Speed of price correction is 'almost unprecedented'
USC economists present some bad news, some better news
By Glenn Roberts Jr., Friday, June 27, 2008.Bookmarking Sites
SAN FRANCISCO -- The bad news: It's "almost unprecedented" that home prices are falling "this swiftly and this steeply in this short period of time" in some California market areas.
That's according to Delores A. Conway, director of the Casden Real Estate Economics Forecast at the University of Southern California Lusk Center for Real Estate, who spoke Thursday during an economic and housing forecast presentation at PCBC, an annual builders' conference.
Prices have fallen about 30 percent in the past two years in some market areas in the state, she said.
"Things look pretty bleak now," she said, with foreclosures "really mounting" in some areas and prices falling sharply in inland California market areas like Stockton, Sacramento, San Bernardino and Riverside.
Historically, there have been price declines of similar magnitudes, Conway said. For example, there was a 20 percent decline in home prices in the Los Angeles area in a past market cycle. But that took place over a 6-year period, she noted.
More bad news: "Banks really don't have as much money to lend. The lending criteria have really tightened up. The other piece is buyer psychology. When buyers see prices falling they don't want to jump in ... they may risk losing their down payment or any money they put into the house."
The falling prices and rising foreclosures "tend to really create almost a downward spiral."
Liquidity remains a major issue, particular for homes above $1 million that exceed the conforming loan limit. "It is very difficult to get jumbo loans. The inventories are mounting (for these homes)," she said.
Unemployment is a concern in markets like Orange County, which had a high concentration of mortgage-related jobs, and in the Inland Empire, which has lost many construction jobs, she said.
The better news: Homes are becoming more affordable, with monthly payments falling because of relatively low interest rates and falling home prices. In Riverside County the typical monthly payment for homes has dropped by about 33-38 percent from its peak, she said, "so we don't have a whole lot more to go."
Some foreclosure properties in Riverside County are drawing multiple offers, and that is a sign that the market may be on the rebound. "There is buying interest that's returning to Riverside," she said.
"We're already two years into this correction," she said, adding that it could take another 12-24 months, depending on the area.
The good news: "We are moving through this price correction pretty quickly," Conway said.
Raphael Bostic, director of the Master of Real Estate Development Program at the USC Lusk Center, said that lending activity in some market segments in California "shut down here much more dramatically" than in some other U.S. markets because of the comparatively high cost of homes in the state.
And while there are several legislative and regulatory efforts to expedite the market's recovery, "Until banks and (others) decide to participate in a significant way -- there is very little that anyone can do about it. It's got to be lender to lender."
Consumer psychology is key to the recovery, Bostic said. "We need to watch how consumers are acting. To what extent does the $5-a-gallon (gas prices) change people's preferences and how they live?"
A view that "everything is a disaster -- everything has collapsed and is never going to return again" is erroneous, he said, and provided examples of market areas where the up and down cycle was muted or even non-existent.
"The local context is really important," he said. Mountain states markets, such as Billings, Mont., and Ogden, Utah, experienced slow rises in home prices and have not seen the sharp descent exhibited by some California market areas, he noted.
Those markets that were "late to the party" in appreciation are generally weathering the downturn better than others, he also said.
The markets experiencing a high volume of foreclosures now tend to be those markets that had heavy building activity during the housing run-up and may be slower to recover as a result.
Richard Green, director for the USC Lusk Center, said some lenders have severely pulled back on jumbo lending. "What they're saying is we're closed for business" for high-value loan amounts, he said.
The mortgage market is factoring in default rates for prime mortgages that are four to five times higher than what it had considered in previous years, he said, which could be out of line with the actual risk.
Green said he is watching the TED Spread, a measure of credit risk that compares the interest rate in U.S. Treasuries contracts with that of contracts in U.S. dollars at banks outside the United States. The spread has been rising lately, he noted, and tends to be greatest in times of financial crisis.
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Submitted by Richard Greenwood on June 27, 2008 - 6:20am.
Almost unprecedented??? Has there ever been a time when it was worse???
Submitted by Diane Aurit on June 27, 2008 - 6:21am.
Diane Aurit
This is the kind of article I find most valuable on Inman News. I have always thought your insight of the real estate market to be comprehensive and of great value to me as a Realtor.
Submitted by Julie Ferenzi on June 27, 2008 - 7:07am.
While I'm not part of the California real estate market, some suburban areas in Chicago didn't take as big of a hit.
From 2005 through the end of May of 2008 my city of Plainfield has still seen a 2% rate of appreciation in single family homes, but I think we started to feel the heat a little earlier in the game.
I think market data needs to be analyzed on a hyper-local scale to be valuable to buyers and sellers when deciding to buy or sell.
I also think banks need to wise up on how to liquidate their non-performing assets. Buyers are making offers, but the banks take so long to respond to requests for short sales that buyers simply walk away and rescind their contracts.
They need to be doing more to fix this situation.
Submitted by chis eliopoulos on June 27, 2008 - 8:40am.
This is such OLD NEWS.
It has happened in every real estate cycle. The "experts" quote the "reasons" why (who cares?), while the politicians and regulators slap more rules ("helping" everybody) and and the entire cycle starts over again.
In the late 70s to early 80s when interest rates went north to 22% (yes it happened here in the US), values dropped by 60% and the market started moving upwards in 86, peaking in 89. In the 90s, values took a drop of 70% (officially they averaged lower, about 58-62%). Most of the institutions /banks (thanks to the "corrective" investigations from the FEDs on their junk bond holdings) went under and there was that mess that was called the 90s.
Now this current market it has just started going south. It is my opinion (just looking at the history and practice in the field), this market will go down as much as 70% in value the next three years and will start correcting itself in about five years.
Regardless what the experts are saying (they are historically wrong), there are basically two reasons for a market to flourish. First, REAL affordability
and second affordable good financing (not the one-year interest only on a teaser rate crap to get anybody into the market).
This is a great opportunity for many real estate practitioners to make fortunes.
Go to work and forget the "experts" with their doom and gloom! Also turn off the TV and anything that talks doom! There is always some one buying and selling out there..
Submitted by Marty Van Diest on June 27, 2008 - 8:40am.
It was worse in the mid-eighties. The oil belt saw huge price drops. I bought my home in 87 for almost exactly 50% of the new price in 84. Then I watched the value fall more.
It was 1991 or so before the value came back up to my purchase price. I finally sold it in 1999 for the almost the same price that it sold for in 1984.
Submitted by Vicki Lloyd on June 27, 2008 - 8:44am.
I'm wondering why they call it "Almost" unprecedented. If there was ever a faster correction, they should point it out, otherwise it IS unprecedented.
Hopefully, this will lead to a faster recovery! I'm definitely seeing an uptick in volume recently, so there are buyers who are satisfied that the bottom is getting closer.
Vicki Lloyd, MBA, e-PRO, ACRE, Realtor
http://LiveLakeForest.com
(949) 457-0281
Submitted by Ruthmarie Hicks on June 27, 2008 - 10:03am.
The comments by Julie Ferenzi, chis eliopoulos and Marty Van Diest demonstrate yet again that real estate is a LOCAL BUSINESS...Julie Ferenzi pointed out that the fall-out was nothing like the CA mess in her part of the country. This is true as the vast majority of the country's foreclosure activity has been concentrated in four states. Chris Eliopoulos pointed out some of the broader market trends (I'm not sure about the numbers though) while marty Van Diest pointed out that while most of the country was enjoying a housing boom, Texas was in the midst of a major housing correction due to the oil bust of the mid - eighties.
This is something that needs to be hammered home to buyers. If you want the "deal of the century" you are going to have to buy in one of the four states that is driving the housing correction (and all the hype along with it.)
Submitted by Laurie Manny on June 27, 2008 - 10:32am.
While Long Beach California has been hard hit by this market, we are witnessing a leveling off. Prices seem to be stabilizing here in most neighborhoods. Many buyers who have waited for "the bottom of the market" are no longer able to attain the financing needed to purchase (they can thank the media for that). There are highly qualified buyers and investors caught up in multiple offer dramas daily, and a better selection of homes to choose from.
We are seeing less short sales and more bank owned homes available. Sellers are beginning to understand what it means to price to sell and sales of homes here have been rising for the last couple of months.
Laurie Manny
Long Beach California Realtor
http://www.longbeachrealestatehome.com
Submitted by Daniel Rothamel, Inman Community Manager on June 27, 2008 - 6:15pm.
"Many buyers who have waited for "the bottom of the market" are no longer able to attain the financing needed to purchase"
We are seeing the exact same thing in the Charlottesville area as well. Prices can't fall large enough or fast enough to make up for the rise in mortgage rates. In my opinion, it is one of the most overlooked aspects of the current market.
http://www.RealEstateZebra.com
Submitted by Tom Teece on June 27, 2008 - 7:08pm.
Can we really trust the big banks to help the individual homebuyer now, after they took away their home and their ability to get another mortgage by foreclosing? For those fortunate enough to decline the "too good to be true" mortgages and refi's offered a couple years ago, the big banks have another "gift" - next to nothing interest on your savings. And big government is rewarding the big banks by expanding their insurance of mortgages. It's just my opinion, but that is cause of our "downward spiral".