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.

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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.