Different this time?

So what's ahead for Westside prices? We know the arguments for the housing bubble, see the bears were right in general, and prices are falling in many places. We know prices fell in Santa Monica some 25% in the 1990s.

But there is the nagging question: Westside prices so far have only plateaued, listings are limited, foreclosures are rare, we don't see seller distress. Is a fall just a matter of time now, or is something different here, this time?

I'd like to summarize and revisit two good arguments for why prices won't fall from the comments on the "LA Times lead" Oct. 17 post. But first I'll divide Westside buyers into two types:

1. The money-is-no-object wealthy can write a check if they really like something. They choose between 90402, Pacific Palisades, Brentwood, Malibu, Bel Air, Beverly Hills, Manhattan Beach, Palos Verdes, etc. Some move from one house north of Montana to a bigger one a few blocks away. There aren't very many of them, though, else why so many unsold multi-million-dollar houses? And I expect them to be impacted by a stock market fall.

2. High-income professionals who still need a jumbo loan and must sell their existing house to move up. Maybe they can afford low-end north of Montana, but more likely they're shopping Sunset Park or Ocean Park if in Santa Monica. They're already unwilling or unable to buy many listings at current prices, and will be impacted by a faltering economy (overdue for a recession from housing falling and less consumer ability to spend), tighter credit, and falling demand for the houses they're selling.

As Newbie (10/28) commented, "The realtor - happily - told me that more than 75 percent of the homes she was selling were being purchased with no money down, IO or similar." These move-up buyers must be impacted on one or both sides by tighter credit. Now on to Rosebud (10/18-19) and Anonymous (10/20).

Rosebud:

So how does it happen? What's going to make more people need to leave? How many homeowners in SM would be subject to the risky loans of the past few years if sales volume is so low?

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

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

SM has seen an 8% population increase since 2000, an unemployment rate go from 7.4% to 4.2%, and aggregate business receipts go from $7.7B in '02 to over $9B in '05 (they're even higher now, though not reported). The office vacancy rate has gone from over 12% in '01 to under 7% in '06. SM's schools' API's are now through the roof, with the 2 Northern SM elementary schools some of the best in the state.

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

Anonymous:

that said, no matter what i see in this and warchestsm's blog, i can't see how that is going to happen. sm just isn't part of the same calculation as the rest of los angeles county. santa monica is ... a prestige community with some of the best public schools in the country ....

there are other, less tangible, incentives, like always driving against the flow of traffic ... better comminity support institutions, ... a community forest program with a ambitious vision for a green city, solar conversion support, and so on... this is just a better place to live.

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

I'd summarize that Santa Monica is becoming more upscale, led by 90402, driven by job growth and quality of life, while housing supply is constrained. But wasn't that largely true two decades ago? Roosevelt and Franklin were top-ranked elementary schools then, especially compared with LAUSD across the city line. To pay $300K for a tear-down north of Montana in the mid-1980s was absurdly expensive, but supply was tight.

True, traffic is worse now, houses are grander, and SM is more upscale. I'm not expecting a lot of existing owners to sell in distress, but there appear solid reasons demand (as in ability to spend) will fall for move-up buyers. Prices overreached and fell back 25% in the 1990s, and this time their run has been longer and higher. (Rebuttals welcome!)

Case-Shiller update

Here's the latest S&P/Case-Shiller monthly index for Los Angeles, and their original ten-city composite, just released for August. (I also updated Saturday's "SM vs. Case-Shiller, revisited" post with it.)

Los Angeles is now down 5.8% from the peak in September 2006 - another 1% from July. The national index is down 5.3% from its peak in June 2006 - another .7% from July. In contrast, Los Angeles fell 27% from the last peak in June 1990 to the low in March 1996.

For more and bigger Case-Shiller graphs see Paper Economy.

1980s specs

The big push up in "lot value" prices north of Montana in the latter 1980s was from spec builders. Paul Zahler was especially well known for these. Their new houses sold for $1.5-1.7M, for 2 stories, ~4,000 SF, but not the opulence of new houses of the last decade. Ballpark price of these houses from the 1980s now would be over $3M, as opposed to $4-5M for current new houses.

A good example, and one of the last of that cycle, is 330 10th. It's tear-down sold in 8/88 for $785K. The new house (photo), is 4,558 SF, 4 bed / 5 bath, sold 8/90 for $1,572K as the market had already turned down.

It all came to a halt in the 1990s. Jeff Mandel, developer of 330 10th, was too leveraged at the wrong time and reportedly went broke. With no new-construction demand, prices of tear-downs fell 25%, and didn't recover for a decade.

Nothing sold - the sequel

Back on September 24 it was a big deal: No houses sold that weekend in Santa Monica ... or <$2M in Pacific Palisades ... or in Palms-Mar Vista. None. It just happened again this weekend (yawn). Along with a few price reductions, a house back on the market, and new attempted flip.

"Beautiful white iron gate"

For some cheap entertainment while I contemplate the BIG question of whither Westside property values, here's something that really belongs in Dr. Housing Bubble's "Real Homes of Genius." From Panorama City, a 2 bed / 2 bath house at 15213 Lorne St., asking $510K (reduced from $535K), its flier states:

"Beautiful home with a beautiful white iron gate, paved driveway [!] with R.V. access. The home is neat as a pin, with copper plumbing, a large bright living room, a lovely updated kitchen with a large breakfast area above a spacious family room with brick backed wood stove, fabulous entertainer's bar, and space for a home office. Shows like a model home. There is a 2 car attached garage [not what I see]. The yard features a covered patio with Italian tiles and lots of room for entertaining!!!"

As they say, beauty is in the eye of the beholder. This can be yours if you're willing to leave the Westside! It's a quiet street ... except for the railroad tracks three blocks south. Or there are a number of other houses in the vicinity asking in the $400s.

SM vs. Case-Shiller, revisited

Remember last month I tried fitting the LA Case-Shiller index to low-end north-of-Montana prices, specifically 9th, 10th, 12th, and Euclid? (As I noted before, I scaled the Case-Shiller curve to fit the north-of-Montana data, which doesn't matter in terms of percentage changes. Updated with for August, released 10/30.)

I found more sales data from 1989-92 (the last peak) and 2002-4, which I've added to refine a new graph (above). There were lower prices than my recollection of the last peak being over $900K. The lowest recorded prices appear to be:

$295K - 550 10th - 3/85?
$316K - 527 Euclid - 12/85
$450K - 545 12th - 11/86
$470K - 347 12th - 9/87
$605K - 348 12th - 1/88
$725K - 615 Euclid - 7/88
$712K - 560 9th - 8/89
$725K - 323 10th - 2/90 - Up ~150% from 1985
$735K - 326 9th - 11/90
$690K - 628 12th - 2/91
$600K - 438 12th - 11/92
$541K - 627 Euclid - 5/96 - Down ~25% from 2000

There appears a divergence this year, where north-of-Montana tear-down prices took one more jump up. Although $2,050K for 307 Euclid in 6/07 is pretty consistent (up ~275% from 1996), as is the apparent sale last week of tear-down 704 15th, last listing price $1,990K (not on graph).

I tried this again (graph above) with Sunset Park, specifically Hill and Ashland east of 11th. (Also see recent Hill St. sales from last April.)

This one's harder, perhaps because Sunset Park has less clear "tear-down" activity than north of Montana. In the last year there were two really low-end sales (the low points on the graph), $896K for 1408 Hill in 2/07, now demolished, and $928K for 1616 Hill, now rehabbed, but the rest were a step up in price and livability.

Weekly inventory update

10/26 - SM inventory <$3M is down 5% and PP <$2M is down 4%, due to few new listings, but MV is up another 3%. "Freeway Close" dropped its price another $60K.

10/19 - SM inventory <$3M is down 4%, PP <$2M is down 13%, but MV is up 9%. No longer listed include 611 14th ($2.049M), 2158 La Mesa ($5.5M), and 1020 Palisades Beach Road ($10.55M) in SM, and 3653 Mountain View ($3.395M) in MV.

10/12 - SM inventory <$3M is up 5% for the week, PP <$2M is up 11% and MV is up 2%, with more price reductions. (Corrected - thanks, Dan; pesky Excel formula didn't survive inserting columns.)

10/5 - SM inventory <$3M is up 10% for the week, and the highest this year; PP <$2M is up 4%; MV is down 1%.

       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
 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          59  17  74 103  26   9  90  81  87  20  87
10/ 5/07  58,973  65   8  81  98  27   2  95  85  86   6  87
10/12/07  58,918  69  13  85 102  30   5 103  64  88  13  87
10/19/07  59,029  66  16  81 105  26   6  96  70  96  21  87
10/26/07          63  18  80 105  25   6  97  76 100  29  87
11/ 2/07