Monday, August 13, 2007

L.A. Business Journal: Median price bounces back as mortgage crisis widens

Optimism still abounds in the reporting of our regional real estate. According to an L.A. Business Journal article by Rebecca Crowe in the August 13 edition, and Home Data, the same firm from which MelissaData gets its numbers, the median price for a SFR in Los Angeles County is back up to $585,000 in July, up 6.4% YOY, despite a -11.2% change in sales volume YOY, and after temporarily slumping in June by $10,000. And the median price for a condo has hit an alltime high of $450,000, up 7.1% YOY, with sales volume up YOY by 9.3%

Notably, the "desirable seashore and hillside communities continued to defy trends," according to the article. Sales of very high-end homes "continued to be brisk, propping up the median." One regional expert quoted in the article notes that the rate on a jumbo variable rate loan over $500,000 jumped from 6% to at least 8% at some lenders early in August, and that "jumbos are going to be hard to come by because they're now harder to sell on the secondary market." A Re/Max professional notes that "lenders are increasingly inflexible on loan terms" and are "unwilling to extend the interest rate lock on a mortgage" should an escrow fail to close by a deadline - thus leading many potiential sales to fall out of escrow. The same professional notes that homesellers in the lower price and mid price ranges are increasingly competing with a growing list of foreclosures. According to the MLS, 50% of all REO homes are listed under $500,000, and 95% are under $750,000.

These pros have been good at supplying us with numbers, but I disagree with their conclusion that inventories will start declining as frustrated sellers pull their homes off the market, thus allowing foreclosure and bank-owned inventory to "work itself out of the market," leading to some market improvement after Q1 2008. The pros were saying something like this over a year ago, that things would get better as sellers on fishing expeditions pulled their homes off the market. Well, market conditions have deteriorated if anything, not gotten better, despite the purported median price gains.

I consider the reporting of these numbers a gross abuse and misuse of statistics. Indeed, the entire article is a gross misuse of statistics. But we don't have much else to go on right now. Here are the beach cities numbers. Prices are MEDIAN prices.

-------------------- SFR ---------------------
COMMUNITY        ZIP    July    %YOY       July      %YOY
                        Sales   Change     Price     Change
El Segundo      90245     6     -40.0%  $1,270,000    42.2%
Hermosa Beach   90254    25     108.3%  $1,400,000    21.5%
Manhattan Beach 90266    28     -26.3%  $1,812,000    25.0%
Redondo Beach   90277    16     100.0%  $1,077,000    -4.9%
Redondo Beach   90278    22      -4.3%    $732,000   -11.3%

------------------- CONDO --------------------
COMMUNITY       ZIP     July    %YOY       July      %YOY
                        Sales   Change     Price     Change
El Segundo      90245     4    -42.9%     $541,000   -30.9%
Hermosa Beach   90254     2    -50.0%   $1,050,000   110.0%
Manhattan Beach 90266     3     50.0%     $870,000    -4.2%
Redondo Beach   90277    25      8.7%     $810,000    14.2%
Redondo Beach   90278    25      8.7%     $810,000     5.3%

The most expensive SFRs in Los Angeles County are in Santa Monica 90402 (median SF+39% YOY); Beverly Hills 90210 (-6.3%); Malibu 90265 (-15.5%); Pacific Palisades 90272 (+45.7%); Manhattan Beach 90266 (+25.0%); Brentwood 90049 (+3.2%); Beverly Hills 90211 (+9.1%); West Hollywood 90069 (+29.3%); and Palos Verdes Estates 90274 (+1.4%). The most expensive condos are in Beverly Hills 90212 (+24.2%); Century City 90067 (no sales 07/06, so no YOY comparison); Handcock Park 90004 (+229.4%); Redondo Beach 90278 (+5.3%) and 90277 (+14.2%); Brentwood 90049 (+40.3%); Pasadena 91105 (+24.8%); Santa Monica 90403 (+18.3%); Marina del Rey 90292 (-2.6%).

The places of greatest SFR median price erosion, according to this article, are Glendale 91207 (-32.0%); West Los Angeles 90025 (-26.8%); San Pedro 90732 (-25.5%); Bel-Air 90077 (-25.2%); Rowland Heights 91748 (-23.4%); Canoga Park 91304 (-21.1%); Mid-Wilshire 90036 (-17.3%); Santa Clarita 91390 (-16.9%); and San Gabriel 91776 (-16.7%). For condo prices the places are: Torrance 90504 (-42.7%); Phillips Ranch 91766 (-41.4%); West Hollywood 90048 (-33.8%); El Segundo 90245 (-30.9%); North Hollywood 91602 (-29.9%); Agoura Hills 91301 (-29.4%); Pasadena 91107 (-26.1%); Inglewood 90301 (-25.6%); Calabasas 91302 (-24.6%); and La Crescenta 91214 (-23.4%).

In theory, the places that were supposed to be hardest hit by the subprime implosion are the lower income areas, e.g., around South Central and Carson, such as zip codes 90037, 90044, 90745. And the areas that are supposed to be "immune" to the fray are very high-end areas. But if you look at those lists of the places that are enjoying the greatest price appreciation and the most price erosion, it's not so straightforward. Why is West Los Angeles, a relatively tony area, experiencing price erosion, while neigboring Rancho Park 90064, a comparable area, experienced a 328.6% increase in sales volume YOY and a 26.2% median price increase for SFRs?

The data in the article, as presented, does not bolster that assumption. The assumption is probably true, but this monthly snapshot does not prove that damage has been inflicted by credit tightening. When you look at an area like Baldwin Hills 90008, and observe that there was 1 condo sale in July 2006 and that there were 0 condo sales in July 2007, then you cannot make any conclusion about condo price trends in that area for 90008. This is the problem with breaking out data into such small pieces. It is not statistically valid to say that median condo prices in Hermosa Beach increased 110% YOY on the basis of 4 sales in July 2006 and 2 sales in July 2007.

This is one of the reasons why, in my opinion, that housing bubbles take so long to correct. This type of reporting is very misleading.

At least with the stock market, you can get an almost instant opinion on the value of a stock because stocks are so frequently traded. It is very rare that stocks are floated out there, and they have no bids, and if that were the case, the Fed would probably take measures to make sure the markets stay "orderly". (It happened during the 1929 crash, and the bankers pool went in and made bids on stocks to shore up the market temporarily.)

But in the housing market we don't have a way of valuing homes with "no bids", because most homes at any given point in time have no potential buyers. The snapshot we see each month of homes sold represents just a tiny fraction of all the homes in the same area, and the monthly report tells us nothing about the value of all those homes not for sale or that are for sale and haven't sold. So how does a homeowner determine the value of his house when there isn't somebody bidding for it (other than going on a fishing expedition and putting his home on the market to hopefully attract a bid). This opaque pricing isn't usually a problem - until a homeowner wants to sell in a weak market.


Blogger bearmaster said...

As of August 14, August sales started out strong in Redondo Beach, weak in Manhatan Beach and Hermosa Beach, and non-existent in El Segundo, when compared to August 2006.

I wonder if the strength in Redondo could be due to buyers rushing in to buy before they get shut out of mortgage opportunities.

8:52 AM, August 14, 2007  
Blogger redondo_beach_dude said...

Maybe, I can't quite figure this out. Can the beach cities be immune to the rest of LA caving in? That's the argument I'm hearing at the parties, etc. I persist in the steadfast belief that ManHerRed may climb a bit higher, but will then have that much further to fall. How can the foundation crumble and the penthouse stand?!?

10:39 AM, August 14, 2007  
Blogger bearmaster said...

RB Dude, not to worry, the high end markets are not immune to a prolonged downturn.

They were saying that at parties in 1990 too, and a sizeable number of homeowners subsequently got financially killed when their fortunes turned, they couldn't keep up the lifestyle payments, and they HAD to sell. Nothing new under the sun.

FWIW, it looks as if the "cheaper" part of Redondo, i.e., North Redondo, is what is really zooming at this moment. Maybe that's where people are rushing in to buy something "affordable" (yeah right) before the financing opportunities evaporate.

Right now I guesstimate 59 sales for 90278 for August. South Redondo will be flat to slightly up for August if the current sales rate continues. I guesstimate 45 sales for 90277.

The other beach cities started off August rather weak.

11:01 AM, August 14, 2007  
Blogger bearmaster said...

I'll add that as of 8/13 new inventory is coming on in the MLS at a rate of about 3 properties a day. If this rate continues, then the August would see a theoretical 93 newly listed properties versus a theoretical total of 104 sales.

We'll see what happens. If a financing window has indeed shut, things could potentially turn on a dime.

4:24 PM, August 14, 2007  
Blogger stealthcat said...

Ultimately, the financing *has* to be what shuts this down. The bottom of the price scale for a 2-3 bedroom condo for the beach cities is $625k+. Assuming a fictitious 10% down (we're talking bottom-end houses, so how many first-time buyers have even $60k+ sitting around in cash?), it works out to something like this, for a loan that actually gets paid off...:

$3,600 PI (30 year fixed)
$650 tax
$200 HOA

So we're talking close to $4500/mo required for an "entry-level" home for a husband+wife or small family. I *have* to think that very few who "bought" in the past several years is dishing out that kind of money.

The *only* reason we have these kind of prices is that people could get all kinds of wacky financing with 0%-down, 4% I/O teaser rates, etc. My gut guess is that the typical (temporary) monthly payment is more like half of the figure above ($2200-$2500/mo).

As this financing dries up, who will buy the entry level homes?

8:38 PM, August 14, 2007  
Blogger bearmaster said...

As of 8/17, my guesstimate for August Redondo sales is revised down to 94 sales, with slowing coming mostly from south Redondo.

3:22 PM, August 17, 2007  

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