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In our continuing series of guest posts Peter Viles, writer of the L.A. Land blog for the LA Times is gracious enough to share his thoughts on housing prices. We interviewed Peter a while back, you can listen to him here.
How far will home prices fall? Seven percent? 15 percent?? 30 percent??? 50 percent??? On my housing blog at the LATimes, I put up a post over the Labor Day weekend linking to a post at a favorite LA blog of mine, Manhattan Beach Confidential, that collected various predictions of how far prices will fall from their bubble peaks. Here is my post on LA Land.
The comments I received were, as always, enlightening: Pat wrote, “Pricing is completely dependent upon the neighborhood. Auctions have shown 30% price drops already in parts of Riverside, San Bernardino, and San Diego counties. Other areas, like the Westside have shown drops of less than 10%.”
Amir wrote, “Anybody who read Fooled by Randomness or The Black Swan knows that most predictions (especially economic ones) are usually wrong. Not some of the predictions wrong, all of them!” (I liked that comment because Morgan recommended “The Black Swan” to me, and I’m enjoying it).
Lastly, investorguy wrote, “75.3% of all statistics are made up on the spot.”
My thoughts: I agree with all three of the above. When all of this is over — 10 years from now — there will still be no clear answer to the question, “How far did prices fall after the great 2005 real estate bubble popped?” There are too many ways to measure prices. There will be no single answer.
But I’m also starting to believe the crash will not be an equal opportunity destroyer of home values. Areas and neighborhoods where sub-prime borrowers were plentiful will be hit much harder. Think it through: who’s the natural buyer of a home previously owned by a sub-prime borrower in a neighborhood full of homes that last sold to sub-prime borrowers? The natural buyer is another sub-prime borrower.
Except: that loan isn’t available any more. Sadly, I see a downward spiral of prices in those areas. It’s quite likely some of the single family housing stock becomes rental housing. My guess is we’ll see “foreclosure clusters” where prices will fall further, and the government will focus its efforts, once it decides what those efforts will be.
I agree with you that there will be pockets of areas that will see much greater value loss than others. I am in the central valley of California, and we are going to take a beating. Stockton, Modesto, and Sacramento are in the top 10 for highest foreclosure ratings in the nation. You are also correct that the subprime loans are the largest defaulting loan (we will see what happens when option arms start their recast). What we can hope however is that some of the neighborhoods, especially here, were not what you would call “typical” of sub-prime lending. If FHA would raise the loan limit $25k, you could see homes that are being lost to foreclosure, open up to first time homebuyers or even move up buyers using more conventional financing.
I wonder if there will be investors around to pick up old sub prime property for rental units.
Morgan — enjoy your time back East. It’s a pleasure to be part of your blog.
Pete
THE BIGGER THEY ARE, THE HARDER THEY FALL
The biggest price drops have been in areas heavily financed by subprime loans - for now. Watch for the “prime” areas to get hit next and get hit even harder.
Problems with jumbo loans and improved underwriting standards will finish off the wealthier neighborhoods.
Here is my prediction:
Nationwide, -15%
California, -30%
Inland Valley, -40%
Los Angeles, -50%
Manhattan Beach, Beverly Hills, Santa Monica, etc., -60%
(Peak-to-trough Case-Shiller Home Price Index)
HK
Peter is right.. it’s often difficult for consumers to understand that there are people who could qualify for the expensive homes and the prices and they are not going into foreclosure
While it’s true that certain areas in particular will probably get hammered more than others, it’s also true that real estate transactions are on a kind of ladder, where the ones at the top ultimately depend upon the ones at the bottom in order to happen. During the last downturn, homeowners in Beverly Hills and Santa Monica all thought they were immune from the housing bust contagion that spread through Hawthorne and Lawndale…until they, too, were caught up in the slowdown. The explanation is pretty simple: typically, in order to move up to a nicer place, the buyer has to sell their lesser abode, and so on up the ladder. As I recall, the Great Housing Bust of 1990-1996 didn’t hit the westside of L.A. until about 1994-1996, but when it did hit, it hit with a vengeance — Orange County didn’t even begin to recover until 1997, according to this link:
http://www.rntl.net/history_of_a_housing_bubble.htm
It’ll be interesting to see if history repeats itself. Especially in light of today’s recession-implying employment figures and the fact that this latest bubble is even bigger than that last one.
While there are “people who could qualify for the expensive homes and the prices” as Kaye stated, there are also plenty of people who “bought” them when they couldn’t. There is no shortage of homes in the Bay Area where people purchased a home less than a year ago and the same home is currently listed for $30,000-$100,000 less than the last purchase price. Cross reference craigslist postings and zillow recent sales and you’ll see what I mean. The further you get away from the city, the more of these you see.