Wednesday, November 4, 2009

Cash For Clunkers Hits The Housing Market

Since the government subsidized home credit took effect, the lower end on the Westside has come to life. Multiple offers have appeared on properties purchased with conforming FHA loans. 3% down, 5% loans and an $8000 govt credit, people are jumping at these favorable conditions. With Westside prices off by 20%-30%, it sounds like a no-brainer. Before you jump in, here are a few issues you might want to consider:

1) Having finished only the 2nd year of a typical 7 year cycle.
2) $8000 credit due to end this month.
3) FHA helping to re-inflate the real estate bubble with bad loans once again.
4) FHA quitting to be the lender of last resort due to insolvency problems.
5) Govt raising interest rates sooner or later, while prices remain inflated.
6) Over 100,000 Option Arms in CA recasting and subsequent strategic defaults.
7) 225,000 active Alt-A loans in the LA Metro area where nearly 50% are distressed.
8) Increasing rate of Prime loan defaults.
9) 22% underemployment in CA.
10) Underwater homedebtors and shadow inventory.

Just like the auto industries' temporary sales spike from "Cash for Clunkers", housing appears to have benefitted from the same type of govt stimulus. The $700-$900K starters, generally 50-70 years old and in need of substantial repairs seem to be the only houses moving. Decent houses on the Westside are still stuck, as their prices continue declining, absent any govt subsidy. That alone should tell you something.


Anonymous said...

Well, they just extended the credit for 6 months, and expanded it to "move up" buyers who've been in the house for 5 years. This should have the salutary effect of getting more people to list their houses and driving up inventory. Brilliant!

Anonymous said...

8000 or is it 6500 now, is like a nano drop in the bucket for a 800k home. tax credit is not a factor when it comes to westside sales. it is a combo of FHA loans (which hopefully dries out soon), high wage earners (200k+) and family help.

Anonymous said...

8k FTHB, 6500 for move up. Agree on the drop in a bucket comment though. And FHA seems to be having some, uh... trouble. ;-)

Anonymous said...

My husband and I were going to jump in on one of those $750,000 homes with an FHA loan...but people are seriously over-bidding on near tear-downs in awful parts of Mar Vista. And at open houses, we found ourselves in the company of potential buyers who were obviously not very saavy. So, we're on the sidelines again. For us, we just need to look at what the average prices/per square foot were each year for the last 15 years...I don't want to live in a shoe box that cost $880/sq foot when my parking-lot-attendant neighbor paid $150/sq foot 10 years ago!

Anonymous said...

Dear "Robert" - the other day you were making a bunch of bullish comments here, and contradicting our widely held belief that when interest rates rise, prices fall.

Enraged by your bullishness - I went out on a quest to prove you were wrong - and rip into you with full force. As it turns out however, it looks like I owe you an apology.

As it turns out, a rise in interest rates DOES NOT necessarily mean a drop in prices. Rich Toscano (i.e. the normally bearish "professor piggington") sent me a link which supports your theory:

As you can see from the spreadsheet, during the 70s and 80s when interest rates were 10-15% prices were still going up thanks largely to inflation going up 8-9-10% or more a year.

I questioned Rich about this thoroughly. He said (in a nutshell) high rates will not crush housing (nominally) because inflation (including the lagging but necessary wage inflation) will be going up at a decent clip as well.

I really really didnt want to believe this, and if this didnt come from someone I trust like Mr. Toscano, I really wouldnt believe it still. It causes me to rethink my conclusion that its best to buy when rates rise (cause prices come down). I wanted to believe that was the case, but obviously, the stats dont lie.

In any event, I wanted to say I was sorry. I like so many here am just frustrated that westside is so expensive. As such, I do have a tendency to lash out at any conclusion that is contrary to what I would like to believe.

Note - I do think westside is going to keep falling based on months of inventory and other metrics. However I will abandon the theory that higher interest rates will drive the prices lower. Thanks for helping me shapen my thinking about the subject.

Anonymous said...

Rates are low right now and I want to take advantage of them when buying, but I do not feel like buying in this market since I still think prices should continue to correct this winter once all the knife-catchers who got impatient get out of the way. To hedge myself over the next 6 months, I have built a reasonable hedge in TBT to profit if interest rates do start increasing. This position is approximately 20% of my downpayment. Any others doing the same?

Anonymous said...

if it is 20% you can lose than do it

Anonymous said...

Can I ask what the big deal is with buying on the westside is? With rents so low for houses there.....why buy?

Anonymous said...

GREAT QUESTION -- I am a high-end renter right now. Eventually, though, assuming that prices will come into line, buying could make sense. Buying make sense if (a) you use leverage, and (b) prices are rising. So, if prices "get in line" with rents, and we hit what looks like a bottom, it would be time to buy. That is a whole lotta IFs as of today on the high end, but there you have an answer as to why discuss buying.

Anonymous said...

I am looking at 3 bedroom condos in the 90403. It is frustrating how expensive they are compared to any other neighborhood in S california

For example check out this nice condo in PP - only $400 a sq foot vs comparable condo selling for $600 in the 90403


Sold on 10/22/2009
860 HAVERFORD Ave #404
Pacific Palisades, CA 90272
SQ. FT.: 2,475
$/SQ. FT.: $400

Anonymous said...

I am in the same boat. I have 25% down just sitting around collecting 1-2% in various accounts. My wife and I see units that we like, but are waiting to pull the trigger. To the anonymous poster who was considering FHA loan on a 700k+ house, I would actually say don't. FHA loans have higher up front coast associated with the loan and on top of that you have to pay insurance for the life of the loan. Unlike conventional loans, when you reach 20% equity you still have to pay the insurance money. Not to mention much higher interest rate. If you look at the life of the loan you pay a lot more for a FHA loan. If you can save up and get a conventional loan. For houses, I am able to find mortgages that only require 5% or so and at a better rate.

Anonymous said...

Hey - anyone here following the North of Montana market closely?
What is the cheapest price that something North of Montana has sold for in the past two years? I want to say that 1.6 million is the absolute cheapest for a pice of land any where North of Montana and that 2.2 million is the cheapest for a 5 bedroom house

Anonymous said...

LS2009 said...

"1) Having finished only the 2nd year of a typical 7 year cycle."

And yet in March 2007, at the beginning of your so called 7 year cycle you said:

"I personally believe the latest speculative bubble is due to unravel much faster than most people think. By the end of the next selling season ( Summer of 2008 ) you will see declines of 45% in Santa Monica off of it's peak in August of 05'."

So it begs the question - why were you so willing to ignore your "7 year cycle" notation back then?

Anonymous said...

" why were you so willing to ignore your "7 year cycle" notation back then?"

Why do you care? Seriously, if LS is wrong... so what? If you don't like what LS says, why bother coming here? You've got some issues you should work out... Or, you have a vested interest in LS being wrong.

Anonymous said...

You asked why buy rather than rent. We moved here 3 years ago and are renting after many years of being homeowners. There are arguments both ways, but the hardest part of renting is the lack of control. The high end building I am in is not being maintained well and is only 3 years old. The door to the garage has been broken for 3 months now and hte idiots in the HOA don't seem to know how to pick up a phone and get it fixed. My husband already fixed our side door twice simply by lubricating it. When you own your home and there is no HOA you can maintain it properly and keep everything fixed. In addition the first place where we rented the owner got in financial trouble and sold it so we had to move. That is a pain. Now for us the pain was worth the minimim of $100k/year price drops vs buying, but as prices drop I will be willing to put in low ball offers that have me come out ahead over renting if I stay put for 5 years. Meanwhile our downpayment is buring a hole in our pockets.

Some people want to change and customize their homes for their own tastes. There are many reasons to buy and well as good reasons to rent. I am just starting to look because I believe the next year or two will be a good time to buy. I am also concerned abotu inflation. I remember the 70's well and would like to have a hard asset.

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

"Why do you care? Seriously, if LS is wrong... so what?"

Because its fun. In 2005-2007, I openly mocked the permabulls who said there was no bubble, or the damage was "contained".

Now its the permabears turn. I.e., I openly mock those who say things like "By the end of the next selling season ( Summer of 2008 ) you will see declines of 45% in Santa Monica off of it's peak in August of 05'."

Anonymous said...

Buy what you can afford now, and don't over leverage yourself. If you need more space in the future and have the money then, move up to a larger place.

Nothing decent on the westside is going to be affordable to the run of the mill 200k or less household income folks with the a 30% down paymnet in place.

Anonymous said...

Falling rents will be the nail in the coffin on house prices. Landlords did not receive bailout money.

Anonymous said...

"the run of the mill 200k or less household income folks"

That is not a "run of the mill" HH income. Please provide an actual source for this info.

Anonymous said...

"That is not a "run of the mill" HH income. Please provide an actual source for this info."

How bout the US Census:

Looks like there are 77,000+ households in the area making more than 200K a year. Anyone doubt the vast majority of them are livin on the westside?

Anonymous said...

Good work on finding the number 77 thousand.

I think you need to distinguish between the number of people with jobs on the west side and the number of people that live in houses on the west side. The number with jobs may be 4 or 5 times the number of houses.

Therefore it shouldn't surprise anyone on this blog that just because a person has a job in one of the office buildings on the West Side, there is no guarantee that he can afford a house here - now or ever.

It was government policy to build a lot more offices than house.

This is especially true in Santa Monica - there are literally thousands and thousands of office jobs in the Water Garden and nearby giant office buildings that are filled with people who can never get a house in Santa Monica

Anonymous said...

the census numbers are based on where people live.

Anonymous said...

" Anyone doubt the vast majority of them are livin on the westside?"

Yep. You believe that the entire top 6% of households in the entire city live on the west side? You do realize that there are plenty of high-end 'hoods in LA besides the west side right? Maybe you don't get out much.

latesummer2009 said...

The biggest change in the real estate market is the absence of easy credit for unqualified buyers. Prices were jacked up because of this, and now we are still experiencing bubble prices on the Westside. If you take the amount of people in bad loans, upside down, default, foreclosure, etc., etc., it is significant. Most of those people couldn't really afford buying at bubble prices, and are living way beyond their means. This includes entry level homes, all the way up to the highest end. Until, buying becomes advantages to renting on a fundamental basis (sales price/rent = 15-20), prices will continue to decline. No govt tricks will change that, and we will have more knife-catchers on the way down.

I have to agree with Arti. First we have to identify the last pre-bubble year (Before funny money took off). Then, increase that value by the historical average appreciation until 2009 to arrive at non bubble pricing.

Anonymous said...

I agree - I live in a nice part of the West Side and I want to see all of those that can't really afford to live here out -

Market will return to sanity when those people return to the valley. Simple as that.

When they sell their houses, new people that can qualify for jumbos today will buy -

I see jumbos at 4.9% available to those with 30% down. Is that what you see, latesummer?

Anonymous said...

You believe that the entire top 6% of households in the entire city live on the west side?

No - thats why I said "vast majority" and not "entire".

Anonymous said...

Here's the 2008 census data for Santa Monica:

$75,000 to $99,999: 4,813
$100,000 to $149,999: 6,389
$150,000 to $199,999: 3,596
$200,000 or more: 6,273

Median household income (dollars): 67,581

Mean household income (dollars):112,837

These numbers are based on 2007 data - incomes have probably drooped a bit. Still, if we go with the standard 3x-4x income to mortgage rule and 20% down, that means that in a normal market the average house in Santa Monica should be around $254K-$338K (based on the median) or $423K-564K (based on the mean).

Yeaaaah, I think this market is still a little over priced...

You can also get 2008 census data for the 30th Congressional District, which covers much/most of the Westside:

Median household: $82,425
Mean household income: $133,189


Anonymous said...

The census includes a massive number of people that live in rent controlled apartments

also includes people that bought houses years ago

if you look only at people that have bought houses since 2004, you will find very substantial numbers of people whose incomes are too low. These people need to move to the valley. If they can't afford the valley then Palmdale and Valencia beckon

Some of the people that bought since 04 have the incomes to support house prices

Anonymous said...

Still, if we go with the standard 3x-4x income to mortgage rule and 20% down, that means that in a normal market the average house in Santa Monica should be around $254K-$338K (based on the median) or $423K-564K (based on the mean).

Actually - you need to look at the historical metrics since (as another anon noted the income stats include a number of perma renters who skew the incomes down). Its a dirty little secret but the 3X income rule hasnt worked in desirable east coast or west coast locales for decades (ask the bearish blogger "got popcorn/ Neil" for details)

In the year 2000, census indicates median home price in Santa Monica was 626K - median household income was 51K. So back then Santa Monica was at 12X income

As of today we are a bit over 14X incomes. So we probably have a little more to go, but not much.

Anonymous said...

Thank you Anon 3:21

I love the people who say that SM home prices should be at 3X income....give me a break!!!...hasn't been that way in Santa Monica for 100 years.
The people that buy here put a lot of money down OR have other income that perhaps isn't tracked (parents gifting, etc.)

Get real......

Anonymous said...

"hasn't been that way in Santa Monica for 100 years."

Yeah... OK. Actually, it's only since the mid- late 70's that housing in this area has gotten out of whack with the "traditional" income ratio. And it's generally been at around 4-5x income until about 10 years ago. Since you were probably in your teens 10 years ago, you wouldn't be expected to know that.

JBR said...

Just for fun... here's a quote from the president of the Dallas Fed from today's speech.

Several recent sources of strength are likely to wane as we head into next year. Cash-for-clunkers and the first-time-homebuyer tax credit have both shifted demand forward, increasing sales today at the expense of sales tomorrow. Neither of these programs can be repeated with any real hope of achieving anywhere near the same effect: The more demand you steal from the future, the less future demand there is for you to steal. The general tax cuts and government spending increases included in this year’s fiscal stimulus package won’t have their peak impact on the level of GDP until sometime in 2010, but their peak impact on the growth of GDP has come and gone...

Read it all at

Some of you folks really need to look at the big picture. "Rosy" is not a word I'd use to describe it.

Anonymous said...

I agree - the 3 times income rule doesn't apply here

Just look around santa monica - plenty of aspiring screen writers buying houses for 1.5 million

you think these wannabees make 500 k a year? Don't make me laugh

Mommy and daddy, back in the midwest, are paying for the house.

For many young people, income has zero correlation to the house they buy - at least in Santa monica this is the case- is it true elsewhere in LA>? I don't know - all I know is North Santa monica

speedingpullet said...

I agree - the 3 times income rule doesn't apply here

Why not? Is there something magical about incomes in Los Angeles?

3 x income works for every other part of the country (if not the rest of the world) but for this tiny section of one city.......?

The fact that we're sitting here on tis blog (and others) talking about the nosedive in both sales and prices, and the skyrocketing of mortgage defaults just goes to show that nothing is different here.

And btw - Santa Monica spent a great deal of the 20th century being a sleepy and slightly run down beach town. It was when various media companies decided to build offices there in the late 70's and early 80's that it became 'desirable'.

100 years ago, it was a small village. Then again the population of LA county in the 1900's was about 30,000, so there you go.

Anonymous said...

Go to or any of the similar sites. What you see are plenty of young women who live in Santa Monica.

Think about it - these santa monica residents may report income of zero or close to it to the IRS, since gifts are not taxable income. Yet due to gifts they live in Santa Monica

Do the math - the income stats you are looking at are way way off base

Anonymous said...

Yeah - there are a number of places where the 3X income doesnt work. Look at NYC - I was shocked to find out that it was at 20X income ten years ago.

The 3X rule is dead on accurate for the entire united states as a whole but thats the average between the huge swaths of anywhere USA where its historically at 2.5X or less, and the small desirable, usually coastal areas where its 5X or more.

Thus, the mistake is applying it to everywhere and assume thats where they will end up. If you use the 3X rule, you would assume Santa Monica, NYC, etc are on the verge of an epic meltdown. Likewise, the 3X rule would also make you conclude that places like Cleveland are about to explode in value. Neither one is true.

speedingpullet said...

True that, Anon 7.30am.... it is indeed possible to buy property for less than the 3 x income formula - Detroit comes to mind - though without a decent job market and/or infrastructure you have to wonder if its worth it for the cheap housing.

Though I'd hazard a guess that areas with prices still over 3-4 x income are having a hard time right now.....

As for NYC - I've never lived there, but have lived in London which (IIRC) has a similar property situation... a lot of people without the hefty salaries and/or the connections to actually buy in Manhatten normally rent, and the less affluent live in the other Boroughs - where prices are cheaper, but transport more of a hassle.

I don't think you can equate NYC with LA really - for a start there's no shortage of land out here. Yes it may feel congested on the Westside, but you certainly don't get huge areas of SFRs with decent lot sizes either in NYC or London. They really aren't making any more land over there....

I've always maintained that there will be parts of the Westside where it will always be too expensive for 'average' people to buy - hillside and ocean property comes to mind.

As much as I'd love to buy in Malibu, or Holmby Hills - I know that I'll never be able to afford it.

But that's OK, because in a sane world there would be other neighbourhoods nearby that would have housing to fit my needs and pocket (and not out in Simi Valley or wherever)

But prices are so out of whack for the whole of L.A county - not just Westside that I seriously have to ask myself "How much Sunshine Tax am I willing to pay in order to own here?" At the moment the answer is still - "Too Rich for My Taste - keep on renting"

Anonymous said...

Speedingpullet - I respect very much what you are saying - I think you once mentioned that you were from the UK. Have you spent much time in Dallas or Austin? Both cities have a lot of amenities, both are very sunny. Obviously the summers are harder to accept in those cities, but the price of a nice house in both cities is about one seventh of what the same house costs in North Santa Monica.

I am not telling you to move to those cities, but simply asking you to check them out and think about it.

Need I also point out that income taxes are high in Los Angeles and are zero in those two cities?

Anonymous said...

There is nothing special about West LA. The 3x-4x income to housing ratio has historically applied to much of the Westside - there are obviously micro-areas where it hasn't (as mentioned above) but the ratio didn't go out of whack until 2000 or so, when the repeal of Glass-Steagall Act and the introduction of insane mortgages started the current RE bubble.
At more than 4x income to mortgage, housing becomes unsustainable over the long term.
A responsible bank (harder to find these days than a virgin hooker or an honest lawyer) should not give out a mortgage when the ratio is higher than 4x, especially without a substantial down payment; it's just stupid, insane and irresponsible, which pretty much describes the last decade.


Anonymous said...

"Yeah - there are a number of places where the 3X income doesnt work. Look at NYC - I was shocked to find out that it was at 20X income ten years ago."

Agree - heres an interesting exercise someone pointed out a while ago to explain this.

Assume area X has 7 families, whose incomes are as shown below. Also, assume that everyone buys at 3X their income. Thus, the vital stats for the 7 families in area X are as follows

1. 30K/90K
2. 30K/90K
3. 30K/90K
4. 60K/180K
5. 90K/270K
6. 100K/300K
7. 150K/450K

Median income = 60
Median home price = 180K
Ratio = 3X

Everything looks hunky dory right? Now, suppose 2 migrant families move in making 25K and rent. In this case, the stats for area X now look like this:

1. 25K/Renter
2. 25K/Renter
3. 30K/90K
4. 30K/90K
5. 30K/90K
6. 60K/180K
7. 90K/270K
8. 100K/300K
9. 150K/450K

Median income = 30K
Median home price = 180K
Ratio =6X

suddenly, home prices look way out of whack, when in reality, everything is completely stable.

Im not saying this is what happened - but there is so much "fudge" in the 3X rule or whatever to render it nearly worthless.

speedingpullet said...

Anon 12.42 - indeed, stats are very easy to manipulate to 'prove; what you want them to - and I speak as an ex-statistician... ;-)

Though, I believe that the '3-4 times income' rule actually applies to your own personal income - so if your household makes 100K a year then you're asking for trouble if you buy anything for more than 400K

FrankH - nicely put, couldn't have said it better myself!

Anon 9;50am - no offense taken about the other cities.. we have friends who moved to Austin last year and so far they're really enjoying it. We're hoping to go visit soon.
TBH - we're here for economic reasons. LA is a beautiful city, esp the Westside, but the USA is blessed with many lovely cities where the property prices are lower and standard of living is higher than here in SoCal.

But The Husband loves his job here, and is well compensated for it - and until he either loses his job or stops enjoying it, then we're rooted within commuting distance from the Water Gardens in SM.

I do contract/freelance stuff, so as long as I have broadband and fedex I could be anywhere... and truthfully, I'd rather be in Santa Cruz or Flagstaff ;-)

Anonymous said...

I hear you - I used to work near the Water Garden - literally everyone in the Water Garden was obsessed with living North of Montana. Is that still the case ?

Anonymous said...

Of course the lower end has to go down -- too bad these bad FHA loans are propping it up. Look at a $750,000 house in Mar Vista - it will have small rooms and need at least $100,000 worth of work..but it'll get snapped up by a buyer with a FHA loan. And then look at what you can get for $850,000 -- a HUGE difference. But the $850,000 house will have a harder time selling because it requires a buyer with 20% down. But eventually those $900-$800 homes will have to lower their prices again, which will push the $700's down too.

Lucy said...

From today's LA Times - the FHA is under it's legal limit of reserves and may require a taxpayer buyout. AND, first time home buyers are making up 47% of the real estate market. I'm no analyst, but seems that this would support the theory that these FHA loans that are propping up the bottom of the market could in fact be drying up. Do we know if that could indeed happen? I'd bet every dollar of my savings that without 5% down FHAs, the lower end of the market will drop SIGNIFICANTLY!