everyone elses. False. My relative purchasing power will be increasing, b/c, you see, I'm renting, and have been since 2005.

felix said...

OK guys - you win. Good luck with either moving to Smyrna, TN or waiting an unknown number of years for the market to 'bottom out'.

Westside Bubble said...

Good discussion, Felix and others! My 2 cents:

1) Last time it took a decade for prices to return to 1990 levels. If this is a bad recession, which I expect, potential buyers are likely to be strung out at the bottom rather than poised to buy.

2, 3) Appalled said it well, that current prices here are based on unsustainable financing. My list items should take air out of the balloon that brought peak prices. Although LONG-term, you're right, there is exclusivity and scarcity.

4) Like the line about predicting 8 of the last 5 recessions, but eventually the cycle does turn.

5) If you're a waiting renter like Appalled, it saves real money to wait for prices to fall.

At the same time, if you got a good deal and get to settle in already, that may be a good choice for you vs. waiting a few years renting.

Anonymous said...

sWhat everyone is missing is that you can't make more land in the 90402, because it is north of Montana and therefore limited. This means there is only so much 90402 soil, and it will keep going up accordingly until only hedge funds and mutual funds, not mammals, own the residences there.

Please get educated before you say foolish things about the 90402. But I agree that everywhere else prices will collapse 20-40%.

Anonymous said...

Anonymous 12:41 AM,

What YOU'RE missing is basic econometric theory. If you follow history, and it remains the best teacher, the highest values tend to fall proportionally in any overall market correction. Before the last big real estate collapse, it easily could have been said of Beverly Hills that "...you can't make more land..." and BH had one of the largest percentage-wise drops of any area.

Other reasons for very high income areas to drop drastically -

The Democrats are coming and with them they will bring higher taxes, by a substantial margin, to the very rich.

Or maybe there will be a Republican President elected who will try and keep the boat floating, therefore making the eventual consequences even worse.

Either way, things look dismal. Check out the story about Countrywide using the FHLB "...like its personal ATM..." to the tune of $51,000,000,000. And that is only as of September 30th. How the heck are they gonna pay that back?

I think the best comment on this whole mess was on the cover of last week’s issue of Fortune magazine regarding financial malfeasance "What Were They Smoking?"

Don said...

Felix: Let's assume that all properties decline uniformly by 20%. Are you still OK? It depends on your financing. If you only had 10% equity in the home, then not so much. In the early 90s there were a lot of people who were trapped in their homes in just this scenario. They no longer had any equity in their homes and when their jobs moved out of state, they were unable to sell their house since they didn't have sufficient cash to pay off the mortgage balance.

90402: What has changed that makes the increase in real estate prices make sense? Are there really that many more wealthy people in Los Angeles compared to 2002?

Jeremy said...

Housing will and should fall. The reason SF's economy has been flat for 30 years is because its housing is too expensive.

LA needs to remain affordable to remain competitive. We dont need bragging rights, we need disposable income.

Good weather, good jobs, affordable housing (even in desirable neighorhoods).

Anonymous said...

Dear Felix Said...

If you found a house/neighborhood you are in love with ... perhaps it makes sense to buy. (Note I sold my condo in Jan of 07 - now rent a much larger house - driven by both market timing and an additional member to our family) By almost any calculation, it makes no sense to buy. I hear people claim tax break on interest..I argue what about the AMT. If you can afford payments on a 1M home in LA, you will run into the AMT. That being said, there are few houses that I would consider nice enough to buy for even 1M. Me and my wife are not from LA, so we are use to a newer, larger house. It blows my mind when people ask for 1M for a house that you know you are going to have to totally rehab. Now if you find the perfect home (based on location, layout, yard, etc) and plan on living there for over 15 years, maybe I could justify buying. But it better be a perfect house - or your wife isn't nearly as particular as mine. Good luck with the house - If you are having a house warming open house - let the blog know. You'll get a few visitors and at least one small plant.

Anonymous said...

"90402: What has changed that makes the increase in real estate prices make sense? Are there really that many more wealthy people in Los Angeles compared to 2002?"

Unlike 2002 when the rich people were spread between Malibu, Beverly Hills, Bel-Air, Brentwood, etc., etc., now all the rich people want to live on 7500 SF lots.

Anonymous said...

"Unlike 2002 when the rich people were spread between Malibu, Beverly Hills, Bel-Air, Brentwood, etc., etc., now all the rich people want to live on 7500 SF lots."

Oh...I get it...that's why so many well healed moved to Manhattan Beach to live in 3 to 5 mil plus glorified condos in the tree, sand and hill sections? BTW, those homes are taking a hit also...big time.

Anonymous said...

Are there really that many more wealthy people in Los Angeles compared to 2002?

I don't know what circles you all move in, but I see people making money hand over fist. Lots of money. Lots of people.

Has anyone been reading about the stratification of wealth in the US in the period of the current administration? Concentrations that rival the Gilded Age or the oligarchies of Latin America. Only Russia is more top heavy than we are.

Even in the non-stratosphere, there's a ton of money out there. And it doesn't want to live in Pico Union. Or Palmdale. Cool desert house in Joshua Tree maybe...

I don't mean to suggest that prices won't fall on the Westside somewhat, but the calamity you all are cheering for seems unlikely. This blog's bubble is as much a bubble as any housing bubble. Bubbles feed on themselves and reject all divergent perspectives or data.

This one. The housing one. Two sides of the same coin.

Richard Mason said...

Anonymous 12:41 and Anonymous 2:53 are kidding (and likely the same person).

All others are apparently serious.

This public service brought to you by SarcasmoMeter.

Anonymous said...

"All others are apparently serious."

What else are real estate clerks going to do all day?

Dr. JwB said...

I propose we rename Washington Blvd to "Montana".

Problem solved.

Don said...

As the person who asked about the numbers of rich people, I asked that largely because I don't actually know. My suspicion is that the numbers of wealthy people have not increased in a way to justify the run-up in high-end areas of Los Angeles, but I don't know.

Anon 6:45, no offense, but I don't want anecdotal evidence. After all there are plenty of people living the lifestyle of the wealthy who don't have the income and assets to back it up. My next door neighbor, for example, has a 42" plasma TV, three classic cars in the driveway and barely can cover his relatively cheap rent. You wouldn't be able to tell by comparing lifestyles that my wife and I do better than he does financially. Partly because we put our money into savings rather than stuff.

Incidentally, concentrations of wealth are not going to justify widespread jumps in real estate prices. What we're seeing is not more wealthy people, but rather the wealth being put into the hands of a small group of people while others see their income and assets stagnate or decline.

To buy a home worth a million dollars with a 20% downpayment requires a household income of $265,714.29 (assuming a mortgage at 6.75% and no financed points). How has the absolute number of households with this income level in Los Angeles changed over the last 5 years? Don't tell me about seeing more Beemers in the driveways, I'd like to see sourced data.

Anonymous said...

did you forget the earthquake, LA riots and s and l crisis. Not the same deal this time

California resident said...

Most of L.A. was completely unaffected by the earthquake. The riot did not affect ANY of the decent neighborhoods. It's a load of crap that affluent people's lives OR property were affected by the riots.

This time the disaster caused by the real estate bubble will affect even wealthy people and certainly the middleclass.

This fiasco is taking down our financial institutions--its affect will be much more significant than the S&L crisis.

The fall has only begun and look at the fallout already.

Westside Bubble said...

did you forget the earthquake, LA riots and s and l crisis. Not the same deal this time

Anon, most of the last drop happened before the earthquake in early 1994. In Santa Monica I recall low-end north of Montana prices fell a final amount from around $600K to $550K after the earthquake red-tagged some old houses.

Likely true that it won't be the same deal as the S & L crisis - it'll be a lot worse this time.

You left out wildfires in the 1990s. Oh, yeah, they're back too.

----------

Good point, Don. Anyone have such data?

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