Those who don't think there is a huge So Cal housing bubble - explain this
 

I think there is, and prices will fall at least 50%, maybe more, in most areas.

There are lots of technical reasons, but here is one that I find fairly compelling.

This is a random house near an area I grew up in LA. So I know this area very well. These are typical post WWII construction tract houses in an area that is best described - ok'ish. I wouldn't personally want to raise my kids there. You are going to have a mix of some fairly well kept houses, and some dumps, on the same street.

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Now, when these houses were new, I think they sold for $20K or so. I'm not sure when they were built, but say the mid 50s or so.

From that time onward, they followed a fairly typical appreciation line. Probably averaged 5-6% per year or so, some years more, some years less.

This steady line goes on for FIFTY years.

Now, suddenly, from 2004 to 2006, the house's value supposedly goes from roughly $300K to over $1 million.

How can this NOT be the product of a speculative bubble?

The typical answers don't seem to work:

"They aren't making land anymore" - Really? Did they just stop in 2004?

"So. Cal. has great weather, desireable place, etc." That also seems to have been true for the past 50 years.

It seems to me the only response is that we are in a "New Market," there has been a "paradigm shift" or something like that.

But has that ever happened with housing in any time in history? Or even with any other asset class?

The house in my example could go down 60%, and that would only take it to $400,000. That doesn't seem unreasonable at all to me, because:

1) That's still a lot of money for a house in that area (I wouldn't pay $400K to live there, and $1 million is laughable).

2) $400,000 would still represent tremendous appreciation for the house from 2000 to the present.

So, does anyone think the value of houses like this will stick?

Also, as a follow up, assuming that houses like this do fall 50% over the next 2-5 years, what effect do you think it would have on the national economy?

nope


i've argued this all along: certain areas will lightly correct, others will heavily correct. Ones that follow the plot above should fall in the latter category. My soon-to-be-ex-house should be the former due to location

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"Oh, but this time's different".

If I were handy with pshop, I'd draw a straight trend line on your graph.

That would show that the house should trend towards around $1 million. From an apparent peak of $1.5 million, that's a pretty heavy correction.

And, the house in your graph isn't going to lose as much percentage not because it is in a good location, but because it didn't bubble as much as most.

but it's slope is steeper due to location and commute times

true - but losing 25-30% of value from the peak is still a pretty heavy correction, and that loss seems to be a "best case" scenario for most Southern Californians over the next few years.

The prices will drop, but in L.A., in very small increments. I'd say 10 to 15%.

I work near Hancock Park, and two houses I've seen for sale there commanded close to $2 million. They both sold in two weeks.

L.A. is immune to what plagues the rest of the country. Why? Because it's L.A. Everyone wants to live here. For the odd person who says they don't, there's 1,000 more who say they will. This alone will fuel prices to where they are now. Sure, there will be corrections, and foreclosures are on the horizon. But there's a reason $2 million dollar L.A. Metro homes sell in two weeks, in addition to the fact that way out in Landcaster/Palmdale, the average price of a single-family is approaching $800,000.

1) There are only so many houses available here.
2) Lots people want to be here. Few if any will be admitted $$-wise.
3) The people who do come, have the money to pay, and continue to fuel the high prices.

I wonder what a graph of the interest rates for the past 10 years would look like if it was superimposed over that one.

IMO Some houses in so Cal are grossly overpriced, mostly the ones that are near or over $1.5 mil.
Those houses will get hit with a significant correction.
The houses in the $700k range? Small correction which will be temporary. They will drop about $50k to $75k but will get all that back within 5 years.

This bubble theory has been bouncing around for about 3 years and I haven't seen it happen. In fact my house has gained about 50% since the bubble predictions started and 12% in the past 12 months.

If the bubble is going to burst, when? How bout some predictions?
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I think Wayne has hit upon it the best. It is not so much the interest rates, or that "Everyone wants to live in LA(That is patently ridiculous, I would not live in LA if someone GAVE me a house, I have lived there, did not care for it)

It is a supply and demand thing, but not houses, it is financing. There has been a lot of easy money, with people taking out ill advised loans that probably should never have been approved. The Real Estate Industry wants to sell property, they don't care if you can reasonably afford it, or even if you default on your mortgage. If you do, they just repo, resell and get another commission.

It will all fall apart, it is a question of when and how far. I just hope I have enough ready funds to cash in on some poor fool who thought he was going to get rich in real estate.

If you want to hear some really scary stories, have a talk with a mortgage broker...after he's had a few beers.

First you will hear about "interest-only" loans and how they have been supplanted by "negative amortization" loans. Then you'll hear that a huge number of loan apps are fraudulently written. Many of the brokers in my area haven't written a traditional 30 year loan in more than 5 years.

In the East Bay, it's hard to find a house for under a million. So we have thousands of struggling couples who fudge their debt numbers to get into the 1.2 million dollar house. They have an interest-only loan that will need to be refinanced in 3 years. If the interest rates climb even a little bit they can no longer afford the minimal payments and if the value of the home has dropped, even a little bit, they are upside down and have no option but to walk away.

Foreclosures here are on the upswing and the higher priced properties are losing value. It's the tip of the iceberg.

Bursting right now, but it depends on your definition of "burst."

I've posted my predictions in other threads, but here it is again: Bursting bubble leads the economy into a recession. I predict an actual fall in prices which will be compounded by the effects of inflation. I believe we will see a YoY decline in median and average prices in many markets by fall 06 or winter 07 and if things really unwind, we'll see an unprecedented YoY decline in the national median price. Assuming Bearnanke does not drop $100k bills from B-52s, we may not eclipse 2005 prices until the next decade.

jurgen

Wayne,

Right. The lending inst. and banks decide whether people get loans. The more buyers, the higher the prices due to the supply/demand model. The higher the prices, the more money these financial institutions make from interest, closing costs, etc...sounds like corporate conspiracy. profits above all else, no matter who gets hurt in the end.

I think it will have an effect on the minority of people involved in recent transactions, either purchase or taking equity out of a house. The vast majority of people owned their house before the bubble, so it was a paper gain. And now it is a paper loss.

as long as your mortgage remains the same and you can pay it, what difference does it make if your house is worth 1 Million or 100K?? the only problem is IF you want to sell it , then your mortgage might be more than your house value. so when you sell, you have to add money to cover the balance on the loan.

either way, your house is not a business. it's a liability. It's an asset, but for the bank. They make money on the interest. It's also an asset for the insurance companies, the local government, and all your maintenance contractors.

on-ramp, if you're going to lay blame, don't forget the fine folks at Fannie Mae and Freddie Mac. Their accounting activities are nothing short of fraud, and legislators have been willing to look the other direction while enjoying the perks of Fannie's fabulous lobbying arm.

Additionally, as the housing boom winds down, we will become aware of many instances in which local governments approved subdividisions and provided occupancy certificates for substandard construction and piss-poor planning. As long as property values and the tax base are increasing, they are perfectly happy to overlook upcoming infrastructure problems.

But wasn't all of that true for the past 50 years? That doesn't explain the graphs above. Hancock Park has always been a nice area. What happened in 2003 or so that hadn't happened in the past 50 years to suddenly make everyone realize it and drive prices up sharply?

(I'm not saying there won't be a price decrease). There are always thresholds beyond which things happen dramatically. Very easy to see in illness. You're noticing just a few minor symptoms learn to deal with them, and then BAM suddenly you're in the hospital with five new diagnoses and needing surgery.

People have to live in LA (the job is there, family there, whatever). Space is limited in areas where people can live - no one wants a 3+ hr drive twice a day. People want single family detached homes with garages. Many families earn more by having 2 incomes. Add in mortgage rates/lending practices and things start to takeoff.

Anyone who "knows for sure" what will happen, whether slowdown, minor bust, or the apocalypse is kidding you.

SoCal, we haven't reached capitulation, yet. Revisit this thread in 2 years. Greed breeds short memories.

Keep an eye here for weekly data.

http://www.benengebreth.org/housingtracker/location/California/LosAngeles/

I've noticed that most areas are well above their winter lows, but we're seeing some recent weekness which defies the fact summer is the hottest selling season. It will be interesting to see how prices head in the next 3-5 months. Inventories are mounting, but we don't know how many sellers need to sell vs. want to cash out on big appreciation.

I am not so concened for myself sitting here in LV, as the value of my house can be cut in half and I am still even. If you consider that the Builder essentially gave me back 2/3 of my Downpayment after I did the substantive repair work for Construction Defect, you still can take away another third of that value and I'd still be even.

That said, I would say never say never, prices can collapse. During the Depression my Grandparents were able to buy a home for $3000 that formerly had cost $12000.

Nostatic and DD are in the world of wishfull thinking when they think that they will be immune. I have seen this happen a coupla times before in LA., Boom then Bust. and Boom again. Each time it has taken years to work out from top of the market to bottom of the trough, and as there are excesses to the upside there are excesses to the downside. I think to gauge an area you have to see how quickly and by how much an area has risen and the reverse of that move will give you an indication of what the potential decline is gong to be.

While the actual number of people who paid those "HIGH" prices in any given hood maybe few, the fall out will be the decline in the net worth of everyone (paper profit) and especially anyone who refinanced their home to take advantage of their new found wealth.

Well, somewhat of a non issue for me as I'm being bought out of the house under a divorce settlement agreement based on an agreed upon value right now. I never said I was immune. Just that some properties will drop more than others. Even during the bust years there still was a premium for houses that were in good school districts and provided short commutes to central work areas. If you look at the plot of my ex-house, the "bubble" has already pretty much burst and it is back down to a value that is in-line with the past 10 year increase. This is due (imho) to the fact that the schools have gotten better while most areas have gotten worse, and commute times have increased, placing a higher premium on more centrally located single family dwellings.

But I may be FOS...doesn't matter as long as I get my settlement check. Then I want the market to tank hard so I can afford to buy another place...

First of all, you don't know me nor know where I live aside from the city under my avatar. So secondly, you're speaking from a generality that cannot cover every neighborhood in L.A. or L.A. County. Where I live is a neighborhood that is established, stable, and houses continue to sell quickly with little to no reduction in asking price. It'd be different if I were out in Palmdale, Landcaster, Redlands or Rancho Cucamunga, where large housing communities are continually built and excessive prices - much like what is causing the development collapse going on in Vegas right now.

Last: your conjecture is based on, it sounds, many people living by the skin of their teeth - which is certainly not the case for all people in Los Angeles. Aside from feeling sorry for those who may lose their homes at the first whisper of a half-point interest rate increase, I also feel sorry for (though not really) the ones who left L.A., thinking they'd make big cash on their home's sale, then come back to something larger, as in you, Tabs. But that ain't going to happen.

L.A. is not the rest of the country when it comes to decreasing land values in the housing market.

L.A. is more like a marriage: sure, you can break up with it, but when you want to come back, it's going to take a lot more money and effort to do so.

I'm wid ya! Here's hoping a big crash happens!

What's the zip of this magical place?

If you need to ask, you can't afford it. SmileWavy

90210?

Let's get something straight...
 

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"There is no housing bubble in SoCal. Never!"

Surviving a Real-Estate Slowdown

I disagree with Heebner's thoughts on the effect of RE on the economy, but I am shocked to hear such bearish sentiment from a real market player.

Lord god I don't want to see the children!

Not looking to buy - you'd have to be nuts to buy in so cal right now.

Anyways, you know your own zip and address, you can run it on Zillow. Does it show charts like above? (Sudden spike in value in 2003/04?).

If so, and your neighborhood is "established and stable," what caused such price instability (to the upside) in 2003/04?

Run Zillow on your house and post the 10 year chart. We'll preserve it here and see if you were right 2-3 years from now. Betcha a beer you won't be!
:)

Thing is, 2-3 years, I'm not going to care, much in the way I don't care now. If my house value goes up, good, it goes up. If not, fine. I'm not living where I live to make a profit in 2-3 years.

I've always thought home ownership is as much about personal character as it is about the means to finance the home. Flippers (those who flip homes) lack character, IMO.

Except those that have sunk I suppose. . . Somehow that metaphor makes more sense now thinking about it. . . ;)

this thread isn't about house flipping, or selling an existing house in the next 2,3,4 or 10 years.

the existence or non-existence of a bubble is impt for a lot of other reasons. like you, I'm neither buying nor selling a property in the next few years, so the answer to the bubble question has no direct effect on me either. but it should have an effect on what one does with one's other assets in the portfolio.

correctly figuring out the bubble v nonbubble is impt, IMO. There's lots of ways to make money if you are right or lose money if you are wrong on that issue, other than direct home ownership. That's why I'm interested in getting perspectives on the issue. stuff needs to be moved around, and I'm trying to figure out where to move it.

(I also am fascinated by how "this time will be different" is so readily accepted by so many, when "this time" is never different).

Well, there will be a correction. I realize that. But my question is why do things need to be moved around? Or rather, what is it that you think needs moving around? My thought is to just stay put. If you're employed and can withstand any adjustments, you are in a good position. Oh, and watch the spending - i.e. no new Porsche stuff.

Everyone I know in L.A. has a mortgage. But also very few people I know have taken out a second mortgage. And also, no one is moving. One outstanding reason is no one can afford to move unless they leave L.A.

That's fine if you disagree. Effect (or is "affect") is intangible depending on the owner.

Property, however, doesn't care who owns it, because property in and of itself, realizes it will always come back, and will always be, in large part, secure. Some properties will be affected less than others. But in the end, it will always stabilize, and later, rise as high or higher than before.

Case in point: house prices in the San Fernando Valley after the Northridge Quake plummetted. However, western Santa Monica and Santa Monica Canyon was also hit hard after the earthquake, but house there prices didn't fall at all.

Back in '94, one could pick up a 2,500 sq. ft. SFV house in Sherman Oaks, for $200,000. Now, 12 years later, some of those houses average close to $1 million.

So yes, the tide comes in, but it eventually also goes out. One just needs to wait it out...if they can.

If you want to go back even farther, in '88, there was a recession. Valley homes then might have been as low as $80,000 to $100,000. Now, with a correction looming, those home will still be worth much, much, much more than their 1988 value.

According to Zillow, my house's bubble has burst.

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Has anybody been watching the housing futures market? I know it started ealrier this year but I haven't heard anything about it. Just wondering.

According to Zillow, mine's still going up. Went up more than $9000 last week alone. Of course they are wrong. LOTS of inventory sitting on the market here. VERY unusual for this area. Things are starting to head south. If my home was a mutual fund and not the place I live, I'd have sold already.

Like I said, They're dead wrong.

I'm pretty sure my house is worth less now than it was a year ago and I expect a much greater devaluation in the next few years.

I've looked into it a bit. Traded on CME (Chicago Mercantile Exchange). Have futures for several cities plus national. Based on Case-Schiller housing indicies. 1 contract = nominal $65,000 value. Initial margin is something like $2,500 per contract. When launched, these futures were utterly illiquid, traded like 1 contract per day. I think volume is still low.

Problems:

1. Maket already assumes a decline. Longest-maturity future offered in to May 07 and futures prices already imply material declines. E.g. SF current index is 217.52 and May 07 future is 205.20 implying -5.7% decline in 1 year. That is a pretty steep decline, if sustained would imply 32% price drop in 5 years. So to make money you need SF housing prices to decline at an even faster rate, over the coming 1 year. Maybe could happen, but its not as easy as simply betting on a decline - you're betting on how fast of a decline in the relatively short-term.

2. Capital investment required. Suppose SF housing prices actually decline -10% in coming year. So the May 07 future eventually goes to 195.80 and you make 5% shorting one futures contract. 5% of $65,000 is $3,250 profit on initial margin of $2,500. Yes, that's a terrific percentage return, especially considering the margin remains yours. But suppose you want to hedge a $700,000 house against that -10% decline, you need $70,000 of profit. That's 20 contracts, or $54,000 initial margin capital that has to be tied up. After you've just bought a house.

3. Marked-to-market. The futures are marked-to-market daily. If the future swings against you one day, you may need to put up more margin. Idea of getting a call from broker saying we need $10,000 in next hour or your position gets closed out is, well, interesting. Especially given low liquidity so potential of extra-volatile behaviour.

Caveat - my knowledge of futures trading is entirely theoretical, I'm only an equities guy, so consider this post as just raising issues to consider - do your own research.