L.A. Times: Realty reality: Housing prices are headed way down

I thought you all might be interested in this piece by Christopher Thornberg of Beacon Economics in the L.A. Times today. I think his opinion pushes closer to the reality of the future than that of most forecasters.

Rather than come up with any number that is likely to be off, I maintain that the more that the crowd's perceptions change as to the desirability of living in a particular location, the more housing prices in that location will correct. In a way, I think that even Thornberg is too optimistic.

By BY CHRISTOPHER THORNBERG
December 28, 2007
In 2002, the median price of a single-family home in Los Angeles was $270,000 and the
median homeowner's income was $65,000. With a $50,000 down payment, the annual cost 
of that house (taxes, insurance and payment on a 30-year fixed-rate conventional 
mortgage) would add up to about 33% of the median household's income -- just under 
the 35% mark that the Federal Housing Administration calls the upper limit of 
"affordable."

By 2006, the cost of that same house doubled, to $540,000 -- pushed by unbridled 
speculation fueled by unparalleled access to mortgage capital. But median income rose 
a paltry 15%. So today that same set of costs come to 60% of gross income.

That might be a manageable burden when home prices are rising at double-digit rates, 
creating new equity that can be accessed to support spending -- but not when prices 
are flat and the home-equity ATM is closed.

There are "experts" out there who once preached that there was no bubble; they now 
preach that all real estate is local and that prices in your neighborhood won't be 
affected by foreclosures and price declines elsewhere.

The cold, hard truth is that foreclosures are serving only to hasten the painful 
process of shifting housing prices back to a level the market can sustain. Prices 
must and will fall. Everywhere. Probably 25% to 30% from their peak.

2008 is the year when gravity will reassert itself. You should be adjusting your 
expectations of your home's value so that it's correctly aligned with market 
realities. And when making important financial decisions today, be realistic and 
factor those declines in.

Christopher Thornberg is a founding partner with Beacon Economics.

CAR November 2007 report for Redondo Beach

The following figures are from the California Association of Realtors (CAR) for November. CAR gets its figures from Dataquick.

The median price for a Redondo Beach home (new or existing, SFR or condo) is now $742,000, down -2.3% YOY.

My estimate came in higher, at $832,500. 41 sales were reported by Home Data, but I have only 27 November sale records in my database, which obviously comes up short. And, unfortunately Zillow is no longer helpful in obtaining home sale figures. I think there could be an issue with cut-off times for when escrows are recorded as closed, as noted by DataQuick, by Home Data, and by any other reporting agency. My October figure came in low, and my November figure came in high. There is the possibility that what I counted as November were actually October sales, and what I am now counting as early December could be part of November sales.

For the beach cities, which to the best of my knowledge encompasses what Shorewood encompasses - El Segundo, Manhattan Beach, Hermosa Beach, Redondo Beach - the median price is $1,048,500, up +15.92% YOY and up from $877,500 in October.

For the South Bay area, the median price is $640,000, up +4.07% YOY and up from $617,250 in October.

The median home price in the Westside is $820,000, down nearly -32.8% YOY, while West L.A. median price is $730,000, -6.35%. On the other hand, Palos Verdes Peninsula area records a median of $1,222,500, up nearly 20.4$ YOY.

The whole picture seems to me like a violently wobbling top.

Macromarkets: Los Angeles area median housing price down -8.8% YOY for October 2007

The Case-Shiller index was released for October 2007.

According to the index, Los Angeles area median home price was down -8.8% from October 2006, and down -2.1% from September 2007.

To learn more about the Case-Shiller methodology, visit Macromarkets.

Los Angeles Beach Cities Resale Activity for November 2007

As you are by now well aware of, home sale volume in Los Angeles County was horribly weak in November. By other measures, it was largely new homes that held up the Los Angeles housing market - resales were much weaker than sales of new construction.

90278 and 90254 currently show the weakest YOY trends on resales. The beach cities charts in general continue to show very wobbly trends. Compare the median price line graphs from the beginning of a price chart to about mid-2005 and then compare the section of line up to mid-2005 with the section of line from mid-2005, and you'll see what I mean. That powerful surge up to mid-2005 is now wobble on most of these charts.

How long high-end home sales will continue to sustain the market is difficult to say. Another possibility is that lower-end buyers may find other sources of financing and drive sales volume back up, though that possibility looks rather remote. (But if low end buyers were to reenter the market, I would expect median prices to actually fall.)

Here are the detailed RESALE statistics for the beach cities and some of the surrounding zip codes:

                         SFR   MEDIAN    %YOY    CONDO  MEDIAN   %YOY  
COMMUNITY         ZIP    SALES   SFR      CHG    SALES  CONDO     CHG
LA/Westchester    90045   18    $725     -3.5%    N/A     N/A      N/A  
El Segundo        90245    1  $1,049     24.1%     3     $600   +12.1%
Hawthorne         90250   19    $488     -9.6%     1     $410    -8.9%  
Hermosa Beach     90254    2  $1,013    -19.6%     4     $760    -7.3%  
Lawndale          90260    6    $455    -12.1%     1     $299   -13.3%  
Manhattan Beach   90266   21  $1,835    +34.9%     2   $2,100   +90.9%  
Palos Verdes Pen. 90274   17  $1,798    +21.9%     2     $478   +46.2%  
Rancho P.V.       90275   22  $1,215    +25.9%     5     $579   +15.8%   
Redondo Beach     90277    7  $1,178    +20.5%    14     $767    +4.0%   
Redondo Beach     90278   18    $730     -3.3%    11     $642    -4.8%

Other measures of Los Angeles beach cities market activity, November 2007

Shorewood caught me off-guard and published November sales numbers quite early. No, I did not miss the median price graphs from the L.A. Times DataQuick table - it hasn't been published yet.

According to Shorewood, November DOM for the four beach cities has come down to 49, down from 60 in November 2006. There is no resemblance whatsoever between their official beach city DOM statistic and what I calculate. My last calculation for November for just Redondo Beach was a median DOM of 104 days and an average of 128 days - though my definition of "time spent hustling a property" stretches out a bit more than what realtors use.

Now on to Supply Stength (Demand Weakness). This is a measure of my own making but I use Shorewood's official homes for sale and homes sold numbers. Notice that I-S/S bottomed around the late spring of 2005, when this market was probably at its peak of optimism, and life just couldn't get any better. This ratio now continues to hit new highs, which I interpret as bearish. Whether it will continue to surge higher over the next few months, or whether the beach cities will instead work off some inventory over the winter, remains to be seen. Since sales volume is so low, I don't get the sense that inventory is being "worked off" - I think listings are expiring unsold.

Median price for the four beach cities has rebounded back to the September level of $950,000. At this point it is difficult to know if ultra-high-end home sales will keep that median elevated. If market conditions continue deteriorating, I would expect that the psychological impact will eventually make even well-heeled buyers think twice before plunking down millions in cash on a home - when there just might be a fire sale a few years down the road.

L.A. Times: More flee state than move in

I did not blog this AP story from a year ago, so I will summarize it here. According to California's Department of Finance, in 2006, for the first time in a decade, the number of residents leaving the state exceeded the number of those moving here. Those exiting the state are heading to places like Arizona, Nevada, Texas, Washington, and Oregon. (I don't think this accounts for births and new immigrants, in terms of total population figures - only residents who come from other states and residents who leave.)

Now the L.A. Times, in this December 20 story by Sharon Bernstein and Paloma Esquivel, is noting the continuance of this trend. According to the SFGate story, the net loss in 2006 was 29,000. According to this current story, the net loss in 2007 runs around 89,000. (I hope I am comparing apples to apples!) This year, only 5,800 jobs a month have been created, compared to over 20,000 a month the prior year. Jobs have been lost in finance, construction, housing, and other sectors, and some indicators like number of cars sold is down.

Remember, California, and the Los Angeles area, are the places that last year the experts touted as being likely to survive any housing downturn due to its diverse economy. Now, will this exodus trend pull the rug out further from California housing markets?

The story notes the similarity in the exodus to that of the 1990's, but the experts are still saying it won't be as bad because the economic problems and "image" problems aren't as extreme. Like the governator who recently stated the crisis "won't last", the experts, too, are claiming this won't linger like the problems of the 1990's.

These are the same people who were brimming with optimism and assured us that things would be fine this year. I have no reason to be believe their assurances now will be any more accurate.

Be sure to check out the story, and take a look at the interactive graphic on migration trends!

Also check the related December 21 story by My-Thuan Tran, Flocking from So Cal to Houston.

DQNews: Southland prices fall again; sales perk up

Well, I guess it depends on what "perk up" means. According to this December 18 story by DQNews, home sales rose slightly over October, during a time of year when sales normally decline. But October was truly awful in terms of home sales, so a leveling off here, if that's what is happening, certainly doesn't mean the worst is over.

It was still a bad month. Total So Cal home sales of 13,173 units were up by about 2% over October, but down -42.7% from November 2006. This is the worst November since DataQuick started keeping track back in 1988. The prior low for November was in 1992 at 15,446 homes. The average for the last 20 years has been 22,749 sales.

It was new homes that grabbed most of the sales in November. Sales of existing SFRs was flat and sales of existing condos was down -6% compared to October. New home sales rose 11.5% over October.

DataQuick notes that some people say the market is bottoming now, but the firm wants to see a more sustained trend. Sales financed with conforming loans have been increasing since September, actually up 3.5% between October and November. Mortgages exceeding the conforming loan limit of $417,000 were practically flat month-to-month, declining just 0.1%. At least the jumbo loan problem is not getting worse - so DQ News says.

The price decline for a Southern California home from October to November was from $445,000 to $435,000, down -2.2% month to month, and -10.3% from November 2006. The YOY decline is largest DataQuick has ever seen for the region. Median price is now back to the March 2005 level.

Here is an interesting statistic, and it helps answer a question as to how much the mortgage crunch has affected So Cal. Jumbo financings accounted for 40% of sales up to the August credit crunch, but in November accounted for 22% of sales. The number of loans within conforming loan limits has doubled.

This last statistic is telling me that there aren't a whole lot of wealthy people out there right now whipping out their checkbooks and plunking down cash on high-end properties. At least, not enough of them to hold up the market. That statistic is also telling me that there are plenty of fools still waiting on the sidelines to get their heads handed to them on granite slabs.

DQNews notes that market indicators "continue to move in different directions." Foreclosure activity is at record levels, while multiple-mortgage financing and ARM financing has declined. Non-owner occupied buying activity (flippers) have risen slightly. See what I mean about plenty of flippers on the sidelines wanting to take their swings with the speculative bat?

Southland          Sold     Sold     %YOY    Median $    Median $   %YOY
County             Nov-06   Nov-07   Chg     Nov-06      Nov-07     Chg
Los Angeles        8,274    4,468   -46.0%   $517,000    $499,000   -3.5%
Orange             2,867    1,567   -45.3%   $623,000    $582,750   -6.5%
Riverside          4,406    2,503   -43.2%   $427,000    $356,500  -16.5%
San Bernardino     3,309    1,719   -48.1%   $380,000    $330,000  -13.2%
San Diego          3,248    2,400   -26.1%   $487,000    $440,000   -9.7%
Ventura              901      516   -42.7%   $577,500    $521,250   -9.7%
SOUTHLAND         23,005   13,173   -42.7%   $485,000    $435,000  -10.3%

During this decline I expect to see mini-bursts of buying activity as prices hit certain levels. I don't expect a real recovery for several years, and not until we see major improvements in affordability.

more on the Ruxton Lane Developments

I managed to stop by the 27-unit development on Ruxton Lane today before the open house and snuck in to one unit. Although the realtor was not in sight, he had left a music player on amidst cases of sodas and party food, and we glanced around one new unit to the tunes of Led Zeppelin.

We did a more thorough look of the unit next door. For the money, I think this is a far better, more practical layout than the Bayberry plan in the Village on Oak, which as far as I know is sold out. But the prices are still astronomical.

I did accomplish what I set out to do - get a price sheet. Square footage ranges from 1903 to 2144, and asking prices range from $749,000 to $810,000. Out of 27 properties, it looks like three were pre-sold at 1720. I've added all the properties in to my database.

As we were leaving, we greeted the realtor as he was hauling in some bags of ice.

There is a 192-unit relatively new pack-em-in senior condo development just up the street from these condos. This pseudo-panoramic photo is of the senior condos, on the north end of Ruxton. Apparently Ruxton has been the target of a revitalization project, and the site of the senior condos was once a plastics factory. I don't know anything about the prices. I don't have anything to say about them except that they look as institutional as Fusion or most of the other pack-em-in style housing projects in the area.

L.A. Business Journal: L.A County home sales drop to new low in November

According to this story by Deborah Crowe in the December 10-16 edition (link may expire), home sale volume hit a record low in November since the housing market started declining. However, the price slide seems to have stabilized at least for the month. There were 2,680 November home sales. In 2006 there were about twice as many sales. In October there were over 20% more sales. November 2007 home sale volume is about 25% of November 2005 sales.

The median price for all of L.A. County remained at $525,000, down 4.5% YOY but unchanged from October. October was the first month of price decline since the housing market started its decline.

Patrick Duffy of MetroIntelligence attributes the sales volume decline in big part to "people who are stubborn and waiting for the market to return...they aren't willing to sell until they get the price they want."

Analysts think prices will continue to drop, but the optimists will only concede that prices will drop for a few more months, while the bearish analysts believe much more pain lies in store. Opinions vary along that range.

Syd Leibovitch of Rodeo Realty in Beverly Hills thinks sales will start picking up in December and beyond, with prices leveling off around February, when things normally start to pick up again. (Perhaps he can afford to be more optimistic, considering where he practices his business!)

Chris Thornberg of Beacon Economics feels that too much attention has been focused on subprime mortgage resets, when the major problem is that homeowners are unable to afford their mortgage payments all over the mortgage product spectrum. He points out that in the late 80's, the median income earner earned 20% less than what was needed to afford the median priced home. Today, that gap is 40%. He anticipates much more pain in 2008 and says the meltdown in the Inland Empire will eventually make its way here.

Places like Beverly Hills 90210 continue to do well in the housing market. In the South Bay, Mike Collins of Shorewood says sales are "propped up by buyers with ready cash. We are seeing a greater percentage of sales from the people who can just write a check for more than a million dollars." (Straight from the horse's mouth! High end sales are what are propping up the median prices here in Bubbleville Beach.)

Notices of default on mortgage payments in Q3 2007 were up 166% YOY to 72,751, the highest in 11 years. The increasing number of foreclosure and bank-owned homes that are going on the market, often with big reductions since their last selling prices, are dampening asking prices. One Prudential realtor who now spends about 75% of his time marketing REO properties said, "There's got to be something fundamentally wrong when a property goes into foreclosure less than a year after the loan was made."

-------------------------- SFR ----------------------------------
COMMUNITY          ZIP    Nov     %YOY        Nov     %YOY
                          Sales   Change      Price   Change
El Segundo       90245      6     -25.0%    $980,000   15.0%
Hermosa Beach    90254      9     +12.5%  $1,345,000  +26.3%  
Manhattan Beach  90266     19     -26.9%  $1,650,000  +19.6%  
Redondo Beach    90277      7     -36.4%    $970,000   +5.4%
Redondo Beach    90278     15     -25.0%    $781,000   +5.5%

------------------------ CONDO ----------------------------------
COMMUNITY          ZIP    Nov     %YOY        Nov     %YOY
                          Sales   Change      Price   Change
El Segundo       90245       1    -50.0%    $475,000  -20.2%
Hermosa Beach    90254       2    -60.0%    $495,000  -31.2%
Manhattan Beach  90266       0       N/A         N/A     N/A  $645,000 in 2006 
Redondo Beach    90277      10    -33.3%    $881,000  +14.4%
Redondo Beach    90278       9    -60.9%    $675,000   -1.5%

The most expensive SFRs in November were in Santa Monica 90402 (+26.3% YOY); Pacific Palisades 90272 (+30.3%); Marina del Rey (+22.7%); Palos Verdes Estates 90274 (+28.8%); Manhattan Beach 90266 (+19.6%); San Marino 91108 (+24.5%); Brentwood 90049 (-16.6%); West Hollywood 90069 (+24.9%); Malibu 90265 (+28.9%); and Mid-Wilshire 90036 (+25.3%).

The most expensive condos in November were in Pacific Palisades 90272 (-4.6%); Redondo Beach 90277 (+14.4%); Los Feliz 90027 (+73.2%); Redondo Beach 90278 (-1.5%); Santa Monica 90403 (-7.5%); Laurel Canyon 90046 (-2.1%); Marina del Rey 90292 (-23.3%); Venice 90291 (-41.9%); Studio City 91604 (+20.2%); and West L.A. 90025 (-13.4%).

The places experiencing the greatest losses in SFR prices are Long Beach 90813 (-50.9%); Long Beach 90804 (-35.3%); West L.A. 90025 (-31.9%); Whittier 90603 (-30.0%); Sierra Madre 91024 (-29.8%); Palmdale 93552 (-29.3%); West Adams 90018 (-28.5%); Inglewood 90301 (-28.3%); Inglewood 90303 (-27.3%); and Montrose 91020 (-26.3%).

The places experiencing the greatest losses in condo prices are Panorama City 91402 (-66.1%); Playa Vista 90094 (-51.2%); West Hollywood 90048 (-45.4%); Pacoima 91331 (-41.9%); Venice 90291 (-41.9%); North Hollywood 91602 (-40.7%); Long Beach 90804 (-40.4%); Koreatown 90005 (-38.1%); West Hollywood 90069 (-37.6%); and Monterey Park 91754 (-35.1%).

Notice that Playa Vista, a zip code that I regularly cite as a place doing booming dollar volume business, is on the list of places experience great price loss in condos. Sounds to me like they are building lots of relatively cheap condos there and making it up on volume.

Keep in mind that the article lists gains and losses on median prices on very small numbers of sales in a specific zip code, which are not statistically valid in most cases.

Ruxton Pacific and other news

Just a quick note to some of you who might remember the rainy Saturday I spent in September checking out the Ruxton Pacific development. The signage I photographed during my September trip says "starting in the high $700,000's", which I took to mean at least $790,000, but one unit has now been listed on the MLS at $749,000. I'm glad to see builders reducing prices, though I continue to hold the belief that everything here remains grossly overvalued, and $40,000 off the top still leaves an inflated price. (For many people, if a home is even $300,000, the asking price might as well be a trillion.) However, I anticipate that the price reduction on these new units will put some pressure on prices elsewhere in Redondo Beach.

I may try and swing by the grand opening that starts at noon on Saturday, but I just want to go get price information, and I don't know if they'll give me anything firm. If I go, I'd be just a looky-loo.

I haven't blogged the November sales report out of L.A. Business Journal but I hope to pick a print copy up Saturday morning and then hopefully this weekend I'll be able to update this blog.

Zillow continues to underreport sales and I am relying solely on The Manhattan Beach Reporter for any semi-real-time news of home sales. December overall is looking better than November, but November was REALLY bad in terms of home sale volume so any pickup will look good. For the 10 sales I've found so far for Redondo, median price is $722,500, and average is $717,400, min is $540,000 and max is $980,000. Median sqft is 1641 and average is 1670. Since this is such a small dataset the stats are highly suspect,

Inventory is drying up on ZipRealty, which I attribute more to listings expiring rather than a major surge in sales volume. It is now the 14th, and I show only 18 new property listings (not counting the remaining 26 units at Ruxton that aren't on the MLS). According to MelissaData, 14 properties have been sold so far in 90278 and 8 in 90277 (total 22). Compare that to December 2006: 43 in 90278 and 39 in 90277 (total 82). If I make a wild optimistic guess that final December sales will be 2.5X what they are now, that would put Redondo at 55 sales for December - another YOY decline.

The interesting thing is that sales volume has actually been pretty much on the decline for years. December sales volume actually peaked in 2002. For years, Redondo has been Mcmansionizing, Dotcondoizing, and Bloataminiumizing, leading to fewer sales but making up for it on the bigger bucks people pay for housing. Now what happens when the bucks to be borrowed are precious and few?

          2006     2005      2004     2003     2002     2001
90278       43       45        74       64       78       53       
90277       39       31        37       56       60       42
TOTAL       82       76       111      120      138       95

Preliminary look at November 2007 Redondo Beach sales

Using sales records from the Manhattan Beach Reporter, I've been trying to scrape together a dataset for November 2007. Zillow is pretty worthless. The state of sales data is fragile and precarious. Keep that in mind, and ignore October. (My October 2007 sales data didn't fare so well, possibly because I didn't even know MBR was printing sales records until too late to retrieve them out of the hard copy editions which we toss out weekly.) Notice that median price is up above $800,000 again, which is sort of where I would expect it to be. However, the November median hasn't drifted above the September median. Average is back in line with where it was in September. Interestingly, when compared to early this year (May), minimum sales price is getting more minimum and maximum sales price is getting more maximum. Is this market suffering from bipolar disorder?

STAT     MAY 2007   JUN 2007   JUL 2007   AUG 2007   SEP 2007   OCT 2007   NOV  2007    
records        91         62         78         51         68         44          37
MEDIAN   $777,000   $764,500   $860,000   $850,000   $857,000   $755,000    $832,500
AVERAGE  $855,228   $830,711   $880,279   $867,925   $935,506   $770,416    $933,956
MIN      $453,000   $485,000   $359,000   $365,000   $369,900   $369,900    $379,000  
MAX    $1,640,000 $1,565,000 $2,299,000 $1,510,000 $2,400,000 $2,560,000  $2,500,000

I will throw in here that the median original asking price on these sold properties in November was $864,500, and the average original asking price was $997,765. I will compare these numbers to outstanding inventory numbers at the bottom of this post.

Sales by square footage have been consistent, with the heaviest sales volume in the 1500-2000 range.

What I have been calling DOM (days on market) is a little misleading. A realtor would define that as the time from when a property is listed in the MLS to the time it is sold, and that is only from the most recent relisting up to the time of sale. Maybe I should call my measure "total time spent hustling a property." With some new construction especially, I've noticed listings in Craigslist for properties not in the MLS. So I've taken the Craigslist posting date as the date listed and have included those properties with everything I find in ZipRealty.

The other problem with my measure of "total time spent hustling a property is the data source (Manhattan Beach Reporter). The MBR lists sales that close escrow for the week but don't give specific closing dates for each property. So I've been taking a date at the beginning of the week to estimate the date of sale.

Even though I've been guessing closing sale dates, my calculations of DOM have been consistent with what I've calculated for previous months. The median time spent hustling a property is about 3.5 months, and the average time spent is nearly 4.3 months.

How much did the November 2007 Redondo Beach home seller have to reduce his price in order to make a sale? Median and average percent reductions are now both over 5%, and the maximum reduction was nearly 14%.

I ran an outstanding inventory snapshot through the end of November to see how the inventory compares to the current sales data. This is what I have.

            November sales       Outstanding inventory

median
orig           $864,500             $859,000
ask

median
sale or        $832,500             $835,000
current
ask

Do you see what I am seeing? At the beginning of this year sales and outstanding inventory were pretty far apart in terms of how they perceive the reality of valuations - the percentage difference was in the teens. Now it appears that they've met up in the same general price region. I started noticing in September that inventory was coming in to line with the reality of sales. Now that they've met, will we see a violent move by one group of sellers in a particular direction, like two billiard balls that have collided? For instance, will the January-February home sellers ignore the lessons of 2006 and 2007 and try jacking their asking prices up 15-20%? (I doubt it, but that's what I mean by a violent move in a particular direction.)

For what it's worth, the median percent reduction on outstanding inventory no longer sits at 0%; it is now 1.2%, and the average reduction is 3.3%. The difference between a successful sale and a listing that rots could be a price reduction of greater than 5%.

Out of my outstanding inventory of 807 records, some 47.7% show no price reductions or a price increase from the original asking price, while 52.3% show a price reduction.

Sure, median price has gone up this year, but we are aware of the factors that are skewing this. The truth is that this market is looking sick and if the market were doing well the price reductions would be practically non-existent.

L.A. Times: New mortgage deals aim to spur activity

Lenders clearly haven't felt enough pain yet to stop playing with fire. According to this December 2 story by Jonathan Diamond, even banks "not stuck with bad loans" are now offering what they think are less-risky mortgage packages to only the very credit-worthy.

One such product is a two-step mortgage, which totals 40 years. In the first 15 years, the borrower has the option of paying interest only, but the interest rate is fixed. The loan goes through a one-time adjustment and remains at a fixed interest rate for the remaining 25 years. This is being offered to jumbo borrowers.

Other lenders are also carrying 40 year loan products with the option of paying interest only. One lender says he is a "big fan of" such products even though they get "a lot of criticism."

The article goes on to state that the criticism stems from the fact that a payment jolt occurs when the switch is made between interest-only and interest plus principal. I think that misses the mark somewhat. When one is paying only interest on a house, they are only pretending to own the house. They are not accruing any equity.

And there are still lenders out there selling negative amortization loans. They offer teaser rates of 1% while the real rate is closer to 7%. What is new is that banks that haven't offered them are now offering them. That is why I said at the beginning that not enough pain has been dealt to the lenders yet for them to learn their lesson.

At least one finance professor at Claremont Graduate School isn't buying it. Jay Prag says that he doesn't think many people "fully understand the ramifications of sophisticated mortgage products...the more they tweak the product, it really isn't dealing with the problem: A lot of people believe they can own a house and handle the mortgage payments, and a lot just can't do that."

Fiscal crisis coming soon to a state and county near you!

On many of the housing bubble blogs, bloggers like to banter about predictions for home prices. Prognostication is a risky business, as just about anyone who has tried it will tell you.

I am personally very bearish on home prices - far more bearish than the experts whose predictions you read in the press. I don't really like to say much more than "prices will fall" , but I have often said, and will continue to say that whatever prices do will depend on the mood of market participants. If the participants are optimistic they feel like taking on risk, be it a lender who wants to extend credit or a borrower who wants to take on a mortgage, or an asset market that adjusts mortgage interest rates so they are attractive, or a municipality that invests in infrastructure. Problems like fires or mudslides or earthquakes, though causing terrible inconvenience, are overcome with a gung-ho "we will rebuild" attitude. Home prices might be buoyed by such optimism. On the other hand, when participants become risk-averse - whether they shy away from taking on more debt or issuing more credit or investing in credit, the support for home prices crumbles as pessimism becomes the prevailing mood. Throw in fires, mudslides, earthquakes, and other violent phonomena of Mother Nature and these events become excuses to leave a particular market. Perceptions on what constitutes a desirable place to live can change dramatically. The more severe the change in perception as to the desirability of living in a particular place, the more severely property prices in that place will fall. That's my working hypothesis, period. No fancy charts or graphs needed.

It isn't just Mother Nature's rebellion that can serve up excuses to leave an area. In downturns, crime increases. Recently, there have been stories in the news of home invasions in Redondo Beach. Man-made fiscal disasters can do the trick just as well. I have here two Daily Breeze stories in the latter category that may foreshadow what is in store for us. (Does anybody remember New York City in the 1970's?) The links are posted but will expire.

Coffers filled by soaring property values could be drained over the next two years as the real estate market cools

Originally published Thursday, November 29, 2007
Housing crisis may put L.A. County in the red
Coffers filled by soaring property values could be drained over the next two years as
the real estate market cools.
By Troy Anderson
Staff Writer

Los Angeles County officials are bracing for a round of belt-tightening as property
tax revenues fall short of expectations on drooping home values and the state 
prepares to cut off additional funds.

While soaring property values have poured millions into county coffers in recent 
years, officials say they expect revenues to increase just 2 to 5 percent next year - 
compared with 9 percent this year - as the real estate market cools.

At the same time, California's fiscal woes are worsening as Gov. Arnold 
Schwarzenegger has asked all state departments to prepare for 10 percent cuts amid a 
slowing economy and unexpected setbacks that have created a nearly $10 billion budget 
shortfall over the next two years.

While county Chief Executive Officer Bill Fujioka said he is optimistic, he is 
preparing a report on the potential effects on the county budget as the first 
property tax checks start rolling in Dec. 10.

"We aren't seeing any negatives in that area yet," Fujioka said. "As far as the state 
budget, it's early. … I've been talking to friends of mine in the Legislature and 
they are saying the problem is much worse than what is being publicly reported."

In the past five years, property tax revenues collected countywide have nearly 
doubled to $4.6 billion, helping to boost the county budget to $21.8billion.

It's been welcome relief for the county, which nearly declared bankruptcy in 1995 and 
has spent years cutting health and law enforcement services.

Flush with cash, the Board of Supervisors has approved hundreds of millions of 
dollars on everything from pay raises to bonuses and pension and health benefits 
improvements for the 100,000 county employees.

Hundreds of millions of dollars also have been spent to reopen jails, hire new 
sheriff's deputies, probation officers and social workers, and set aside about $100 
million to address homelessness in the county.

Still, the county continues to face a variety of financial problems, including a 
health department deficit expected to hit as much as $854 million by 2010-11 and 
liabilities to pay for retirees' health care costs estimated at $13 billion to $20 
billion.

The city of Los Angeles collects about $1 billion in property taxes each year, 
providing 20 percent of the general fund. So far this year, property tax revenues are 
still strong and the collection rate is 97 percent, finance specialist Rex Olliff 
said Wednesday.

"There's no reason to think there will be a big drop in property tax this year. It's 
(in) the 2008-09 budget that we'll start to see the effect of the real estate 
downturn," he said.

Collection rates are expected to fall as foreclosures rise. And the boost in receipts 
generated by home sales and high new prices will slow.

But the cooling market already has had an effect on money generated by the real 
estate transfer tax, which is a fee charged when a property is sold.

Transfer tax receipts from November have dropped 35 percent compared with the same 
period last year.

"While the real estate decline has not played out fully in the city of Los Angeles, 
as it has in other surrounding markets, these latest numbers do not bode well for the 
city budget or local economy," Controller Laura Chick said.

Local governments nationwide are struggling with similar problems. Earlier this week, 
a U.S. Conference of Mayors' report on the housing foreclosure crisis estimated that 
nearly 400 metropolitan areas will lose $166 billion in economic activity next year - 
including $8.3 billion in losses in the Los Angeles area.

As the housing market slumps in California, local governments are seeing declines in 
property tax and sales tax revenues, said Paul McIntosh, executive director of the 
California State Association of Counties.

"So most counties are starting to take a look at their budgets in the current year to 
see how they are faring," McIntosh said. "I haven't heard about anybody having to 
make any cuts, but they are certainly concerned about the next budget.

Staff Writer Kerry Cavanaugh contributed to this article.

California Democrats seek special legislative session on foreclosures

By DON THOMPSON
Associated Press Writer

SACRAMENTO (AP) -- Urging swift action to combat a continuing wave of foreclosures, 
Assembly Democrats on Thursday asked Gov. Arnold Schwarzenegger to call a special 
legislative session to find ways to help troubled homeowners.

Assembly Speaker Fabian Nunez called the rate of foreclosures in California a greater 
threat than long-term water shortages or health care reform, the other topics the 
Legislature is supposed to be addressing in special sessions the governor called in 
September.

Lawmakers so far have failed to reach agreement on either of those topics.

"It's a more immediate crisis," Nunez said of foreclosures. "You better believe this 
is the biggest crisis we're facing today."

California was second to Nevada in the rate of foreclosures filed last month, 
Irvine-based mortgage research company RealtyTrac said Thursday. More than 50,000 
foreclosures were filed in California in October, or one for every 258 households.

That compares to a national rate of one foreclosure for every 555 households in 
October.

The foreclosures are the most visible symptom of a state housing market that is 
dropping quickly from the sky-high prices of the past few years. Home prices and 
sales are declining in most California markets, leaving local governments with less 
property tax revenue.

The ripple effects of the housing slowdown are being felt throughout the state's 
economy. The nonpartisan Legislative Analyst's Office projects a $10 billion state 
budget deficit over the next two fiscal years, a forecast that has lawmakers and 
Schwarzenegger concerned.

Nunez, D-Los Angeles, said those economic ripples could cost state and local 
governments $4 billion in lost revenue.

"We need to strike right now while the iron is hot," he said during a Capitol news 
conference.

Assembly Democrats proposed a legislative package that would assist financially 
troubled home owners and ensure strict standards for lenders. The bills would:

- Ban prepayment penalties that are sometimes applied when home owners refinance into 
more affordable loans.

- Increase state oversight of lenders and require them to create a uniform way of 
dealing with delinquent mortgages.

- Require lenders to send homeowners a list of their legal rights and require them to 
employ full-time ombudsmen to address complaints and help borrowers who are in 
financial trouble.

- Restrict some types of loans and mortgage fees.

- Increase the number of credit counselors employed by private community agencies by 
providing the agencies with more money.

The California Association of Mortgage Brokers supports efforts to prevent 
foreclosures and protect borrowers, president Pete Ogilvie said in a statement. But 
he warned the Legislature against going too far and enacting laws that discourage the 
types of loans that have helped thousands of people buy homes.

The bills could go to an Assembly committee next week if Schwarzenegger called a 
special session immediately, Nunez said.

He predicted the Assembly could pass the bills by mid-December, with the Senate 
sending the bills to Schwarzenegger's desk by year's end to take effect immediately. 
Waiting until the next regular legislative session begins in January could delay the 
bills for months.

A fast-tracked process could severely limit input from Republicans, however. 
Republicans in the Assembly and Senate have their annual retreat scheduled for next 
week.

But Nunez said Democrats, who control both houses of the Legislature, could pass the 
bills with simple majorities and thus would not need Republican support.

Threatening to bypass Republicans "is like saying we're not concerned about the 
issue. That's just outrageous," Senate Minority Leader Dick Ackerman said. "There is 
no need for a special session. I think Nunez is doing this to try to get publicity."

Ackerman, R-Tustin, said foreclosures are a serious problem but often result from 
foolish decisions by borrowers and lenders. The Legislature must take care not to 
overreact and harm the long-term lending market, he said.

Schwarzenegger spokesman Aaron McLear said Nunez's news conference was the first he 
had heard of the Democrats' proposal.

He could not immediately say whether Schwarzenegger, a Republican, would agree to a 
special session.

The Center for Responsible Lending predicts California will see about 500,000 
foreclosures from all loans made between 1998 and last year. The Durham, N.C.-based 
consumer advocacy group projects more than one-in-five subprime loans in California, 
or those made to borrowers with shaky credit histories, will end in foreclosure.

In a report last week, the center estimated that California cities will see 180,000 
foreclosures just from loans made in 2005 and 2006.

The Democrats' bills would affect about 60 percent of lenders regulated by the state, 
said Assembly Finance and Banking Committee Chairman Ted Lieu, D-Torrance.

The legislation would help limit practices in the future that helped promote the 
mortgage meltdown.

He also said the legislation should be structured so it applies only to 
owner-occupied homes. In that way, it would not become a bailout for those who were 
trying to get rich quick from soaring housing prices and got stuck with their 
properties when the market began to dive.

"We don't want to help speculators and investors," Lieu said.

The speculators who were trying to take advantage of the market are a big reason for 
the housing troubles now facing California.

In the Sacramento area, for example, investors from the San Francisco Bay area 
flooded the market over the past five years, sometimes buying multiple houses with 
little or no money down.

Their game was to get in and out quickly, buying homes and then flipping them within 
months to take advantage of home prices that were experiencing double-digit 
increases.

Many of the speculators are now stuck, facing mortgages they can't afford and homes 
that are worth less than when they bought them. Much of that speculation occurred in 
new neighborhoods that are now riddled with abandoned homes.

At the same, historically low interest rates allowed lenders to offer risky mortgages 
with low introductory rates that are now resetting, swelling monthly payments. Many 
of the people who took advantage of those low initial rates cannot afford the higher 
payments.

The lending and buying mania of recent years helped inflate home prices beyond 
practical levels of affordability.

Assembly Minority Leader Mike Villines, R-Clovis, said the Democrats' proposals 
should be handled through the regular legislative session starting in January. He 
also said they will not solve the housing market's larger problems.

"What we need is people to be very careful about the decisions they make, and 
companies need to be careful about the loans they make," Villines said.

The Democrats' proposal came the same day Schwarzenegger announced a $1.2 million 
campaign to tell homeowners about options that could help them avoid foreclosure.