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

CarreraS2 · 07-04-2006, 10:10 PM

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.

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?

CarreraS2 · 07-04-2006, 10:16 PM

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?

nostatic · nostatic's Garage

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

Porsche-O-Phile · Porsche-O-Phile's Garage

"Oh, but this time's different".

CarreraS2 · 07-04-2006, 10:33 PM

Quote:

Originally posted by nostatic
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

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.

nostatic · nostatic's Garage

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

CarreraS2 · 07-04-2006, 10:38 PM

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.

dd74 · 07-04-2006, 11:30 PM

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.

sammyg2 · 07-05-2006, 06:23 AM

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?

Tobra · Tobra's Garage

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.

Moses · 07-05-2006, 06:42 AM

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.

turbo6bar · 07-05-2006, 06:50 AM

Quote:

Originally posted by sammyg2
If the bubble is going to burst, when? How bout some predictions?

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

on-ramp · 07-05-2006, 06:52 AM

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.

red-beard · red-beard's Garage

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.

on-ramp · 07:01 AM

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.

turbo6bar · 07-05-2006, 07:03 AM

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.

CarreraS2 · 07-05-2006, 07:11 AM

Quote:

Originally posted by dd74

L.A. is immune to what plagues the rest of the country. Why? Because it's L.A. Everyone wants to live here.

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?

artplumber · 07-05-2006, 07:21 AM

Quote:

Originally posted by SoCal911SC
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.

turbo6bar · 07-05-2006, 07:35 AM

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

turbo6bar · 07-05-2006, 08:20 AM

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.