Friday, July 21, 2006

L.A. Times: soft landing not so soft; rent increases; the area code plot to kill the bubble

Housing market stories are piling on fast and furious at the L.A. Times. A July 20 story by Annette Haddad reports that rent increases in California are outpacing much of the west. A July 21 story by David Streitfeld reports that Leslie Appleton-Young, the so-called housing "expert" at the California Association of Realtors, no longer wants to use the term "soft landing" to describe what's going in this market. And finally, a somewhat humorous op-ed piece on July 21 hypothesizes that while the Federal Reserve couldn't kill the Los Angeles area housing bubble with its rate hikes, the area-code plot to kill the Los Angeles bubble will succeed.

Let's talk about rent increases first. Due to low housing affordability, the demand for rentals is increasing, according to the article. Indeed, in the last two quarters rents rose at their fastest rate in five years in Los Angeles and Orange County. According to housing analysts, landlords are "brazenly" raising rents and taking advantage of the current market dynamics. What's downright laughable is that that one married couple mentioned in the article, faced with a 14% rent increase (not the 20% the article claimed), decided to buy a house!

According to a survey of apartments of 100 or more units, San Jose got slammed the hardest, with an average rent hike of over 9%. Ventura saw a hike of 7.3%, Inland Empire saw a hike of 5.7%, the Los Angeles-Orange County area saw an average hike of 6.8%. Analysts don't see the trend changing.

I don't think we have enough information yet to know if we are going to experience a similar prolonged multi-year inflation in rents yet as we've seen with housing prices. The Los Angeles Business Journal recently carried a front page headline about the net exodus of high wage jobs leaving the state and the area. Personally, I think there are market pressures to keep rent prices in check. It'll be interesting to watch in any case, as time ticks on.

In the second story, it sounds like the chief economist at CAR is starting to nibble on a little crow. Personally, I think that Leslie Appleton-Young is Irving Fisher reincarnated. He was the economist who said that "stocks have reached a permanently high plateau" just days before the October 1929 stock market crash. Now Leslie Appleton-Young is admitting that her use of the term "soft landing" has given the impression that housing prices have reached a permanently high plateau, when they are showing some signs of crumbling. (And by the way, she stated publicly that she is looking for a new term to use!) In the meantime, the bubble in real estate agents is reaching new highs. Are we going to see people standing on street corners wearing signs that say "Will sell houses for food" soon? If there are homesellers out there who have been relying on real estate economists to tell them the truth about the property markets, you have my condolences. Your financial health is put in great jeopardy when you rely on such people's forecasts, because in spite of all their forecasting they simply don't have the tools to anticipate trend changes. You need to be warned in advance of all the factors that could propel a market into a reversal, not after the fact.

This article reminded me of what one purpose of a central bank (our Federal Reserve) is: to maintain orderly markets, not to prop up asset values. Fed Chairman Bernanke has been quoted as saying that "so far" housing market changes appear orderly. I dunno but I guess when you are losing your shirt in an orderly market, you at least retain some dignity and financial credibility unlike when you lose your shirt in a chaotic market.

On to the op-ed piece. On August 26, the 424 area code will be introduced. According to the California Public Utility Commission website, 310 will be retained for the northern portion of the current 310 area code, including the majority of Inglewood, and all of Culver City, Marina Del Rey, Mar Vista, Santa Monica, Beverly Hills, West Los Angeles, Malibu and a small portion of the City of Hawthorne and Ventura County. The southern portion of the current 310 area code, including El Segundo, Hawthorne, Compton, Redondo, Torrance, Lomita, and San Pedro shall be split off to form a new 424 area code. The op-ed piece talks about the "trendiness" of the area that will comprise the new 310, arguing that people won't pay 310 prices to live in the 424 area. Remember, this is satire!


Blogger bearmaster said...

Gee, on rereading the article that mentions Leslie Appleton-Young, I have come to believe that I have misinterpreted her frame of mind. She said "soft landing" was the incorrect term to use, and here I was thinking, oh she sees the Sacramento and San Diego markets unraveling at the seams, so she's looking for a term like "bumpy landing".

WRONG! In looking at other articles, I think she believes that our California real estate markets are just reverting back to normal. In other words, she isn't eating crow yet. ARRGGH!

12:08 PM, July 24, 2006  

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