L.A. Times: Home Price Appreciation Slackens

There are are some interesting statistics to note in this September 20, 2006 L.A. Times story by Annette Haddad The rate at which Southland home price appreciation is flaming out is just as fast as the rate at which appreciation flamed out in 1989-1990. At that time, YOY price appreciation went from double-digits to zero in just eight months.

In May 2004, Southland home price appreciation (that includes condos as well as SFRs) hit a peak of 27%. In March 2006, the rate of appreciation was 10.7%, still double digit. In August, the rate of appreciation was 2.7%, the lowest level since July 1999, which was over seven years ago. The last time all six Southland counties posted single-digit increases was December 1999, almost seven years ago.

If history were to repeat itself exactly, then we'll hit 0% appreciation in November or thereabouts, which starts in just six weeks. And we aren't really even talking about median price declines yet, we're just talking about going from double-digit to 0% YOY appreciation.

And still, the "experts" and "analysts" do not want to consider the possibility of severe price declines. They certainly haven't held back in the past on forecasting continued appreciation but I guess when it comes to loss of home values, forecasting is forbidden - seeing is believing. Experts see a "leveling off" of values, or "even a decline in prices", as if the potential for values to decline were still extremely improbable at this point. No, the market will "flatten out." It will "come back into balance."

So even though appreciation is flaming out at the same rate as it did in 1989-1990, to quote Haddad, "few experts predict that Southland home prices will retrench at the rate they did during the last downturn, when prices fell 17% between 1990 and 1996, according to DataQuick." (Remember - that 17% number is an umbrella value for the entire six-county Southland region. Your particular area may have flamed out a lot more or a lot less.)

The experts like to point out the job losses and recessions that led to the 1990's downturn. They say that history does not offer any data about the situation we are in now, with a recession "nowhere in sight."

OK, I will offer my interpretation. The recovery from the 2001 recession was fueled by lower interest rates and ridiculously easy lending standards which was like handing the U.S. population a giant credit card by which we could hyperinflate home values and spend until we're dead. We have a negative savings rate (even by fiddled and tweaked government revisions) and record levels of debt. We've had an inverted yield curve for the better part of a year, an indicator which has had a good historical record signalling slowdowns ahead, but which the Federal Reserve calls a "conundrum", caused by a "global savings glut". Is this unprecedented in history?!? YOU BET.

Gosh darn, these economists are thinking, if only the rest of the world created a consumption bubble like ours, we wouldn't have this savings glut, then everything would be normal again. Then we could take our fingers out of our ears and stop singing "LA LA LA WE CAN'T HEAR YOU!!!"

I will be the first to admit that the stock market, which is now testing its May 2006 highs, does not appear to be anticipating a recession. But because of the massive amounts of credit sloshing around in our capital markets, we may well be in a situation where such an incredible distortion of values has occurred that some of our tried and true leading indicators are broken. We are flying an airplane with badly calibrated instruments. There could be something worse lying ahead than a recession.

It's kind of like dog training. When a dog growls, thank him. He's giving you fair warning. When you keep punishing the dog for growling, he'll stop growling. And then go directly to the bite.