Friday, December 28, 2007

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.

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 

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.


Blogger wannabuy said...


I have to say Thornberg has proven quite accurate in his predictions. As the Joe six packs of the world read this news or other variations... its going to slow home sales even further.

In other words, we're still so early in this cycle its self feeding.

I went car shopping today (for the wife) and it amazed me how:
1. Many deals there are (2007 and 2008 models)
2. How empty the lots were.
3. How many 2007's are still on the lots
4. Cars/trucks of every type are in surplus.

Did car buying just stop? I've been car shopping at the end of the year before. Normally the 'left overs' are odd colors or weird packages. To walk onto a Honda dealer and be offered $3k off a car my wife would love was... odd. To walk around and find eight more and have the salesman wave his hand over the dozens of other cars I had ruled out for arbitrary reason (e.g., no seat heater).

Gulp! I'm inspired to go blog this... ;)

Got popcorn?

2:24 PM, December 28, 2007  
Blogger bearmaster said...

Hi Neil,

Funny you should mention car buying. Did you see MSNBC's story today?

For car sales, this year may mark the worst in 10

As I posted on another board, if consumers aren't buying houses in the volumes they used to and they aren't buying cars, what the heck are they buying?

BTW, if I don't hear from you again before 2008, Happy New Year!

3:14 PM, December 28, 2007  
Blogger JimAtLaw said...

Bearmaster, I agree, and in fact think that Thornburg is significantly too optimistic.

He uses the period from 2002 to 2006 to show home prices doubling while incomes rose only 15%, but looking at the Case-Shiller numbers and the long term graph of inflation adjusted home prices, it's evident that by mid-2002, prices were already at an inflation-adjusted all time high!

If we were only to drop the 25 to 30% from the peak that Thornburg suggests, that would only put us at 2004 pricing, which is already being reached in some harder hit areas. To return to the trend line, we'll need to return to nominal 2002 prices or better I think.

4:32 PM, December 29, 2007  
Blogger wannabuy said...


Thanks for the info. :)

I agree Thornberg is being optimistic... but of all the 'name brand' economists, he's really doing the best job of getting the news out. Is he perhaps moderating his predictions a little to make them more palatable for the MSM. Perhaps moderating is the wrong word... 'wordsmithing' might be a better way of describing what he's doing.

I really respect Thornberg for sticking his neck out early when it wasn't a popular thing to do. If he predicts a 25% drop this year and then revises it to 40% in late 2008, ok. He's still getting the message out to Joe Sixpack far better than we bloggers could. :)

Got popcorn?

12:06 AM, December 30, 2007  
Blogger wannabuy said...


I just blogger our new car purchase. The deals were good. Its another situation of a 'buyers market.'

Got popcorn?

8:26 PM, December 30, 2007  
Blogger wannabuy said...

Happy new year!


11:57 AM, December 31, 2007  

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