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Southern California Home Prices... Are We Really in Trouble?

By Kaye Thomas

Real Estate Agent with Real Estate West BRE# 701315

August 31, 2007 04:36 PM

Over at the LA Times Blog by Peter Viles there is a lively discussion going on about home prices and affordability in CA. While most of the comments are from people who are waiting for home prices to crash in California and express their continued outrage about affordability issues.. one person noted that California is the only place where he wants to live. What surprised me was that no one picked up on that statement... and they should have because it's one of the reasons prices are so high in California.
A lot of people don't want to live somewhere else.. they want to live in California and specifically in the Los Angeles area. This is one of the reasons why homes cost so much more here then in other areas of the country... people want to live in Southern California instead of Wisconsin in the winter or Vegas in the summer.

Sure we can talk about subprime loans, greedy bankers and terrible real estate agents but the reality is that when it comes to LA County housing..we are pretty much built out.... yet everyone still wants a single family home on a nice lot.. in a great area.. with no heavy traffic, good schools, lots of open space with parks, quaint shops and good restaurants. Oh yes.. and prices should be about the same level they were 15 years ago.

Hello... people living here just don't get it.. if you want affordable housing... you have to build it and that means density.. a lot of it and no one is willing to do that. Every city has had "NIMBY" etched on the Welcome to our Community sign when it comes to affordable housing..

People are upset about the traffic and the toll a growing population takes on our infrastructure but we continue to do nothing about the problem except gripe. Everyday more people come to our area.. and that means more competition for what amounts to a nice house in that "good" neighborhood. Guess what folks.. that translates to prices going up.. and even if they come down it won't be enough to go back to that 1990 level. There is no place we see this more clearly then in the South Bay-Beach Cities.....

The South Bay is a very desirable market and a lot of people want to live here. Yet we don't build more housing.. especially affordable housing. Residents in the South Bay are up in arms at the mention of more housing even as the demand for existing housing goes up. Econ 101 said it.... as supply decreases and demand increases... prices will go up.. you may not like it but deep down you know it's true.

We made a number of housing choices in our communities. If we don't want to increase the housing supply we are going to see prices continue to go up beyond the level of the average consumer. Those with the most money are the ones who will buy homes perceived to be in the best areas. It 's probably not fair but it is what has happened. Certainly some of the high housing costs in California are associated with cheap money and no doc loans but not all of them.

There is this strange perception that anyone who bought a home over $500,000 must have had lousy credit, no money down and will soon be in foreclosure. Sorry but it's just not true. Sure some of the people who bought in the Beach Cities got in over their heads but the fact is that most people who bought homes in Manhattan, Hermosa, Redondo and El Segundo could afford to buy those homes and will not lose them.

I don't get this whole mind set that says I want my friends and neighbors to lose their homes because I didn't buy when they did. Since when did we become a nation of people who believe that they are owed something at another's expense? I understand the frustration of buyers who have been priced out of certain markets. What I don't understand is this self-righteous smug attitude that seems to be expressed by so many people.

I'm not in favor of lender bailouts or of trying to save people who never should have bought a home in the first place. Bailouts will not solve the problem. If you reward bad behavior you will get more bad behavior. There was nothing wrong with most of the loans that were on the market. Many presented good solutions for people who didn't fit the mold. The problem is that these products were abused. Someone with bad credit should not be able to buy a home until they clear up their credit problems. This isn't rocket science... it's basic common sense.

South Bay-Beach Cities: Sold July 2007
South Bay-Beach Cities: Sold June 2007
South Bay-Beach Cities: Sold May 2007
South Bay-Beach Cities: Sold April 2007
South Bay-Beach Cities: Sold March 2007
South Bay-Beach Cities: Sold February 2007
SouthBay-Beach Cities: Sold January 2007

All content copyrighted@ 2007 Kaye Thomas

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Kaye Thomas

Real Estate West - Manhattan Beach, CA

e-PRO, Manhattan Beach CA

lw- I never said we would be immune from the current problems.. we are certainly going to see the effects from the credit crunch.. particularly in North Redondo. Prices are already showing signs of cooling in all the Beach Cities.. with the exception of the upper-upper end of the market. However that doesn't mean the market is going to totally fall apart. I have never said we would not see problems here..WE WILL ... I have said that I do not believe they will be as bad here as in other places... and I still think that will prove true.

As to qualifying ratios.. I don't know for sure but am guessing ratios will be slightly more generous then in the past.. maybe up to 36% for PITI with 20% down and a very good FICO. There are still a lot of variables in the credit market. Contrary to what you read there are still stated income loans.. with 20% down. What I find so interesting is the idea that no one has 20% down, or good credit or can qualify for a full doc loan. Many people can and are ready to do so.. Homes have been selling in the last 3 weeks.

As to where the money comes from.. many just simply make a lot of money.. and yes some have inherited it The where is not as important as the fact that people can buy and while they are not rushing out to buy multiple homes there are buyers who want to buy and will buy.

Sep 03, 2007 10:40 AM

Anonymous

Yes many people make alot of money, but they were around before along with the many more people able to buy that $1 mln house six months ago that are now unable to do so because of the changes in credit. Again less demand = lower prices.

As for the upper upper end of the mkt, that is it's own creature. I don't travel with people that buy $10 mln homes (one of their 3+ homes) out of their checkbook.

Btw a decline in value of 40% for a house that more than doubled in the last 7 or so years is not a market falling apart. It's a ten year increase in value still way ahead of the historical rate of appreciation,

everything is relative

Sep 03, 2007 12:28 PM

#34

Kaye Thomas

Real Estate West - Manhattan Beach, CA

e-PRO, Manhattan Beach CA

LW- Certainly some who could buy 6 months ago are now out of the market.. and we will see prices cool as fewer buyers can qualify.. The question we can't resolve is how big of an impact that will have on our market..

Actually I partly agree that a decline in prices that more then doubled in the last few years is not a market that is falling apart.. unless of course you bought a few years ago and that 40% decline wipes out all of your equity..then you might feel differently.. especially if you were one of those who put down a decent down payment and currently have a sensible loan... and there are many of those.

In the 90's I saw the value of my home take a huge drop but as I had no plan to sell it didn't matter and I knew prices would come back.. There are a number of homeowners in the South Bay who will view this market change the same way. So unless we have a huge number of foreclosures.. the market may hold up better then anticipated. Homeowners may just dig their heels in and refuse to sell.

Sep 03, 2007 12:48 PM

Ray Saenz

Exit Realty Laredo - Laredo, TX

Homes for Sale in Laredo, TX - Texas, Realtor

Kaye,

As always, great information to share with consumers / fellows, I always learn more from California with you :)

thanks

Ray Saenz

Sep 03, 2007 07:19 PM

Anonymous

John T Watts

You are so right about the prices in the LA area being high because it is a beautiful place to live and because the area is pretty well built out. The whole area is banging up against the mountains on one side and the ocean on the other. Perhaps people who love living there would do well to encourage companies and individuals who might be just as happy and well off living somewhere else to go ahead and make the move. My wife and I moved to Northeast Texas about 2 years ago and we love it here. The cost of homes, manufacturing, commercial and office property is much more reasonable. I would love to see more companies and individuals move to this area. They would be welcome. Check out Realtor.com for Paris Texas. You will see some great bargains. Also check out the Chamber of Commerce Webste at paristexas.com.

Sep 03, 2007 11:32 PM

#37

Anonymous

Actually there are very few Fortune 500 companies headquartered in the socal area Unlike say the Bay Area, much of the job growth has been in real estate related jobs: construction, mortgage finance, re brokers title insurance, etc. It is somewhere around 30% of the labor force.

South Florida and Southern California may be beautiful places to live but they also have the biggest real estate booms and busts in the country

This doesn't bode well for the future.

Sep 04, 2007 12:28 AM

#38

Kaye Thomas

Real Estate West - Manhattan Beach, CA

e-PRO, Manhattan Beach CA

Hi Ray...and I have learned a lot from you about Aurora.. that's the great thing about AR.. we have access to knowledge about markets all around the country..

John- One of the problems we are facing is that mid- range jobs are leaving CA.. so sorry but I'd like to keep a few of these jobs. I know prices are very low in TX compared to our prices.. but I have heard that taxes are quite high compared to the prices.. Truth is I know very little about Texas other then the Dallas/ Ft Worth area..and I don't know a lot about that..

Sep 04, 2007 02:57 AM

Kaye Thomas

Real Estate West - Manhattan Beach, CA

e-PRO, Manhattan Beach CA

Anonymous- You are correct we don't have a lot of the larger companies one finds in SF or NYC but we do have many satellite offices of these companies.. We do have a lot of jobs related to RE and as these go away we will feel the effects of lost jobs. On the other hand we are still getting a number of contracts (gov't & non-gov't) for planes, satellites and related hit-tech products. Many software companies are based locally in El Segundo. The Port of LA and Long Beach have a number of well paid jobs associated with the businesses that are part of the import/export trade. We are the major Pacific Rim port.

The real estate boom/bust cycles are not good and may well pose future problems but there is not much that can be done as the places where most want to live are truly built out. I don't know what the answer to affordable housing is short of completely revamping our urban areas and instituting a mass transit system along with high density living.. and that's definitely not in the cards.

Sep 04, 2007 03:20 AM

Anonymous

sorry to rain on your parade (again) but the jobs in the industries you describe do not have large numbers of jobs that allow someone to buy a $1 mln under normal (current) credit conditions.

I have no doubt the vast majority of people in those industries that live in your area couldn't afford to buy their own homes at the "market price" of 6 months ago.

san diego is beautiful and lot less stressful place to live. Prices are dropping sharply there.

Sep 04, 2007 08:03 AM

#41

Kaye Thomas

Real Estate West - Manhattan Beach, CA

e-PRO, Manhattan Beach CA

Anon- Actually we have people from a number of different industries.. including celebrities from many fields, non-celebrities who work in the music and movie business, a number of CEO's not to mention the normal group of Doctors, Pilots and Attorneys etc. We also have people who work normal jobs.. but often when you have two people working their combined income is rather substantial.

Of course many people could not aford to buy their current home.. but that has always been true if you own a home for any period of time.. especially in CA. San Diego has been on the cownside for about 3 years .. mostly due to the huge number of downtown condos that were built and the large number of speculators that went into that market. San Diego also saw more speculation then the South Bay..

Don't get me wrong we are not immune from problems and will certainly have our share.. Only time will tell whether we get into a lot of trouble or a little trouble..

Sep 04, 2007 09:06 AM

Anonymous

I guess you would agree santa monica is not a low end area

add this to your bookmarks

www.smdistress,blogspot.com

Sep 05, 2007 01:54 PM

#43

Ray Saenz

Exit Realty Laredo - Laredo, TX

Homes for Sale in Laredo, TX - Texas, Realtor

Kaye,

Well, it is a pleasure to check your blogs, hey also I have been working lately on spanish blogs, so hope that I will help hispanic people around there.

Ray Saenz

Sep 07, 2007 05:25 PM

Kaye Thomas

Real Estate West - Manhattan Beach, CA

e-PRO, Manhattan Beach CA

Ray- I think a Spanish language blog is a terrific idea.. I did another BPO .. Hispanic resident 100% financing, foing into forclosure... I'm sure they could not afford the loan and were talked into it by an agent and lender.. A majoirty of foreclosures in this area are in some of the less affluent areas with a heavily Hispanic population... You know many of them did not really understand exactly what they wre getting into with the interest only, no doc loans.. Thanks for visiting..

Sep 08, 2007 03:09 AM

Gena Riede

Riede Real Estate, Lic. 01310792 - Sacramento, CA

Real Estate Broker - Sacramento CA Real Estate (916) 417-2699

Kaye, in theory I agree with you, but I do know that there are others out there that were taken with these loans and not just new homeowners. There are folks that were convinced to refinance their existing loans after 35 years that are loosing their homes, as well. Don't you feel that the Banks had the responsibility of just saying NO? The public relies on the Banks to know whether or not they can get a loan. My feeling is that most of these folks had no idea. And yes, there were some who did and took a chance.Then, there are those were fraud was committed. So, my heart goes out to them since there seems to be no help in sight. I frankly wish that the Banks would renegotiate the loans so that some of these homeowners could stay. Just my respectful opinion.

Sep 09, 2007 02:28 AM

Kaye Thomas

Real Estate West - Manhattan Beach, CA

e-PRO, Manhattan Beach CA

Gena- I think there is enough blame to go around that everyone gets a share.. Certainly there were lenders who were extremely deceptive in their dealings with clients.. especially on refinancing. The fact that many lenders put people in products they knew would be disastrous for borrowers needs some scrutiny by the FEDS.. If fraud is found then Banks should be held liable and not only pay monetary compensation to the borrowers but recast the terms of the loans. Fraud is unacceptable and should carry a penalty.

However many homeowners were just dumb.. and never calculated the consequences from refinancing and taking out cash multiple times.. not just once. I know a number of people who bragged about how many times they had refinanced. At some point they must take responsibility for their actions.

Sep 09, 2007 05:07 AM

Gena Riede

Riede Real Estate, Lic. 01310792 - Sacramento, CA

Real Estate Broker - Sacramento CA Real Estate (916) 417-2699

Kaye, I totally agree with those that were milking their equity. I always think it's important to give the responsible ones who don't want to lose their home and are trying to have a dialogue with the Banks to also have a voice. Thanks for giving me that opportunity.

Sep 09, 2007 05:40 AM

Kaye Thomas

Real Estate West - Manhattan Beach, CA

e-PRO, Manhattan Beach CA

Gena- It is sad that banks seem unable to differentiate between responsible buyers who are in distress and those who have abused the system..

Sep 09, 2007 05:50 AM

Anonymous

the banks (actually mortgage companies) had no incentive to differentiate between the responsible and the irresponsible, they collected their fees and sold the mortgages into the capital markets. the expression is IBGBT(i'll be gone by then) they had no risks related to whether the loan ever got paid back. Thank derregulation for that.

They had no more incentive to weed out irresponsible buyers than the guy that sells a $5000 plasma tv to someone who is buying it by adding to his $100,000 of credit card debt, or the guy that put in the pool getting pai with a check drawn from a home equity loan.

All these people got their money upfront just like the mortgage company, the mortgage broker and yes...the real estate broker that convinvced them that they could make the payment and since real estate in socal always goes up and it's a great "investment" even if they stretch themselves.

once the system developed to facillitate this the rest was inevitable

for the geeks out there you can read bernanke's speech and those of others at the jackson hole meeting which explain things quite well. btw read between the lines "maestro" greenspan deserves plenty of blame

http://www.kc.frb.org/home/subwebnav.cfm?level=3&theID=9954&SubWeb=5

kansas city fed

www.kc.frm.org

Sep 09, 2007 07:44 AM

#50

Neal Bloom

Brokered by eXp Realty LLC - Weston, FL

Realtor CRS-Weston FL Real Estate

Kaye,

I think the market is all screwed up for all the reasons..not just one...we are all somewhat responsible..but I'm not sure what will happen...banks do not even want to lend money the commercial industry either. "where is all that money they were trying to lend before:)

Sep 09, 2007 08:15 AM

Kaye Thomas

Real Estate West - Manhattan Beach, CA

e-PRO, Manhattan Beach CA

Anon-No question there are lots of problems and we will all pay the price. I agree that Greenspan created many of today's problems by either ignoring what was happening or trying to micro-manage the economy. Bernanke seems to have similar difficulties.. I don't think these guys have a clue about what is really going on out in the street.. As for Leamer he's been predicting a housing crash since 2000.. at some point he had to finally be right.... but he didn't forsee the credit crunch on a world scale. Now he's screaming recession but he never saw it coming. Personally .. I don't think anyone knows what's happening. It's all guess work. These guys all sucked up to the financial markets.. have allowed a huge deficit and now they are crying about the dastardly housing market being the cause of all the world's woes. Garbage..

Neal- You are dead right..things are definitely screwed up. I think the money is there.. these guys just haven't figured out how much they can charge for the use of it. If the FED lowers the funds rate then they will not get as much of a premium.. if they don't lower the rate money will be so expensive that it will create major problems in world markets. I suspect that either way there are a few who are poised to make lots of money at the expense of the majority.

Sep 09, 2007 09:54 AM