Southern California back into a year-over-year decline. Los Angeles median home price down over 10 percent in 4 months. Slowest housing sale month since March of 2008. 30 percent of buyers involved all cash and the median price for these homes was $190,000.
Déjà vu yet again for Southern California housing prices. Remember all the hype about home prices going up in early 2010? Well Southern California has entered another month where the year-over-year median price has declined. In other words you didn’t miss out by jumping head first into the empty pool of housing industry mantras. This should come as no surprise given the pervasive unemployment in the region and the fact that many of the new jobs that people took on are in lower paying employment sectors. No more moonlighting as a mortgage broker or real estate agent and pulling in six figures. In other words keeping prices inflated with lower wages doesn’t seem to be in the cards. Another stunning fact is that 30 percent of all home sales last month were for all cash and the median price paid for these homes was $190,000. The investor class is thinking they can turn a profit making these into rentals. I wonder if they are factoring in vacancy rates, fixing places up after tenets rip up items like the carpet, or the fact that California is not very favorable for landlords. Either way, I think many investors are being lured by the siren call of low prices without doing a deep analysis. The below chart tells us where things are heading in California home prices:
Southern California median home price
Another key point in the data that was released was the fact that home sales in January were the slowest on record going back to March of 2008. This was in fact a very weak report. We find that many Southern California home buyers are price conscious (now that they have to document income) when it comes to the monthly payment. Let us spend some time on the above chart since it is important to understand. The Southern California median price is now down on a year-over-year basis. We already knew this was going to happen simply because the economy is in bad shape and the massive amount of shadow inventory. Once the inventory hit the market prices would move lower. The trend started happening after the summer of 2010 and now prices are back to levels last seen in 2002. With little hope of major price moves up in 2011 we will have a nominal lost decade. We may even breach the lows reached in 2008 in terms of median price given that investors are jumping in for low hanging fruit.
Los Angeles County took a big hit last month. The median price dropped from $330,000 to $300,000! A 9 percent hit in one month! In September of 2010 the median LA home was going for $340,000 so we are now down over 10 percent in a matter of four months. Until the shadow inventory becomes a tiny portion of the overall housing market jumping into the market at these prices is a speculative bet.
It is also the case that foreclosure re-sales are going back up as expected:
This is an interesting trend but falls in line with our last report that banks are now moving on shadow inventory at a brisker pace. 37 percent of all homes sold were foreclosure re-sales in January. This is up from 33 percent from the June 2010 low when all the stalling gimmicks were in full effect. Expect this trend to continue up especially if investors are looking to pick up cheap places to rent or flip. Many are buying out in the Inland Empire but many forget to ask whether these communities are sustainable especially if oil remains at a permanently high plateau. A large number commute into the basin and incomes are much lower in these areas. From investors that I have talked to renter turnover in these areas are high. So those using optimistic full occupancy metrics are using a lower price to base potentially optimistic models. Look at Nevada and Arizona for examples of desert regions with cheap new housing developments. Sure your mortgage is $700 but what about your $300 energy bill and $500 of fuel for your car to get around?
Late night infomercials are a good indicator of where not to invest. Last night I happened to catch a glimpse of someone trying to teach people how to buy foreclosures in California and “become financially independent in 3 months.â€Â This kind of get rich psychology hits at the primordial part of our brain that likes to believe in fantasy and is devoid of rational logic. Even though we like to think of ourselves as far above snake oil tactics most of us have a hard time avoiding the herd and diving into another gimmick. The shadow inventory and the above charts have a hard time competing with people and their instinctual drive for finding a big harvest with little work. These are not deals because these areas especially where homes are selling for $190,000 all are built in a model where energy is cheap and abundant. I don’t need to tell you that model is now no longer viable. Growing global markets are competing for the same resources so this isn’t some kind of temporary spike.
You also have many younger households that are holding off on having children and aren’t drawn to the allure of the suburbs. This may or may not be part of your situation but younger couples of today have different tastes from those of past generations. The housing bubble was largely a baby boomer phenomenon. We have a new dynamic where young working professionals are coming out with student loan debt that previous generations never had to contend with. Many young professionals have a mortgage before they even buy a house because of the burden of student loan debt. The generations of working at a blue collar job and affording a home in a good part of town seem long gone. In order to compete, many are finding it harder to avoid debt. Yet debt is now harder to access because the economy is over leveraged already. In other words, it is hard to see how interest rates don’t rise in the next few years. It is also hard to keep this model going because it is unsustainable. To iron out these dislocations, either incomes need to go up (no evidence of this with a 23 percent unemployment and underemployment rate in the state) or home prices need to go down (this is actually happening).
California currently has 162,000 homes for sale. Add in homes in the foreclosure process and the number jumps up to 446,000. This is not a normal market. Investors seem to be hungry for low priced homes and banks seem to be letting go of some of their shadow inventory. What does this mean? Lower prices for 2011.
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44 Responses to “Southern California back into a year-over-year decline. Los Angeles median home price down over 10 percent in 4 months. Slowest housing sale month since March of 2008. 30 percent of buyers involved all cash and the median price for these homes was $190,000.”
Another well known economics blogger had a piece a week or two ago wherein a woman in New Zealand!!! was enticed by a TV ad touting Arizona homes for investment purposes. I’ve heard of other such ventures being offered to people abroad. If you are in Sydney or Hong Kong buying homes for under $100/sf would seem attractive. Since you note that 30 percent of SoCal sales are now cash deals any idea how many of those
are not local investors but money from abroad?
I agree trying to rent out single family homes in California has disadvantages especially if you are trying to manage them from across the Pacific Ocean but it also the case that there aren’t many other ‘safe’ investment opportunities. Stocks and bonds can be viewed as very dangerous now and with ZIRP and looming inflation it maybe that, at some point, real estate makes sense. Where replacement cost is considerably higher than your purchase price and where there are no ‘locational’ problems as a hedge against currency debasement and/or high inflation residential property does have an appeal.
There are no safe investments in the world. If there were you can bet all the hedge funds would be in that. Not even US treasuries, once considered the safe investments are that attractive anymore, give our deficit. There are different kinds of danger for different kinds of asset. That’s why you diversify. Housing has historically tracked inflation. So it’s more of an expense like a car than investments. I think this misconception that housing is an safe investment is partly to blame for the housing bubble. After all, if you were told that your $700k house will be worth $500k, you think a lot harder about making that purchase.
I think a lot of the cash deals are people that own homes and are relocating. Since >50% of homes are owned free and clear this shouldn’t be a big surprise.
If someone had history on percentage of cash buyers it would be useful.
Also I see the returns on properties as rentals as decent as well. A large number of people I know are using REITs.
Also – don’t forget all the accidental landlords, especially in areas like LA. Lots of people have moved out of their underwater homes and are renting them out in hopes that prices will come back so they can at least break even. Ain’t gonna happen. The vast majority of these will give into the stress of being landlords and get foreclosed in the coming years. I still see tons of rental listings for houses at wtf prices, and know those people are being negotiated down to the reality of losing money every month. That can’t last long.
Exactly. They all think that inflation is going to bail them out. LOL.
Has anybody else seen the sockpuppets of late that come in and mention what a good deal RE is because of “looming inflation”. Buy now or you’ll be inflated out forever!
Wage deflation here we come! I expect that there will be a whole lotta angry debt ridden physicians in the years to come. The doctors I know say that they’re being squeezed by medicare and insurance companies now. Good thing they listened to my advice 2 years ago when I told them to keep renting.
Unless they’re approved by HAMP, negotiate their monthly payments to 31% of their monthly income, which can be less than what they can rent it out for. So they rent it out at a profit, move back home and live with mommy and daddy.
But once you rent the house and move out it’s no longer your primary residence, which disqualifies you from HAMP no? Not that these specuvestors ever pass up a chance to cheat the system 🙂
Doesn’t work that way Jason. I AM approved by HAMP, and if I did what you say, that would be fraud. Even with HAMP approval, there WAS NO PRINCIPAL REDUCTION, so I still sit under water by $120,000 from purchase price. The *only* thing keeping me in my home is the fact I put 20% down, and that will only keep me in this house until the interest rate starts going up again….if that long.
It boils down to circumstance. I’m looking at retirement in 10 years, do I think this market will come back in 10 years? No, I don’t. I think the prices may come back to 2004 levels, but how much will those american dollars be worth in 10-15 years?
I can invest $15,000 per year pre-tax in Wall St. at a fixed interest, but at least that money will be there, who knows where housing prices will be.
I checked Craigslist for rental houses in San Diego zip area and what a shocker. Different from just three months ago now the listing of rental houses are steeped in rents ranging from $3000 to $6000. A new phemomenon. You are right. Looks like a lot of underwater houses are for rent with the owners hoping for a recovery.
Yet Bernake says he will defend his decisions till his deathbed. The lunatics are running the asylum.
If RE is not safe investment then I am going to repeat my question again.
“Where do you park your CASH”
You put CASH in the bank. If you are asking where you invest cash then you spread it out over many investments domestic and globally. But you are asking a question that has a million answers, no one knows where to invest, hence why you always hear RISK.
Personally, I think Las Vegas (tax free state) and Phoenix are good area to pick up cheap homes. Baby boomers are still going to retire and they will want cheap homes in a warm area. And you should be able to get 5-10% return on those homes over time.
Right now there are lots of people (myself included) with a good chunk of change just collecting minimal interest since other investments are so risky (401k anyone?). Sure I could try the stock market roulette wheel, but I have kids’ college to think about. So instead my money does absolutely nothing for the economy except collect a piddling interest. Multiply this by the number of other people in my boat and I bet it’s a huge amount of wasted capital. All this, combined with the wasted capital of people investing their cash in old stucco boxes and we have a recipe for failure in this country, both economically and culturally. Only the super rich can play the investment game – us “middle class” minions are left watching on the sidelines while they laugh their way to the bank.
Be very careful with the ruse of “below replacement cost”. That only makes sense when they are building, look around…
in complete agreement as usual doc. Especially comments about buying way out in the IE and high desert, where there were never many jobs to begin with. So what if you can buy a house for 600.00 a month – add in energy costs and you might as well live in the basin and save wear and tear on your car and nerves, unless you’re already retired and find those areas desirable. Can’t imagine why tenants would see it any different.
I just want to say I’ve been reading real estate blogs from all over the country for years and this one consistently has people bringing their “A” game to the discussion. Bravo to you Maestro Dr.! I’ve been a realtor in south Orange County since 1986 and have seen various trends with real estate through the years. What I’m seeing now is different than anything I’ve seen and/or studied regarding the history of real estate. I’m seeing real inflation in commodities filtering down to the street level. I’m not interested in Bernanke’s spin regarding core inflation and “containment”. This is the same guy who was telling us there was no housing bubble as the you know what was hitting the fan. Zero credibility. Anyway, I’m seeing “real inflation” in congruence with further home price compression especially with price ranges above $500,000. A typical inflationary environment will have real estate trending to the upside, yet in this case, we seem to have a divergence between real estate and prices of real goods. Any thoughts/input would be appreciated.
Marty, here’s a well thought out explanation on why fears of inflation and hyperinflation driving home prices upward is pure bunk. Certainly, after a recovery period they would rebound and in fact skyrocket…but not in the near/short term while true necessities would be heading upward VERY fast.
http://gonzalolira.blogspot.com/2011/02/inflation-hyperinflation-and-real.html?source=patrick.net#navbar-iframe
Foolio, thanks so much for the link! Great information.
Many people have hoped for, or predicted a “soft landing” in real estate or have said that a housing recovery is just around the corner. I see it very differently. When all is said and done, I think it will be similar to the aftermath of an A-bomb detonation. There will be devastation. People will think and say, “What happened?” People will wonder how it could have happened. I think the areas most likely to be devastated are those which are still highly overpriced. I think half of California would qualify. Housing prices will be decimated.
Decimated = Back to normal levels (i.e. <1998)
Being a landlord is not for most people. Actual experiences of mine: Calls late at night to unplug a toilet. Tenant’s dog (no, did not know he had one) tears up linoleum, and rips up living room carpet. Tenant’s parakeet allowed to fly free in the house, and craps on all the drapes. Tenant’s son hits a line drive through an expensive, double pane large window. Tenant puts a frozen turkey in a hot oven, and window on the oven cracks. Tenant does not pay last 2 months rent, and threatens to trash the place if we evict him.
Do not become an “accidental” landlord. You will regret it. Just sell at a loss, and move on.
I hear the hype; but when I venture out to buy that home I don’t see anything nice for an attractive price. Sure something sold for $190 in SoCal. I bet it was a dump or in an area that most of us could not get to work in under 2 hours.
I have seen housing prices fall from an extreme bubble, but they are still really high when compared to income.
There is no reason that housing should be so expensive. Everyone needs a home to live and to avoid living in the car or the street. Society should want cheap housing as expensive housing only helps the banks and government collect more money.
To use an extreme example; if homes cost $1 then all of the other money could be spend on consumer items that make the economy function. Now there is a the problem that everyone will want to live in Beverly Hills which drives prices up. But if every home was $1 we could spend our money to make all areas as nice as Beverly Hills. Sure beach front property will be a premium but there could be other appealing areas. I know kind of a Utopian ideal.
So lets look at the other extreme. All homes cost $10,000,000. Now we have a lot of homeless and 20 families to a home. People wondering the streets and living in their car.
Looking at the extreme shows where prices should be. Housing should be cheap, it benefits society. And the government should make housing cheap as allows people to buy other items and focus less on a necessity. Instead, the government is trying to prop prices up and keep them high! It just does not make sense. Until you realize they want more tax dollars and the are in bed with the banks.
So is housing overpriced. Of course! But the system is build on greed, so prices are high, and most of the people in the system suffer. Just think how much better off you would be if you could get a nice home in SoCal near where you work for $100K. Instead, for $500K you can own a dump built about 100 years ago.
Note: you don’t need to explain supply and demand. I have a business degree. This post is more about philosophy and why we place such a high price on shelter.
Sean, on this one I have to say I agree with you 100%. It’s absurd, it’s unfair, it’s disgusting.
It would be nice if we could have a house for a dollar. Actually, go to Detroit. You can get a house for a dollar. The problem is, you can’t get a job. Be careful what you ask for, you might get it. If the price for an average house in Southern California comes down to $100K, you may wish it hadn’t. I don’t think they’re so happy with the $1 houses in Detroit.
Sean I just had to reply. That’s what we need more govamint intervention to make housing “affordable” for everyone. Let’s see we subsidize every product that goes into a house just so it can be “cheap”. What’s a limber jack worth? Saw mill operator? Trucker? Carpenter? A brick mason? A plasterer? Landscaper? Drywaller? Plumber? Electrician? Oh and what is a “fair” profit for the greedy contractor? If we pay them all a “fair” wage, subsidized by Bill Gates and Warren Buffet maybe everyone can get a house for one dollar so we can keep everyone at Walmart employed and still afford that 54″ flat screen.
Constman, you’r missing the point. We currently have gov’t intervention to prop up housing prices. If all we got from gov’t is to get out of housing altogether it would be a big step forward…
You said it DM. We have government intervention to make houses more expensive.
And sure houses will never be a dollar due to supply and demand, but when we have condos 3/4 vacant, vacant houses on bank balance sheets, people living in houses for years without paying, abandoned houses in developed desirable areas that are boarded up and starting to crumble and yet nothing is done with the land, supply and demand just doesn’t have a lot to do with anything anymore.
I never said the Government should intervene and make the homes cheaper. In fact they are doing the opposite. I think the government should stay out of the housing. They can provide loans but it should be with 20% down where people have some skin in the game.
The $1 example was philosophical to show how life could be if we didn’t spend everything on our home. Maybe there would be money for education, police, schools, etc.
Being a landlord is a huge liability and headache for very little reward. Believe me it is a ton of work even if you hire handy people. Vacancies take forever to recoup and bad tenants will make you crazy
It will be interesting to see what plays out in the next 3 to 4 months.
With all the news of prices on everything going up more, than we are already experiencing, especially gas, who will be buying besides investors and uninformed buyers, because interest rates could go up more!!!
As a reader for about 3 years, I’ve learned quite a bit from the Dr. and he sure makes sense. He spoke of shadow inventory even before it came to light or what we have witnessed in the bank’s shadows.
Everything makes sense as the way the Dr. explains it. Even with all the spins the banks and our government have now added to all our lives, we have all paid the price, some how or another, bail outs, low interest to keep housing inflated as well as taxes.
On the news more job cuts and service cuts.
I applied for my drivers license renewal in the middle of November and am still waitting, 3 months to the day.
Well in the mean time I will just keep reading what the Dr. has to say and just keep learning to take it day by day.
Anymore I tell myself with so many people out of work, the American Dream is not owning a home anymore, but having a Job!!!
Maybe we should rise up like the Egyptians and throw both parties out of the “White Palace” couldn’t get any worse…
You should write a song about it and it might become a hit.
This article is another confirmation why I put my house for sale 12 months ago that dropped 200k in value. Thankfully after 12 months I was approved and was able to close last week with no deficiences thanks to the HAFA program. I have steered many to this site and I know one person that sold a property in burbank based on reading this site and was able to rent for a few hundred less and got a little equity back from the sale. Thanks Dr.
I definitely saw this when I looked at a rental property in So. Torrance this past weekend. 3bd/1.5bath for $2200… went to check it out. It was 4 houses off of Hawthorne. I saw some crappy patch job between a bedroom and the living-room and did some more research. They bought this 2bdrm beauty for $500K last year (in foreclosure) and did a half-assed job converting the dinning room into a 3rd bedroom. Also, had to put a patch over the door leading to the backyard. How do you get into the backyard? Walk out the front door and around the house! I think someone got a bout of HGTV-itis… thought they could buy a house in foreclosure, do a quick re-model, and flip it for a handsome profit. Looks like their handiwork was as good as their investing skills.
Sorry but that was good for a laugh from me. South Torrance is a nice area but a PITA to get into and out of. Much like Palos Verdes, You are kind of far from the freeways.
So, 500k plus some slapshod work gets you 2200$ per month? Wow, that is still a major overprice considering a 200x multiplier is 440k. Getting murdered on taxes as well. ARM with a teaser rate.
What does it mean? It means the Banks know something about future government regulations, roles, or both. The banking lobbyist may have gotten wind that something is coming and they are deciding to get out before whatever it is drops.
Either way who cares…I bought a home in Rosarito, Baja California just a few blocks from the beach. Now i pay 50 bucks a year in property taxes. We live 15 minutes from the border and enjoy my same doctors in San Diego. We need less than 600 bucks a month and most of it goes towards my truck payment.
We have the same weather as San Diego for a fifth of the price.
Get out while you still can…
Dr–We are in trouble! from one Doc to another….
Advice sought: Condo in Marina del Rey (few blocks to beach). Bought for $790K in 2006, now appraised at $550-600K. Interest only loan 6.9%, fixed until 2014. Never missed a payment, credit score 780.
Bank refuses to modify (despite co-borrower with Leukemia!)
I have enough cash saved up and a loan I can get for a new home, at 2003 prices in Santa Monica, and then walk away from the underwater place.
But many here on the blog think prices are still correcting (even in Sant Monica?)
However, the instant I skip a payment, I will lose my credit score and ability to get a loan for at least 3 years…
So should I buy now before I walk, or Rent for a while, saving cash, and letting my credit recover after the short Sale, or Squat in the house, not paying and awaiting foreclosure…. Understanding that prices may still fall, and rates must rise… and that low prces are better than low rates… but where will we be in 3 years? when I get back to the table? If the Sky doesn’t actually fall in the pallisades, I will be priced out of the market…
ok, Discuss! THANKS for advice!
I’ve been monitoring Santa Monica for many years now. Like BH and other prime areas they just recently started correcting, prices are still at 2005-2006 levels and don’t believe the BS about how SM is different. Prices still have a long way to go.
Buying now in SM would be a big mistake IMHO. There’s no need to rush. Wait for them to be at 2000-2002 levels at least. If I were you I’d walk away from your current place and rent for a few years, save up some cash.
Advice sought: COndo in Marina del Rey (near beach in Los Angeles). BOught for $790K in 2005, now appraised at $550-600K. INterest only loan 6.9%, fixed until 2014. Never missed a payment, credit score 780.
Bank refuses to modify (despite co-borrower with Leukemia!)
I have enough cash saved up and a loan I can get for a new home, at 2003 prices in Santa Monica, and then walk away from the underwater place.
But many here think prices are still correcting (even in Sant Monica?)
HOwever, the instant I skip a payment, I will lose my credit score and ability to get a loan for at least 3 years…
So should I buy now before I walk, or Rent for a while, saving cash, and letting my credit recover after the short Sale, or Squat in the house, not paying and awaiting foreclosure….
ok, Discuss! THANKS for advice!
I don’t get it, how do you have a int only loan at 6.9% with such a high credit score?
how much money did you put down to buy the 790k?
if you are thinking of strategically defaulting, perhaps you should stay in there for your free 2 to 3 years? and save money for a new place, quit making payments and wait for the foreclosure 2 to 3 years from now?
perhaps the bank will renegotiate when they see you are not making payments?
We bought in 2005, sale price of $790K, Put $80K down. At the peak, 2007, we refinanced to get a better rate, pulled out no money. So in 2007, refinanced into a 6.875% interest only 7/1. It will convert in 2014.
I was never clear why my partner (who coordinated these loans) did not get us into a juicy 30year fixed at 5%, which were available around that time.
Anyway, now we have this FTD that is refinanced, meaning “REcourse”. My understanding is that in CA, this loan is recourse, becuase the refinance makes it NO LONGER a purchase money loan. Even though we took out no cash…. HOWEVER, I am told the banks never go after recourse and judicial forclosure here….
If I squat for a year or more and don’t pay the mortgage, rather than quickly SS or even Deed in leiu, I will drag out the credit score pain, and delay recovery.
Moreover, eventually, then bank will want their missed payments paid to them… so the “rent” will get paid eventually, unless I am bankrupt.
I figure to move out, probably rent or maybe buy, while my credit is still good. Then, list for sale or put a renter in there and skip a few payments, see what happens.
I’ve already applied and been declined 2 times for modifications. I bet the tune changes when payments are skipped, but I am angry. I have been paying as agreed. The bank will not renegotitate this toxic loan. I am willing to maintain the property and pay everything I owe. But if I am forced to skip payments in order to get their attention, and wreck my credit in the process, I say F**K them! At that point, its war, Ive no incentive to do anything, since my credit is tanked.
BTW, looking at houses in Santa Monica and Pac Palisades, I am seeing prices back at 2003 levels on SFR. Yeah, the sky might fall, and Iran might nuke us, but probably not. I think there is widespread demand for homes in those areas, and the massive shadow inventory will be unloaded slowly there, maintaining prices right about where they are now for a while. And rates will continue to trend upwards, so this might have a net effect of gently pushing prices a little lower or not, but it washes out when you consider rates.
As an aside
if you gonna try buy something else, ill warn you in advance, you better have a big income. and if you did have such an income, i dont think you would really care about a 20% drop in your home value?
because first thing loan officer is going to do, is work out your debt ratio, and after your new purchase and keeping your old, if ratio is over 45%, you are probably not going to get that loan.
I’m curious Doc if you have any thoughts on this trend I’ve been noticing in Culver City and surrounding areas – houses go into pending then seem to just stay there for 3 months or longer. Generally it seems to happen with homes that seem very bubbly still (even bubblier than other CC houses). I’ve been watching one on Lafayette that has been pending for months. Appraisal problems?
Just a guess that those long pendings–and I’ve been seeing those for quite a while–might be contingency chains waiting to resolve. In other words, the buyer can’t close until they sell their house, or the seller can’t close until they find “home of choice,” or something like that.
Realtor.com released some January data yesterday that provides some additional reference points. The Los Angeles-Long Beach metro area was the No. 3 most searched market in the country last month.
Additionally, median list prices were $340,000, a decrease of -14.98% compared to January 2010. National median list prices were $199,000. Total listings were 41,357, an increase of 7.82% year-over-year.
–Jill Kipnis, Community Builder @Realtor.com
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