July 31, 2007

The History of the Los Angeles County Housing Bubble (2000 – 2007). Proudly a County of a Renting Majority.

Take a long and hard look at the chart above. Sometimes a picture is worth a thousand words or in this case, worth half a million. Many would be housing buyers have felt the angst of never being able to afford a home in Southern California. Anyone sitting on the sidelines for the past seven years has seen the largest historical run-up in housing and probably felt helpless at each consecutive jump in prices. “Housing has gone up 20 percent year over year,” became a monthly media sound bite embedded into the psyche of any California resident. We start out with a median price of $200,000 seven years ago and currently see median home prices of $520,000 in Los Angeles County. This double-digit year over year appreciation started in February of 2001 and didn’t end until April of 2006. That means housing never dropped below 10 percent yearly gains, (sometimes reaching gains of 26.6 percent) for 5 years and 2 months.

Even as we are facing massive meltdowns in the subprime and now prime mortgage arenas, why in the 30 mile zone world is LA housing still going up? Welcome to the world of shady statistics, exotic mortgages, and good old fashion greed.

Lies, Damned Lies, and Statistics

Los Angeles housing has always been relatively expensive in comparison to the rest of the nation. Let me define the word always. When I say always, I mean from 1970 and beyond. Similar to real estate agents saying real estate always goes up. Yet something happened in the last decade that sent housing prices in the Southland into the Al Gore stratosphere. I remember reading a book by Robert Allen called Nothing Down and thought to myself as I read it many years ago, “this sounds fantastic but this is relegated to the late night infomercial circuit with tanned gurus in Hawaiian shirts pimping real estate seminars at 2AM.” Go figure that a few years later, nothing down went mainstream. Not only was nothing down mainstream it became a staple of the housing bubble.


Lending standards took a major dose of laxatives and let out a major wave of dirty mortgages. Hence, the name “toxic” loans we now hear. At least that makes sense because these mortgage products were full of you know what. In addition, all the stats used by mortgage lenders incorporated skewed statistics and made up incomes. If you think stated income is ridiculous then you have not lived in Los Angeles. Stated income was the future baby! Why does the bank need to know how much I make? Why are they nosy and trying to dig into my business? When I say I make $500,000 I really mean it even though I have no idea where my W2s are. I’m not even sure if I work but we’ll let Wall Street worry about that. It was an implicit agreement of you sign here, and we’ll put you into this over inflated home. If people on the streets were conjuring up their incomes, what about the companies providing these people the mortgages? Well now, we are taking a deeper look at what really went on and opening the Christmas gift from hell. It turns out that Nothing Down doesn’t bode well in the mortgage game. Why is that? People will generally fight like riled up hyenas if they have skin in the game. If you had to put 20 percent down on a piece of real estate you will do all you can before having the house foreclosed. However, with zero down most folks are more than happy to walk away from their massive mortgage obligations. Heck, the lending institutions are doing this right now in their 11th hour. We all know that every large metro area is declining and facing massive jumps in foreclosures.

Wacky Median is Still Going Up

No negative housing information seems to make a dent on the resilient LA median price index. The prices keep going up. Again, the devil is in the details. Sales volume has dropped off a cliff and has been in free fall mode for over a year. Yet a home that doesn’t sell cannot be factored into the overall sales data. Therefore, what we see is homes in prime areas such as Beverly Hills, Brentwood, Santa Monica, and Palos Verdes skew prices even higher because these places are still selling. Lower priced homes aren’t selling therefore they are not included in the overall sample size. And the sales sample size is shrinking as we speak.

Then we have homeowners addicted to five years of double-digit gains unable to reconcile that they can no longer sell their home for peak prices. They feel entitled to peak prices because they say so. Can it be that housing prices were inflated by exotic mortgages and general greed? Why else would people be so eager to jump into a home that they could rent for half the price? The new paradigm of housing included double-digit appreciation until the end of time. Well the end of the time arrived in summer 2007.

Why Did Los Angeles Go Up and Other Areas Did not?

This may come as a shock to you but we have sun here in Southern California. Actually, we own the exclusive rights to it. Therefore, prospective buyers had to pay a sunshine tax to live here. Florida has sun too hence their run-up in real estate. This may seem simplistic but most metro areas in the US are now overpriced. Some are overpriced by 10 percent and some are overpriced by 50 percent. LA wasn’t the only place with a mad run-up in prices.

We also have a very mobile population. The majority of folks spend a good portion of their day on the 5, 10, 210, 405, or any other freeway you can think of. A very small portion of people see housing as a long-term investment here. The general culture does not think of buying a home, raising a family, and retiring all in one place. In fact, we have a culture where you play the Russian matryoshka doll game; you know where each little doll is nestled in a larger doll? Well people purchase homes here to trade up. Each consecutive purchase brings you a larger home with an equally larger mortgage. Each added member to the family is reason to purchase a larger car on a new lease. This is how many families operate in the Southland.


Yet the squeeze is being put on the middle-class of the state. Rising gas prices, car costs, healthcare, food, utilities, and housing all cut into the operating budget of the family. Like the couple earning $130,000 and lost their home to foreclosure, many families are realizing they are suffocating on servicing their debt. The grim fact may hit many families like a ton of bricks that they were using credit to stay afloat. Now that credit is becoming more expensive to obtain, they are realizing the true nature of their spending habits. Many families are also feeling the pinch of a declining dollar. I’m not sure if John and Susie Public are too concerned about a falling dollar or inflation. You just hear them ramble about, “damn, prices are always going up!” I’m hoping that people start asking the next question and look into the reason prices are going up. And many folks are realizing that their paycheck isn’t keeping up with the cost of living. Slowly the public is being taxed via inflation and a falling dollar. The only person running for president that I’ve heard mention anything about these economic issues is Ron Paul.

Los Angeles is a different beast. We have 88 cities in the county. We have 10,000,000+ people living in a relatively small area. There are 3,339,763 housing units. The median income for a household in the county is $42,189, and the median income for a family is $46,452. In addition, the homeownership rate is 47.9 percent. So in fact, Los Angeles County has a renting majority population. But if you want to own, we have some wonderful Real Homes of Genius eager for a new owner.



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32 Comments:

Rob Dawg said...

It may come as surprise but LA driving miles and commute times are about average for all US metro areas.

Dr Housing Bubble said...

@rob,

Miles I can understand. But actual time "stuck" in traffic may differ. I'd be curious to see where you are gathering the information or which study cited that information. I recall a study last year naming the 10 and 405 exchange the absolute worst traffic spot in the nation.

Dr Housing Bubble said...

I'm sure many have seen Jim Cramer's view on the housing market video. Basically saying the inland empire is in for a world of hurt and 2/28 mortgages will default at 100 percent. Wow, talk about converting to a housing bear. Here's the video if you haven't seen it:


Cramer Transforms into Housing Bear

And a blast from the past:


So Subprime Blows Up; So What


Cry now, smile later. Things do change over time don't they?

FZ6 said...

Like always doc great post!

I have a question that has been crawling in my mind for a while. I completely agree and understand that housing is way overpriced. I was thinking of buying a home back in Jan of this year out in the IE (off 15). The home was 600K, I said no thanks. At what price would you say that it is "acceptable" to purchase. I was thinking low 400K. Last I checked they were low 500K but I am still waiting thanks to you.

Thanks for what you do Doc.

Dr Housing Bubble said...

fz6,

Not sure if you got a chance to watch the video but this is a partial transcript of what Cramer said and it pertains to the Inland Empire:

"I'm looking for a 100% default of the 2 and 28's. 100 percent. The bears are looking for 50 percent. I'm saying that they're foolish and way too optimistic.... Now, where are these 2 and 28 loans concentrated? Largely in Florida, in Phoenix, in Las Vegas, in the Southland of California, the northern part, Sacramento, but most importantly, the Inland Empire. I think the Inland Empire needs an agricultural adjustment company. ... we need to, like, plow over the Inland Empire, because there's so many more homes. And the homebuilders have way too much inventory. And the people who have made these loans whoever, where the mortgages are, I think almost everything that was written from May of 2006 until the end of the year was worthless."

Those are pretty strong words and much of the current housing market is based on perception. Cramer has a lot of influence and housing is not exactly a hot commodity at the moment. As usual, there are a few methods of calculating a home's value. At a minimum you should:

1. Check the local area for similar rental/lease rates.
2. Factor in stagnant to negative appreciation.
3. How diverse is the local economy?
4. Inventory. Is it going up or down? For the IE there is lots of inventory.
5. Tax benefits.
6. What loans are available to you and your down payment.

These are much more important than price. Because even a home that is $200,000 but only rents for $750 a month is not necessarily a good deal. In fact, from an investors stand point it is a horrible deal and will negative cash flow.

The benefit is you have time on your side. There is no rush to jump in. Foreclosures are climbing and each week, more short-sales are hitting the market. Do your research and wait the market out. We are nowhere near a true buyers market. Prices are not going up so you don't have to worry about being priced out.

Dr Housing Bubble said...

All,

I posted this in the previous article but warrants a heads up here as well:

--
Trading opened and AHM is getting creamed:

Down 89% and trading at 1.15. Total market cap is now $63.5 Million. Big difference from the $500+ million just last week.

This on news that it will be unable to fund loans.

Peppermint Hippo said...

I watched the Cramer video several times. In my opinion, he's trying to goose the Fed into lowering interest rates and divert the economy from a recession. Don't know if he has any influence over the Fed, but I do know I completely disagree with lowering rates to prolong the problem. I'm not even sure lowering rates would do anything for housing, but it may allow the private equity party to pick-up again.

A colleague of mine believes that the policy makers are going to make sure we have a strong economy and bull market through 2008 because it's an election year. Any merit to this notion, DHB and others? Even with the election year around the corner, I think Q3 2007 through next summer will present challenges for the positive spinsters to tackle. (I guess we should expect more coverage on Paris Hilton and Lindsey Lohan.)

Rob Dawg said...

American Community Survey from the US census 2003 but there may be a newer one.

Yes, the 10/405 is one of the busiest in the nation.

There's a lot of myths about LA and car culture and all that. For instance, by a large margain LA is the densest urbanized area in the country and by every enumerable definition the least sprawled urbanized area in the country as well.

W.C. Varones said...

You're right about the median being skewed by the mix changing.

For a better methodology, check out the Case-Shiller Index.

http://www.macromarkets.com/csi_housing/MSA/los_angeles.asp

L.A. is sinking.

Peppermint Hippo said...

A good editorial from Financial Sense that discusses what the central banks will probably due in the new few months. Bottom line: lower rates to choose inflation over a recession or worse.

http://www.financialsense.com/fsu/editorials/hoy/2007/0731.html

Dr Housing Bubble said...

@peppermint hippo,

I'm not sure what policy makers can do to stop this train from hitting in 2008. I mean what are they going to do? Pay the mortgage off. I've thought about this as well but my thoughts are that there isn't much clout on both sides to force the overall market to respond. In addition, this thing is global and other countries will deal with a credit bubble as well.

I would think that Democrats and Republicans are jostling for a spot next year since there isn't a clear winner. The spot is completely open.

@rob,

Here's another study:

By the Texas Transportation Institute's reckoning, the cities having the worst traffic problems are:

1. Los Angeles, Long Beach, Santa Ana, Calif.

2. San Francisco, Oakland, Calif.

3. Washington, D.C.

4. Atlanta

5. Houston

6. Dallas, Fort Worth, Arlington, Tex.

7. Chicago.

8. Detroit

9. Riverside, San Bernardino, Calif.

9. Orlando, Fla.

11. San Jose, Calif.

12. San Diego

Not a myth but look at the congestion on all the major highways during morning drive time and rush hour. Since I own property in other parts of the country and travel to many states, I have yet to find another city that has the congestion that we have (aside from New York City).

Here is a newer link to the survey you mention: US Census Survey Just a brief overview.

@w.c. varones,

Case-Shiller does a better job. The only problem as we saw with AHM today, is once credit is cut, all hell breaks lose. I mean what's the difference if you can't make the payment on a $200,000 mortgage or a $500,000 mortgage? Either way, you will lose the home and the mortgage holder will need to sell in a declining market.

Not exactly a good spot to be in for selling a home.

Rob Dawg said...

You cannot trust the TTI's conclusions. Their data are great but they... ummm... torture the science of mathematics to get what their sponsors are looking to promote.

The RCI (Roadway Congestion Index) is not an actual measure of congestion but rather roadway utilization. A major snowstorm in Boston actually takes a few percentage points off their rating as but one example. You see with no cars on the roads for a few days their utilization goes down so in effect our good weather is part of what TTI wants to pawn off as congestion.

formul8 said...

Dr. HB, you nailed the exact reason why I decided to postpone/cancel my planned dream move to Pasadena. The price to keep a roof over my head would be too much for just a scenery change.

BTW, I live in Chicago and will say that besides the 405, seems the traffic is bad in LA, but it always moves. Our traffic here which has actually been clocked at 3 minutes more than LA for the average commute time, is worse. Ours stops and goes, stops again. Then goes.

Our highway system here is seriously over burdened with no new highways planned and nowhere to put them w/o some major backlash or declaring public domain on some expensive pieces of property. I was totally surprised about the traffic when I was driving around the last few times I was there. I was thinking "What is everyone here complaining about???".

(Maybe being there in February with the top down on the rented covertible might have had a slight influence....)

4MySales said...

You are right about LA housing being a different beast. Regardless of home prices, we almost always have an influx of population from other states. More citizens means higher demand, even if fewer and fewer of us can afford a home.

-4MySales

Darrell said...

Re: Robert Allen--Nothing Down. He filed for bankruptcy in May 1996. As did several other real estate, book selling gurus. Here's a list (unverified-from web):

• Albert Lowry, author of “How You Can Become Financially Independent by Investing in Real Estate,” declared Chapter 7 bankruptcy in 1987.
• Craig Hall, author of “Craig Hall’s Book of Real Estate Investing,” declared bankruptcy in 1992.
• Bill “Tycoon” Greene, author of “Two Years for Freedom,” was convicted, fined and sentenced to prison. (He later escaped from a minimum security prison and is believed to be living in England.)
• Tony Hoffman, author of “How to Negotiate Successfully in Real Estate,” filed Chapter 11 bankruptcy for his company in 1986.
• Wade Cook, author of “How to Build a Real Estate Money Machine,” declared Chapter 7 bankruptcy in 1987 and 2003.
• Dave Glubeitch, author of “The Money Game,” declared Chapter 7 bankruptcy in 1987.
• Dave Del Dotto, author of “Cash Flow System,” was charged by the FTC with misrepresenting products in 1993. He filed Chapter 7 bankruptcy in 1995.
• Charles Givens, author of “Wealth Without Risk,” was successfully sued by a former customer for giving bad financial advice. He filed for Chapter 7 bankruptcy in 1995. He died pending trial.
• Sonny Block, author of “Inside Real Estate,” was indicted in May 1995 by a federal grand jury for fraud and fled to the Dominican Republic to avoid prosecution. He was eventually deported to the U.S., but died pending trial.
• Ed Beckley, author of “Million Dollar Secrets,” declared bankruptcy in 1987 and was sentenced to federal prison for wire fraud.
• Robert Allen, the author of “Nothing Down” and “Creating Wealth,” declared Chapter 7 bankruptcy in May 1996.

Also, note that Robert Kiyosaki (Rich Dad, Poor Dad) published (http://www.richdad.com/pages/article_dollar_crisis.asp) three updates warning his followers, first one titled All Booms Bust!

Dr Housing Bubble said...

@rob,

Seems like quality of life articles
are popping up everywhere. Just read this article posted yesterday on Yahoo:

The Most Unhealthy Commutes in America

Two paragraphs from the article:

“SoCal's Triple Whammy

Not only do commuters in Southern California inhale the worst year-round particle pollution levels, but Riverside drivers also face the highest rate of fatal auto accidents per capita, and Los Angeles drivers spend the most time sitting in traffic. In 2003, the annual delay per traveler there was 93 hours.

Long commutes, research has shown, can lead to loss of short-term memory, more days of missed work and such ailments as higher blood pressure, muscle tension and an accelerated heart rate.”

@formul8,
A convertible always makes anything feel better. Pasadena is a gorgeous city. Definitely one of the gems of Southern California. I’m not sure how much of a decline we’ll see in prime areas but Pasadena ranks very high up on many lists.

@4mysales,
We have a net migration out of middle-class families and an influx of immigrant families. In essence, we have a lack of affordable high density housing in the Southland, not high priced McMansions. Many of the incoming population are not looking to purchase $600,000 homes and do not have the means to do so. You can always rent so people do not need to buy; like I highlight in this post Los Angeles County is predominantly renters.
Housing demand is economically elastic. That is folks can easily substitute buying a house with renting. It isn’t inelastic like a certain drug medicine need to cure an ailment. Sometimes you have to purchase that one product with no adequate substitutes.

@Darrell,
I read about RA’s bankruptcy on another website. Interesting to note that many of the bankruptcies listed happened in the previous trough of the real estate cycle. Maybe we’ll see similar action in the market this time. Who are the prominent gurus of real estate currently?

Son of Brock Landers said...

Great work Dr HB. California seems like a cross between Shangri-la and the land of Oz.

Recession guess: We're headed for a housing/consumer driven, weak business cap ex spending enabled recession. In a futile attempt to guess when it begins, I would say right during the Olympics in China and the Presidential election in the US. I do not think the currency devaluation will help our export industries enough to get us through a soft patch.

Dr HB is right about an unavoidable recession or central banks being unable to cut rates to avoid it. On a global view, the European Central bank is obsessed with a strong currency and fighting inflation. Look at how the Eurocrats introduced the euro and had it be so close in value to the dollar so the 1-1 psychological ratio could be forever discussed. Think about German hyperinflation. This could all be scheisser as we have not seen how the ECB will act in the face of a true blue recession. I may be biased as I wrote my honors thesis on how the euro was a bad idea without full political integration.

If you truly evaluate the recession of '01, it was mild compared to '90-91 and the '80-82 recession. We've put off the pain of a true recession for years now, and the normal progression of the business cycle must be kept. As much as I dislike conspicuous consumption, I am even more disgusted by CEOs who would rather spend money on share buybacks than on investing in R&D, employees, and projects that create true growth in earnings.

Now if the US has a recession it is going to hurt "export only" economies of the Far East, which will in turn damage the commodities based economies of countries like Australia, Canada, Brazil, etc. It's globalization at its finest. I only hope that governments do not go psychotic in protectionist measures and make things worse.

I can't wait for the 24/7, 21st century media to cover a real recession.

Joshua said...

Just discovered your blog a few days ago. Great work!

Musnbny said...

Front page of Inland Valley Daily Bulletin: HOUSING TREND IS CLIMBING. Huh? That might make you think that sales are up.

But the subtitle tells all: Foreclosures make sharp increase in I.E. Silly journalists!

My wife and I thoroughly enjoyed Jim Cramer's videos. Watched them several times. I don't think 100 basis points is going to make that much difference. It is insane for most of us to spend 500K on a home at 6.5 or 5.5% interest rate.

I'm not sure, Dr. HB, what you meant when you said things matter more than price. Actually the listing price of a home really means NOTHING in relationship to its value.

Dr Housing Bubble said...

@Musnbny,

I'm not sure, Dr. HB, what you meant when you said things matter more than price. Actually the listing price of a home really means NOTHING in relationship to its value.

I should have been more clear. What I was getting at was people are fixated on the actual median price when they should look at other factors such as local lease/rent rates, potential for appreciation, and property location to derive a value of the asset. Looking at last month's sales data is not much help now that the bubble is bursting.

We're going back to the fundamentals (slowly, but it is happening).

covered said...

My HELOC (back when I had one) was tied to the LIBOR. The Brits have raised rates twice this year if memory serves so I really don't see what good a Fed rate cut is gonna do for current FBs and their resets. I suppose it might help the new buyer pool (well, maybe the new buyer jacuzzi, since I'm not sure there's enough new buyers to fill an entire pool.) Also, I'm getting the sense that the magic bullet some are counting on besides a mass bailout is a re-negotiation of terms for current delinquent (oximoronic?) loans outstanding. For that to happen,though, wouldn't the house have to appraise out for at least the purchase price and/or the mortgage amount? Perhaps Cramer is correct with the "plow 'em under" theory.

Liberal said...

I find it kind of interesting that people are posting about the idiots who fell for the RE bubble and then in the same breath talk about listening to Jim Cramer and all HIS wisdom.
Cramer should be banned from TV for trying to manipulate the stock market.

Rob Dawg said...

Ignoring Cramertainment is like ignoring a reckless driver on the highway. You may say you don't drive like that but still you are affected by his behavior.

Musnbny said...

Hmm. I've learned all kinds of stuff about the stock market from Jim Cramer. No one else on TV is filling the gaps left by my mediocre economics teacher from high school. I have all kinds of science degrees and so I appreciate anyone who tries to make money and the market more understandable and fun. And, less important than that, I've made some Mad Money of my own listening to the things that make sense, and ignoring the advice that doesn't. And everything the man said about housing lately makes sense to me.

The North Coast said...

formul8, dear fellow Chicagoan, we here in Chicago do not need more highways.

We need more and better public transportation. More CTA el trainlines linking the lines that exist, more METRA, more transit in low-density outer neighborhoods.

We then need to zone for higher residential density around transit/retail hubs like Howard St, 6 Corners, Forest Park station, Harlem Ave, and other similar "hub" places.

But no more highways, please. Notice that the more highways we build, the more congestion and sprawl we get.

Come over to my blog and we can talk Chitown traffic problems.

The North Coast said...

Dr HB, forgive my departing from the main thread. I won't let it happen again, and in the future I'll discuss those matters on my own site.

Darrel, thank you for the Rogue's Gallery of real estate gurus who have bankrupted and/or faced criminal charges.

You'd really think the American public would be pretty jaded by get-rich-quick-schemes by now, but I guess it's human nature.

However,it could also be an economy that ceased to be truly productive 30 years ago and is now dependent upon financial crazes to generate economic activity.

Rob Dawg said...

But no more highways, please. Notice that the more highways we build, the more congestion and sprawl we get.

Everything you said is the exact opposite of the conclusions of 8 decades of transportation data and analysis. The densest places are the most congested. The places with the most transit are the most congested. Not even the most ardent transit supporters try to say transit reduces congestion because the data are clear; transit causes congestion. Unstead theyll speak of transit as an alternative to congested roads. What they won't tell you is that transit commute times are double POV times despite being physically shorter in distance.

JimAtLaw said...

They just need to widen the highways we have, and not by one lane, which is fully occupied by the time they even finish the projects, but by double at a time, giving us 10 years or more between the need for re-expansion, or perhaps by building upward (two level highways) for cross-town transit lanes. It's expensive, but I doubt it could possibly be more than building mass transit that people still need to drive to and park at, and increases rather than decreases the speed of people's commutes.

Dr Housing Bubble said...

@covered,

The same issue occurred in Japan with their real estate bubble. In their situation, they dropped rates to zero percent, and still the asset deflation kept on going. After all, with many of these implosion happening in the subprime sector, they are already much higher than prime.

@liberal,

As you can see from the video link above, Cramer has shifted his stance on real estate. He has done this many times in the past. Remember the tech bust? Many of his followers blasted him for pumping stocks that tanked. I’m thinking he learned his lesson and is trying to cover his bases. He is smart guy and strikes at any opportunity. My belief is Jim views the impending housing bubble bursting and wants to be seen as an expert in the field. Claiming that they should “plow” the IE is an interesting approach but we’ll see if he maintains his stance. If he comes out like this on cable, then I’ll believe that he is serious. But having what he said only online via streaming video is not reaching a large enough audience.

@rob,

It is hard to ignore the character. He is fun to watch and does have some good tips. I’m not sure if his philosophy is long-term investing; more like momentum trading.

@the north cosat,

Glad to see two Chicagoans on the site. It seems that this bubble has played out very similar in many metro urban areas. Traffic is an issue that any densely populated area will need to face. Even the book Life 2.0 examines the flight of many folks into smaller towns to avoid this quality of life issue including high housing prices.

@jimatlaw,

I’m not a transportation expert but each year, traffic seems to get worse by 5 minutes. Typical commutes that took 25 minutes now take 35. I’m not sure if widening the roads would provide any relief in the short-term since it will take years to get this accomplished; two-level highways would take much longer. Maybe in the meantime we can do what Mexico City does and allow only certain license plate numbers on the freeway during a given day of the week. I’m sure that’ll go over well.

Monique said...

Terrific graph at the beginning of this post, but I'd love to see one that charts both median real estate prices and median incomes in Los Angeles from 2000 to 2007.

Kevin said...

Dear Dr. Housing:

I love your site & your insights. As a buyer who is sitting on the sidelines (and growing my future downpayment), I thought it would be interesting if you created a chart of what the median house price would be if we held appreciation constant through this bubble.

I can't attach the simple spreadsheet I created, but for Burbank (where I live), the Nov. 2000 median house was reported being $256,400 (compared to LA county at $200,00). If I then do some simple compounding at 6%, the "expected" value of that $256,400 home in Nov. 2007 should be $385,531. Obviously massively lower than the median house value in LA county.

I would love to hear your thoughts. Obviously the "fair market price" for a house in Burbank will be whatever the market settles on after the inevitable "crash" or "burst."

Thanks!

felix said...

I am planning on moving back to Los Angeles and would like to buy a house sometime, but not while the prices are declining. I now have 100k for a down payment and should be able to afford 4k+ for housing.

I was wondering what anyones predictions on how much prices should fall over the next 2-5 years.

I used this chart as a historical guide and as a best guess as to what to expect in the future.
http://mysite.verizon.net/vodkajim/housingbubble/los_angeles.html

My observations or analysis are that prices go up faster and take about 2 times as long to bottom. I have been conservative and followed the same pattern as the 1987-1997 pattern. Prices went up for 3 years and then went down for about 6 years. If you apply the same angle of price declines from 90-97 to nominal prices should be down by 20% (conservative) by 2012. I also noticed that in the first half of a downturn, the prices fall 2 times as fast as the second half.

Of course if you factor in inflation housing should be an even worse investment.

Anyway, do my predictions make sense given that I a trying to follow the pattern of the last downturn and that the last run up in prices was more of a bubble, so my predictions are pretty conservative that whatever homes are on the market now, I should expect to get for about 20% less nominally in a few years?

As far a LA being unique in the "fact" that it has a great economy, weather, and a growing population, wasn't that true also in 1990-1997? Prices still went down then.