Wednesday, January 28, 2009

A projection

Let's plug the old crystal ball into the new Case-Shiller and try a few assumptions. I've added to it our North of Montana Index and two new lines, the Standard & Poor's 500 stock index and Santa Monica Household Income, both scaled to match the Case-Shiller at the beginning of 1980.

Ability to buy pricey Westside houses depends on (1) income to make mortgage payments, (2) loan rates and standards, and (3) assets to make down payments. Let's assume:

1. Upper-end incomes rose faster than the trend the last few years, but the financial crash will return those to trend.

2. Lax lending standards of the last few years are over, and rates for Jumbo loans are similar to the last period of very low rates, when the Fed rate fell to 1.25% in November 2002 and 1.0% in June 2003.

3. Assets for down payments are from previous house sales and/or financial assets. The stock market is now below its October 2002 bottom. Overall L.A. County house prices are back to the beginning of 2004 and still falling steeply.

Asset values and loan terms point back to late 2002 (black line). That also happens to be where the Income line crosses the North of Montana Index. Therefore it seems likely for middle Westside prices (below the very rich and above Conforming loans) to revert to those levels plus around 23% from the income trend (end of 2002 to end of 2009), if not overshoot.

For low-end north of Montana that would be about $1,100K* + $250K = $1,350K, around 33% below the peak of a little over $2,000K. The magenta X marks the spot. (* 402 10th Street sold for $1,100K on 11/25/02)

Another way to look at this is $1,350K represents a reversion to spring 2003 low-end prices (229 12th Street sold on 4/10/03 for $1,375K), somewhere in 2010.

What does this suggest for Los Angeles? The Los Angeles Household Income line crosses the LA Case-Shiller curve farther back, about the end of 1999. That is a decade along the flatter Los Angeles Household Income line, about 35%. The Case-Shiller index for January 2000 is 100. Adding 35% equals 135, the index value of mid-2002.

Case-Shiller for Los Angeles peaked at 274 in September 2006. From symmetry of the curve, reversion to 135 - a 50% drop - should also occur in 2010.

So there it is, in round numbers: a 50% drop for Los Angeles (reverting to 2002 prices) and 33% drop for the Westside (reverting to 2003), both falls finishing in 2010.


Anonymous said...

A) Unemployment means income is falling.

B) Spending 1.3m for a modest home defies logic and economic sense--Santa Monica is just not that nice. So using an economic model to predict future trends probably won't work.

C) Here's a question. Given that rich folks would eat crap if it was expensive enough and Oprah told them that it was the new trend in healthy living. Is it possible that Santa Monica will no longer be a desirable area if the median price falls below 1m?

Just call me Maria said...

A few weeks ago someone posted an amazingly useful website that allowed you to type in an address and get the names of the neighbors and the purchase price. Could someone please post it again?

rosebud said...

Maria, Website you're asking about is probably blockshopper.

Great graphs. For more color on 90402 income, it rose overall by 6.4% in 2006 to $338,122. Most amazing thing is that the biggest group of earners are those making above $200k (28.6% of the population).

That means 1,683 individuals or families were in this group. Their average adjusted gross income was $1,072,035. A lot of folks at that level when compared to the number of homes that sell there every year.

I buy what you say about stock losses being monstrous in '08, but capital gains were only $345,872 of the above AGI... so I don't know if the stock market losses will return the high earners right back to the overall city trendline.

Nevertheless, great analysis and definitive predictions; nice work.

Anonymous said...

OK - let's make sure this is clear - 1700 people live in the 90402 and make over 200k a year - does the MEAN person in this group make 1 million a year or does the median person in this group make 1 million - the difference is pretty important when it comes to understanding the demand for 4 million dollar houses

Anonymous said...

Blockshopper gives a lot of color about who is buying, including bio's, occupation, employer etc. Take a look at SM zip codes and see the diversity of occupations; a lot of these folks look like they are doing OK and not about to get foreclosed or go broke. Hopefully the data will stop all the low-level chatter about "who can afford to buy" and "all the high-paying jobs are drying up."

For middle income folks hoping 90402 prices free fall over the next x years and they can jump in dirt-cheap, take a peek at what buyers look like today. These types of folks will be your competition tomorrow as well.

Anonymous said...

1700 families making one million per year on average

Anonymous said...

"Take a look at SM zip codes and see the diversity of occupations; a lot of these folks look like they are doing OK and not about to get foreclosed or go broke."

Yep. Another variant on the "SM is immune because of ..." (substitute, according to preference, "Saudi oil princes", "British expats", "hedge fund types", "media moguls" ...). Pure denial. As if it is reasonable to have to earn >$1M in order to have the privilege to own a teeny-tiny 2BR in the 90405.

dwr said...

Do you know the difference between average and median? Assume there are 1700 families, 1699 of those families make $400K and one makes $1 billion from his hedge fund (that year only mind you), what is the average? Answer- almost $1 million.

That's why everyone uses the median- but go ahead and prove your point.

rosebud said...

Hey dwr, if you have access to the median, please post (I don't have it). I hear what you're saying, but respectfully disagree... Wouldn't hedge fund gains show up as either capital gains, taxable interest, or taxable dividends?

Speaking of which, one small clarification regarding capital gains stat I quoted: only 1,458 of the 1,683 folks listed capital gains or losses. The average for those 1,458 was $345,872 (as opposed to all 1,683 averaging this).

dwr said...

Not for the hedge fund manager- that would be a bonus from his/her job, i.e. income.

Since all the rich people are flocking to SM, how many houses have gone into escrow this month in either 90402 or 90403?

dwr said...

And isn't this the median, from your own post? Since (as always) you didn't post a link, it's hard for me to verify.

"For more color on 90402 income, it rose overall by 6.4% in 2006 to $338,122."

Anonymous said...

Thank you for this prediction and breakdown.

I'm of the opinion that much of LA will likely overshoot, due to the fact that we're facing the largest declines in employment, across all sectors, that this country has seen in quite some time. Many of the lost jobs were in fueled by the bubble and won't be coming back any time soon. Also, the high level of unemployment will lead to lower wages for many, since there will be a lot of competition.

Anonymous said...

I agree but can someone clarify - is that one million a year income figure posted above MEDIAN or mean

?if it is the mean can someone post the median income of those 1683 families thanks

Anonymous said...

To put the mean, median, and mode Q's to rest, can someome please post a link with the data from a credible reporting source? Respectfully, another blog or Realtor page is not a credible data source (sorry Westside). ;)

Anonymous said...

yes link to the data

we can do our own calculations

The key here is the one million a year in family income - if there really are huge numbers of families earning that in the 90402 then it is a bullish sign

if not it is bearish -

so let's see the raw data

rosebud said...

All the numbers I posted are means. Go to melissadata for the overall zip code adjusted gross income (they list it as $342,169):

For the more specific stats that have breakdowns by income group and type of income, go to the IRS:,,id=96947,00.html

Not published, so you'll have to pay $500 for the whole country, or $25 for CA.

For tax treatment of hedge fund managers, just do a google search. My question was rhetorical about where that income would show up. They've been treating it as capital gains (not wages) for years, which is why the issue has come up before congress in the last year(ish).

dwr, these are the same sources I always cite for income (along with the SM city site)... I imagine that your example of one billionaire to 1,699 half-millionaires could still be true, but wouldn't that be using the same type of logic that some bulls use when speaking of overseas investors and individual saviors?

Anonymous said...

It all depends on the distribution of these 1700 people

whose mean is a million

if most cluster towards the mean of one million that means perhaps a thousand people that can easily afford to pay 5 million for a house in the 90402

If most cluster towards the bottom and one or two make a ton that means few people that can afford to pay 5 million for a house in the 90402

The key issue debated on this board is not whether people want to live in the 90402 - the key issue is how many can afford the 5 million price tag for a brand new spec home

the cluster is crucial to that

Anonymous said...

This is a lame discussion thread.

The people who buy houses in 90402 have to come up with a lot of $$$ now to put down and afford it.

Yeah? So?

Why do I care how they get it?

Anonymous said...

Down payments are not the issue - potential 90402 buyers seem to have 20-30-40% down amounts well in hand. The issue is qualifying and getting a loan in a tight credit market, and the perception another price drop is coming. I am not a Realtor, but my situation and a lot of what I hear is 'if teardowns hit $1.6M or livables hit $2.0M, or larger old Spanish hit $2.6M I am in'. When credit opens (it will) and when prices drop (they will), readers may be surprised by the amount of clearing activity. The big question is when both factors will happen.

Anonymous said...

"When credit opens (it will)"

How are all those houses in the Inland Empire selling today? Because credit is available. Unfortunately, prices have to drop 50% (give or take a little bit) from the peaks in order for the numbers to make sense for the typical buyers in each neighborhood.

Anonymous said...

How are all those houses in the Inland Empire selling today? Because credit is available.

Conforming loans were never shut off - not the same as jumbo. 50% drop is not going to happen - do you believe low-end NOMA will go down to $1.1M? I'll put 70% down and get a conforming - as will about 100 other buyers.

Anonymous said...

The 1700 people with incomes that average a million can afford the 90402 at today's prices

Anonymous said...

I'm not so sure about the 1,700 over $1MM steady annual income number (but some folks are getting big pops from bonuses, scripts, cap gains, inheritances, etc.). A lot of my 90402 friends and neighbors are firmly mid six figures, real steady, for years past and likely years future. None of them live in a new McMansion or anything worth over $3.5MM - perhaps I know the po' folk. If you are looking for a concentration of +$1MM per year folks they are probably in other nearby 'hoods like Brentwood Park, PP, Holmby, Mandeville, Beverly Crest, etc.

Anonymous said...

Right - the 90402 doesn't "feel" like the type of place where million a year people live

We all have a mental picture of the people making a million a year year in and year out -

but that mental picture may be wrong

a thousand of the million a year types or a few hundred of them like the low key vibe of 90402 - you expect them to drive Bentleys but perhaps they drive priuses

dwr said...

Has anything gone into escrow this month in the recession-proof 90402 or 90403?

dwr said...

"50% drop is not going to happen - do you believe low-end NOMA will go down to $1.1M? I'll put 70% down and get a conforming - as will about 100 other buyers."

Maybe not 50%, but low-end will end up well below 1.5. I agree with Westside Bubble's 1.3 number, give or take a little.

You know 100 people with 700K for down payments? Are you a tax preparer or something?

Anonymous said...

DWR, I am in a profession (not R/E) that deals with high net worth individuals. I admit I overstated about the '100'; I personally know 8 individuals in the +$700k down range who are looking. It is awkward bumping into some of them at open houses (I am also looking) over the past year or two, but good to compare notes. FYI, the #3 gripe I hear (behind stuck prices and tough jumbo's) is when a random Realtor finds out about their financial sitution and becomes a pest.

Westside Bubble said...

Has anything gone into escrow this month in the recession-proof 90402 or 90403?

Yes, these few:

210 21st St, 3/3, LP=$1,995K (-19%), into escrow 1/14/09.

1024 23rd St, 4/4.5, $2,695K (-6%), 1/29/09

473 16th St, 4/4.5, $3995K, 1/21/09

dwr said...

So three houses went into escrow in all of January, and given how many BOMs we see these days, it's likely that at most two of those will close escrow. Sounds like a very sick market to me.

dwr said...

"tough jumbos"

You mean, standards are back to the2000 era (i.e., you need to make well over 500K to afford a $2 million mortgage) and rates on jumbos are what, 8 percent? If people are holding their breath for the 2003-2006 lending standards to come back and that will save NOM, good luck with that.

Anonymous said...

I love how you all see this issue in black and white. NOMA will never drop by 50%....NOMA has to drop by 50%. I lived in neighborhoods all over this country that used to be where rich people lived. Look at West Adams in LA isn't that were the rich once flocked? Now look at it.

On the other hand, what if those most optimistic among us are right? What if one small neighborhood of rich folks continues to increase in price even in the face of the most challenging economic period in the last 100 years? So what, does that mean that all of LA will remain unaffordable/over priced?

Anonymous said...

8:30 is right on the money

There is constant evolution in where the rich want to live - a neighborhood is "hot" and then it is not.

Look at Newport RI - rich people spent $10 or $20 million of today's dollars to build houses there and then when the neighborhood went out of style in the 1950's you could buy those same houses for $200k

Today the neighborhood is back in style and those same houses are back at $10 million each.

Neighborhoods that are disgusting become hot and in demand - take the meat packing district in Manhattan - people that paid $300k for a building there can now sell it for $14 million

Neighborhoods are either on the way up or on the way down. Just cause you remember the 90402 a certain way from your childhood doesn't mean is is still that way today

dwr said...

"Just cause you remember the 90402 a certain way from your childhood doesn't mean is is still that way today"

I remember the 90402 from about 2002, right before the funny money inflated the biggest bubble ever. If you truly believe the 90402 will at most correct 10%, then go buy something right now.