If Not When, Then How Much of a Discount on the Westside, Before Buyers Jump Back In?
By now it is obvious, Westside buyers are on the sidelines, waiting for prices to correct. Unless they find a steal, time is on their side. The question is:
What time frame are buyers looking at, before jumping back in?
OR
How much of a discount (From 2007 peaks), are buyers waiting for?
There are arguments for both. However, I fall into the second camp (How much?). My reasoning is this. Many "experts" are predicting 2009, 2010, 2011, 2012, and even 2016, as the time frame for buying back into the Westside. But, we are in uncharted territory here, and it seems, more is revealed each day. Nobody really knows the timing of this, as it could transpire quickly or, drag out for many years. Once again, there are arguments for both. My feeling is, when the fundamentals fall back in line, people will start buying homes to "live in". This is quite different from, speculation that occurred throughout this decade. 50% off or more, appears to be the threshold, where other California areas have experienced substantial sales increases. Many may argue that, the Westside is different. But, the recession/possible depression, changes that significantly now.
What do you think?
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38 comments:
Sellers waiting to sell vs. buyers waiting to buy. Who can wait longer? That is the question. My guess is that the buyers not only can wait, but in today's market have to wait too... On the other hand, there are many monied folks who have empty houses not for sale yet, etc., and don't care. That is why the Westside (or parts of it) are different.
Here is another way to look at it: What is the "natural" percentage of houses that MUST be sold in high value areas of the Westside due to death, divorce, relocation, or financial distress? If that figure outshines the "natural" demand at a given price point, then sales will happen. Very few buyers MUST buy. Some desperately WANT to buy, and that is the market at this point.
Does anyone have an estimate of the "natural" yearly forced listing percentage of all houses in say Little Holmby or Brentwood might be?? And a comparison of the current closed sales volume versus that percentage?
With unemployment continuing to skyrocket, you will see house prices on the westside drift lower.
We are looking to buy and will wait until we see something of real value. We can rent for the next 10 years and it won't bother us one bit. We also know that we can take our downpayment savings and move elsewhere and buy a ranch/estate/town/whatever for cash outright. So we're in no hurry to buy the rather small, overpriced listings that we're currently seeing. If I had to give a simple answer, I'd say I'm waiting to see prices back at 2001 levels; maybe I'd go up to 2003 levels for something really charming.
Unemployment is not the issue. Underemploymenet is. When high wage earning West-siders have their incomes cut in half next year (wall street types) or have to take lower paying jobs as a result of downsizing, the number of houses for sale due to unafforability ("have to" sales) will go up.
Prices for buyers are psychological issue, but the fact that we are going to back the "dark ages" of 20% down excludes a huge percentage of so-called potential buyers.
you need to see a discount to prices when zero down wasnt the norm. So, a discount to 2004? 2002 prices seem to make sense. 50% discount to the high? Maybe more is you time it right.
I'm like another commenter, we are in a great rental situation and don't see any pricing nearing reasonable.
We can afford a buy in our area, but still feel the prices are *way* too high. When I see a %40 drop in house prices. I may never own a house in L.A. for that reason and that's okay. I'll pay cash for a house wherever we land next.
The other thing I forgot to add is that even the middle-management wages of the entertainment industry inflates housing prices. Therefore a decline in housing prices may not be as dramatic.
We'll see if the entertainment industry shrinks at all. IMHO, they are responsible for all of the cost of living increases in greater Los Angeles.
The housing market will start to pick up in the second half of 2009. Supply and demand in the housing market is based off of affordability. Affordability is based off of mortgage rates. As the fed continues to buy treasuries to drive down mortgage rates, you will start seeing buyers come to the table... not because prices have come down, but because interest rates have come down. Coupled with an Obama stimulus package that incentivizes new home buyers, you're going to have a the perfect storm for new home buyer activity, for those with excellent credit and the ability to put down at least 20%. Sellers, for the most part, will sit on their homes rather than take the hit, unless they're forced to foreclose. With new buyers popping up because of substantially lower rates, you'll see prices start to increase within the next 12 months.
I've lived in Westwood most of my life. I sold my condo at a nice profit a few years ago and I have an ideal rental situation; the owner has kept the rent far below market because I take care of the place as if it were my own. My wife and I can easily rent for 5 more years, or longer.
Prices in Westwood are just not realistic; we won't start looking until they get down to 2001 or 2002 levels or lower. And it will happen.
I don't think it's realistic to think that prices will come down substantially further unless it's driven by foreclosures. The core of Obama's stimulus package will be keeping Americans in their homes. Why would someone sell at a huge loss, unless they have to? If mortgage rates continue to decline as the fed buys up treasuries, you will start seeing a new round of buyers. Just like many people can sit on the sidelines and continue to rent, many homeowners can sit in their home until the market recovers (rather than sell at a huge loss). As much as I would like to see 2001 prices, it's just not going to happen. We may go sideways from here for many years, but I don't see prices coming down too much further if mortgage rates get in to the 4.5% range for the 30year.
The market will not "recover" to 2003-3007 levels, since the RE Bubble was driven by bad regulation, greed and stupidity. It's time to deal with that reality.
A lot of places on the Westside are - or will soon be - upside down; so while there is a group that bought in in the 80's and won't have a reason to sell, quite a few will have a big incentive to sell or walk away. Take a look at the condo foreclosures in the Wilshire corridor in Westwood.
$400K for a 670 sq foot box? Those days are long over.
Prices will come down because they have been inflated to levels that are only sustained with Zero-Down Loans, Interest-Only Loans, No-Doc Loans, and Neg-Am Loans. Back before these products were so readily available and freely distributed, we had reasonable housing prices (still more expensive than other parts of So Cal, but at least they were supported by real supply and demand). In the past few bubble years, we also had flippers and developers and 'cash-back' schemes which further inflated the prices of homes. We need to shake this nonsense out of the free market and that's why prices will return to normal. I say 2003 levels, and there will not be any increases seen for at least 3 or 4 years, maybe even longer. Just look at the last decline in the '90s.
Until buying, pencils out as opposed to renting, it doesn't make sense. Why would you pay almost double for a mortgage, risk capital and not wait for prices to go lower? Even with tax savings, the buying argument doesn't make sense at these price levels. Throw in everything going bad with the economy and you have a perfect storm in RE. We are in the process of asset deflation and probably wage income as well. People are realizing this decade was an anomoly, fueled by unregulated predatory lending. Now the chips are falling and everyone is suprised. We have a long way to go yet, and I look for 50% declines to be common place for Westside properties. More government tricks won't work, as has been proven so far during the last couple of years. The govt is out of their league. Let the cards fall as they may, so we can face the music, instead of a decade of slow torture.
Anon 12/15 12:10pm wrote: "Supply and demand in the housing market is based off of affordability. Affordability is based off of mortgage rates."
Very 2005-07 thinking. We have been in a VERY low interest rate inveironment for quite some time.
Currently, Demand is less driven by interest rates that it is credit availability. Credit is only available to buyers with FICO score above 720, 20% down payments, and predictable, verifiable income streams. Yhis is estimated to be less than 10% of the people who would qualify 2-3 years ago.
Few buyers = Low demand, regardless of interest rates.
The Fed announced a reduction in the federal funds rate to a range of 0% to .25%, and said it plans to keep the rate low for the foreseeable future. The Fed also said it would use “all available tools” – such as buying mortgage-backed securities to lower mortgage rates – to pull the U.S. out of a recession. Mortgage rates will soon be as low as 3.5%. As much as I would love to see housing prices continue to free fall, it's not going to happen. The Fed is pulling out all the stops and stabalizing the housing market is one of their top priorities.
Anon,
The Federal funds rate is disconnected from lending rates these days. Banks haven't come close to getting the haircut their asset base deserves. The Fed's "free money" simply keeps the banks capitalized.
Banks are still tightening lending AS WELL AS charging healthy premiums for borrowing. E.g. you and I won't be able to borrow for the requisite super-jumbo loan at 2%-4% to buy on the Westside.
Aren't mortgage rates tied to LIBOR? not to the fed rates. Housing prices in bubble markets will continue to free fall.
Aren't mortgage rates tied to LIBOR? not to the fed rates. Housing prices in bubble markets will continue to free fall.
Even lower mortgage interest rates won't make sense if the buyer does not perceive them as SUSTAINABLE so that the underlying value of the house will stay high. Yes, the buyer on a 4.0% mortgage could pay more on a MONTHLY basis, but, the minute the rates go back to "normal" (whether 5%, or 7%), prices will drop again, and the "homedebtor" will be under water, with the 20% equity he put down long gone. Any buyer who thinks beyond 1 year will see this issue.
Also, superjumbos are at 8% today, even with 1% Fed financing. What is going to change that??
December 13, 2008 12:19 PM
Nobody answered my question about the "natural rate" of "must sell" situations as a percentage of all houses in high-end areas in WLA... That is a big factor in terms of judging this market. Then add on the Alt-A re-set "must sellers" who will be showing themselves over the next 3 years.
How would you define a "natural rate?" Versus what exactly, an "UNnatural rate?"
How do you easily define a "must sell" situation?
There's a good reason why no one answered. Your question is unanswerable.
no, someone with demographic knowledge and information could answer this question. A certain percentage of the population has a divorce each year, and a certain percentage DIES, has to move for a new job, etc. Just because you can't answer the question (neither can I, though I could ESTIMATE), does not mean it is not answerable as a statistical matter. Any takers?
...are people on this blog high? You must be high if you think that prices will turn around in 2009. And you must be really-really high if you think Obama's stimulus package is going to do anything for anybody other than maybe a few of his buddies.
"The core of Obama's stimulus package will be keeping Americans in their homes. Why would someone sell at a huge loss, unless they have to? "
BWHAWAWA!...hold on a minute
BWHAWAWAWAWA!!!
I would keep my identity anonymous too if I believed that...If you said Santa Claus and the Tooth Fairy will keep people in their homes and will sustain prices it would be more plausible. Hope! and keep on hopin'.
The facts are that
1.Westside real estate is still grossly over-priced in relation to fundamentals like income and rents.
2.The subprime meltdown will be dwarfed by the Alt-A and Option Arm meltdown. Log onto 60minutes.com to see last week's piece. And whereas subprime was not as prevalent on the Westside due to better credit scores on the westside, Alt A's and Option Arms are all over the Westside.
3.The unemployment rate is accelerating. "Why would someone sell if they didn't have to?" Many will when they are laid off from their jobs or their businesses fail. Not to mention the usual people who must sell due to death, divorce, job relocation etc. Why someone would hold onto a rapidly depreciating commodity instead of cutting their losses while they have a chance is perhaps a better question.
you're wrong though... most people will not walk away from their home because they're underwater. just like most people will hold onto a declining stock or mutual fund, especially if they think that it will recover over time. you're right that some people will be forced to sell because of divorce, death, etc. however, i'm not a mortgage rate expert, but aren't option arm rates based on the fed rate or libor, plus a spread? with libor and the fed rate dramatically declining because the fed is buying these securities en masse in an effort to reduce option arm rates and mortgage rates in general... and in turn help homeowners stay in their homes... other than people that must sell, why not live in your home until the market eventually recovers? especially if the cost equivalent to renting is comparable? and especially if you think that you might be above water 3, 5, 10 years from now. what i expect to see over the next year or two is tremendously low volume in terms of transactions, but not the huge sell-off that you're looking for because other than the people that must sell for the reasons stated, most people will live in their home as long as they can afford to continue making the payments, especially now that their option reset rate will be at a much lower rate for the foreseeable future.
I have a different take on prices. From now on prices of homes will follow the inflation rate. May I repeat: prices of homes will follow the inflation rate.
That means when prices finally bottom out, do not expect a repeat of "I never lost money in my house" or "the only place I ever made money was in real estate."
A home is a place to live. Home ownership is a luxury. Take a deep breath and realize that the workd has changed and the previous ridiculous appreciation over a relatively short period does not normally come from a place where you live. It comes from taking a risk on a company, a new business venture, a stock, art, etc.
Wake up Southern California !!!! The past history is over. If you need to sell your home, sell it now. No one promises you to double or triple your 10-20 % down in 2 or 3 years. Think about it...this is the bubble of all bubbles.
Robert in LA, but only since May 2008
Anon...you are right that people will hold onto a depreciating commodity, and that "most people will live in their home as long as they can afford to continue making the payments."
However...you are incorrect on the "especially now that their option reset rate will be at a much lower rate for the foreseeable future" The problem with the option Arms and Alt A's isn't the LIBOR rate. The problem is that almost all of the people who took out these loans opted for the interest only or Neg. Am. options that the greedy mortagage brokers/bankers/RE agents sold to them. OK?
Now, without the interest only and Neg Am teaser rate options, almost none of the buyers would have been able to purchase these incredibly over-priced homes. The problem is that when the rate does reset to Libor, these Loan-Owners cannot afford to pay the mortgage...even if Libor is 0%. The teaser rate was less than that...get it...the mortgage was negatively amortizing. Their loans aren't shrinking. Their loans are GROWING! And what they owe every month is going to be more than what it would have been when they originally purchased the property...get it? The only reason the mortgage brokers/bankers/RE agents sold them this house/loan was to get their big fat commish...see? And the only way that they could justify writing one of these ridiculous loans (and I assume the only reason that someone would take out one of these loans,) was based on the flawed assumption that REAL ESTATE ALWAYS GOES UP! And if REAL ESTATE ALWAYS GOES UP then the buyer can re-sell the property to the next sucker before the rate resets.
The thing is, this scam actually worked for awhile...which only fueled the hunger more and made the bets bigger and riskier. This was further fueled by side-bets in the Credit Default Swap market. (I won't even get into all that) The problem is that this Ponzi scheme ran out of suckers. And although "REAL ESTATE ALWAYS GOES UP" is a fallacy, ALL PONZI SCHEMES FAIL is not a fallacy.
You see, the fundamental rule of Real Estate is that prices are a function of income....And guess what? Real wages have actually DECREASED over the last 30 years. See this article by David Lazarus in the LA Times and its charts.
http://www.latimes.com/business/la-fi-lazarus17-2008dec17,1,4019512.column
So then why has RE increased exponentially? I won't give away the answer here, but if you can figure that out you will be on your way to solving the riddle of life...
Oh and in the meantime you might want to check out
http://www.doctorhousingbubble.com/
they have hundred of articles with supporting data and graphs with micro and macro looks at this. I'm not trying to burst anyone's bubble here, but you have to give me more of a reason than "HOPE" to convice me otherwise. You all work hard for your money. At least do a little research and due diligence before you start throwing it away in the housing and stock markets. Just think of all the good that could have been done with all that money (your tax money now too) if it had gone to charity instead of into a group of greedy people's pockets.
Oh, and if you want to gamble or get rich quick...next time just go to Vegas or buy a lottery ticket.
Dr Housing Bubble is an excellent resource and is listed in the links to the right. Nice post willwill. Most of what you say is right on. Unfortunately there is no fix to this problem until prices collapse. All the govt tricks haven't an won't work. If you really want to get ahead of the curve, read Nouriel Roubini. He is one of the only economists that has told it like it is, the past 2 years.
Westside is going to get hammered this year....
Thanks latesummer. I'll check out Nouriel. I came across a link to a hilarious video on You Tube that was a couple of clips of so-called "expert economists" including Ben Stein laughing at Peter Schiff's bubble predictions a few years back...hysterical!
http://www.youtube.com/watch?v=2I0QN-FYkpw
How could these guys be experts?! They didn't even do their basic homework. It is laughable. You can take a two week course in Real Estate or take a Series 7 exam and suddenly you are an expert in Real Estate or Stock Brokering. And people gladly fork over their money to these guys. I come from back east and I have friends that couldn't pass high-school math that are six and seven figure stock-brokers and RE agents. Everyone knows guys like these back there...worse than used car salesmen. I wouldn't trust them to make me a sandwich much less trust them with my financial future. Check out the book Liar's Poker from the 80's for a now timely and hilarious account of how Wall Street really works and you will start to get the picture on this whole mess.
I can't really say when the Westside will crash as Schiff couldn't tell when the bubble would pop. But Schiff knew the bubble would pop eventually and I am sure the Westside will crash like the rest of the Southland is crashing. There's nothing complicated about it. It's just dollars and cents.
Let's look at it from the other side of the coin.
As one of many Anon's above said, people that don't have to move will just stay in their houses. So even if we assume that everyone can pay their mortgages when they reset (which they can't,) we still have deaths, divorces and relocations that will have to sell. These sellers will take a beating because the NINJA, Alt A, Neg-Am, Sub-prime, Option ARM loans don't exist anymore which greatly decreases the pool of potential suckers..er buyers. How many people do you think have $200,000 in cash lying around for their 20% down not to mention those fat commishes and closing costs, and also make the $10k/month it would take to qualify for the loan?...I'll tell you. Not many. Last I checked Santa Monica's median income was around $60k. So anyway, when these sellers do take their beating, guess what that does to the comp's in the hood? You guessed it. Just as when a beat-up old shack sold for $1,000,000 it drove the comps up in the hood, when a old shack (or a McMansion for that matter) takes a beating on the price, so do the comp's in the hood...whether you can afford your mortgage or not. Oh and what anon said about it being cheaper to stay in your house than it is to rent is ludicrous unless you've lived there for I'd say oh...10-15 years, I would bet that it is much, much, much cheaper to rent, even at the current inflated rents on the westide...which will also come down by the way.
Check out Nov. Dataquick on SAnta Monica....10 homes sold all for high avg. cost per square foot.....
hmmmmmmm....
(Anon 10:36) Realtor alert.....
Dataquick #s (Nov)
90405 1 sale $990K median(-32.9%) $743/sqft
90403 2 sales $1288K median(-12.7%) $1159/sqft
90402 7 sales $3112K median(+30.3%) $958/sqft
1)Only 10 SFR sales for all of Santa Monica
2)90405 is DITW (Dead In The Water) Very important move-up market for 90403 & 90405
3)According to $/sqft, 90403 is now more expensive than 90402??? (I don't think so)
4)1 high end sale skews a small # of sales
Sorry, these are NOT good numbers. Don't expect them to improve anytime soon.
What do you think about the lower interest rates and how they will affect the market? I know my HELOC and CC rates have come down dramatically over the past couple months.
Has anyone seen evidence of lowering rents on the westside. From everyone I talked to, landlords have been raising rents.
Existing homesales just dropped 8.6% in November. The knife is falling faster now... Why would anyone buy in this horrible market, unless absolutely necessary.
2009 is going to be a year to remember.
Anon-"What do you think about the lower interest rates and how they will affect the market? I know my HELOC and CC rates have come down dramatically over the past couple months."
Dr Bubble Housing Blog just posted some figures that explains much better than I can why the interest rate drops won't do much.
other anon-"Check out Nov. Dataquick on SAnta Monica....10 homes sold all for high avg. cost per square foot.....
hmmmmmmm...." This is not surprising, nor does it refute any of the gloom and doom predictions. Price elasticity means that prices fall more slowly than they rise because people want so much to at least "break even" in their minds and will sometimes hold on for 30 years if they can paying all that interest, tax and maintenance while they wait for inflation to get them back to their sales price. But the small number of sales points to the obvious, and all I can say is just you wait...
Interesting discussion so far.
Potential first-time home buyer here. Like others have said, we also have a big down-payment saved up, but refuse to buy anything on the Westside until prices come back in line with incomes. 4.5% interest and a $20k tax deduction probably won't get us to buy either. There's just too much risk and not enough upside to warrent trying to catch a falling knife. We're happy continuing to rent and most others we know in our situation feel the same way. The only people we know who have purchased a house recently had substantial help from their parents.
Great blog, thanks for encouraging the discussion.
I'm in a similar situation as the previous poster. So it looks like the demand is there but it is now tempered by logic. Perhaps it's one good thing to come out of this mess.
I'm not living in the area yet but I've kept my eye on the Westwood area (mostly 90025 and 90064) for the past 6 months. I've seen the decline but I don't think prices will fall back to those of almost a decade ago. I would be very happy to see a further decline of 20%, but I'd also expect a significant and competitive amount of interest in such discounts. And perhaps that is what will keep the prices in that area up.
I'm an armchair speculator and my logic is probably flawed, but there have been sales at current prices (usually just under a mil for an average 3/2 on a 6k sf lot). It seems to me as long as people are buying, the prices won't fall too much further. Maybe 10%?
But as willwill pointed out, not many can justify the 200k/yr income and 300k down that is now fully required (no shenanigans) to get a loan on a property that wouldn't typically turn any heads. And is that property really worth a million dollars? Or even 900k? It seems some still think so and I fear there is indeed a sucker born, or arriving in the area, every minute.
Prices will continue to fall quickly in 2009, and then more slowly for 1-3 years after that. They need to get back to 2001 prices (-40%) at least, but the huge debt made worse by EESA (TARP) will drag out growth, and with unemployment figures expected to rise, prices could possibly continue to decline for years to come. A lowering on the non-conforming limit to $650K (?) in 2009, is also going to make it much harder to buy more expensive homes. Lowering rates has attracted many, especially first time buyers in the foreclosure and condo market, but the subprime selling is starting all over again with FHA insured loans, attracting the same unscrupulous brokers, which will add another $100,000,000,000 to the tax payers bills.
California is a place
Comprising desert, and empty space
And in a struggle to save face
Lots of fools rush around
Where liar loans abound
At prices that will astound.
from an interesting article... Contributing to the supply/demand imbalance and declining values in most major markets is the unprecedented number of foreclosed properties for sale. The speed with which this inventory overhang can be removed is critical to stabilizing housing values. TARP funds can support the rapid turnover of REOs by providing structured subsidies to purchasers of REOs that will occupy the property as a primary residence for a prescribed period — say, three to five years. The subsidies can include discounts from market value, funds for rehabilitation or repairs, and below-market interest rates.
Any program of this nature must be accompanied by regulations to neutralize any adverse effects on non-distressed sales activity. Otherwise, buyers of non-distressed properties would have their borrowing ability impaired, because the assessments of their properties would be reduced through comparisons to comparable sales of distressed properties.
The aggregate costs of these initiatives will not be excessive, and they will be far less than the costs an extended period of inventory overhang would entail. In fact, if the $150 billion dedicated to tax rebates over a year and a half ago had instead been used to implement the above strategies, significant indicators of a recovering housing market might already be in place.
How long is a piece of string? People will want to wait until the very bottom, which is signaled by an upturn. With the prospects of growth being poor for some time due to a protracted recession, it makes sense to wait until that time to ensure when you eventually sell your home, you do so for a healthy gain when your retire, because you're going to need it.
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