L.A. Times Opinion: Bring on the Housing Slump

Opinion writer Joel Kotkin in this January 28th piece has stated some of the impossible-to-ignore problems about the Los Angeles housing market that have been mentioned here over the past year.

Kotkin correctly mentions how real estate developers, speculators, and homeowners have "gorged" on the big runup in property prices over the last five years and how middle-class families are moving out, though he has completely neglected to mention how local politicians have aided and abetted the orgy, always taking advantage of opportunities to collect more and more property taxes. There have been many land-grab cases here in the Los Angeles area too, for "economic development." Politicians have been putting the goose that laid the golden egg on growth hormones and have jeopardized the health of the goose.

I do not necessarily subscribe to Kotkin's "gradual deflation" theory. If and when critical points of stress are reached, I still believe an economy, or market, can unravel rather quickly after it has been bumbling along for a while. After all, a market can bumble along in the other direction, and then hyper-boom very quickly, as we have witnessed. At this stage, few writers still want to voice the possibility that pain in the other direction can be brutal, sudden, sharp, and severe.

Kotkin sees a building trend shifting back to the middle-income buyer. That can be good or bad. He sees the McMansionation trend fading out. But Kotkin also says a builder who offers a "good product" at "$400,000" "will sell it." To some extent that is true. But excuse me, $400,000 still is very budget-stretching. That's still not affordable to many. It might as well be $1,000,000. And what will the product be? High density tenement style housing in a city masquerading as a beach city built by a company who doesn't even bother to mention the city's name in one of its brochures?

Kotkin says a "severe price correction" would be helpful in reviving L.A.'s inner city, but at the top of the article he says the real estate bubble will deflate gradually than burst. I'd like to know what criterion he uses to rate a gradual deflation rather than a bust. Will it be some measure of median price change per year? It is my own belief that the psychological devastation will accumulate regardless of what he calls it, and when it hits a certain point, it will feel to market participants like a severe blow regardless of whether prices initially declined by 0.2% a year or by 20% a year. Whether you die from gunshot wounds or from a million paper cuts, you're still dead.

Kotkin shrugs off the ramifications of a decline, saying "who cares, besides BMW dealers and McMansion builders?" Oh, how about the lady who got laid off from the fire alarm company she worked for because her company was having trouble with receivables from local builders. Or, how about the local restaurant who rents out its big dining room for wedding receptions, only that business has fizzled because people are no longer taking out big home equity loans to splurge for fancy weddings for their daughters? Or how about furniture companies? Or automotive companies that sell trucks to contractors? I am not making these examples up, these are situations that have all appeared in credible print within the past year. It's not just higher-end wage earners who may have been living vastly beyond their means, it's a lot of people at lower economic tiers too. I think Kotkin underestimates the economic ripple effect of a potential bust.

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By the way, I think we are entering a dangerous turn in the local market here. Because we have seen such high asking prices within the past few years, we have those levels set as "anchor points" in our brains. In the properties I'm watching in Redondo Beach, there are plenty of substantial price reductions, so these properties now seem like "great deals." It is my own opinion that they are not great deals - not when you consider the overall price history of the area. There is plenty of buy-the-dip activity going on - the market is not dead. The Sirens are luring Ulysses into the housing market. But the inventory buildup has not gone away.

Dollar volume charts will probably get published next weekend.