Tuesday, November 27, 2007

L.A. Times: How low will housing market go?

This November 27 story by Peter Y. Hong, and the related story "How low will they go?" are encouraging because the opinion in these stories has shifted dramatically to expecting further price erosion, and not some happy talk of a recovery. And if you want a chance to vote your guesstimate on how low prices will go, follow the link and get your chance!

So, how far will we limbo rock? How low will we go? And for how long? Sticking one's neck out with a market forecast is not something many academic market watchers are willing to do at this point, but a few souls have ventured opinions:

Starting with the biggest bear of the bunch, Christopher Thornburg of Beacon Economics, he estimates a 25% decline, and all areas will be affected. Take heed of his advice: "If you sit around and pretend you will be immune from the downfall, you're fooling yourself."

Edward E. Leamer of UCLA Anderson School of Business estimates a 20-25% drop, bottoming 2009-2010 timeframe.

Michael Carney at Cal Poly Pomona estimates a minimum 15% drop, bottoming at the end of 2009. He doesn't rule out a turnaround but he just doesn't see that happening now, citing buyers' reticence.

There were a few forecasts in a "it's neighborhood-specific" or "it's house-specific" style of argument.

Kenneth Rosen at UC Berkeley estimates an 8-15% decline, bottoming in mid-2009, and he thinks the affluent areas of Orange and Los Angeles counties will hold up well relative to other areas. He points out that each location is different and each house is different, and feels a very strong neighborhood might not see any decline.

Dolores Conway at Casden Real Estate Economics Forecast at USC estimates a 5-10% in tight areas of Orange and Los Angeles counties, 5-15% in those counties where supply is not so tight, and 10-20% out in Riverside and San Bernardino counties.

Of course Leslie Appleton-Young of CAR piped up, saying how difficult it was to gauge this downturn because it was "different" from the last downturn. She did not get the last downturn right either.

As encouraging as it is to see more realistic estimates of where we are going, I question whether they go far enough. Not one of these forecasters has addressed affordability, and only one has suggested that things will get back to normal when people buy homes to live in them, not flip them. When forecasters in a downturn keep trying to pinpoint the time of a bottom, that time almost invariably gets drawn out. Another problem with forecasting this trend is that although the forecasters acknowledge the economy will affect the trend, they are still making assumptions largely based on how the economy is right now - it is difficult to build a worsening economy scenario into the forecast. In a housing downturn that really pulls the economy down with it, how will some of those more downturn-resistant areas hold up? Just as home sellers keep slashing prices and chase a market down, forecasters are also typically behind the trend - and they'll keep revising their forecasts. It'll be interesting to see what evolves over the next year of this debacle.


Blogger Mike said...

i think even thornburg is underestimating it. by the time it's all said and done i'm saying 30-40% down from the peak in most areas of socal, and 40-60% in the less desirable areas (palmcaster, IE, south LA, central valley, etc.). market forces will dictate that lenders only lend out money that can be reasonably expected to be paid back under the terms of the original mortgage, and there will be at least a local recession, if not a nationwide one. we'll start to see signs of a recovery by 2012, earlier if price declines come faster.

what's your prediction bearmaster?

9:52 AM, November 27, 2007  
Blogger bearmaster said...

I've been following the Clif Droke scenario that I've posted a number of times on this blog - maybe a bottom around 2012 but since it's been taking longer here in So Cal to really get the bear train rolling that could go out further. I also think we will see a false dawn or two along the way.

As for price levels, geesh. I don't think 75-90% drops would be impossible. Not next month, not next year, but maybe 6-7 years out from here. Prices continued to go down after the last bottom, which occurred when people started to realize they could buy fairly reasonably with monthly expenses that were equivalent to their rent, and sales surged accordingly (about 1996).

The more peoples' perceptions change as to the value and utility of living here, the more vicious the drops. The McMansion of today, burning up all that energy with tiny incandescent bulb lighting and spraying precious water through fountains in a drought-ridden area, with the tax liability of well over $10,000 plus, may become perceived as the financial burden of tomorrow. The millionaire China importer of today buying the bloated housing of today - will his good fortune be sustainable if consumers decide to close their wallets?

By the way, check yet another great column by Steve Lopez at the L.A. Times. Many of the wealthy shopping on Rodeo Drive are real estate investors.

A strange trip in to the land of $2,500 sneakers

And if you haven't seen it, his earlier one:

$3 million doesn't buy what it used to

10:13 AM, November 27, 2007  
Blogger bearmaster said...

Speaking of affordability:

"Also maintaining its long-held standing on the HOI was Los Angeles-Long Beach-Glendale, Calif., which has now been the nation’s least-affordable major housing market for a dozen consecutive quarters. There, just 3.7 percent of new and existing homes sold during the third quarter were affordable to those earning the area’s median family income of $61,700."

NAHB news release

3:55 PM, November 27, 2007  
Blogger Westside Bubble said...

I ballparked potential drops, based on Santa Monica sales data matching the LA Case-Shiller index and median income, at 30-50% in 6-10 years:

30-50% fall in 6-10 years?
30% in 6 years?

Considering the LA Case-Shiller index fell 27% in the 1990s, and has already fallen 7% from its peak last year, estimates of 8-25% have to be low.

7:58 PM, November 27, 2007  
Blogger bearmaster said...

WB, that sounds like a good way to come up with an estimate. Though I don't know why per-capita income is better than median household income in terms of making this estimate.

And the estimate is assuming, of course, that incomes keep marching along that trend line.

I think we pretty much concur that the drop will be more than what the quoted experts are saying and that the drop will be more drawn out than what they are saying.

7:34 AM, November 28, 2007  
Blogger wannabuy said...

Michael Carney at Cal Poly Pomona estimates a minimum 15% drop, bottoming at the end of 2009. He doesn't rule out a turnaround but he just doesn't see that happening now, citing buyers' reticence.

My, that assumes a lot of wage inflation. Wage inflation I'm just not seeing. ;)

I don't think 75-90% drops would be impossible. Not next month, not next year, but maybe 6-7 years out from here.

Wow! I'm not bearish enough. I tend to set the limit at 45% to 60^. Why? At that point the aerospace employees hit affordability.

However... they are losing patience (the employees). There are thousands of them renting in the south bay ready to leap on a new opportunity in a new area... Since the relocations I've heard about haven't happened (in mass)... yet. It could be less.

But if they keep talking about a "V" recovery... people will get disheartened and leave. Then we can see that 90% drop.

munch a buncha. Let's just say we can all agree that in a few years we'll still be discussing the downturn. ;)

Got popcorn?

11:31 AM, November 30, 2007  
Blogger wannabuy said...

30-50% fall in 6-10 years?
30% in 6 years?

I like your graphs. One comment on your 30% to 50% drop (and yes, I'm going to counter my previous post), you assume no overshoot while in the past the undershoot has been about the same magnitude as the overshoot.

Yikes... that's a scary thought.

Got popcorn?

11:37 AM, November 30, 2007  
Blogger bearmaster said...


I pulled that number out of the air because I recall distinct properties from last time around that fell about 2/3rds - a few years after the official bottom. Not in fabulous neighborhoods but not too shabby neighborhoods either. I figure this time will be lots worse.

If we live through years of traumatic declines there will be a lot of fear in the air that could paralyze potential buyers.

I've been reading about recent home invasions in Redondo Beach recently, plus burglary rings, and thought again about what a housing depression will do to the mental state of Californians. Police believe one victim was targeted precisely because she was driving her money down the street, i.e., her pricey cars. Real estate $$$ volume for many parts of Los Angeles (e.g., south central) are in freefall. That's brewing potential for social unrest that makes the Rodney King riots look like a Sunday afternoon festival gathering, and peoples' perceptions as to what's a great place to live could change in a REAL hurry.

Hence my 75-90% decline target.

BTW, I hope to have November charts up this weekend.

11:55 AM, November 30, 2007  
Blogger redondo_beach_dude said...

This is the part of the article that really jumped off of the page at me, what I put on bold smacked me right between the eyes...

"If the gap between Riverside and Orange County becomes too great, a person will say, 'Forget it, I'm not going to live in Orange County,' " he said. "If prices get too high in Beverly Hills, it drives demand to Santa Monica." Such movement eventually drags top-end prices down, he said.

Data gathered by Edward E. Leamer of UCLA's Anderson Forecast back that up. Since 1989, Leamer has tracked housing prices in the 20 least expensive and 20 most expensive ZIP Codes in Los Angeles County.

He found that all areas fell by about the same percentage when they hit bottom in the 1990s downturn.

This is the current debate in my group, that ManHerRed beaches will hold values because of all the $$$ folks in the area, while Torrance and the rest will fall. The way I look at is that a rising tide raised all boats, and when the tied recedes, well, it may take 6 months longer, but the beaches will recede. The beach city value increases were caused by the same speculation; why would they hold while surrounding areas fell? I remember seeing a chart that shows Alt-A resets increasing late spring, early summer '08. How much no-doc speculation do you think took place at the beach, Bearmaster?

10:26 AM, December 01, 2007  
Blogger bearmaster said...


That might be good question to toss over to Manhattan Beach Confidential. I'm not sure about no-docs, but I'm thinking maybe HELOCs will be the tsunami that does us in, rather than no-docs. In some of the foreclosure data I've looked at for Redondo, I noticed that some foreclosures were on properties that had been bought long ago, foreclosing on amounts far exceeding what the original place sold for.

Yep, looks like every place will die the same death in the final analysis.

11:36 AM, December 01, 2007  

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