Saturday, March 15, 2008

Los Angeles Beach Cities Resale Activity for February 2008

Wow. I just studied this March 14 L.A. Times article by Peter Y. Hong in more detail. Get this:

Southern California home prices are now 19% below their peak last year. Home values also plunged 19% during the last real estate bust, but that was over a six-year period ending in 1997. Prices have now fallen just as much in less than a year.

Let me repeat that:

Southern California home prices are now 19% below their peak last year. Home values also plunged 19% during the last real estate bust, but that was over a six-year period ending in 1997. Prices have now fallen just as much in less than a year.

What else does this article say? One-third of Southern California homes sold in February had been foreclosed since January 2007. For February 2007, the proportion was 3.5% over the comparable period.

The experts are "surprised" at the decline. Why? We've already achieved declines that surpassed their predictions from last year. Michael Carney of Cal Poly Pomona, who predicted a minimum 15% decline last year, notes, "We don't appear to be leveling out." Delores Conway at USC last year predicted a 15% decline but now states, "...that's not to say we won't see 30%." Chris Thornberg, formerly at UCLA, and now at Beacon Economics, has doubled his forecast to 40%, noting "It's the speed of the decline."

According to DataQuick, Southern California home prices multiplied 3 1/2 times between 1997 and 2007. Tom Davidoff of UC Berkeley thinks it could take a while for prices to fall because of the long run-up. He believes that even the affluent areas would "eventually feel the pain as well." He notes that in the affluent areas, where prices have held up better generally, long-time homeowners haven't been under financial pressure to sell, so they are sitting and waiting for the market to turn around before trying to sell. Eventually, more homeowners from these areas will get tired of deferring their retirement or moving plans, and they will have to sell.

Edward Leamer at UCLA thinks the region's price decline could be overstated because relatively few high-end homes are listed or sold. Dataquick's numbers are currently heavily weighted toward the lower-end, especially with foreclosures. Leamer thinks that the Case-Shiller index gives a better picture, which excludes new construction and only compares a home's sale to its previous sale. By Case-Shiller, prices are 15% below their peak.

Are you starting to understand why I am such a grizzly bear and why I think we could see 70-95% declines from the peak over the coming years?

Yes it sounds crazy, I know. But this real estate tail has been wagging the economic dog, and the labor market is finally now starting to show some signs of stress. If the employment rug gets pulled out from beneath us, it'll be all over. If that does indeed happen, I would expect the decline to accelerate substantially and perhaps it will be mercifully quick, instead of grinding us down over a period of several years. I honestly don't know which would be better.

This downturn is orders of magnitude greater in size and scope than the last downturn. So if I can manage to retain full employment, with little or no reduction in income, and my savings and investments don't evaporate into thin air, I will figure I am doing pretty darn good.

To quibble over whether we actually have a 15% decline or 19% decline in home values reminds me of clipping the toenails on the body and ignoring the blood pouring out of the bullet holes.

Long-time readers know that with the exception of the charts for all of Los Angeles County, I place little value in the rest of the charts below, due to the low sales volume that generates them. Nevertheless this is all we have to go on. Remember these are sales of EXISTING homes.

Here are the detailed RESALE statistics for the beach cities and some of the surrounding zip codes (prices are in 1000's):

                         SFR   MEDIAN    %YOY    CONDO  MEDIAN   %YOY  
LA/Westchester    90045   12    $728     -4.3%     1     $380   -16.5% 
El Segundo        90245    4    $773     -9.6%     5     $539   -14.4%
Hawthorne         90250   19    $513     -6.8%   N/A      N/A      N/A  
Hermosa Beach     90254    9  $1,255    +32.2%     6     $903    +1.0%  
Lawndale          90260    7    $370    -30.8%     1     $500    -9.8%  
Manhattan Beach   90266   13  $1,723     -6.9%     1   $1,215    +9.8%  
Palos Verdes Pen. 90274   13  $1,300     +2.0%     2     $261   -45.8%  
Rancho P.V.       90275   22  $1,108     +3.3%     2     $482    -3.6%   
Redondo Beach     90277   12  $1,078     +7.9%     7     $810    +7.6%   
Redondo Beach     90278    8    $645    -12.8%    13     $640    -6.5%

And let's pay special attention to what one former homeowner said of her recent experience getting out from her home at a loss:

We had no business buying that house, but everybody was buying a house, and the loans were there. Don't get caught in the hype. It bit me hard.


Blogger Rob Dawg said...

I would put the lower limit at ~85% which is roughly the amount of back taxes, service charges and transaction expenses for conveying a worthless property. There will be some places worth less than their tax bill which will have to be dealt with because recent tax assesments will have proven to be untenable being based upon 2005-2007 purchase prices but that's an accounting issue.

9:11 AM, March 16, 2008  
Blogger bearmaster said...

Good points Rob Dawg,

One of the few good things I expect to happen from all this is that some efficiencies will be brought to the real estate transaction market. A truly debilitating deflation in the market will force the market participants to seek ways to cut out middle men, reduce costs, and so forth.

We are already seeing things happen in this market that have not happened before, it'll be interesting to see what transpires (and the positive constructive outcomes from it) when it gets downright bad!

11:22 AM, March 16, 2008  
Blogger Flat Rock Pointer said...

I am hearing from multiple sources that Palos Verdes Estates volumes are going ballistic in the past month. My sources tell me that the pent up demand from "I'm Going to Wait"-ers and the 10%-ish listing price cuts, plus some falling borrowing rates, has led to a mating frenzy. Moreover, I'm hearing of increasing bidding wars through the listing price in PVE as the "waiters" don't want to see "their house" sold to someone else after they waited so long. One source tells me that the fact that many in PVE don't "need to sell" is limiting inventory, fueling the trend described above.

Your thoughts?

2:23 AM, March 18, 2008  
Blogger bearmaster said...

Flat Rock Pointer,

This all happened before during the last downturn. Maybe history does not repeat but it rhymes very closely. Price declines reach a certain level, the "buy the dippers, gotta have a house NOW" crowd comes out of hibernation, there is a bidding frenzy, prices quickly bounce back to a certain level, the adrenaline wears off, market resumes its slump.

Then the cycle repeats all the way to the bottom, which is years away.

I suggest reading this blog very carefully. You'll learn that some industry experts quoted in the papers recently believe that even though those in the affluent areas initially do not feel the financial pressure to sell that those in the mid-level areas do, eventually they must, if they want to move forward with other plans. So the affluent areas get affected too.

Read about bidding wars at auctions, how PV was particularly hit, and more about the last downturn:
The Last Great Southern California Housing Slump

4:07 AM, March 18, 2008  

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