Friday, February 1, 2008

Monthly inventory update

2/1 - Santa Monica inventory <$3M is up 8% for the week, up 22% for the month, and up 42% year-year. Pacific Palisades <$2M is down 13% for the week, up 30% for the month, and down 7% year-year. Palms-Mar Vista is up 6% for the week, up 11% for the month, and up 27% year-year.

1/25 - Santa Monica inventory <$3M is down 2% (but SM Total is up 5%), Pacific Palisades <$2M up 19% (also noted in recent comments), and Palms-Mar Vista flat for the week. In contrast, Santa Monica inventory was falling this time a year ago.

1/18 - Santa Monica inventory <$3M is up 6%, Pacific Palisades <$2M up 8%, but Palms-Mar Vista down 5% (perhaps from old listings withdrawn) for the week.

I added back this week from a year ago (1/19/07). SM and PP inventories fell during January 2007, but have been rising so far this January. Year-ago-this-week all inventories were higher, except, strikingly, total PP inventory is much higher this year: 100 vs. 71, all in the higher-priced houses.

1/11 - The number of new or returned listings this week, despite losing a few that seem expired, resulted in Santa Santa Monica inventory <$3M up 12%, Pacific Palisades <$2M up 14%, and Palms-Mar Vista up 9%.

       LA County  Santa Monica  Pacific Palisades  Mar Vista
<$3M New Tot DOM<$2M New Tot DOM Tot New DOM

-------- ------ -------------- -------------- ----------
1/30/06 27,732
2/28/06 29,420
3/31/06 31,819
4/21/06 33,054 35
5/ 1/06 34,032 38 33
6/ 2/06 37,847 56 36 38
6/30/06 42,317 66 40 49
8/ 4/06 45,315 70 34 50
9/ 1/06 46,781 71 27 59
10/ 6/06 47,369 83 25 98 71
11/ 3/06 45,780 80 20 91 77
12/ 1/06 43,103 65 18 72 96 39 20
1/ 5/07 35,646 54 4 60 117 33 6 71 66
-------- ------ -------------- -------------- ----------
1/19/07 60 70 115 33 71 69
1/26/07 51 60 120
2/ 2/07 36,715 38 15 45 124 29 16 61 71
3/ 2/07 41,251 42 14 51 114 26 10 68 79 53 25 76
4/ 6/07 42,857 41 23 49 107 18 8 73 103 52 52 50
5/ 4/07 45,918 46 28 54 92 19 6 82 79 68 37 52
6/ 1/07 52,198 50 25 61 78 17 15 87 78 77 39 53
6/30/07 52,769 42 18 56 81 17 11 92 77 74 33 61
8/ 3/07 54,166 53 28 68 86 23 12 78 76 84 39 68
8/31/07 57,432 57 21 72 98 18 7 69 75 90 40 79
9/28/07 58,973 59 17 74 103 26 9 90 81 87 20 87
11/ 2/07 58,731 62 19 81 120 29 7 106 77 98 35 88
11/30/07 59,108 52 14 67 136 23 11 88 94 96 23 96
12/31/07 53,475 42 5 53 148 19 2 73 119 79 13 116
-------- ------ -------------- -------------- ----------
1/ 4/08 42 0 54 157 21 4 80 101 80 7 106
1/11/08 52,619 48 7 59 145 24 6 90 102 88 19 98
1/18/08 51 10 61 148 26 8 100 97 84 23 99
1/25/08 53,258 50 12 64 157 31 13 106 108 84 31 92
2/ 1/08 53,722 54 15 67 157 27 14 101 118 89 33 96
2/ 8/08
All Westside

                 4/6     6/1     8/3    9/28   11/30     2/1 
3/1 5/4 6/30 8/31 11/2 12/31

Bel Air-H.Hls.86 92 100 103 99 86 99 104 104 86 64 85
Bev.Ctr.-M.M. 57 48 53 54 65 64 67 75 75 73 59 71
Beverly Hills 70 56 46 53 49 59 61 62 58 65 56 65
B.H. P.O. 91 92 88 93 95 92 94 90 93 85 75 78
B'wood Vic. 36 31 39 38 41 42 46 50 59 57 48 50
Brentwood 71 73 75 72 68 86 77 89 96 90 65 77
Chev.-R.Pk.'8'20 19 22 23 22 26 20 28 23 27 20 21
Culver City 25 20 28 33 36 41 48 49 46 39 32 42
Malibu 181 192 199 206 220 224 216 216 209 209 181 185
Malibu Beach 44 51 52 56 58 54 45 43 45 43 41 38
Marina Del Rey20 20 27 29 28 26 27 26 22 19 23 26
Pac.Palisades 68 73 82 87 92 78 69 90 106 88 73 101
Palms-M.Vista 53 52 68 77 73 84 90 87 98 96 79 89
Playa Del Rey 8 17 20 21 20 21 24 29 27 26 25 22
Playa Vista 2 3 1 3 5 4 9 8 10 7 5 5
Santa Monica 50 49 53 61 57 68 72 74 81 67 53 67
Sunset-Hwd.H.178 159 166 180 168 187 184 215 226 214 183 189
Topanga 41 36 43 45 54 49 54 55 52 49 39 49
Venice 64 57 68 70 72 69 68 68 84 75 54 72
W.H'wood Vic. 32 25 36 42 41 40 36 49 52 49 41 48
West L.A. 21 25 24 25 34 31 36 40 37 30 21 20
Westchester 46 47 45 53 52 62 72 82 78 73 68 72
W'wood-C.City 44 37 42 33 34 29 37 42 50 33 24 37
___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
Total 1274 1457 1522 1671 1600 1509
1308 1377 1483 1551 1731 1329
Month-month incr.-3% 8% 6% 2% 3% 2% 8% 4% -8%-17% 14%

Notes

LA County inventory via OC Renter. Santa Monica Days on Market (DOM) is for <$3M, and omits Santa Monica Canyon (in City of Los Angeles but S.M. Post Office). Pacific Palisades DOM is for <$2M and count omits mobile homes. "New" is for previous month, or month-to-date for current partial month.

75 comments:

Jonathan said...

I am pretty sure you have it wrong. There has never been a time in the history of L.A. real estate when prices have been less 10 years later than from the time it was bought. There was an exception in San Francisco during the earthquake in the early 1900's and the stock market crash of 1929. However, L.A. was still immune to that. The truth is, L.A. survives earthquakes, recessions, writer's strikes, the L.A.Times negativity, 911, fires, mudslides, and the wonderful traffic because people love living here. People have encephalitis (short term memory loss) when it comes to living in L.A. All of the above tragedies are forgotten very quickly.

The depressed market of the 90's was down a total of 18% statewide. How could Santa Monica have been down more than Fresno? A 30% decline would also mean that is an average. The standard deviation would be probably around 10%, so figure homes are going down another 10% and prices for the rest of California are going to be probably another 45% to 60% down. If that occurs all the price gains of the past 4 to 5 years are wiped out and the gains that were made in housing from 1998 to 2002 would be very slight. Probably 30%. The gains that we see are year to year. They certainly have been tumultuos, but so were the declines of the 90's. You also have to account for an average of 2% inflation each year.

I would like to point out some thoughts and figures about Los Angeles:

1. L.A. in 2006 was the 16th largest economy in the world. Russia was 17.

2. L.A. is the second most populated city in the country and on the Westside of LA there is no where to build, there is no land, nada, unlike Miami, Las Vegas, and Phoenix. We are going vertical and condos will become more and more popular for first time buyers. That will make the current inventory of homes even more expensive over time.

3. There are more millionaires living in LA than any where else in the country. Income per capita on the westside of LA is truly one of the highest in the world.

4. The US dollar is very weak at the moment and foreigners are buying homes like crazy here for all cash.

5. Last year, there were more homes that sold for more than $10M than at any previous time in LA history. Not bad for such a crappy market.

6. Inventory is still reasonably low compared to the rest of the country and most Sellers just don't care about lowering their prices unless they really have to. Ego plays a huge part with real estate in LA and people who believe that prices are going to go below $1M in Santa Monica above Wilshire are smoking crack. As a matter of fact, there currently are 78 homes on the market in Santa Monica, they asking on average about $1,995,000, they have been on the market for an average of 89 days, asking $1,017 per square foot,and on average sell about 1.5% under their asking price. In the last 3 months the average sales price for all of Santa Monica was $2,437,031 with a low sale of $650,000 and a high sale of$6,332,000. The average time to sell a home was 48 days, Average cost per square foot was $862, and they sold about 1.4% below asking. Mind you, this is all of Santa Monica, not the best part which is closer to the beach and above Wilshire Blvd. I am not even going to mention north of Montana, which prices are even higher because of the demand and prestige of living there. I think a more accurate way of figuring out whether there is a bubble North of Montana is basing it on average price increase over time, inventory averages over time, income per capita, and the rents in that area. Those figures would help. The Case/Shiller Index has improved over time, but starting in the year 2000 does not account for whether the market was low historically in price, or high. I believe it was well below what it should have been at that time because of the fallout of the 90's.

7. With the current interest rate drops and the prices that have decreased people will be saving possibly another $700 to $1,000 on their mortgage. If you stay in an apartment you are probably going to be paying close to the same, you can't write off any of the rent, and you have no chance of appreciation. You still have to have good credit now and certainly be able to put down at least 20% (10% down is the 0% down of the past few years. You can still qualify for these loans, but they are not easy to get)to get what I would consider an exellent rate of close to 6% on the Jumbos and 5.7% on conforming. In some cases, you can get below 5.5%. Another point is the possible increase in the conforming loan limits. If they increase to $630,000 that is going to be a huge boon to Buyers who qualify.

8.On average, the value of a home doubles every ten years. Last time I checked, the value of an apartment that you live in didn't.

9. People have a tendency to run with the herd. When people were buying houses from 2003 to mid 2005 everyone fought to pay higher and higher prices for homes that they wanted. Now that all the doomsayers are out and interest rates are down again people are panicking! You can take your time now and make a prudent decision. And now Buyers are waiting. Waiting for what? So what if the market comes down. If you can afford to buy and are going to be staying in the home for at least 5 to 6 years you just can't lose. A matter of fact, doesn't your happiness of owning your own home mean anything?

10. The average homeowner's net worth is $171,000 around the country. That is nearly 46 times that of a renter, whose average net worth is $4,600. In L.A. you can multiply that by another 5 times.

Look, the real estate market certainly sucks right now for many, but I bought a condo in 1994 at the worst of the last market downturn for $235,000. In 11 short years I sold it for $755,000. I had put down $56,000, 20%. My return on investment was over 1000%. Anyone who tells someone that if they buy a home right now they are an idiot just has no idea of what they are talking about. I can almost promise anyone out there that even though prices will probably come down in the short run, maybe 15%, who knows, they are going to make a crap load in the long run. Please use some common sense here. There is so much more to say about what the true causes of this market are, but even though the high end of the market is not immune, moat surrounding the castle is a hell of a lot harder to cross.

Thanks for reading my rant,

Jonathan

Anonymous said...

Your statement that LA was the 16th largest economy in the world (higher than russia)

is really an eye opener

i don't agree with most of what you said but thanks for sharing

Anonymous said...

jonathan, a mouth piece for the NAR.

You'd have to be an idiot to buy right now.

There is plenty of land to build around L.A. In the Inland Empire and Antelope Valley they have put up more homes than they can sell. People just commute 50-90 miles one way.

Sorry, you are wrong.

Jonathan said...

We are not talking about 50 to 90 miles outside of LA. We are talking about the Westside of LA. Of course those are going to get dumped on. The homebuilders duped many buyers and investors in those areas. Yes, to buy something in those areas is a tough pill to swallow. You would definitely be buying to live there.

You really did not read what I wrote anonymous, but thanks for calling me an idiot. I am sorry I offended your intelligence. Yes, I am a real estate agent, but I try to be as unbias as possible. I am certainly not a mouthpiece for the NAR,

Jonathan

Jonathan said...

Anonymous,

I would love to know specifically what you did not agree with?

Thanks,

Jonathan

dan said...

Hi Jonathan,

Thanks for your comment.

I'm not as negative as some here are nor am I nearly as positive as you are.

On your first several points, you show that LA is indeed a rich, valuable place. Particularly on the Westside.

But, in a way, that isn't the question. Infra-marginal owners are just setting a floor it won't go below. The price is set by the marginal buyers. And they're doing less well. So I do expect some decline.

I agree there's no way standard lot value in 90402 is going to $1M. But I do think there's a good probability it will go down from where it is, making this a bad time to buy. It's hard to tell, but it looks like we've gone from $2.0 to $2.0--I could certainly see $1.7, but who knows. Seller intransigence looks like it will make it take a few years to reach equilibrium.

In the other points you make (those not just showing that LA is rich), there are some interesting questions.

At the end of 6, you suggest housing was undervalued. I suspect this may be true, but that would also mean it was a one-time correction: Housing won't appreciate nearly as much in the future.

7. I generally agree with your assessment that the Fed's lowering of rates makes buying smarter; I think they're re-inflating the bubble a bit at the cost of future inflation, but locking in these rates would be good if you're on the market. The tax deductability of rent is a red herring: The mortgage interest is a deductible expense for the business that owns the place, so ultimately, it's all the same (the tax savings is just a sales pitch by people who don't understand Econ 101).

8: Doubling every 10 years is a 7% rate of return. You could probably do better on the stock market, especially with the current large gap between renting and owning (I've done the spreadsheets). The main difference is that most people don't have the same amount of leverage on their stock investments.

9. If you think it is going to come down 10% in two years and then go up another 20% over the next ten years, wouldn't it more rational to wait two years and make 20% rather than 10%?

10. Correlation does not equal causation: Of course people with more money are more likely to buy a house. But if I buy a house, my net worth won't magically increase.

You raise some interesting points, but ultimately, I think a lot of the points are unrelated to which direction housing prices are moving today.

(And I do think that in 10 years, local RE will be higher, but for slightly different reasons.)

Thanks,
dan

Anonymous said...

Dan -

thanks for your reasonable comments

I once spoke to someone who made the following argument -

if you think there is a 50% chance of house prices getting cut in half and a 50% chance of them doubling, you are smart to lever up to the greatest extent possible and buy the biggest possible primary residence

what he told me is that california has a law that says that the lender can not go after your other assets -

so if you buy a house and default on it and the lender takes a $500,000 hit, the lender is out of luck and can not go after your other assets

however if the house goes up by $500,000 you get to keep all of the upside and not share any with the lender

so due to the structure of the incentives, buying a huge primary residence in general makes sense.

Can anyone comment on whether the law is really like this in California for primary residences?

don't flame me i really just want to know

dan said...

I'm no lawyer, but yes, I think that is the law.

I think it would be immoral to just walk away (you're making a promise; the ability to foreclose is just extra insurance), but the outcome would be as you described.

Anonymous said...

This sounded too good to be true.

I mean it is well known that when times are good real estate developers can finance each of their projects on a non recourse basis.

So let's say that a developer has ten projects around the usa - he knows that half will be disasters and half will be home runs (but he doesn't know which is which)

if he can get all ten financed with 5% equity and 95% debt, non recourse, the average project might have a 0% return but the developer walks away with tons of money.

that is the magic of non recourse debt - it gives the developer all the upside and only a small piece of the downside

it is hard to believe this is available on residential real estate.


i just want to be super clear on this - if someone bought in 1995 for one million, and the value was three million in 2005 and they took out a mortgage in 2005 for 2.8 million and took perhaps 2 million in cash out of their house,

then today the value has fallen to 1.5 million they can just mail the keys to the bank - the bank takes a 1.5 million dollar loss, but the home owner gets to keep the 2 million in cash -

even if the homeowner has it in a money market account or something, earning interest, the bank is just out of luck and can't get at the money?

I mean, it sounds like a really skewed system so i am just double checking

Jonathan said...

Dan,

Ok, I can now repsond to some of your points. In my original comments I was talking about Santa Monica North of Wilshire. There have been marginal Buyers there for quite a while. What it comes down to with them is affordability. Yes, I totally agree, the prices are going to come down. Every area, no matter how well insulated it is gets affected by an overall decline in a housing market. However, it is a question of how much. I had read on this blog people suggesting 40% to 60% declines. Since there has never been a time where real estate has declined even 25%, I don't know how that is even possible unless the dollar collapses and the country goes into a depression. Which, by the way has been suggested by a couple of economist. But you are always going to have excentric repsonses at times like these. $1.7M for a lot is possible, just not probable in the short run. Another 2 shoes have to drop before we see it happen.

My 6th point about real estate being undervalued at that time is a fact now. It must have been otherwise we would not have seen the explosion in prices go up from then. Of course, interest rates becoming so low in 03 and easing of credit certainly help create a monster. And you are right, real estate will not, and cannot possibly appreciate at the same pace it did from 2001 to mid 2005. It is a very healthy market now and air definitely needed to be released from the baloon.

Your response to number 7 is true and not true. Because lenders criteria has become much tougher on buyers only truly qualified people are going to be able to get loans. If a lender becomes loose, then you would be totally right, but they are not. As far as the return on investment, yes, it is around 7% on average every ten years. Here is the source: http://www.housingmarketfacts.com/
The big difference between the stock market and a home is the advantage of leverage, so your return on investment is much greater when a home doubles in value. If you bought a home for $500,000, put down $100,000 and the price of the home was worth $1,000,000 in 10 years, then you have at least made 500% on your money plus the equity you have built up over the years.

Your response to my 9th point is reasonable. However, I don't know what is going to happen. I assume prices will continue to drop and that you could probably time it to make a better investment. But, it really depends on why someone is buying a home. If they are buying it to live there then it is not going to matter. There is an intrinsic value to living in a home and the enjoyment you receive from owning where you live in my opinion far exceeds the 2 year period to time the market. If you are a pure investor, then it is a different ball game. However, when the numbers work and there is a no brainer investment that you can't pass on it is not going to matter what kind of a market we are in, you are going to buy that investment.

On point number 10 I was not tryng to make a causation point, I was trying to explain the advantages of owning a home over a long period of time and that trying to time a market ultimatley is not really going to matter based on historical numbers.

I hope that explains my point of view more clearly Dan. I would love to hear what your reasons for real estate moving higher in 10 years are,

Jonathan

Robbie Fields said...

Jonathan wrote :

"I am pretty sure you have it wrong. There has never been a time in the history of L.A. real estate when prices have been less 10 years later than from the time it was bought."

Try 1887 as a benchmark. For most areas, prices did not recover in nominal terms for 60 years and in inflation adjusted terms for more than 100 years!

Jonathan said...

Robbie,

Where did you get that data? I have seen recorded data going back to 1900 or just before, but they had no records of home sales in California before that. If they did, I seriously doubt the accuracy of them.

Thanks,

Jonathan

Robbie Fields said...

The 1887 bubble, following on from the earlier 1876 one, primarily involved speculation in newly subdivided land and existing vacant lots. You should spend some time researching it ... though regional in scope, it remains one of the great manias and the basis for many of the great Los Angeles/Pasadena "old money" fortunes.

Anonymous said...

Gotta love realtors and their neverending optimism:

"1. L.A. in 2006 was the 16th largest economy in the world. Russia was 17."

It was certainly in a very similar position in 2001, so why weren't prices astronomical in 2001?

"2. L.A. is the second most populated city in the country and on the Westside of LA there is no where to build, there is no land, nada, unlike Miami, Las Vegas, and Phoenix. We are going vertical and condos will become more and more popular for first time buyers. That will make the current inventory of homes even more expensive over time."

All true in 2001 too, so what?

"3. There are more millionaires living in LA than any where else in the country. Income per capita on the westside of LA is truly one of the highest in the world."

See #2.

"4. The US dollar is very weak at the moment and foreigners are buying homes like crazy here for all cash."

Care to give a few examples, since you're privy to all the data? Just some addresses, I can verify if you're full of crap or not.

"5. Last year, there were more homes that sold for more than $10M than at any previous time in LA history. Not bad for such a crappy market."

Last year included many many months before the real crap hit the fan. Also, no one is going to dispute that Britney Spears et al. live in L.A. and will buy $10MM homes no matter what is going on.

WarChestSM said...

Jonathan,

Like you, I am very bullish on 90403/90402/SM/Westside/etc over the long term.

However I am very bearish right now and will likely stay bearish for the next few years (depending on incomes, economy, price declines, etc).

I run the Santa Monica Distress Monitor. We have been showing via many examples (just like this blog) that a lot of the price increases in this area were due to the same loose lending and massive speculation that went on across the country...and now many many speculators are bailing and banks are just starting to put foreclosures on the market. We look at rents in addition to just looking at asking prices on units.

The price to income and price to rent ratios still make it seem that we have a lot of downside to go. You even admitted in your "rant" that you think prices are going lower. So why would anyone buy right now when they can't afford it, the fundamentals are still way out of whack when looking at historical relationships, and prices are going lower every day?

Also, it generally makes more sense to buy when interest rates are HIGH because that is usually when property values are lower. So you want to buy when rates are high so that your taxes will be lower and you pay less for the property. You then wait for rates to fall and then refinance to a lower rate.

There still seems to be recession risk at hand and given the massive run up during the bubble, it seems impossible to say that values are bottoming right now.

Real estate goes through long and drawn out cycles. You know this. So given the poor fundamentals and the fact that we aren't very far into the decline, it would seem prudent for buyers to wait a few years. Trees don't grow to the sky.

Jonathan said...

Robbie,

How does it relate to the recent and current market? I will do some research on it. I do not recall anything like what you are describing. Something new to learn I guess.

Jonathan said...

Warchestsm,

I would love to see some of the rents you are talking about. The rents that I see are ridiculous and have not changed at all. I know Santa Monica has a lot of rent control, so those rents are definitely, and have always been below the price of a home.

As far as buying when interest rates are high, that sounds sensible, but how do you know when they are high. In the early nineties they were close to 9% and have continued to drop ever since. Last year, or the past few months they were the highest in the past 5 or 6 years. I like the concept, but that just has not occurred.

As far as buying right now, I will say it again; buy now if you can afford it and want a place to live. You only live once for crying out loud. If you do not need to sell the home for at least 5 to 6 years you should be fine. Of course, I could be wrong and the market could go down 50% and you would have lost a lot of equity. However, if in 6 years the market goes down more than 25% this country is going to be in serious trouble. Only people who bought a home and put down more than 25% in 1999 or 2000 will have any equity left, banks will continue to go under, people will be filing bankruptcies, and we will probably be close to a depression. I certainly don't want to see that happen, and yes it is possible, but not probable.

You commented that we have only just begun this descent. I believe this started in mid 2005. I don't think we are at a bottom. Nobody knows when that bottom will be. That is my point. If you are going to keep speculating on what is going to happen you would never buy a home. Please take a look at this link to home prices in CA from 1968 to 1996 and tell me that you don't feel a little more assured that we will recover sooner than later(http://www.pickcanter.com/files/Annual%20Sales%20Price%201969-2006.pdf). If the market goes down over the next 2 or 3 years, so what. If you are looking to live in a house for a long period of time and you can afford to do so you should not care. What would you have told the people who bought a home 3 years ago? Don't buy, it is too high? What about 6 years ago? If you are an investor or a speculator, then I completely understand, sort of. However, the most successful developers in LA have bought when the housing market was at its worst in the 90s and they certainly received their fare share of bruises. Geoff Palmer, Alan Casden, and Rick Selby come to mind. 2 of the 3 are billionaires now. Would you have told them not to buy then?

Thanks for listening,

Jonathan

Anonymous said...

You guys are looking at the tiny waves on the beach and you're trying to predict what is going on 3000 miles away.

There's a tsunami coming and no matter what the last wave looked like, it doesn't mean a thing.

Talk about trying to catch a falling knife.

Or, you can't see the forest for the trees.

The sky IS falling and it will take all of the granite counters and stainless appliances with it.

Jonathan said...

Anonymous,

This is a joke, right?

Jonathan said...

Anonymous,

You are an oxymoron! You just get through telling everyone you can see the future.

I do know someone who did cash in on the subprime crash. He made $600Million! Anonymous, if you know what is going to happen I suggest you get your wallet out and bet on it like Jeff Greene did. You too will be on the cover of the Wall Street Journal!

WarChestSM said...

Jon,

It appears that the Fed has given up on trying to restrain inflation as they are aggressively cutting rates. I think there is going to be a sizable amount of inflation in the future as a result (some signs of this are occurring now via record prices for energy, metals, food, etc). The dollar is at record lows and continues to trend lower. The silent bailout has begun...inflating away or "papering over" the problems is what is being attempted. Thus, ultimately I think the bond vigilantes will begin to awaken from their deep slumber. Higher rates seem likely to be on the horizon. Obviously it is hard to say how soon or whether rates go lower in the short term though. But higher rates in the future means a better time to buy in the future because values will be negatively effected and your tax base is then lower.

While you say that rates have been at their highest levels in the past 5 or 6 year recently, I believe this is short sighted because even the "high rates" recently seen have been extremely low when looking at longer term historical rates.

I think that rising rates are going to be yet another force that prevents a meaningful recovery in housing anytime soon. Also you mentioned that the slow down began in 2005 so therefor we aren't at the beginning. Well, some places started falling then (most marginal areas), but SM was still going up or flat at worst in much of 2005. The flattening occurred in late 2006 and declines really didn't start until late 2007 and now we are starting to see declines in some "better" areas and on more desirable units. From a long cycle (i.e. real estate) asset class, we are still early in the declining phase.

So for SM, I would imagine that prices fall noticeably for a few more years at least and then the back half of decline comes more in the form of "real" declines (i.e. flat to slightly down nominal prices with inflation doing the damage). This is what appeared to happen in the early 90s downturn.

Again, after a record run up, to suggest that we only look at a decline of a few years with no long dragging along the bottom phase would be irresponsible. It would also be incredibly dangerous and irresponsible (in my opinion) to just tell people that you only live once and to just buy something if you can because everything will be fine in the end. Obviously new highs eventually will be hit but that doesn't change the fact that it is a horrible time to buy right now (even if you can afford it) and it will likely be a horrible time to buy for the next year or two at a minimum.

Once there is real blood in the streets and there are a few more years of declines it will start to make more and more sense to buy if you can afford it and hold through the end of the decline. We are not there yet and it is going to take a year or two before we can even talk about being there.

I agree that rents are still high in a lot of areas for high end units and great locations. I am not calling for a collapse in rental prices or even a sizable decline (or decline at all even). The market will be back in balance as a result of slightly higher rents and significantly lower prices.

Your job is to get people to buy and sell property so of course you are going to try to say its OK to buy...but as I have gone over here and on my blog, the numbers don't add up and buying now is akin to knowingly paying extra for shelter that you don't have to pay by renting for a while longer and then buying.

This decline should present some fantastic buying opportunities...come back in a few years and I think I will be much more likely to agree with you on your advice of "buy now if you can afford it".

Westside Bubble said...

You started a strong discussion, Jonathan!

Here's my documentation that north-of-Montana lot value fell about 25% between 1990 and 1996.

And here's my last November list of reasons "Why Westside prices will fall".

Inventory levels (your #6) are at record levels in Santa Monica for this time of year, as are days on market (counted from original listing date across re-listings, as my DOM does).

Having seen it happen before, after a smaller bubble, when most of the same limited land and high desirability was already true (your #1, #2) leads me to expect it again.

Additional notes:

6. Case-Shiller now goes back to 1980 (formerly 1987). My north-of-Montana lot value to the early 1980s.

9. If I wait to buy and prices fall $400K, that's $400K (minus interim rent but plus interim property taxes not paid and earnings on my money) lower lifetime expenses! That's real money in my pocket!

You bought your condo in 1994. That's exactly the point! Buy in the next 1994, not the current 1990.

JBR said...

"If you can afford to buy and are going to be staying in the home for at least 5 to 6 years you just can't lose."

Really? Will you guarantee that? In writing? Because if you will, I will buy a house, using you as an agent, right now. If I have lost money after 5 or 6 years, you will reimburse me right?

Seriously though, it's nice to have an opposing view here though, otherwise we're just in an echo chamber. :-)

Arti said...

Excellent discussion!

On the whole Jonathan's points, while unpersuasive and while they cannot trump the data pointing downwards, still generated very good discussion.

Jonathan: I am glad you use data to back up your bullishness. But most of your data does not have a strong, PROVEN correlation to home prices. There are only two proven factors, to a statistical degree, that indicate where prices should be: rents in an area, and wages in an area.

In the areas of LA we are talking about, home prices appreciated far beyond anything that can be supported if you look at the comparatively steady and slow rent increases (absolutely no 100% jumps from 02-04, for example), and the same for wages, you see that housing prices must come down some 20-30% from here in order to have any support.

If on top of this data there is panic, the general tendency to "over-correct", a recession, and more liquidity crises precipitated by the coming credit card delinquency writedowns and general banking crisis, you see how a 30% drop is in fact quite supportable and by data far more reliable than statistics about how there are a lot of rich people in this region. LA saw a net outflow of legal residents in the past few years, the LA times had a piece on this recently.

The best explanation I've ever read about the just-beginning housing collapse is the one that compares it to the five stages of grief. First we had denial ("there is no bubble, this is subprime nonsense"). Then we had anger ("it was Countrywide's fault!"). We've finally moved into bargaining: "the 12% we got hit with is it, we're close to the bottom! Okay maybe not, but only 5% left" etc.

We will have hit bottom when, year after year from here, housing takes a 10-15% beating per year, people get tired of following it (everyone's too busy dealing with the larger recession and the horrible band-aids the politicians will pander), and finally we get to depression and then acceptance.

Jonathan said...

WarChestSM,

You said:
"after a record run up, to suggest that we only look at a decline
of a few years with no long dragging along the bottom phase would be
irresponsible."

I understand your point of view WarChestSM, but you still did not answer my question of when then should people have bought? It is not my job to tell people to buy now. It is my job to give them sound advice based on historical figures and my own knowledge. I bought my own house at what I consider the top of the market in mid 2005. Was I irresponsible? How can I force anyone to buy or sell a home at this point? Just as I am not going to try and change anyone's religion, I would never tell someone to buy unless they wanted to at the moment. I just think that, yes, if you can afford to own a home how is that irresponsible? If someone bought at this time they are irresponsible or an idiot? Some of the wealthiest and most intelligent people I know are buying homes at the moment. Alan Casden and Jeff Greene, the gentleman who predicted the sub-prime crash and made $600M from it bought this past year. Is he irresponsible, or just an idiot? In the long run they are going to be just fine. It may be true that we see a decline or flat market for a number of years, but please, reading declines of more than 25% in Santa Monica is crazy to me. Sorry, I just don't get that, just as I don't get someone saying that California is going to fall into the ocean.

I have no idea of whether it is going to be a couple of years, 3 years or 5 years. However, I totally disagree about the amount of the decline predicted on this blog. You telling me that I am irresponsible I think is not fair at all. I don't how you can predict what has never occurred in the past 100 years in LA real estate on the westside.

And as far as inflation is concerned, it will happen and always will happen. Oil prices go up, gold prices go up, the stock market goes up, and real estate goes up. To wait when interest rates are at their peak is pure speculation and I think irresponsible. Interest rates are certainly at historical lows, but I have no idea what kind of "higher rate" you are talking of? That could be in 20 years for all we know. Or, it could be in 5 years, but I doubt that. The Federal Reserve cannot let interest rates go too high in the nest few years because of all the debt. I guess if you are going to wait for interest rates to reach their highs, whenever that is, you should never ever buy a house in the next millenium! By the way, it was not inflation that brought the housing market down in late 1989, it was the Savings and Loan disaster along with the same attitude people had recently, pure greed and speculation. Inflation altogether disappeared in the 90's as far as housing is concerned. We had a recession in 1991 and then interest rates continued to ease since then till now. So, based on your theory, the last time anyone should have bought a home was 1990-1 during the recession and the beginning of the collapse of the housing market at that time.

Sorry, I don't like being called irresponsible WarChestSM. I am actually a nice guy and only want the best for people, including you.

Jonathan said...

Westside Bubble,

I am not sure where you got your data from? 1990-1996, or 97 for that matter prices did fall quite a bit. I have read several different documentations on the price declines at that time and where as I am sure there were some lots that fell 25%, on the whole that is not possible. Real estate has never dropped 25% for a median priced home in CA for the past century, not even mentioning SM. Somebody mentioned 1887, but I still have not read anything showing that is true, but I will take their word on it. Case/Shiller is a very good index, but the government index, CAR, and NAR I believe are more complete as they do all areas, not just 20 cities. I know they are refining the Case/Shiller index all the time, but it has different numbers compared to the others. No doubt, prices will come down and are starting too. I have written about the irresponsibility of banks, buyers, homebuilders, appraisers, realtors, mortgage brokers, escrow, and title companies for the past 4 years. However, this is a natural cycle, just as business cycles go up and down, so will real estate. I love the discussion on the blog and I am sorry that I am ruffling so many feathers, but I just want to see some reasonable reaction to what is going on in real estate, not armaggedon. This last week in my office, which is in Beverly Hills, there were 8 multiple offer transactions. That may seem crazy to a lot of people, but there are a ton of buyers out there. People will always need a place to live and people will always need to sell. Westside Bubble, I love the site and the discussion, I just disagree that prices north of Montana are going to drop more than 25%. That is all.
I have a couple of links that I think would interest everyone on this blog. One is the historical returns of housing in CA and the U.S. from 1968-2006. I also have a recent 2008 economic report that was at Skirball this past Thursday. Here are both links. I would love to hear your thoughts on those:
http://www.pickcanter.com/files/2008%20LA%20Economic%20Report.pdf

http://www.pickcanter.com/files/Annual%20Sales%20Price%201969-2006.pdf

Maybe you will think it is all propaganda. I hope not.

Jonathan said...

JBR,

Thanks for being a little lighter on me. Of course, there is no way I can guarantee anything in the market. However, I do believe it is a fairly good bet based on the historical numbers and data that I have you should be fine. Figure if you are spending $2,500 a month on rent for 6 years you will have spent $180,000 that you could not write off. Figure that a home priced at $2M right now would have to fall another $360,000 or 18% to come out even. Plus you have the advantage of owning and having it increase thereafter unless you are predicting prices to drop more than that and continue for an additional 3 or 4 years. In that case, I don't know what to tell you. I suggest you read the economic report that I gave a link to on my previous response and tell me what you think after you have read it.

Thanks for the open response and engaging discussion,

Jonathan

pvc said...

I think at lot of this back and fourth can be summed up like that: if you're buying real estate as an investor, the numbers are against you right now. If you're buying a place to live, the numbers are still against you, but there's a lot more context when it's a place you're going to come home to every night, raise a family, etc... So, in that sense, Jonathan is right in so far as it may make sense for certain people to buy, despite the realities of the current market, based on all the other factors in their lives. But if you're looking at this from a purely financial standpoint, this really is not a good time to buy and it seems foolish to argue otherwise. It's been said over and over again, but even if the market does go up in the long run, there's no reason to burn that equity now if you don't have to.

Jonathan said...

Arti,

I feel like a piƱata right now. That's cool. I brought it upon myself to challenge the establishment of this blog. I think you had a good response to mine except for the rent part and 15-20% down a year! That is as crazy as people predicting the market was going to go up at least 20% a year for the next 20 years! Just no way it is going to happen. And since the market has never dropped, at least in the past century, more than 9.1% in median price(this past year, the highest it has ever dropped, so a point for your side) in CA in a single year that is one hell of a prediciton. Look at the stats from 1968-2006 - http://www.pickcanter.com/files/Annual%20Sales%20Price%201969-2006.pdf
Sales on the other hand have certainly gone down in a single year more than that. But, I assume you are talking about median prices.

As far as rents are concerned, I don't know what data you are looking at, but on the westside most people pay an average of around $2,400 for a 2bd place around 1,000 sq ft. Please do not include rent controlled areas.

According to the Casden Forecast:
The average rent for a two-bedroom unit is the highest in West Los Angeles at $2,319, nearly double the price for the same unit in the Antelope Valley. For the rest of 2005, rents should increase almost 4% to an average of approximately $1,200 for a one-bedroom, $1,500 for a two-bedroom and $1,700 for a three-bedroom unit. Occupancy rates will remain tight as job growth picks up throughout the county. New construction will help meet demand in the downtown area and also in Santa Clarita where renters are attracted to upscale lower-cost units within commuting distance of Burbank and the San Fernando Valley. That was in 2005. Rents obviously has gone up since then.

And L.A. has 3,356,353 total housing units with just less than half being apartments. L.A. ranks 4th in the U.S. in rental increases at 6.4%, due to strong demand verified by the high occupancy rate of 95.5%. The sources for this data are:
U.S. Bureau of Labor, California Employment Development Department, U.S. 2006 Census, DataQuick, Realfacts, California Department of Finance, and Southern California Governments, and Forbes.

Tell me your thoughts and where you received your data from and maybe I will become a believer!

Thanks,

Jonathan

WarChestSM said...

Jonathan,

I was not suggesting that you as a person are somehow irresponsible. I'm not trying to call you names or be insulting.

I'm saying that ignoring the current fundamentals and historical data and then saying that buying now should work out for you in a few years is in my opinion an irresponsible act. If you can hold for a long time it will obviously work out...but if you lose a job or some other unfortunate event occurs, you are going to be under water and in trouble. It is not worth the risk to buy now unless you are extremely wealthy and can weather any storm for any length of time. Most of us here are not in that position. Potential buyers should be aware of how real estate works and how we are currently experiencing the early phases of a monumental bust. The risk adjusted returns don't make sense from a pure financial sense or from a normal Joe home buyer perspective.

People should have bought when the fundamentals made sense...so basically anytime from about the mid 90s (around the end of the last bust) to around 2001-2003 (depending on the area). They should not have bought towards the mid/end of the upswing because at that point prices were too high. They should also not be buying now because prices are still too high and have a long ways down (I'm not claiming 50% for the westside but I do think it could be at least 30% in real terms). People should start buying in a few years as the fundamentals get better.

People don't have to wait for high interest rates to buy. I am simply making the point that the "interest rates are low" argument is a two edged sword from a buyer's perspective and that if rates start going higher then better buying opportunities should present themselves.

The fact that really wealthy people (i.e. folks who have hundreds of millions of dollars) are buying right now doesn't validate your case. These aren't the people driving SM.

JBR said...

Jonathan,

I've read Watts' report. He's only presenting the sunny side of the situation. There is another way to look at it. Here are some links for you...

Business Week
Housing Meltdown-Why home prices could drop 25% more on average before the market finally hits bottom

http://tinyurl.com/2ntj4u

Traders: Don't Put Jumbos in my TBAs-Why raising GSE caps may not result in lower rates...

http://tinyurl.com/32rtuo (read the comments too!)

Inflation vs Deflation argument. Long thread... good read.

http://tinyurl.com/28gygw

Bottom line- This bubble wasn't about houses... it was a debt bubble, which is unwinding in spectacular fashion. What is happening in the financial mkts is unprecedented in scope. All the rate cuts, stimulus packages, liquidity injections etc. that Watts cites as positive... are anything but. Dig around on the last two sites as well. When you pull back the curtain and discover what is *really* happening in the global economy you may be surprised.

Westside Bubble said...

I am not sure where you got your data from? 1990-1996, or 97 for that matter prices did fall quite a bit. I have read several different documentations on the price declines at that time and where as I am sure there were some lots that fell 25%, on the whole that is not possible. Real estate has never dropped 25% for a median priced home in CA for the past century, not even mentioning SM.

Jonathan, my data are sale prices from the LA County Assessor, low-end north of Montana, on 9th, 10th, 12th, and Euclid.

Lot value is a constant, rather like the Case-Shiller index, and a more accurate indicator than median prices that depend on the mix of houses sold.

Both my lot-value index and the Case-Shiller for Los Angeles fell around 25% from 1990 to 1996.

Could I be wrong that prices will fall, or by how much? Of course! But over the last year the bears have been more right than the bulls (remember "soft landing", then "subprime is contained"?).

Thanks for the stimulating debate! And thanks everyone not going personal with it.

Jonathan said...

Westside Bubble,

Thanks for your response and reasonable attitude with this debate. My data is based on C.A.R. and MLS information. I do statistics every quarter for the westside in 8 areas:

Beverly Hills
Beverly Hills Post Office
Bel Air
Sunset Strip/Hollywood Hills
Westwood
Brentwood
Santa Monica
Pacific Palisades

I do not take any low end or high end areas, just a total of each area. However, I can extrapolate into area codes, but in general, most people know which areas are more expensive than others. In Beverly Hills it is the flats of the 90210 area code and north of Sunset in lower Trusdale and south of Angelo to Sunset that have the greatest value.

I think it is very difficult to generalize in a very small area like what you have given about how much overall prices are going to come down for the entire area. Maybe your data is accurate, but it is a small sample of Santa Monica north of Montana. And as you have said, the low end. You know as well as I do that taking the low end or high end of data is not a very accurate way of coming up with what is the true value of a statistic because it becomes skewed.

As far as the bears being more right than the bulls, I don't know many bulls in this market, or in the past year or so. It is simply a cyclical market that has to run its natural course. I don't know how long that will be, but based on historical figures, give it another 5 years or so and it will start to turn around more than likely. And as you said, no one knows how far down prices are going to go. I personally think around 15% to 20% tops. Of course, I could be wrong. I don't think that is a positive outlook. However, compared to many on this blog it is. Hell, I have arguments with friends all the time about this crap. I have one in particular that is quoting 40% declines. Whenever I give him real numbers he shrugs it off and says they mean nothing and he just knows cause he feels it. That just does not do it for me. I need something, just as you do, a lot more concrete than a feeling. Here is the truth; nobody knows what is really going to happen and maybe 1 in a 100,000 get it right and become famous. It is like trying to call the Dow Jones number for the end of the year. Very unlikely. But, you still can get somewhat of a realistic range, right? I just don't see the 40% to 60% crash.

The other difficult part with housing is each lot and home is a commodity unto itself and has a different value for each person. Each area has an overall average value based on so many factors like income, schools, restaurants, jobs,...etc...
I have got to take a rest, everyone is wearing me down, but I still love the debate. As Herbert Spencer the great philosopher once said,"If we were all truly honest we would all be agnostic". My feeling is the same for real estate. Nobody truly knows the answers or what is really going to happen. We are merely speculating. But it sure is fun trying to do so.

Jonathan said...

JBR,

Excellent response. I do think he is a bit optomistic, although he does produce some encouraging numbers. I have read the Business Week cover article, which was well written. They never seem to get it really right though. However, even BW comes up with the unprecedented number for a national, not CA decline, of possibly 25%.

I will take a look at the other blogs. I am sure it is good stuff. It will give me some good amunition on my next report which I am working on right now. Please read my last one and let me know what you think? I love to get feedback on how I can improve it.

http://www.pickcanter.com/home.cfm?sec=news&ID=100

Thanks,

Jonathan

JBR said...

Jonathan,

Agree about the BW article, though if they fell a 25% decline nationally is possible, well... IMHO I don't think that bodes well for CA, where prices ran up a whole lot more than they did elsewhere.

As to the other blogs... The first one is really really good. Has been cited by the FRB. A must read I think, and some of the best stuff is in the comments.

The second is also really eye opening, though it attracts some crackpots that you'll need to filter out. That said, there is some really good stuff there.

I'll be sure to check out your report.

Jonathan said...

JBR,

Yeah, but California always goes higher than everywhere else. Of course, no area is immune to the decline, but the areas that get hit the hardest are the areas where homebuilders entered into the fray and where loans were given out like a diseased prostitutes promise of true love.

JBR said...

"where loans were given out like a diseased prostitutes promise of true love."

heh... well, I think that pretending that didn't happen on the westside is a bit disingenuous though. It did, it's just on a different scale.

Even in the ultra high end markets, there are people who stand to lose a lot of money. For every sale that goes into multiples, there is a corresponding loser on the market.

Take, for example, BC's listing on Doheny Dr. (I'm sure you know the one ;-) ) If it sells at it's reduced price, the owner is probably gonna eat close to a million bucks. Now, there are many arguments as to what the *problems* are with this, really nicely done, house. But situations like this are what change the psychology of a market. And once *that* changes, all bets are off.

Oh, nice report BTW. :-)

Jonathan said...

JBR,

Not really fair to use that one as an example when you know what I meant. There are 10x the amount of bad loans to unqualified buyers in places like Stockton, Lancaster, and Palmdale than there is in Beverly Hills, Santa Monica, and Brentwood. Two totally different types of buyers on average. Your example of Doheny happens on average all the time, but to compare the amount of chicanery that occurred with the homebuilders and their venture into lending is totally different.

I thought the article on the link you gave me made some good points. We will just have to wait and see what happens. I beleive the conforming loan limits are going to be raised only in the areas where the median prices are higher than the $417,000 currently. I guess there is a good chance that interest rates will probably increase from there, but they are still ridiculously low. They need to get back up over 6.5% to have a real negative effect on prices and they have to stay their for a while in my opinion. That is how it has been working so far, but we'll see.

Thanks for the nice feedback and challenging debate,

Jonathan

Anonymous said...

jonathan,
care to offer some support for this statement of yours or not?

"4. The US dollar is very weak at the moment and foreigners are buying homes like crazy here for all cash."

JBR said...

More fun reading. Not CA centric, but it still matters. Counterpoint to Watts' analysis.

http://tinyurl.com/2zek8d

Jonathan said...

Anon,

Not a problem. I personally have been involved with 2 transactions in the past 3 months where Russians have made offers on houses. The first, was in the Hollywood Hills and originally was an all cash deal for $2.1M. Unfortunately, the buyer had some financial difficulties at the last moment and decided to put down only 50%. The other deal is just beginning, but is for a much smaller amount for a condo in BH. I cannot go in to details, but they are Russian and have made by far the highest offer on a condo that I could not sell for the past 7 months. There have been tons of other deals that have been done in my office with foreign money as well.

In the latest 2008 LA Economic Report it talks about how weak the dollar is at the moment and how many foreigners are buying homes. Because they are not citizens, it is very difficult for them to get a loan with what is going on at the moment. However, they are still managing to buy a lot of high end homes in LA.

Please read the report and get back to me with your own thoughts:

http://www.pickcanter.com/files/2008%20LA%20Economic%20Report.pdf

The report is a bit optimistic in my opinion, but really makes some great points supported by solid numbers.

This is an excerpt from the report:

"Foreigners are very interested in US real estate.The falling dollar makes our real estate a great buy for foreigners. The British Pound is up 10% this past year, and the Euro has risen 47% since 2002. The British make up 12% of the foreign buyers. Canadians are becoming big buyers, especially out west. California, Texas, and Florida are the preferred locations for 52% of all purchases made by foreigners - with California being the most desired state. The median priced home purchased by foreigners is $70,000 higher than domestic buyers. Foreigners buy for investment purposes 22% of the time, and 47% acquire homes for just plain fun and frolic.

Over the next decade, Asians will become the fastest growing segment of the US housing market, concentrating on the west coast. By 2015, China's middle class will be larger than the entire US population. By 2025, India's middle class will reach those numbers! Today, Indians hold 39% of the world's wealth compared to 34% by Americans".

Here is another article to help back up my claim:

http://www.rttnews.com/sp/todaystop.asp?date=11/12/2007&item=17

Arti said...

Dear Jonathan,

I do thank you for continuing to back up your position with actual data instead of the utter rubbish that realtors rely on.

First, I want to point out that you do not diverge too much from most readers and contributors of this blog. You are yourself saying that you can see up to a 25% decline in housing prices. I assume that's 25% from today, not the high. If so, you are far closer to what most here are calling for than you are away.

Second, I want to point out that most of the data you're relying on to support your view is historical; i.e. you seem to assume that the worst is already upon us in terms of the larger macro factors and now housing prices are to reflect that. The BIG flaw in your analysis is that the extent of the crises at the macro level has in fact barely begun to show itself.

The politicians and even the financially illeterate press still talks of today's crisis as a "subprime" problem, with a some at least calling it a liquidity crisis. Things are bleaker however: we have an all-time low savings rate combined with inflation combined with an all-time high trade deficit combined with rate cuts that failed to move the bond market combined with an impending recession. Not taking all this into account, while not irresponsible, is at least not shrewd.

Finally, you say "Real estate has never dropped 25% for a median priced home in CA for the past century". This is typical of your reliance on historical data, which itself isn't a bad thing, but in this case will fail you because though it's never dropped 25%, neither did it double and triple so quickly. Indeed, the situation today is far more dire than it was in 1989, when prices dropped 40% in many parts of LA county from 89-95, and accordingly we have every reason to think that this housing bubble will not merely correct, this bubble is going to crash.

It is only beginning, 2008 is the "bargaining" phase of the five stages of grief.

JBR said...

"Foreigners are very interested in US real estate.The falling dollar makes our real estate a great buy for foreigners."

Well, that may not last...

http://tinyurl.com/3al2zl

Anonymous said...

Jonathan, can you share the data that you have for Pacific Palisades?
what is your opinion on what is happening there?
thank you

Anonymous said...

"The first, was in the Hollywood Hills and originally was an all cash deal for $2.1M. Unfortunately, the buyer had some financial difficulties at the last moment and decided to put down only 50%. The other deal is just beginning, but is for a much smaller amount for a condo in BH. I cannot go in to details, but they are Russian and have made by far the highest offer on a condo that I could not sell for the past 7 months. There have been tons of other deals that have been done in my office with foreign money as well."

In other words, you're not aware of a single closed transaction that was "all cash" as you had previously claimed. Thanks for trying.

Jonathan said...

Anon,

Wow, my point was that many foreigners are buying houses with a lot of cash. All cash deals or not, it does not really matter. They are buying and it is a tremendous factor in the westside real estate market. I will try to find out about the all cash deals, but I was not trying to imply that all were 100% cash, even though I beleive there are. You win anonymous. I am a liar. There are no foreign all cash deals going on at the moment, the market is going to go to zero, and you are going to be the big winner! Congratualtions!

Bernanke has no clothes said...

Jonathan, I think Anon's point is that three years ago, you (representative of most realtors), said: "buy now or be priced out forver". Then two years ago you said; "we're at a new high plateau / paradigm". Then last year you said: "you can never lose money in real estate." Oh wait, you're still saying that, now coupled with the "foreign buyers" angle even though you know prices are falling. How many foreign buyers are there, 100's? 1000's? That's what there would need to be to make a difference. You know of one transaction, and have heard of "a bunch."

Also, I love when "experts" talk about 90402 being different... is it because the people who are living there love making bad financial choices? Love buying something for 4 million they could have for 3? (or 2?) All the people I know in 90402, which is many, love talking about how much more they paid for their house than their neighbor... oh, wait, I got that backwards. And most couldn't afford to buy there right now. And many who did buy only did so because the were getting funny money from the house the were selling so it felt okay, even though they're now MUCH more leveraged.

Now certainly if you can hold long enough, you will never lose money in anything, but does it make the right financial sense is a bigger and more complicated question. For all your history lessons you neglect to point out a time where real estate, which historically rises 4-6%, has gone up by this much this fast, or THAT EVERY SIMILAR ASSET BUBBLE HAS REVERTED TO IT'S MEAN PRICE and most have overshot on the downside...

If the market you're looking at went up 100%, it can go down %50... No fundamentals in LA have changed. Because for all the "Los Angeles economy is X biggest" talk, you could just as easily say that California has the 8th biggest (or close) economy in the world... and how are Sacramento, Bakersfield and San Diego doing?

Should be a fun ride down.

Anonymous said...

"You win anonymous. I am a liar."

I believe that was already established when you told us your profession.

JBR said...

Hey! Settle down! Don't make me stop this car! :-)


Look guys and gals, there are facts supporting both sides of this debate. There are cash rich foreigners *and* locals buying houses. But that won't save the market. And there *are* huge economic/financial problems brewing. That won't completely kill the market. IMHO, the reality lies somewhere in the middle.

Jonathan at least acknowledges the potential problems, and I think we RE bears need to acknowledge the things that still favor RE. Whether you believe all is well or the end of the world is near, I think both sides can agree that the boom is over, right? All we can do now is wait to see what happens... Fun isn't it? :-)

Jonathan said...

Bernanke has no clothes said...,

You know, that is ridiculous. I am certainly not representative of realtors in any way, shape, or form! I am not going to put any particular ones down, but unfortunatley, I have to agree there are a lot of scrupulous characters out there trying to do anything to make a buck. This is a tough city, extremely expensive, and just as in my profession as in other professions there are many who do not represent it well. I am sorry if I am contradicting what your data is telling you. You could be right, I just don't think you are. That is all. It does not make me a liar in the least. As a matter of fact, I have been writing about the impending bubble for quite some time. I was not on board when people thought it was going to continue forever and I am not on board when people are saying the worst is going to happen. It is just my opinion and that is all. We are all probably going to be wrong about what is going to ahppen anyway. This is pure specualtion. I am not bold enough to bet on it and I suggest you not do so either. We are not that smart! There are way too many intangibles. I am a middle of the road common sense kind of guy.

You telling me that i speak for all realtors is like me saying you speak for everyone on this blog. Everyone of us are individuals who identify with people of like mind. It just is nice to throw in a little controversy once in a while as FBR said. Have a little humiliation for crying out loud. You could be wrong, just as I could be!

Westside Bubble said...

Cute but uncool, Anon 9:48. Let's treat Jonathan as a guest, not a troll, and keep to arguments and evidence.

Anonymous said...

i am grateful to have a real live realtor on this board

please do NOT chase the realtors of the bulls out of here

this is a forum for all of us

no flames

i personally expect massive price declines but i want to hear all sides

frankly, i would have predicted massive price declines in 2002 and been way wrong for a few years

Jonathan said...

Thank you. I am not here to make enemies at all. I know I contradict many of the sentiments about how far the market is going to drop and that can be personal for many. However, I really enjoy the blogs and what westside bubble has written. A lot of time and thought went into creating the charts and ideas behind them. I like to use critical thinking skills to make reasonable judgements on what is occurring and the more information there is the better decisions people can make after reading and deciphering it. Each of us has our own ideas and bias about the current market and where it is heading. I truly hope that the predictions of 40% or more are wrong in the 90403 or highend areas of Santa Monica, Pacific Palisades, Beverly Hills, Brentwood, and Bel Air. If they came to fruition, they would be unprecedented and I believe a depression would be the outcome. I think the market is healthy now in the sense that it is coming down in price and hopefully will continue to do so, but over a period of time. 4 or 5 years would be ideal and maybe about 15% to 20% in the highend areas. As I said, this is what I think would be healthy and I believe will probably happen becuase of all the factors I have listed before. Many of you have cited great articles and numbers, charts, etc... to show evidence of an impending 40% or more, and I think it is great to do so. I just don't see it. Maybe I will change my mind over time, but I keep getting offers and I have a ton of Buyers right now. Interest rates have come down over a 1.5% for many loans, while prices have come down too. Buyers cannot get the 0% down anymore and just will not qualify for purchases they cannot afford. That to me is the way it should have been and now we are seeing the consequences of pure greed.

Thanks for tolerating my point of view, even if I am a realtor.

Anonymous said...

"Maybe I will change my mind over time, but I keep getting offers and I have a ton of Buyers right now."

For someone with a "ton of buyers right now" you sure have a lot of time on your hands to write some mighty long posts!

Jonathan said...

It does not take too long to deal with one offer during the day. I am not getting 6 or 7 like the person working next to me in the office. Man, shie is closing a deal a day and they are all REOs. She has about 200 listings! Crazy!
You are a real smart ass anon, but I like ya!

Bernanke has no clothes said...

I didn't mean you represent all realtors, but I did mean that seemingly all realtors say the same thing at the same time... and how true/the real motivation of the NAR-speak turns out to be is pretty clear.

I think it's great that you're here, are certainly entitled to your own opinion and honestly didn't think what I was writing was all that scathing. I also respect how hard good realtors have to work -- but think it's criminal how easy it is to get a "license" and how little you need to know to be giving this very important advice while being looked on as having some special knowledge. But apologies just the same.

That said, it's interesting that you choose to target my implication that you speak for all realtors instead of any of the arguments and real economic issues I spoke of. And here's another one, if people in the 90402 have so much money and don't care about how expensive it is and know they'll make out in the end and are all Russian anyway, why does 1.5% on rates or the conforming point matter at all?

Answer that question, in addition to the coming argument on how it's really hard to get your real estate license.

Jonathan said...

Bernanke,

Firstly, thank you for your apology.

As far as getting a real estate license, I could not agree with you more. It is a joke! You only need to get 70% to pass. You want to know what the real joke is! 51% of all applicants fail the test! Ha! To be very honest with you, one of the reasons I went into the business was because so many realtors are uneducated and do not know what they are talking about. Nor will they make the effort to really learn. However, the numbers are quite startling regarding how many realtors there are in CA; 540,000 in the past year counting brokers. Only half of them made a deal. Figure about half of them will be gone in the next year or so becuase they cannot afford to stay in the business. Another factor is that about 20% of all the remaining realtors get most of the listings. I do not get a tremendous amount, but I do get about 15 or so a year. Some are in the $6 to $7M range, but very few. Most are in the $750,000 to $1.5 range. I do about 30 transactions a year.

Now, to answer your other question:
"if people in the 90402 have so much money and don't care about how expensive it is and know they'll make out in the end and are all Russian anyway, why does 1.5% on rates or the conforming point matter at all?"

I never said owners and buyers in that area code don't care about how much they pay. They care as much if not more than most buyers many of them. Some of them go crazy when they have to pay the prices they did, and still do. All I said was that a majority of them can afford to buy and hold in those price ranges. Most of the buyers that I have had that purchae in Santa Monica or Brentwood can pay all cash for the house, but choose not too. they want to have the $1M write off in interest per year. Also, never said they were all Russian. I said there are a tremedous amount of foreign buyers at the moment because of the decreased value in the dollar. Some of them buy all cash, some of them put a lot down. Anon wanted some examples and I gave him my own experiences, which seemed to not be good enough. I am not going ot go around and start asking my colleagues about all of their clients. We ahve office meetings each week and discuss what is going on. I get the feedback and I am giving to you here.

The lowering of interest rates matter because that is what starting all this crap in the first place. I believe there is a direct correlation to interest rates and prices. Mortgage payments will be lower and with prices coming down in many areas, it is a double whamy. I am not saying prices are going up. I am just pointing out that sales might increase during this quarter, which I had thought they would anyway becuase of the easing in rates, inventory levels during the holidays, panic amongst buyers during the last 6 months, and decrease in prices. Interestingly enough, C.A.R. just came out with the results of the last quarter and 11% and 12% drops occurred throughout Los Angeles except for one place. Yep, you guessed it, the westside. You want to know how much prices increased based on their numbers? I want to see some guesses!

Bernanke has no clothes said...

Good lord, you're not quoting median pricing, are you?

I always thought the westside / wealthy areas would hold up the longest... no great genius, just the fact that more people have money to hold on longer, but not forever. You know as well as I from watching the market that things are VERY different. What is selling is different, how it's selling is different, what isn't selling is much greater, etc... Much like OC and SD last year when everyone said "sales are down, but the median is still higher!" Reality will settle in here, as well.

As for rates, yes, lax standards and criminally low rates (from the same fed geniuses everyone thinks will help now) caused the problem. And I agree with you, prices and rates are directly linked because all Americans care about is monthly payment... (but you can't have it both ways, someone who can afford a 4mil house wants the tax help on the 1mil, but 1.5% doesn't matter)

But there's a few kinks in the NAR propeganda

1. Rates aren't lower. Despite the 2% cut in 15 minutes or whatever it was.

2. Regardless of how low the rates go, they won't approach, nor will the payments approach the stupid lowness of the last couple years because those loans simply don't exist anymore.

3. People don't perceive houseing as such a homerun investment anymore - trickles into ALL aspects of housing.

4. Recession - bad one.

5. people will need 20% down... how many can?

And when you look into the CAR / dataquick / melissa numbers, things are much worse than 12%. Sales in the Valley are down more than 50% yoy. (even the realtors beloved median price stat was down over 14% yoy... things have to be REALLY bad for the median to go down!) No one on the Westside is going to be able to miss the fact of what's happening anymore.

Jonathan said...

Bernanke,

You cannot compare San Diego and Orange County to L.A unless you start comparing specific areas. Yes, the Westside is the last place to get hit becuase of the reasons you stated.

Rates aren't lower. Despite the 2% cut in 15 minutes or whatever it
was.?
What are you talking about? 3 months ago there was not a bank giving a loan below 7%, and many not even below 7.5%! Now, loans are being given at 6.125% for a 10-year fixed and 5.75% for 30-year fixed conforming. I would say that is a big difference for refinancing and buyers. People are definitely hesitant right now, that is for sure. However, they can get a decent loan.

Some people are moving here from other cities and want a place to live. I know that sounds crazy, but I just had a couple buy a condo I was selling in West Hollywood for $900,000. It was new construction. They came from NY and she works at Universal. They were very happy. What can I tell you.

As far as a recession goes, I have no idea. Your guess is as good as mine, but it certainly looks like there is a reasonable chance of one.

Here is the latest stats for L.A. that I have:
County/City/Area December 2007 December 2006 Y-T-Y % Change

Los Angeles Selected Areas
Westside $1,575,000.00 $905,000.00 74.0%
West LA $775,000.00 $795,000.00 -2.5%
Downtown LA/Central City $667,000.00 $756,000.00 -11.8%
South LA $420,000.00 $450,000.00 -6.7%
North East LA $425,000.00 $460,500.00 -7.7%

What are your thoughts? I can't believe the westside results. It does not make sense to me. I can put the entire result up on my site if you want me to in a downloadable file. Let me know.

The 20% down is tough for people, but there is so much freaking cash out there you cannot believe it. I need to show you the stats for millionaires in L.A. I will post them next time in your response.

Anonymous said...

"Most of the buyers that I have had that purchae in Santa Monica or Brentwood can pay all cash for the house, but choose not too. they want to have the $1M write off in interest per year."

Yeah, they like the $1MM write off in interest so much that they take on $3MM in mortgage debt. You can talk in anecdotal BS all you want, but I'm quite confident I've seen more of the actual mortgage data that you have (and no, hearing another realtor in a meeting say "it's an all cash buyer" does not count as evidence- just like your "all cash buyer" who ended up having money problems and only put down 50%- close doesn't count).

I have to admit Jonathan, you're not quite as bad as the other real estaters who've frequented this board, but you're still full of it (and sadly, I think you're smart enough to know you are).

Jonathan said...

Anon,

Full of it? I am just telling you my own experiences with my own buyers. What buyers have you helped buy a home? Tell me all about your clients who you have seen their income statements. I may not have many clients in those price ranges, but my office still does more slaes than any other office in the world for Coldwell Banker. The Russian buyer who was going to pay all cash removed their contingencies and was suppose to close. They had over $17M stolen in art, as they were an art dealer. That is why they had problems. Another buyer in BH on Hillcrest was supposed to close a $10M home and they released contingencies only to have their company not sell. They lost their deposit of close to $250,000. The house immediately sold for $9.6M with another buyer. I don't know how much all these buyers put down, but from my own experience in these transactions they have extremely large portfolios that they have to disclose. That is usually the process with very expensive homes. Were there some bad loans made to people who should not have been buying high end homes? I am sure there was. However, not nearly as many bad loans were made on the high end as the was in the low end. The proof is in the pudding anon. How many foreclosed homes are their on the westside compared to Palmdale, Lancaster, and Central California? Please show me your proof. The only one who is full of crap and has no idea what they are talking about is you. You are all talk. Show me your evidence! Please, make me eat my words. Maybe I am just ignorant here, but full of BS, no. Like I said anon, I can only go on my own experience and the numbers that I see and what I hear. Does that not count for anything?

JBR said...

Anon @ 7:21...

Let me just interject here... First off, I'm as bearish as anyone here, but I don't think Jonathan is full of it. He's dealing with a pretty rarefied market and I'm sure his observations are accurate. I have some knowledge of the high end Hollywood Hills area, and while there is a lot of nervous chatter, sales, at stupidly high record prices, are still happening. And frankly, in the grand scheme of things, it doesn't matter.

"The Westside" despite the portrait of it as all rich folks, is really pretty diverse. Some idio... uh... guy just paid $2600 sq ft for a house in the hills. 3 or 4 miles south of that house, in a zip code where places were selling recently in the million dollar range, there are so many NOD's and REO's you wouldn't believe it.

And I'm sure he's right about buyers too. There are tons of people who see the %10 or so declines, and think this is the opportunity of a lifetime. Unless you really dig into the fundamentals, which most people don't do, the market *right now* doesn't look too bad for buyers. Gary Watts' forecast looks rosy. Zestimates in this area are still high, and the mindset of the last 6 years or so is still entrenched, *especially* on the *westside*

Thing is, When you look a little deeper, things are horrifyingly ugly. There is absolutely nothing that's gonna stop this from unwinding. Nothing. It's gonna take a while. A lot of peoples lives are going to be turned upside down. And it's not going to be pretty.

Friend of mine bought a nice place in the valley for 750k last year. He thought prices were down about as far as they were gonna be (despite my gentle warnings), and talked the seller down about %5. He felt he got a great deal. As of last week, comps on his street are priced 100k + lower than he paid, and *nothing* is selling. He shoulda waited. A lot of people on this side of the hill are in, or soon to be in, the same situation. We're just arriving at the party here...

"He that can have patience can have what he will. "
-Ben Franklin

Jonathan said...

JBR,

That is a reasonable response. The funny thing is, I am bearsish. This is like the Republicans who are gong after McCain because he is not as conservative as them. I totally agree there are some very scary stats out there. Credit card debt is up 300% in the past 6 months, there is more debt now than at any time in the history of this country. Even in the stock market the numbers are scary. There is definitely a lot of fragility. However, there are some very positive numbers numbers also. Unemployment is still at very encouraging numbers. Interest rates are still very low. Americans are earning more now than they ever have. Innovation is still very strong in this country. Hell, maybe armeggedon is coming and this country is just a year or two from becoming the Titanic, but I am a bit more optimistic than many of you. That is all. Forget that I am a realtor, I am trying to just tell you my interpretation of the numbers and news that I read.

Bernanke has no clothes said...

Frankly, old snapshot data and small group unconfirmed 'stories' are probably why so many people here mock realtors.

I really don't care much about data from months ago... I care even less about that data when not given in context. Four months ago everyone said "gee the [insert area here from: valley, oc (aliso, newport), san diego (city, carlsbad, wherever)] sales are way down but the median is still going up!.. never a better time to buy! But the fact is that sales are down even more and prices have imploded since then. Seriously, for a median to be negative is bad... for it to be 14% negative in a few months is unprecedented. I KNOW IT'S NOT ON THE WESTSIDE YET. I'M SAYING IT WILL BE VERY SOON.

And again... you can't tell me about all the uber rich buyers and then tell me that 1.25% on a million dollar loan is really the deciding factor. $75,000 a year before tax versus $62,500 a year? $1000 a month is going to restart the market? I thought these people were rich.

And for every "this one house" and "These one buyers" you cherry-pick as examples, we could also say "this that fell out" and "this that has been reduced by 20%..."

Oh, and rates are not low compared to recent years - and monthly payments are high compared to the arm and teaser loans 60% of your westsiders took out the last few years.

But the beauty of you, Jonathan is that you know you're wrong but still want to believe what the punch is telling you. You KNOW prices are going down and it's a bad time to buy but still service those who want to... Interesting internal war.

Anonymous said...

Hey Jonathan,
Here are some people in desperate need of your rich, all cash Russians invading Los Angeles:

"Of course, celebrity homes cost much more than that. An entry-level house for an up-and-coming star costs at least $1.4 million in L.A., say experts. Realtor Barry Sloane of Sotheby's International Realty says it's the owners trying to sell homes in the $3 million to $6 million range that are having the most trouble.


"A lot of those people are involved, in one way or another, with the strike," says Sloane. "They're upgrading from lesser houses that they're having trouble selling because of the market, so it's like a domino effect."


http://www.forbes.com/business/2008/02/05/hollywood-economy-housing-biz-media-cz_dp_0206realestate.html

Jonathan said...

All I can go on is the data and what I see and hear. You could be right, and I could be wrong. We will see. I say it goes down between 15% to 20% high end areas, you say, 40% to 60%? I think that the marginalized areas where the homebuilders developed could go down as much as 30% to 40%, but that is a guess. You probably think it is going down 60% to 80%. I have not seen anything tha tyou have shown me to convince me otherwise.

As far as helping people buy a home, of course, that is my job. I have to advice them on what is the best move for them at the moment. Everyone's needs are different. Beleive it or not, the buyers I help who really want to buy at the moment I tell them to take their time if they can. Some people have kids and have always lived in a home and want to move up. They do not want to live in an apartment or lease a house. I know that might be a shock to you, but I can't force anyone to buy, sell, or wait. As I said, each person's situation is different, just like yours. I would never try to convince someone like yourself or of like mind to buy now. It would be like trying to date someone who just is not interested. I get it, believe me. Again, understand what I am saying, I can only advise people based on their situation. You obviously disagree with that, but you are not a realtor. Got I hate that word! Realtor, most of the bloggers on this site make it sound like scumbag. Man, I am thinking of going into another business after discussing this with many of you. You make me feel like crap. Thank goodness people I help don't make me feel that way. That is what keeps me going.

Jonathan said...

Anon,

I know Barry Sloane reasonably well. I will ask him about the comment and get some feedback fro him.

However, there is no doubt there are problems, as I pointed out in my last post what I think the market is going to do. I don't what makes you think I believe the market is doing great or not having problems. I just don't believe in the highend areas it is going to drop 40% to 60% as I have read here. Man, you are a tough! Stop taking my words out of contect!

Thanks

Anonymous said...

"Beleive it or not, the buyers I help who really want to buy at the moment I tell them to take their time if they can."

If that is really true, AND you were giving the same advice in 2007, and 2006 (I would go back to 2003 but I know that's asking too much), then maybe you are one of the few decent real estate professionals.

Then again, your last post says the following:
"I don't [know] what makes you think I believe the market is doing great or not having problems."

And this is from your first post:

"Anyone who tells someone that if they buy a home right now they are an idiot just has no idea of what they are talking about."

So, let's summarize: you think the market is having troubles, will likely drop 15-20% in the best case, but then telling someone who wants to buy a house now that they're an idiot is naive, but then you are also advising people to wait if possible. OK, I think I've got it now.

Jonathan said...

Anon,

Not really, you don't have it. You must be a politician because you take everything I say out of context. I believe that if someone is going to buy a place to live there and is not planning on selling it for at least 5 to 6 years they should be fine. I cannot make any promises, just as I could not make promises in 2000, 2001, 2002, 2003,...etc. However, telling them not to buy if that is their strategy I would have to be a real ass. That is the correct meaning behind the context.

Jonathan said...

Anon,

You can read my quarterly updates. They go back to early 2003, but I only have up to last quarter of 2005. After you read let me know if you think I am still full of crap.
http://www.pickcanter.com/home.cfm?sec=news&ID=69&Type_ID=3

Bernanke has no clothes said...

I believe that you tell them to go slow and that many people don't listen or don't care (until it goes down in value).

And I think prices will probably return to 2001/2002 levels - before the non-supported meteoric rise began and levels that are supported by incomes and normal financing. In some areas that's 40-50%... in others it's 75%... depends where you are.

Jonathan said...

Bernanke,

That is quite a drop and I just simply disagree. You could be right, but I certainly hope not for too many reasons.

However, most of the buyers or sellers I work with listen to me. Some people don't listen and I can only think of a few times when it has worked to their advantage. Hell, if you keep something on the market long enough it will sell at the asking. You just might have to wait years. Some people are just unrealistic and are not sellers. Just as some people lowball their offers and never get the house in the higher end areas. People are extremely stubborn, and you are right, sometimes refuse to listen to advice. If someone wanted to buy right now to spec I would think they are nuts. However, if someone wanted to buy something and the numbers made sense as a long term investment I would not discourage it. The problem is I can't find anything yet that makes sense, but they are getting close with the low end condos in good rental areas like West Hollywood.

Bernanke has no clothes said...

Well every reason you site EXCEPT crazy lending / mania are just not true (increased incomes, jobs, blah blah blah)... that's why I think 2001 /2002.

Nothing even close to makes sense as an investment, rents aren't even NEAR penciling out. And as the economy craters, watch the rents go down. And by the way, you're doing it again, using the recent past examples and fear as implied proof the future will be okay - straight NAR playbook. ("people lowball and never get in the good areas...") Reminds me of my neighbors across the street who bought their house as a reo after it was one of many houses lost in (i think) '92 by one of the biggest local realtors who declared bankruptcy. Now that's past history I think we can learn from.

And the spec thing amazes me, I still see some people buying places to tear down, but now only the REALLY good locations. That takes some big ones because I'm also seeing people who tried that last year losing them to the bank or reselling them with plans because they can't get construction loans. That said, on the well done specs that are finishing now and sell, the developers are clearing some good money - 15 to 30% over total cost to buy and build - but those are the ones that sell. But a that premium for developing they have room to lower the price before it gets dicey. Not gonna be true six months from now. (note: six months is an estimation, don't contact me on August 6th.)

Jonathan said...

I am not that literal. I am not so sure about anything you are saying. NAR stuff? Ok, if you say so. We will see. How far down is it going in Santa Monica and when? I will be glad to eat my words if you are right. I just can't see how you possibly could be though. How is it that you know more than everyone else? Bernanke, you have to have a little humility. You could be wrong ya know, is that possible?

Jonathan said...

BTW Bernanke,

I cite all my numbers and quotes, CAR, LA Times, NAR, Dataquick, Federal Gov, Business Week, Fortune Magazine, The Economist....etc....do you?