Monday, May 19, 2008

L.A. Times: At the luxury end, home prices are falling

The publication of this piece by Peter Y. Hong on May 20 is a milestone in our path to the resolution of the housing bubble. We have been hearing from perennial housing optimists that the more affluent areas would remain immune to the housing bubble bursting, even though our previous slump in the early 90's showed us otherwise. Now we have it in print that the affluent areas are as affected as other areas.

Tom Davidoff at UC Berkeley pretty much has it right. According to a prior story published in March:

Davidoff didn’t hazard a guess on how long prices would fall, but he said that affluent areas – where prices have not fallen as sharply – would eventually feel the pain as well. The higher end of the market has seen only modest price declines in large part because most longtime homeowners in these areas have plenty of equity and aren’t under financial pressure to sell, Davidoff said. So they are sitting on the sidelines, waiting for the market to turn around before they plant “For Sale” signs in their frontyards. But eventually, more and more homeowners in these areas will choose to sell, deciding they no longer want to defer plans such as retirement or a move to another region. “They’re going to start selling, and prices will get to their true market level,” Davidoff said.

And now the vultures are coming to roost. Places like (gasp) Beverly Hills, Newport Beach, and Rancho Palos Verdes are starting to show the kinds of drops percentage-wise that so far has been largely confined to mid-level and lower-level housing markets.

"You can't have one market hugely cheaper than another forever," according to Davidoff. Again, he stresses that the time lag is due to the affluent not being under financial distress and forced to sell. But at some point, if they want to move forward with their own plans, they have to sell, and they may have to cut their asking prices to do so.

The article describes one 90210 mansion originally put on the market over a year ago for $12 million. Not even a price cut in February of over $500,000 stirred any interest. The listing agent said that the "Maginot Line", the "psychological break point", was cutting the asking price to below $10 million.

It isn't just Los Angeles County where we are seeing such declines. San Francisco and Orange County also are seeing declines.

Steven Thomas, an Aliso Viejo broker, notes that foreclosures now make up more than 40% of homes for sale in Mission Viejo and Laguna Hills. The market over $1 million has "definitely changed." The activity below $500,000 has been "tremendous." In addition, foreclosures, which have been practically unheard of in the affluent areas, now are rearing their ugly heads. In Coto de Caza, 17% of the homes for sales are either foreclosures or are listed as short sales.

However, not all affluent areas have uniformly experienced a hit. The article notes that whereas Rancho Palos Verdes was down, the Rolling Hills area was up.

I would not take DataQuick numbers too seriously for any one particular area, for the reasons I have been citing for many months - there are usually too few sales to be statistically valid, and when sales are sorted out by zip code and by property type, the invalidity is even worse. Still, I think the article is a milestone, not because somebody came up with numbers "proving" that the affluent areas are declining, but because psychologically the crowd (via the media) is now acknowledging that affluent home sellers are having the same difficulties selling their properties as do lower-end home sellers. The article even states that one can see dramatic price moves in a zip code on just a handful of sales.

This decline, viral-like in its ferocity, struck first in the outlying areas, such as Antelope Valley and the Inland Empire, where so many buyers obtained their properties with sub-prime loans. Declines in the more affluent areas shows that this is not just a case of too many sub-prime loans, ARMS, or even HELOCs issued. This is a case of the same deflationary psychology (to cut back to conserve) that hit buyers in the lower-end markets now hitting buyers in the higher-end markets. People are people no matter where they live and what their income level, and they are swayed by the same psychological forces. The bursting bubble waters have been inching higher and higher, and though the affluent areas have been on higher ground, it is my belief that eventually, they, too will succumb to the bursting bubble.


Blogger bearmaster said...

As a society, we seem completely incapable and inept at housing homeless people. This is not the first time I've posted about the parking lot people in Santa Barbara.

I hope we see lots more of these, in the shadows of the megamansions that have been sitting on the market for months, possibly years, and still won't sell.

8:26 AM, May 20, 2008  
Blogger stealthcat said...

From the article you linked:

Even if her children offered to help, she said, she wouldn't accept it. "They know me well enough to know that I will get through this."

"My daughter especially is very unhappy. Sometimes she'll cry, and she'll call and say, 'Mom, I just can't stand it that you are living in a car,' " Harvey said. "I'll say, 'You know what? This is OK for right now, because I'm safe, I'm healthy, the dogs are doing OK, and I have a job, and things will get better.' "

I think this woman deserves national recognition. It is so inspiring to see someone in the midst of about the most down-and-out situation one can be in in our country, who still has the strength to say "I'm thankful for what I have and I'm going to work my way through". It's the complete opposite mentality of all the entitlement sense we've been seeing with the housing bubble.

We can only hope that as times get harder (likely), we'll continue to see everyone across all economic statuses be thankful for what they have and that everyone will be more supportive of each other in times of need.

5:36 PM, May 20, 2008  
Blogger bearmaster said...

She is one tough lady, isn't she.

By the way, the outreach program that negotiated with the city to allow homeless people to sleep in their cars is New Beginnings Counseling Center. They also deserve recognition.

5:57 PM, May 20, 2008  
Blogger wannabuy said...

That graph is amazing.

Maybe I should agree with TJ on the magnitude of the downside. ;)

Seriously, it hasn't begun. The middle class is still 'priced out forever.' If this summer isn't the start of the exodus (a la 1993/1994) I will be shocked.

Got Popcorn?

11:50 PM, May 20, 2008  
Blogger bearmaster said...

Yep, that graph is pretty scary. This bubble got so big that it has barely corrected.

We seem to have become masters at delaying the inevitable. I expect an exodus of some sort too, but this year I think there is a small chance we could see some leveling off in our housing market here in So Cal and a slight improvement in the economy (sort of an election year bounce). 2009 will be bloody though, and will include that exodus.

But there are people I read (e.g., Peter Schiff) who think the pain will come much sooner.

6:14 AM, May 21, 2008  
Blogger bearmaster said...


I sent a donation to New Beginnings, along with an email, and I thought you might like to see their response:

Dear Susan,

Please let me take a moment to offer a heartfelt thank you from both New Beginnings and Barbara Harvey, the woman in the CNN Safe Parking report that has captured national attention. The outpouring of support for this woman who is just one of the victims of our current economic circumstance here in the United States has been overwhelming. People are indeed living in their cars here in Santa Barbara and while this might not be an ideal situation, it has indeed proved to be an effective short-term solution to people being put on the streets with nowhere else to turn. Our agency is currently helping Barbara Harvey and others just like her here in Santa Barbara to get out of their cars and into successful living situations. Because of the overwhelming response to the CNN report, a special fund has indeed been set up for Barbara Harvey and her two dogs. With these donations we hope to update you soon via our website how she has transitioned from being homeless, sleeping in her car, to living a vital life in her own home. Thank you again for your amazing support!

Our organization is a registered nonprofit, so your donation is fully tax-deductible. Our tax ID number is 77-0556795.

2:27 PM, May 22, 2008  

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