Housing Market Crashing?

When Caryn and I moved to LA 5 years ago we almost bought a house. A 3 BR hillside place in Mt Washington for $350K. We decided against it at the last moment and thought it would be best to get a feel for the city first then buy something. We try not to talk about that decision. Ever. For obvious reasons. The last few years we’ve seen the houses in our Silver Lake neighborhood go from $500K to $750K to $1.3M. We’d see houses go up for sale, and within days the signs would be gone and people would be moving in. Last week we were driving around and noticed that not only were the signs not disappearing as fast, but there were tons more of them. Houses aren’t selling as quick, and there are more of them to choose from. AOLer Jason Calacanis is seeing the same thing:

“Two years ago when I started looking it was the buyers were in a panic. You were told to make an offer within a day of seeing a house, and to send a letter to the owner about how privileged you would be if they would sell you their home. Of course you should offer 10% more than the asking price–you don’t want to be rude!

When we looked last week three of the eight houses were “flips” by real estate brokers. That is, houses they bought, remodeled and were no reselling. Those three “flips” were on the market for 30-120 days and had all been recently reduced 10-15% from their original asking price. Within 10 minutes of walking in each of the brokers said they had room to work, and that they could make changes to the home (i.e. we could put a room here or a pool–whatever you want).

The most telling part for me was that the brokers themselves are looking to get out. They want out so bad that they are willing to reduce the price by 10-15% not once, but twice, over ~60 days.”

Could prices be headed back in a reasonable direction? That sure would be nice for those of us still writing monthly rent checks.

7 Replies to “Housing Market Crashing?”

  1. Prices won’t drop, but increases will normalize. We’ll see 10 percent instead of 25 percent. If you’re greedy and overprice, you’ll have to behave. The difference between the last half of this decade and the last half of the 80s and 90s is that this time, interest rates are still relatively low. Foreclosures will increase over the next few years as ARMs come due, so there will be deals to be had, In addition, different price ranges will be affected differently. Price increases will normalize under $1.5 million and won’t be an issue in honestly-priced properties over $3 million. There’s no bubble if you’re in this long-term or in the high end of the market. Of course, YMMV.

  2. I read your posting… it’s amazing how prices have skyrocketed, now the question is, how much will they come down to earth. I posted my own story about home prices on my blog. -Max

  3. i would have to disagree w/ lee. we have seen such a tremendous growth in prices over the past five or so years that we have basically pushed RE as far as it can go. the only thing that kept it going over the last two years was ever-loosening lending standards, but even those have been tapped out. we have simply run out of enough people who can pay more than last year’s prices to keep the residential real estate ponzi scheme going.

    the most likely scenario i see is that YOY price growth will continue to slow until it hits near 0%, probably around the end of the year. lending standards will inevitably tighten (according to some people in the business the tightening has already begun) because the only way you can get away w/ loaning 100% or more against a house is when prices are rising at least 10% a year. but if prices are stagnant or dropping you’ll see the easy money dry up in a hurry, because the downside risk to the lenders and buyers of MBS is too great. and, due to inflation concerns, interest rates will likely not drop significantly for a few years. so basically the pool of buyers able to afford these prices will only shrink. incomes haven’t gone up anywhere near 25% or more per year for the past few years (or even up anywhere near 10%), so what makes you think that we can still squeeze out 10% a year in price gains, especially after we’ve basically priced out 99% of the buyers?

    i don’t claim to know exactly how this will play out (how could anyone know?), but i think that in the best case scenario we’ll see little in price declines, but no real price growth for several years until incomes catch up w/ property values. or we could see significant declines over a shorter time frame until we get back to a realistic income vs. property values ratio. but either way the only way in the long run to support high prices is w/ higher incomes. there’s no way around it.

  4. I have to agree with Mike. First, the most novel thing about today’s market as he discussed is that the lending standards have been relaxed. Now, they have not just been relaxed moderately, but to crazy proportions. This has artificially increased demand for housing since all kinds of folk qualify for outrageous amounts of mortgages. The result of this will be that a lot of them won’t be able to pay those bills. Especially considering that a lot of those mortgages have initially low payment options, then increase often dramatically.Some of the higher payments have just started, others will a couple of years down the road. It is amazing how the lending industry has gotten away with this. If you look at lenders the amount of subprime lending has increased drastically. This will come to a halt. I actually think just like some people on different blogs that we have no idea how bad this might turn out. We have no example in history with this frivolous lending behavior. Additionally, people have enormous amount of credit card debt, higher healthcare costs… None of these things will go down because general awareness seems very small.
    I live in Washington State. Eight years ago you had to prove to a lender that you would qualify for a quite small sum by bending over backwards. Now you just walk in, smile, and you basically are in for a super amount. This will prove to be so fatal. After all, there are reasons for strict lending standards. And the argument that lower standard will help the average guy and working class is a big fat lie. Illusions are being sold, and people’s dreams will bust.
    Anyways, I have been reading on the housing market for months now. I think a lot of people are completely oblivious for what is ahead. the dot.com bubble was small in comparison. There are so many people tied into housing, jobwise as well. Boy, it will hurt. A lot of people have been exhibiting herd behavior. By god I have to have this now, or else… Same with other goods.Big, fat cars with no downpayment. Boats without downpayment… It is a cultural characteristic at this point that will cost all of us in the long-run.
    LA and area will be one of the worst in the country. No offense (I lived down there for a while) people there live in a pink bubble. Up here we will be adjusted, but it should not be quite as painful. Anyways, just my two cents.

  5. Another factor to look at is the affordability index. In LA is less than 2% (meaning that only 2% of the households can afford the median priced home). This effectively says that almost nobody can afford to purchase half of the homes in this region. This number also compares to nationwide average of somewhere in the 40% or 50% range and typical rates of 20% or 30%. LA will be one of the last markets to get hit, but real estate prices are like the landscape: a falloff in one are must eventually result in a fall off in the adjacent area. Wait two years and those houses selling for $800k or $900k will cost $500k unless we have substantial wage inflation (which hasn’t happened in decades, but could).

  6. Another factor to look at is the affordability index. In LA, it is less than 2% (meaning that only 2% of the households can afford the median priced home). This effectively says that almost nobody can afford to purchase half of the homes in this region. This number also compares to nationwide average of somewhere in the 40% or 50% range and typical rates of 20% or 30%. LA will be one of the last markets to get hit, but real estate prices are like the landscape: a falloff in one are must eventually result in a fall off in the adjacent area. Wait two years and those houses selling for $800k or $900k will cost $500k unless we have substantial wage inflation (which hasn’t happened in decades, but could).

  7. I don’t want to sound any more pessimistic. But substantial wage inflation doesn’t seem probable to me. Wages have stagnated in a lot of places. Healthcare costs are bound to increase much more since our government seems to do absolutely nothing about it. Even with wage increases the middle class will be completely squeezed. Small to moderate increases are already eaten up by healthcare costs, gasoline prices, higher tuition costs, etc. I really think we are in for some trouble. But I am German and we are known to be more pessimistic.

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