The Evolution of the Los Angeles Housing Bubble. 50 Years in Perspective.

I’ve been inspired to think about the last 50 years regarding the evolution of housing in Los Angeles. What was going on in the 1950s?

*Elvis Presley was hitting the scene with his rebellious music and fashion.
*Many jobs were in manufacturing and food processing.
*Betty Crocker was the model of food cooking and recipe development.
*The Ed Sullivan show was a major hit.
*Marilyn Monroe on the scene.
*One wage families the majority.
*Divorce was not as easy in the fifties.

So this gives you a general overview of the culture of the time. Not to give you visions of apple pie cooking in the oven and Lassie running out in the lawn but this is a snapshot of history. Ironically, a couple of things have made full circle; look at the recent death of Anna Nicole and the fame and fall of Martha Stewart. Ed Sullivan was about discovering talent and what about the current American Idol? History doesn’t repeat itself but it does rhyme to paraphrase Mark Twain. What about the cost of items? I found an article from a local Los Angeles city newsletter discussing the price of items fifty years ago:

Average Automobile: $2,156
Average Gallon of Milk: $1
Cost of a movie ticket: $1
Cost of single family home: $12,700
Average household income: $4,564



The interesting fact about the stats above is you see about a 10x multiplier effect working on many of the items. An average car now cost about $20,000, a movie ticket is averaging $10 in the Los Angeles area, and income in this particular area is about $45,000 per household in 2007. Unbelievably, housing is off on a multiple of 40x since the median home cost is $500,000 in the said area. As you can see, inflation has treaded rather evenly with the other categories except for that of housing. Now why is this? What else was going on in the fifties? We had a relatively booming economy coming out of World War II and many have called this the glory days of the United States. Jobs were plentiful and the Fed had rates at all time lows.

Sounds very reminiscent to today except for the fact that our major base of manufacturing jobs is no longer in the states yet we are the largest consumer of these products. Neither is food production a major source of employment. Many folks find themselves working white-collar jobs nationally. To narrow the scope to Southern California, the largest booming job areas in the last few years are directly tied to real estate and housing; bank financing, construction, and housing ancillary products. Think of the last category as the Home Depot’s and Lowes of our time. So essentially, we have been living off our homes for the past seven years. After the major attacks on the United States, the Fed went on a major credit flooding campaign lowering rates to near zero. Normally during a recession which we did have, housing starts and home prices retreat or fallback but instead we saw housing take an unexpected jump.



Not only did housing blaze a new trail, it went into uncharted swampland territory. No one can use past real estate cycles because we are truly in a unique, probably once in a lifetime housing bubble fueled by lose credit and a real estate industry that is enabling risky behavior. In addition as I discussed in a previous article many of these enablers are now suddenly making folks go cold turkey on the housing bubble. The game is essentially over yet those still partying have yet to receive the memo. First payment defaults are on the rise as reported by DataQuick and mortgage fraud is running rampant throughout the industry.

Yes, 2007 is very different from 1957 even though many things seem similar. Unlike the 1950s we do not have a positive savings rate…:



We do not have fiscal responsibility, and a home is no longer just a place to live; a home has suddenly become the impetus for keeping the consumer economy of the U.S. going. It is the Lost City of Atlantis were all you need to do is plaster a virtual housing ATM on the side of your front door and pull out of your wallet your home equity line of credit. If this is too complicated just shell out your plastic and swipe away; even this is going to be easier with Visa offering credit cards that use radio frequencies. Yet at the end of all this virtual money chasing binge, we are left with an immense deficit that needs to be paid back, with no savings! When will we start paying? Maybe that’ll be another 50 year story.

Filed in: Southern-California-Houisng housing-data real-estate

Did you Feel That? Housing Just Hit the Third Rail.

HSBC, the world’s third largest bank warned that bad-debt charges will be higher than 20% than originally forecasted. HSBC has been a big player in the United States subprime mortgage market so this news comes as a big deal. Signs of credit deterioration have risen to a crescendo, HSBC is warning about $10.56 billion in provisions; meaning they have no idea how bad these loans will get. Essentially they are starting to line their ducks in row getting ready for the implosion of many loans; remember $1 trillion in loan resets are scheduled for this year.

On another front, subprime connoisseur New Century Financial Corporation (NEW) took it in the shorts on Wednesday when it announced that it will revise earnings estimates lower because it did not plan to set aside enough money to buyback subprime loans that will go bad. Whoops!



This little announcement sent NEW down by 17% in after hours trading. Suddenly it doesn’t seem like such a smart idea to lend money to people with bad credit; could this be that maybe bad credit means that people may not pay your money back? Amazing how all of a sudden credit standards matter.

Let us continue on in the world of Wonderland. The National Association of Roosters (NAR) issued the following:

"After reaching what appears to be the bottom in the fourth quarter of 2006, we expect existing home sales to gradually rise all this year and well into 2008," NAR chief economist David Lereah said in a statement.”

Wow, we hit the bottom with one quarter of down sales and now we’re back on track for year-on-year appreciation! Thanks for the informative update David. Who do we believe? Folks that are running scared from subprime mortgages such as NEW or the warnings from HSBC, the world’s third largest bank? These folks have no creditability in the face of the outstanding, ethical, and masterfully insightful NAR. Again, we should always listen to what realtors say because this is the truth. We are suddenly starting to see subprime lenders go down like moths heading toward the light. According to the site Mortgage Implode O Meter 20 subprime ravers are now down and out. Did someone just hit the third rail?

Filed in: Southern-California-Houisng housing-data real-estate

Real Homes of Genius: $463,000 Price Reduction in Bell! I Just Saved Close to $500,000 by waiting 4 Months!

Most can spot a solid deal from a mile away and the above commercial lot in Bell is no exception. Whenever you can save $463,000 in four months, you are doing something right. How many folks make $100,000+ a month? Today we salute Bell with the Real Homes of Genius Award. Not only that, but we should create another section, the category of “I can’t believe I had the guts to list something so ridiculously high” and smile at the end of the day. These folks had initially listed this “high in demand” lot for $958,000. They proceeded to do the following:



Okay, so the first reduction of $323,000 didn’t bring any buyers to the table. After two months of sitting on the market the price was lowered another $140,000. Now we are in February and the property still sits. If anything, this property is a symptom of the housing bubble market mentality. What is running through the listing agents mind when he says “I have a great idea! Let us list this property for close to $1 million” and expecting someone to buy it only by doing radical and insane price drops? This strategy isn’t new; list a home for a price way over appraisal and reduce the price until someone bites. There are two reasons for this. One, there is the perceived belief to the buyer that buying at a “discount” they are getting a deal. Can you imagine telling your friends and family that you saved almost $500,000 simply by waiting four months? You will be Einstein in their eyes and a modern day J.P Morgan. The second point is showing “action” on the MLS. Most agents and buyers that browse the net have their settings to show reduced homes in certain areas. By lowering prices, the buyers market has a perceived notion that this property is having some movement when in reality it is the opposite; consider this the smoke and mirrors technique in real estate sales.

Okay, well maybe the property value is supported by the local population. Let us take a look at those statistics:



Average household income is slightly over $40,000 a year. Even for this commercial lot, what is going to justify the ludicrous price even after a $463,000 price drop? Again, another symptom of the Southern California Housing market. When the dust settles on this people will look back and wonder how did something like this get so out of hand?

Today we salute you Bell with the Real Homes of Genius award.

Filed in:
Real-Homes-of-Genius
housing-data real-estate Southern-California-Housing

The Map of Misery. If Misery Loves Company it must Heart California's Housing!

I’m sure many of you have seen the above glorious “Map of Misery” showing the percent of new and refinanced mortgages into more risky loans. Yellow and red fill the map as if hell hath no fury on those choosing to live by the sea. If you take a minute to look at the chart, you’ll notice that there is a magnetism toward these loans being bulked in the coastal regions. Ironically, we can adjust the colors on the map with red and blue and we have our 2000 and 2004 Presidential elections. Regardless of fundamentals, economics, and politics one thing still holds true, real estate on the coast is expensive. Real estate on the coast or near water is something that is innate in our human nature and necessity to survive. Societies in Egypt built around the Nile many millennia ago and our “elite” society still builds around Santa Monica pier and Malibu. When before water was gold and a basic human need, now we see water as a symbol of wealth and opulence; think of yachts and waterfront condos in Miami beach.

Yet to what extent does this water world cost bleed into the country and dry our reserves? We can see that the hue in the Southwest runs all the way from California, Arizona, Neveda, and New Mexico. Last time I checked Albuquerque was not close to Pacific Coast Highway and neither is Phoenix or Flagstaff. But this mass exodus of funds from equity rich coastal states had to find a place to sit and those states around big brother got the spoils of victory.

To what extent this running of the colors will go on is yet to be seen. Current Census figures show that vacancy rates for homeowners is at an all time high. What is occurring here is many 2nd home sellers are placing their homes back on the market only to create a glut of non-owner occupied inventory. In previous decades you would normally see folks selling their own home and moving out once they found a seller. The game has changed. These new empty nesters are creating pockets of brand new ghost towns in Arizona and Las Vegas; brand new homes sit empty waiting for buyers to come by.

The current housing market sentiment is that housing is a guaranteed way to make money. Look at the number of real estate seminars and housing gurus out there promising to make you rich. No doubt, they do not highlight the fact that housing has historically only appreciated at slightly above the inflation rate. And we are still in a holding pattern with folks snorkeling in the coral of springtime essence with the hope that in a few months cherry blossoms will bloom and home prices will continue their trajectory to the moon. The map of misery may say otherwise.

What say you?

Filed in: Southern-California-Houisng housing-data real-estate