Tuesday, April 29, 2008

February Case-Shiller

More of the same in today's February 2008 S&P/Case-Shiller numbers, continuing their plummet, now back to late 2004.

(January chart) (November chart with Santa Monica index)

Los Angeles (black line, includes Orange County) is now down 21.6% from its peak in September 2006 - 4.3% from January, 3.7% from December, 3.6% from November, 3.6% from October, 2.1% from September and 1.3% from August. The national (orange line, aka Composite) index is down 15.8% from its peak in June 2006.

Besides the original city index they have each city broken into Low, Middle, and High tiers (Under $433,595, $433,595 - $648,146, and Over $648,146; updated). Los Angeles' Low Tier rose the most and has fallen back the most so far from its November 2006 peak, 25.9%. The High Tier rose the least and rather plateaued since 2006, but it too is falling more steeply, 15.8% so far from June 2006.

Second, back on August 21 I developed a graph of where prices would have to fall, per O.C. real estate consultant John Burns, "For prices to return to their historical median ratio of housing costs/income".

The dashed diagonal lines below projected such falling prices, based on DataQuick median prices by county. Look how much steeper the actual fall has been so far! About half way there, at this rate they could get there by the end of 2008.
Added: Mish reported contributor "TC"'s data from the CME Futures Market. "TC" writes: "I've included data available from the CME Futures market so your viewers can see when people are betting the downturn will end and how much lower it will go."

For Los Angeles, the Futures Data Trough Month is November 2010 and Trough Price is $336,840, a 43.8% or $262,341 drop from the peak.

If true, the 21.6% in 17 months so far is almost half-way.


Anonymous said...

What are predictions for Santa Monica? We all know that everything east is diving, but when will it hit? Ever?

NeedleBrain said...

This is and will be unprecedented.

We are witnessing a unique version of "market failure". Since the downward momentum is increasing, there is no pricing mechanism and price floor (no effective government intervention, no increased volume, no lower interest, no easier mortgages or easier credit) to even slow the debacle. It is snowballing.

The psychology has turned, the residential RE and mortgage markets are both starting to show signs of structural "market failure": price discovery is malfunctioning because of the low volume, and there are no discretionary buyers. Soon even the smart sellers ( with equity) will rush to get out as they recognize that the asset class of residential real estate is no longer an investment. In 2-3 years, the severity of this downturn will be unmitigated.

The 'top ' end is doomed,and will fall even more steeply, probably very soon. THe rental value will not provide a floor to stop this debacle because, just as the bubble was non-economic, the bust is looking like it will be non-economic, and perhaps as fast or faster than the upside was.

This is scary.

Anonymous said...

I hope you're right needlebrain, because if Santa Monica and the "top end" continue to basically resist the downward trend in the rest of LA, it means there will be no buying or selling there for years.

You are convinced that SM and the top end will eventually not be immune and will be hit hard. But do you have an explanation for why this hasn't happened yet, and whether it might never happen because everyone wants to live north of Montana?

Anonymous said...

i respect everyone that posted on this thread

let me weigh in with my opinion.

the fact that "everyone wants to live north of montana" is not relevant to the pricing of houses north of montana

i mean if you do a survey of la county residents, you may find that a million of them would like to live north of montana if they could easily afford the price

but this one million people that want the small number of houses north of montana (how many are there - 3000?) are not relevant since the prices won't realistically ever get within reach

i would say that the people that will determine pricing north of montana are those that have the ready ability to pay $4 million plus for a house. which is a small group

i would say that there are still more than enough people who want to pay $4 million who can pay VS the very small number of people who are interested in selling.

i think this last point is important because if you talk to the teachers in the public schools on montana they tell you that very few of the parents are looking to sell - they have the financial strength to stay -

so if you just get to know the people living north of montana you will find a lot of sympathy for folks hurt by the recession, a lot of empathy, but you will not find many people north of montana who personally have to move because of the recession

the number of people eager to pay $4 million to get in north of montana may not be huge, but it is big enough to absorb the supply

with regard to the rest of santa monica, i think the supply of sellers is much much greater. so SM outside the 90402 will be a bloodbath

Anonymous said...

Needlebrain said:

"THe rental value will not provide a floor to stop this debacle because, just as the bubble was non-economic, the bust is looking like it will be non-economic, and perhaps as fast or faster than the upside was."

What does this mean? Everything in the end is economic.

Bubble occurred because, e.g., money was cheap and buyers thought they could make easy money or thought they had to get in ASAP.

Correction is occurring because, e.g., money is no longer easy to obtain and buyers no longer think prices will rise.

The market will over correct downward just as it over corrected upward from the last bubble.

Fundamentals do not change, economics do not change, the supply/demand relationship does not change. The numbers just get larger over time.

Wooster said...

If Needlebrain is correct, I will buy millions of $s of rental homes near SMU when the value shoots south of rental valuations. I'll then retire on the income and watch it grow and grow. Who's in? His bottom pricing sounds a little low though.

Anonymous said...

I also wondered what needlebrain meant by 'economic'. He (she) will obviously be better placed to answer that, but I think it refers to economics in a broad sense such as unemployment, or recession, whereas this thing was 'financial' and turned in on itself, creating the economic conditions that you might expect to affect a housing downturn. The cart before the horse as it were.

I don't know Santa Monica well, but I'm sure there are many people wealthy enough to buy at the moment. However, that doesn't mean that they are going.

Price Stout said...

Great post. I do think you have a math error on your month/month calculations, as I get -3.1% from Dec/Nov.

The HUGE story here is exactly as you say: the continued ACCELERATION of depreciation in LA. Even the "smart money" would be opportunistic buyers of REO and downgraded MBS -- the bears with money to play with -- are universally stunned that price declines continue to accelerate, as they all thought, based on the 90's experience, that prices would more or less stagnate before too long.

I see the mortgage tapes on occasion, and (as dataquick confirms) transactions are dominated in most markets by REO resales, and if you look at the FC data, we're only at the beginning of the REO wave.

REO is most LA markets is selling for 30-40% off of the last sales price (typically sometime in '05 or '06). Granted, this is happening in everywhere but the Westside and the beach communities, but it is only a matter of time for those markets as well.

Simply put, credit for new home purchases has reverted to good old fashioned requirements of 20% down (at least), fully documented income and assets, and the almost impossibility (and high cost) of getting a mortgage over $1MM. That means that prices have to come back in line with incomes, and that's going to translate into a massive price correction.

Epsilon said...

Are there good numbers out there on current mortgage lending, or just anecdotal speculation? Even the articles about the failure of the "new" jumbos don't seem very data-bound...

Are banks really limiting loans these days to debt/income ratios below 4, and 20% downpayments? Are they using all these new capital infusions to continue making risky loans, convinced the worst is behind them? Wooster may have a good idea, but if lending standards are too high, prices will fall below rent levels because no one will have the capital to buy...

Houses are pretty much the only investment that's nearly always leveraged. I think the only answer for how far things will fall lies in the debt markets, and I just don't see good numbers out there... has anyone here been loan shopping lately, and are you willing to share?

Price Stout said...

Are there good numbers out there on current mortgage lending, or just anecdotal speculation?

CFC and IMB publish monthly production volume data publicly. There you will see the shift away from anything non GSE. IMB for example has seen its production go from something like sub 20% GSE to 90% GSE in about a year.

And you may call my comments "speculation" if you like, but I see the trades and the tapes. there's still basically no secondary market for jumbo loans and/or jumbo securitizations. Some of the money center banks have fwd commitments to buy flow jumbo loans, but the amounts are tiny (here's a data point for you: JPMC is buying some full-doc, sub 80 LTV Jumbos, but less than $100MM per day... that is tiny).

Also, the MBA and Mortgage News publish all kinds of public data about production. Google it and you shall see.

Anonymous said...

The big questions, on this housing blog and the other major LA-centric blogs, is WILL these corrections finally start affecting the westside and beach communities, WHEN will that happen, and HOW BAD will it be compared to the declines elsewhere.

I think it will happen, but it will be far more gradual, maybe with prices staying flat for the next 10 years (which in real terms ends up like a 30% decrease from today due to inflation).

In other words, the westside will be affected, almost as badly, but it will take so long to happen that it's not worth waiting for a decline if you want to live there, because prices are not budging.

Epsilon said...

Thanks for the tip. Just looked at the MBA numbers... the scariest thing, I think, is just how much refinancing spiked during the bubble. Really supports how much people used their homes as ATMs...

During the boom (roughly 01-07), there were $394.42 billion/quarter in refinance originations; in the eight years before that, it was only $92.34 billion/quarter. Granted, this isn't adjusted for inflation, but it says bad things about both the profitability of mortgage banks going forward, and home prices...


Anonymous said...

For what its worth, I have lived north of Montana for many years and I see my neighbors suffering from real fear and astonishment at the falling real estate prices. The best way to describe it is that time in life when one of your cherished beliefs is found to be untrue. It is fundamentally unsettling and surprising. You still want to believe but you know it is untrue.

Well off, owners generally are not forced to sell, but they are generally smart but realize that the bubble is over. Many who bought before 1990 do not care because it was all paper profit. Most who bought recently will really suffer.

Each wonders what significantly falling prices means for them: having to work more years to pay for their children's or grandchildren's education, no longer being able to take loans out on the house.

Generally it is the same concerns as owners everywhere.

There is no magic to living North of Montana. It has never been immune from anything. It simply was the area in Santa Monica where speculators built the most new large houses. There will also always be a market for new large houses. But not at these prices.

But all the other ideas about 90402 being free of falling prices are wishful thinking.

Since most people do not have to move, there is very little turnover. That does not mean that prices will not fall.

Prices will certainly fall in line with other areas, however not many homes will be sold. Homes in 90402 will always been more expensive than south of Montana. They always will be. But both will fall, likely pretty far.

There is not , contrary to speculation, much pent up demand to pay full price. If you are curious, drive around the neighborhood, visit the open houses. Talk to the other looking. Do not even bother with the foolishness from the real estate agents and promoters. They simply want your money.

Anonymous said...

"the scariest thing, I think, is just how much refinancing spiked during the bubble. Really supports how much people used their homes as ATMs..."

Is that news to you epsilon? I thought you said you've "followed bubble blogs for years"!?

Anonymous said...

Anon at 1:11 is too categorical. Livable houses for $2.5M or less in 90402 still get lots of attention, especially if they are well-located. Lots on quiet streets attract quick attention, which is amazing given the uncertainty in the spec market. Lots on San Vicente or 26th seem to sit. $4M spec houses sit. So it depends, and it seems hard for everyone, listing agents included, to predict how much interest a particular house will draw before marketing begins. Just some observations from someone who has been attending open houses and watching listings for a while.

Ano Nymous said...

"Anon at 1:11 is too categorical... Just some observations from someone who has been attending open houses and watching listings for a while."

Right. Information from someone who *lives there* should be discounted because it doesn't fit your "observations". OK...

Epsilon said...

You seem kind of obsessed with me, anon... it's a little disturbing.

I've heard people use the phrase, "using your home as an ATM" for years. Seeing that strongly reflected in basic mortgage data is worse...

Anonymous said...

"You seem kind of obsessed with me, anon... it's a little disturbing."

I'm drawn to idiots, what can I say?

"Seeing that strongly reflected in basic mortgage data is worse..."

But that was the point of my original post, if you have truly been following things for years, the actual data cannot be news to you. The fact that it is shows you're (once again) full of it.

And FYI, there is AT LEAST one other anon who is "obsessed" with you.

Westside Bubble said...

Civility, ok? We have really good discussions here, and don't need personal digs.

My sound bites:

* Low-end north-of-Montana prices fell around 25% 1990-1996.

* Current north-of-Montana inventory over 30 days on market is double what it was last fall.

* Lower-end (<$2.5M) north-of-Montana houses have been the quick sales this spring, generally for near asking price.

* I've expected more falling prices than we've seen so far, but expect that to change with rising inventory and broader recession.

* North-of-Montana will still be priced higher than most other neighborhoods, and a higher relative level than in the 1990s before the latest crop of mansions grew there.

Waiting to Buy said...
This comment has been removed by the author.
Anonymous said...

4:01 must have a really, really tiny penis...

Price Stout said...

Westside: Suggestion for the blog. Delete the comments w/ the ad hominems. You have a great blog here, let's keep the stds up.

Epsilon said...

That was the most juvenile thing I've ever read... although I did laugh.

Seriously, though, anon, what is your point? Ever since the debate over the stock market, you've chimed in that I'm an idiot a few times a week, but never added anything else. Your latest theory seems to be that I should have been able to read all about mortgage numbers for the last six to nine months from my time reading housing blogs in 2005 and 2006...

What position is it that you're trying to defend? That housing prices will actually go up? Or is it just that you're an ass?

That is, of course, rhetorical, but feel free to prove my point by chiming in with another inane comment sprinkled with liberal use of "idiot." And to be fair, I am an idiot, but only insofar as I waste my time responding to your drivel...

Epsilon said...

Sorry Westside... I had a long day at work, and this guy is just pissing me off. Thanks for the good work.

Anonymous said...

I would like to second price stout. Ads in which other commentators on this blog are called "idiot" or "stupid" should be deleted. I enjoy reading this blog, and in particular the comments, but the aggressive nature of some of our contemporaries here is annoying. You couldn't even pay me $4 mio to live in a house in 90402 next to someone like that ;-)

Anonymous said...

Can someone please explain to me how the tier valuation system works. Are the values say of the upper tier (circa $650k+) based on peak values in Sept 2006 or whenever? What happens if a house value drops below that value?" Does is get added to a lower tier list, or do things remain constant?

Anonymous said...

But Epsilon is sooooo unlikeable! Can't we call him out once in a while? He is such a smug bastard.

Anon II

Anonymous said...

Epsilon is an elitist, and out of touch with Mainstream America. I've even heard that he does not wear a flag pin.

Seriously though, I've found some of his posts to be a little off topic (i.e. the state of the 90402), but otherwise he makes some good contributions. Plus we can never have too many lawyers in this forum.


Anonymous said...

About a year ago I discussed this house with someone on this blog. It's the big bad McMansion right on the corner of Overland and Olympic. I saw it come up, go for sale, then for lease, then sell for 2.35 million in early 2007. Guess what, a listing is worth a thousand words. Talk about a haircut.



Wooster said...

Epsilon -

For what it's worth, refi numbers have nothing to do with people using their homes as an ATM. Of course that happened on a large sale, but mostly through LOC's. Refis in the bubble period were largely just refis at lower interest rates. For instance, I refinanced and lowered my interest rate a few points, but kept my outstanding principal the same. That is the case in a huge proportion of refis.

mamsterla said...

Regarding the Overland house - that is in my neighborhood - I live about 6 blocks away and regularly pass it. I would have to say that is a huge reduction. It is a nice looking house, but the traffic at that corner is terrible. I have seen a number of accidents there too. I would imagine the street noise from Olympic would be incessant. Either way, given a location discount, it is still a big cut. I have not seen the other houses in Rancho go down that much yet.

Anonymous said...

wooster -- are you so sure about that? I mean, obviously I don't doubt that you did that, but are you saying that you don't think people made cash out refis during the bubble? I suppose this is just a thought exercise right now, because I don't know where one gets numbers about this.

Epsilon said...

Thanks for those who commented on the mortgage issue... I'm still trying to figure out if any of the bubble financing techniques will endure. I also wonder what current underwriting standards are for down payments and debt-to-income ratio... some posts on MBCon have claimed 25-30% downpayment minimums in that area (which makes sense if people underwater will walk away regardless of their income level and credit scores).

I'm going to stick to mbcon for the next few weeks. At this point, I think my presence is detracting from the flow here (and on mbcon, the background level of hostility makes it virtually impossible for anyone to stand out).

Westside Bubble said...

Westside: Suggestion for the blog. Delete the comments w/ the ad hominems. You have a great blog here, let's keep the stds up.

That was the most juvenile thing I've ever read... although I did laugh.

I agree with both. I've exercised an occasional delete before, and will continue.

Can someone please explain to me how the tier valuation system works. Are the values say of the upper tier (circa $650k+) based on peak values in Sept 2006 or whenever?

I've noticed the tier thresholds have changed. Perhaps they divide all the records into three categories each month and report where those divisions hit? But that's just conjecture.

Richard Mason said...


In the first half of 2007, 87% of subprime refis were cash-out. Granted, that's subprime...


In the first quarter of 2007, 82% of all refis of Freddie-Mac-owned loans were cash-out.


Apparently the percentages for 2006 were even higher.

Anonymous said...

OT: Today's WSJ reported that westrentals.com in SM is getting 15% more rental inquiries from potential renters than same period last year.

Wooster said...

I guess I am wrong. I just don't know anyone who cashed out with a refi. All my friends and family just lowered rates.

What do I know anyway? I'm just a land developer who could care less about the mortgage stats. I just want to buy some more distressed lots in the IE.

Kevin said...

CNN is reporting that 56% of refis are cash-out even now:

Anonymous said...

Distressed lots in the IE? Wow, that developer really is a gambler! I'd rather wait for West L.A. to fall a bit and develop there.

Anonymous said...

Blue-topped, permitted lots in places like Cucamonga for $20-25K is what I am talking about.

All you need is a return to a slow sales pace to double that investment.