Los Angeles Business Journal: Stabilizing Home Prices Fuel Hope of Soft Landing - "People don't give up on their house-price dream"

Los Angeles County and South Bay bubble watchers shouldn't miss this October 9, 2006 story by Daniel Miller in the Los Angeles Business Journal (registration and/or subscription required).

Soft landing hopes are in the air because even though the number of existing homes sold in L.A. county dropped 30% in September YOY, and the median price is the same as the previous two months, the price is still up 4.2% YOY. The median price has been "stuck" at or near $550,000 for six straight months. According to the article, talk about a bubble bursting and prices dropping has gotten quieter for now. (Gee, somebody forgot to tell me to pipe down!)

Economists at the USC Lusk Center for Real Estate claim, "The indicators we are seeing are consistent with a soft landing. The market is stabilizing to some degree. But we need more time." Other observers point out that the economy is regionally strong, and unemployment is low. Because of the soft sales and flattened prices some argue it "feels" like a downturn, and it "looks like" doom and gloom when you come off the extreme sellers market that we've had.

According to CAR, DOM for homes in L.A. County in August was a median 51.9 days, compared to 29.2 days August 2005. The inventory buildup in August was 6.8 months, compared to 2.6 months August 2005. According to Leslie Appleton-Young, a six month supply creates a "balanced" market. And, According to Appleton-Young, since 1988, the average unsold inventory level is 6.9 months.

Steve White of the Southland Regional Association of Realtors says that 2005 was "complete insanity" so it was difficult to use as a benchmark, but for that matter so are "2004 or 2003... those years were so far away from normal."

Nor does UC Berkeley see a regional recession for Los Angeles in the cards, though a professor there does not think it is clear the market has found its level.

And what are buyers doing? They are waiting because they "want to feel they are getting a good value." Because people are so unwilling to give up their house price dreams, high-end home sales are being impacted. The same analyst explained, "I feel that a lot of people wanted things to pick up after Labor Day but when we see things close, sale prices aren't close to the asking or over the asking prices as they used to be."

Still another analyst explained that in the summer, families relocate and prepare for the school year, generally making summer a strong time. There is normally a seasonal reduction from August to December.

But the analysts remain upbeat. "There is nothing in the Southern California economy that will portend doom", said one.

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There are a number of points I'd like to make in relation to this article:

1. Buyers want to feel like they are getting a good value. But the notion of what constitutes good value can change practically overnight. The great deal this year can look like a disaster next year, if current underlying trends continue.

2. Gee, was Steve White complaining in 2003, 2004, and 2005 that the market was abnormal and that it would eventually correct, or was he claiming the markets would continue seeing "healthy appreciation" like so many realtors have?

3. Gee, I wish these economists would explain the last time we had a soft landing and what their indicators looked like then.

4. One thing I've been trying to do in this blog is look for leading indicators. Although the moving averages I take of real estate transaction dollar volume is a lagging indicator of that volume, I am operating on the theory that it will be a leading indicator of prices, since we have been seeing the real estate industry impacted. A September 22 L.A. Times story by E. Scott Reckard and Annette Haddad called Waning Sales Take Further Toll on the Industry (which I did not blog) illustrates this point. Many of the YOY moving average charts are well below 0%. So even if the the moving average charts were to level off at this point, that would mean that dollar volume is declining at a steady rate. That's definitely not good for the people in the industry. I've also been looking at moving averages of DOM and I-S/S to see if they serve as leading indicators of price action. Although they appear to corroborate the dollar volume charts, unfortunately the data does not go back far enough to the time of a "normal" market to see what these numbers might have looked like at that time. So if the market were to magically "recover" at this point in time, I would not know what to look for on these charts.

5. According to the moving averages I've been taking of the median existing SFR sale prices in the beach cities, the rate of price appreciation is slowing, meaning that the trendline is sloping downward, towards 0%. For a few beach cities, the trend is already below 0%. SFRs tend to be higher end than condos. If we manage to kick this credit bubble can down the road a few more years, I think we could see the bubble shift toward the lower end, as I wondered about in another post.

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Stablizing Home Prices Fuel Hope Of Soft Landing
By DANIEL MILLER - 10/9/2006
Los Angeles Business Journal Staff

The expected drop in Los Angeles County home prices didn’t happen again in September,
leading some observers to wonder if the housing market may experience a soft landing.

According to data released to the Business Journal, the number of existing homes sold
in Los Angeles County in September dropped 30 percent – about the same as the 
previous month. But the median price of homes sold was $550,000 – exactly the same as 
the previous two months. What’s more, the price is up 4.2 percent from the same month 
last year.

When the number of home sales started dropping almost a year ago, many observers 
expected prices to head south eventually. However, the median price has been stuck at 
or near the $550,000 level for six straight months.

The result: the talk of price swoons and the housing “bubble” bursting has gotten 
quieter – at least for now.

“The indicators we are seeing are consistent with a soft landing,” said Delores 
Conway, director of the Casden Real Estate Economics Forecast at the USC Lusk Center 
for Real Estate. “The market is stabilizing to some degree. But we still need more 
time.”

Indeed, no one has a crystal ball, and prices may well drop, especially if 
predictions that lenders seeking to cash in on the real estate boom issued no doc 
loans – requiring minimal verification of income and assets – to overextended buyers 
are true.

That could lead to a rush of foreclosures as the interest rates on the loans adjust 
upward after their initial introductory period, when their rock bottom interest rates 
expire. A recession would certainly push prices well down.

However, several observers pointed out that the regionally strong economy and 
historically low unemployment don’t appear to set up the Los Angeles area for a steep 
price plunge.

In fact, so far this year the median home price in the county has risen from $519,000 
in January, according to data provided to the Business Journal by HomeData Corp., a 
Melville, N.Y. company that tracks housing prices nationwide. Still, the soft sales 
and flattened prices feel like a downturn, compared to the torrid sales of recent 
years.

“When you come off of an extreme sellers market it looks like doom and gloom,” said 
Steve White, president of the Southland Regional Association of Realtors. “And the 
fact that the year-to-year median price has increased moderately would show you we 
are in a relatively strong market.”

Homes Sitting

To be sure, even though median prices have not gone down yet, sales are definitely 
slower.

Cory Weiss, a broker in Prudential Real Estate’s Beverly Hills office, said homes 
that are realistically priced are selling, albeit at a slower pace.

“Buyers are being cautious. They are taking their time. Deals are taking longer as 
far as negotiation,” said Weiss, who has clients in Beverly Hills, Brentwood and the 
Palisades area.

Weiss’ experience is in line with data released by the California Association of 
Realtors.

The California Association of Realtors estimates that as of August, homes in Los 
Angeles County were staying on the market a median 51.9 days, compared to 29.2 days a 
year ago. That translates into a build up of county inventory levels to 6.8 months in 
August, compared to 2.6 months a year earlier. That means at the current pace of 
sales, it would take 6.8 months to sell everything that’s on the market now.

“Where homes were moving in a week with multiple offers, it seems to be between 30 
and 60 days or perhaps longer now,” said Fran Butler, president-elect of the 
California Escrow Association.

According to Leslie Appleton-Young, chief economist with CAR, a six-month supply of 
homes creates a balanced market for buyers and sellers.

Appleton-Young said that since 1988, the average unsold inventory level for homes in 
the county is 6.9 months.

White said that the current county home market is balanced, though it is hard to 
recognize that after the price gains the region experienced from 2003 to 2005.

“Last year was just complete insanity in many ways, so it was difficult to use 2005 
as a benchmark or 2004 or 2003 for that matter,” White said. “Those years were so far 
away from normal.”

Bob Edelstein, professor of business administration at the University of California 
Berkeley Haas School of Business, said that while it is not clear whether the market 
has “found its level” he does not anticipate a regional recession, which would 
severely impact the housing market.

“The business sector is fairly healthy,” Conway said. “If that changes we could see 
more of a bumpy landing.”

Buyers Taking Time

Weiss said that in the high-end market, properties do still sometimes receive 
multiple offers from prospective buyers, though buyers are no longer consistently 
making offers at or above asking prices.

He said that homes that have sat on the market are “seeing reductions in price as 
buyers are being more particular.”

In the Santa Monica 90405 ZIP code, September sales dropped 32 percent to 13 homes 
sold, with the median price down 12 percent to $1.1 million. In the Brentwood 90049 
ZIP code, September sales dropped 55 percent to 10 homes sold, with the median price 
down 14 percent to $1.4 million.

“I still have a ton of active buyers in the upper-end market but they are holding out 
and want to feel like they are getting a good value,” Weiss said.

Edelstein said that countywide slowdown is part of a typical correction before the 
market turns around.

“People don’t give up on their house-price dream, but the idea that there are fewer 
sales means that less people are getting their dreams,” said Edelstein, co-chair of 
the Fisher Center for Real Estate and Urban Economics at UC Berkeley.

As the market continues to correct, there are fewer high-end homes selling. In 
September, 610 $1 million-plus homes were sold, down from 899 $1 million-plus homes 
sold in August.

Also, there were just 31 $1 million-plus ZIP codes in September, down from 38 such 
ZIP codes in August.

“I feel that a lot of people wanted things to pick up after Labor Day but when we see 
things close, sale prices aren’t as close to the asking or over the asking prices as 
they used to be,” Weiss said.

The county condo market also experienced a 30 percent decline in sales volume to 
1,463 condos sold. The median condo price in the county rose 0.5 percent from a year 
ago to $410,000.

Conway said that seasonal factors will likely lead to a further decrease in the 
number of transactions during the late fall and winter months. This sort of seasonal 
reduction in volume is an annual occurrence for the housing market.

Conway said that in the summer months, families relocate and prepare for the school 
year, generally making that period a strong time for the market.

“Typically we have a decline from August to December,” Appleton-Young said. “I would 
expect that pattern to hold.”

Despite this expected decline, many real estate professionals said the market appears 
to be functioning normally. “There is nothing in the Southern California economy that 
will portend doom,” White said.