Wednesday, November 11, 2009

Bubble Baseline Year For The Westside

Which year should we be looking at to figure out when the bubble began on the Westside? Some will point to the repeal of the Glass-Steagall Act of 1999. Others may point to 2004, when exotic mortgages hit their stride. Depending on which camp your in determines whether or not prices have bottomed. I find myself looking at 1999 as when the mother of all real estate bubbles took off. After the last real estate boom in 1987-1991, prices began rising in 1996. Throw in a few years of cautious buying, the green light for lending in 1999, and the bubble was born. Next, we had money from the stock market crash in 2000 further fueling the real estate boom. Lastly, in 2004 the housing casino kicked into overdrive for a couple years as toxic loans became the rage, only to begin faltering by 2007.

So here we are 2 years later, with prices rolled back to around 2004 and approximately 20-30% off on the Westside. Should we take the 1999 prices and add the historical average of 3% appreciation annually? Or should we be happy with 2004 prices as the beginning of the bubble and jump back in?


Anonymous said...

I find the most important thing is to be flexible in your thinking.

I know someone who waited out the late 80's early 90s bubble - firmly convinced 1986 prices would return. She stubbornly refused to accept the factual bottom in 1996 because prices didnt reach her predetermined level of what the bottom would be.

Sadly - she is still now renting 20+ years later...

blahblahblah said...

dont look for the bottom. its impossible. rather, wait for prices in the area and price range to rise gradulally for 6-9 months. Then, you kno wthat the bottom was reached, and you are in an upswing. You will have more than enough time to ride the wave back up. Problem is, we arent there in prices for that time period.

Anonymous said...

If you can swing the big down payment, lock in a great rate (30y fixed, not adj.), and have the income to support the mortgage/insurance and taxes at 35% of your income....than go for it...

Anonymous said...

If you can swing the big down payment, lock in a great rate (30y fixed, not adj.), and have the income to support the mortgage/insurance and taxes at 35% of your income....than go for it...


If you can afford an item that you think will be worth a lot less if you just wait a year, then WHY buy now?

Are you a RE agent? btw, the word you mean is "then" not "than"

Anonymous said...

1998/1999 +5% annual appreciation is my formula (and i'm sticking to it)...

Anonymous said...

Anon 10:18

I am not a RE agent...far from it. Kinda hate them, they are useless.

I too, have seen a lot of my friends sit on the fence for decades. Granted now is a crazy time, but it may be the right time for those fence sitters (big down payment, low rates, good inventory, etc...)

speedingpullet said...

Anon 4.09pm - my thoughts exactly.

Though I think you're being generous with the 5%.

Inflation has been low for so much of the last decade that I've adjusted my appreciation rate down to 3.5% per annum.

It never ceases to amaze me, when looking on Zillow for the sale price pre-2000, to see that it sold for 1/3 to 1/2 of what they're asking for it now.
If it sold for $500K in 1998, what happened to make it worth $1.6 million in 2009?

Anonymous said...

Apparently Rick Sharga over at realty trac has capitulated on his "shadow inventory tsunami" theory:

"Fortunately, Mr. Sharga does not anticipate a sudden flood of foreclosures hitting us anytime soon. There are some who worry about banks releasing a backlog of properties on the market at one time. However, they are having enough trouble keeping up with the properties they currently have."

2 years ago, each of Sean O'Toole @ foreclosure radar, Rick Sharga @ realty trac and Mr. Mortgage all believed there would be a shadow inventory TSUNAMI - none of them belived a the drip, drip, drip theory of foreclosures to stabilize the market would be possible.

O'Toole capitulated early, said he was wrong, and its going to be drip drip drip for another years to come.

Now, after stubbornly refusing to admit he was wrong, Sharga suddenly reverses course and goes drip drip drip too.

That leaves us only with Mr. Mortgage - who has holed up somewhere on some site that doesnt allow comments so no one can call him out on his failed predictions. (remember his infamous "the quickening" video)? Apparently, he has pulled this video too. Like a wounded animal, retreating to his den, Mr. Mortgage pulls his videos and no longer allows comments.

So with O'toole and Sharga, its now 2 down 1 to go. Will Mr. Mortgage ever have the decency to come clean and admit he was wrong, or will he remain true to his permabear roots and just dig in a little further - we shall see...

Anonymous said...

Latesummer, hard to say. I think a lot will be hinging on how rentals behave, and rentals are beginning to go down all of a sudden. It is not a fast drop, but it is constant. The combination of falling property prices and unemployment is untenable for landlords who won't lower the rent. Don't forget that landlords did not get bailout money, at least not for now, so they have to adjust to the market. My landlord just offered to lower my rent to what it was 3 years ago just so we stay put. There is a real glut of rentals in the Westside, and I see a lot of them remain vacant for a long time in my Westwood area. My question is, if we accept that residential rents are a reflection of REAL prices we have to watch out for the fact that rentals have been almost flat (besides inflation) since about 2001. Now they are dropping even further. Doesn't that mean we have to look at a base price BEFORE 2001?

Speedingpullet, that is my calculation too as long as we don't have runaway inflation. But I don't see any inflation for the time being. What's happening looks more like deflation to me, money injections be damned. I am waiting for the moment when I get the feeling of "I can do this without bleeding myself dry" when I see a nice house. The last time I felt that was in 1998 and 1999, but I didn't pull the trigger for personal reasons and becasue the downpayment was all the money I had in the bank. I cannot say my feeling is scientific, it's just a feeling. Cassiopeia

Anonymous said...

Anonymous 10:20 AM:

The drip by drip theory makes no sense. You can't use an eyedropper to empty a tub that's being filled by buckets. You can only postpone the flood (as it increases.) This future event will continue to destabilize the market before it must eventually innundate it.

Or is there some math I'm missing.


Anonymous said...

I've been renting a room in a home in a not great area of the Valley for a long time in an effort to save money. My income has actually dropped this year. I'll be renting a house soon that I will share with one person either on the Westside or in Sherman Oaks. Both areas will be an extreme upgrade in neighborhood, closeness to work, and in living conditions. Rents have dropped to such an extreme that this is now possible, perhaps without even spending more money. Housing has dropped as well, but I'd like to see if it drops to the point where I can afford a better area. In 2007, I couldn't afford anywhere, despite a salary double the average household income in Los Angeles. In 2008, I could afford Arleta and Panorama City. At the begining of 2009, I could afford Van Nuys and Sun Valley. Now, at the end of 2009, I can afford a SFR in N. Hollywood south of Oxnard, most of Van Nuys, Tarzana, and a few other areas. The question far will rents drop? Rents drop enough and landlords go to Section 8 or they sell. Either pushes housing prices lower. I don't totally hold out hope that the Westside drops THAT low, but I'm seeing rents for 3BD/1BA houses in Palms, Mar Vista, West LA dropping under $2000a month. If those neighborhoods go bad, you can bet it pushes housing prices down further.

Anonymous said...

This is very interesting
anyone renting a three bedroom town house North of Wilshire ?
what are the prices like for nice 3 bed town houses?

Anonymous said...

I've said it before here, falling rents will destroy house prices. Landlords did not receive bailout money. Vacancy rates are increasing due to unemployment. A landlord that outright owns the house or multi-unit apartment building, will easily drop rents to get someone in there and get some cash flow. Landlords that owe on their properties will relucantly lower rents to attract tenants or otherwise pull the plug after a couple of months.

Banks can hold on to foreclosed properties for years and not put them on the market as long as they keep getting taxpayer funds to bail them out.

Anonymous said...

Anonymous 7:35, what part North of Wilshire? 3 bedroom places south of Wilshire in Westwood are languishing.

latesummer2009 said...

If we take that $500K house priced in 1999, get rid of all the rediculous loans, apply a 3-5% , historical average annual appreciation the value comes out to no more than $814K in 2009. That's a far cry from $1,600K. Throw in the true unemployment factor, and the loss of high paying jobs, The Westside is still grossly overvalued. Anyone putting their downpayment at risk against odds such as these is either impatient, desperate, uninformed, foolish, underwater, or tied to the real estate industry. Or combination thereof.

Other areas have already fully corrected, but the Westside has not. Unless you find an absolute steal from someone in foreclosure, your in for a big surpise.

Anonymous said...

I am looking to rent between 16 and 26 North of Wilshire in Santa Monica

Anonymous said...

Reasons why the "value" of housing in LA may have bumped up over the past 10 years, independent of the credit bubble?

-Chinese investors?
-A generational shift to living in urban areas?
-Zoning that makes housing in the desirable areas of LA scarcer than it would otherwise be?
-A rush to safety as living conditions around the world circle the sewer due to environmental degredation? (In this, desirable U.S. cities are driven to a premium by monied environmental refugees from around the world, the "global elite.")
-The new "global elite" produced by globalization who between NYC, London, LA, Tokyo, Dubai, etc.?

We've hashed these bubble ideas to death. The fundamentals look awful by traditional housing metrics.

But is there something we're not looking at that has changed in the world?

I keep wondering... WTF happened in the past ten years?

Are there discontinuous historical changes we're not taking into account?


Anonymous said...

Can everyone here tell us what price range they are shopping in?

I mean there are some neighborhoods on the west side where a house costs 3 million today and might cost 2 after the crash hits bottom

other neighborhoods where a house costs 600k and might cost 400k at the bottom

where are the people on this blog looking?

Anonymous said...

I am shopping for under $650k. I just did one of those calculatora and it claims we can buy a million dollar home. IMHO that kind of leverage is nuts and we intend topay off our home quickly. I am patient and can wait to find what I want.

latesummer2009 said...

It would be interesting to see how a $500,000 house in Santa Monica 90402 has fared over the last 10 years (1999). According to an average appreciation rate of 5% annually, it should be worth around $800,000. With teardowns in the $1,400,000 range on a standard sized 7500 foot lot, we are still way overvalued. Check out all of the closed sales in 90402 for the last 6 months and see the knifecatchers in action at "The 90402" link in my RE/Economic Blogs section to the right, or at

Robert said...

repeat that latesummer should think about a new blog called earlyspring.

one can say the same about the stock market which is up 60% in 9 months.....overvalued, I'll wait, etc etc.
instead of catching a falling knife at 6600, these investor have taken advantage of an opportunity of a lifetime. easy money if there ever was.
all the arguments made on these bearish real estate sites make all the sense in the world except the better houses priced well ARE selling. it's the overpriced homes in poor condition and poor locales which languish. use this time to pick the cream of the crop. if you wit too long the prices will leap ahead without you. and you will wait another 15 or 20 years to purchase something.
if you lost all your money in a house purchased in the bubble, or lost most of the 401-K, this is no place to moan and groan. you will never buy on the westside and all you do is bitch. but it's no one's fault but your own. go out and make more money.
we all know that unemployment is at 10% plus some. we all know that the film industry is cutting as is the important real estate industry as nauseum.
but value investors may be foreigners buying this year with the dollar down 13%, or wealthy retirees, or as someone cited above, many see the value of living in a city like Los Angeles with all its services, restaurants, museums, new conductor at the LA Philharmonic etc.
plus mortgage rates are at ridiculously low levels.
suggest those who are holding back reconsider the real reasons for doing so. prices are down.
listen to the most bearish economists like Nouriel Roubini et al and none of them is looking for the depression we all feared just a year ago.

Anonymous said...

I disagree with the last poster. He is living in dream land.

But I also strongly disagree with Late Summer. Late Summer talks about houses in the 90402 that were $500 thousand in 1999. Sorry, but there was not a single house in the 90402 at that price.

I have followed this very closely for years and years. The cheapest and skankiest houses in the 90402 were $300,000 in 1983 then rocketed to $900,000 in 1989, then fell to $600,000 in 1995, and are at around $1.4 million right now, as we speak.

They were not at $500,000 in 1999

By 90402, I refer to Santa Monica 90402. Note that some of the Canyon has a 90402 zip, but that is really not the same thing - the Canyon gets LA services, not santa monica services

I am not a bull and not a bear - the "North of Montana" neighborhood is the holy grail for a many people. The fantasy.

That doesn't mean that houses won't dip below $1.4 million for a dump in that neighborhood, but let's all be honest about where that neighborhood has been over the past 20 years

Anonymous said...

Yes, North of Montana Santa Monica low end was already $850 thousand in 1999.

This neighborhood has always been a dream for many people - google it - there was a book published called "North of Montana" that had many characters desperate and hungry to move North of Montana.

speedingpullet said...

Anons 4.40pm and 6.20am - LateSummer is picking up on a comment I made upstream, about unrealistic appreciation on Westside property over the last 15 years or so.

It wasn't meant to highlight a real property - although, look up individual properties on Zillow for historic sales prices and you'll see plenty of properties sold for less than $500K in the 90's.

Maybe not North of Montana, but - you know - not all of us are fixated with buying property in NoM - as crazy as that might sound ;-)

It was meant as an example of the lunacy of the last few years, not as a hard-and-fast price comparison.

So - read the posts before you start lamming into LateSummer, eh?

Anonymous said...

We all respect and admire Latesummer for doing the work to put up this blog. Thank you latesummer.

But the truth is that certain neighborhoods are up a hell of a lot more than others

For example, 90402 North of Montana is only up around 50% in the last 20 years (yes, you read that right)

This translates to appreciation of less than 2% per year for 20 years. Look it up - the same house that sold for $900 thousand in 1989 sells for $1.4 million today.

COMPARE that to Sunset Park in Santa Monica where a house that was $300 thousand in 1989 is selling for $900 thousand today. I mean with actual dollars changing hands (market in Sunset Park is more liquid than in 90402)

The difference is staggering. We are talking prices in sunset park today of 3x 1989 vs 90402 prices at 1.5x 1989

I humbly submit to you that Sunset Park is a much bigger bubble than the 90402

Anonymous said...

Anonymous 10:20 AM:

The drip by drip theory makes no sense. You can't use an eyedropper to empty a tub that's being filled by buckets. You can only postpone the flood (as it increases.) This future event will continue to destabilize the market before it must eventually innundate it.

Or is there some math I'm missing.


Dog walker - Different anon here. My BIL works at one of the banks and explained it to me thus:

he tub thats now being filled by buckets will eventually return to its long term trend of thimblefilling. They believe the foreclosures peak in early 2011, and slowly return to normal levels by around 2014.

Somewhere around 2013, they expect to be able to sell more than they take in, meaning the tub will slowly start to diminish - drip by drip, by drip.

Their estimation is that by 2018 the tub will be drained, no flood necessary. However, they have the ability to draw out the draining til as late as 2023 if necessary.

Anon @10:20. Thanks for that update. Im a bigtime bear and think we have a long time to go. Still I appreciate the update as it helps me refine my thinking between the big risks (job losses, deflation, etc) and the redherrings (the long awaited "tsunami" that will never come.)

Anonymous said...

"LS2009 said...

Other areas have already fully corrected, but the Westside has not."

Translation - its different here.

Anonymous said...

No one knows if the West side will correct further or not.

If you are certain that it won't go down more, go out and buy right now. Plenty of smart people are buying right now

If you are certain that it will go down more - don't buy. Plenty of smart people are rushing to sell their West Side holdings right now

Remember that things can plummet farther than anyone thinks possible

prime class a office space in San Francisco is right now selling for less than one third of replacement cost - and there are more desperate distressed sellers getting foreclosed on each month.

The point is that a nice house on one sixth of an acre in the best part of the west side is still today getting bids for 3.0 million that seems too high to me and so I will wait but I won't insult the people that are opening their wallet and writing a 3.0 million check

They may yet be proven right

Latesummer2009 said...

So do we establish 1999 as when the bubble began? Or some other year?

I do believe entry level houses in 90402 were about 2.2 million in 2007. Now they are at 1.4 Million. That's a 36% drop in a little over 2 years. Many of those who bought at the peak are down a nice chunk of change. If prices drop another $300K (14%) to 1.1 Million, were off 50%.

36% off was unheard of just 2 years ago.

Anonymous said...

Yes indeed it is really sweet
I remember when prices were 2.2 and you (latesummer) were saying they would go down and the realturd scum got on this blog and said you were wrong.

Look who is laughing now. The blog readers that chose to trust the realturds are paying the price for not listening to you.

Anonymous said...

If they trusted the realtors they are down 700 thousand (from 2.2 to 1.4)if they listened to you they saved 700k

Anonymous said...

Anonymous 11:34 AM:

Okay... that makes sense... assuming that the banks want to own properties for a decade, even more.

But THAT doesn't make sense. They're brilliant investors, right? I mean, they're the BANKERS! They're the ones that run our country on the theory that they can allocate capital more efficiently than anyone else in the world. And... really? ... they're gonna sit on a pile of residential real estate rather than take the losses and put the freed up capital to work?

You see?

But... okay... say they DO that... b.c. they're not really that magical and brilliant and the best they can hope for now is to just survive for the next fifteen years... STILL...

whatever the normal rate of turn over in housing, it will be tilted by the growing batch of foreclosed properties, at SOME non-zero rate, against the sellers. Even a slight tilt in the market will have a dramatic effect over time. So. You lose a bunch right away by dumping your foreclosed inventory... or you lose a little for many years... either way... you're losing...

and... actually... does anyone know the economics of this? Shouldn't that loss be theoretically equal, whether taken now at once or later in little bits?

Remember, whatever they save on the immediate purchase price, they also lose a great deal of opportunity cost on the froze up capital...

One way or the other, to my numbskull, it looks like there will be a significant negative pressure on prices in CA for quite a while.


Anonymous said...

"and... actually... does anyone know the economics of this? Shouldn't that loss be theoretically equal, whether taken now at once or later in little bits?"

In nominal terms, yes. In inflation adjusted prices, no.

Anonymous said...

Don't, theoretically, interest rates account for infation? Doesn't the cost of money adjust so that any money you might "make" from inflation you "lose" through higher interest rates?

If inflation increases house prices, it's no benefit because the dollars are less valuable.

And the productive use of the capital is lost.

You either take the loss now, or lose the opportunity. There's no way out of that... is there?

Anonymous said...

What is a good area of Brentwood that one could get a nice three bedroom house for $1.0-1.2M?

Anonymous said...

If we just required a standard 20% down and a reasonable interest rate everything would get back to normal and prices would be in line with incomes. Alas..... I love me some Obama, but pumping taxpayer funds into FHA loans is just re-inflating the bubble and prolonging the problem. I'm frustated.

Anonymous said...

I agree with Robert 4:28 . Prices on the westside can't go down because "there is new conductor at the LA Philharmonic"

Anonymous said...

I disagree with Robert 4:28. It's possible for prices on the westside even though "there is a new conductor at the LA Philharmonic."