A Lost Decade of Housing Equity: Los Angeles and Orange County will hit a Housing Price Bottom in May 2011 seeing May 2003 Prices.

04 08 2008

A Lost Decade of Housing Equity: Los Angeles and Orange County will hit a Housing Price Bottom in May 2011 seeing May 2003 Prices.

Posted by: admin in Real-estate news

The California housing market is facing a major calamity. In April of 2007 California reached a peak median price of $597,640 only to see those gains erased in the following year. By June of 2008, the median price in California is hovering at $368,250, a drop of 38.38% with no signs of slowing […]
Related Posts:
■How Many People Overpaid for Their Home in Los Angeles County? Trying to get a Raw Number of Households Underwater.
■Predicting the Housing Future: Los Angeles and Orange Counties. Using the Case-Shiller Index to Find a Bottom.
■Of Bubbles Past. Need a Map for Housing? Ask a Housing Perma-Bull and They’ll See the World Through Colored Glasses!
■Southern California Housing Numbers Exposed: The Bottom Falls out of the Housing Market, Again.
■Don’t Catch a Falling Guillotine: Housing Free Falling in Southern California. A Deep Look at the Numbers.

This bottom psychology has also taken hold on Wall Street. There seems to be a new campaign of getting people to jump back in with both fists with the idea that things are hitting a price bottom. This is a mistake. Just because something has become radically “cheaper” in relation to a peak price does not make it worth the current price. There has to be some underlying economic valuation that justifies the price. After all, the recent job report saw unemployment spike up to 5.7% and we also saw our 7th month of continued job losses:

Clearly there will be no second half recovery. In fact, here in California the Governor just signed an order to reduce the wages of 200,000 state employees to the minimum wage and laid off thousands of part-time employees. Do you think this is good for the California housing market? Who will be the future buyers of these homes? When we examine the data we realize that prices have further to come down. I’ll give you five reasons why prices will continue to fall in California:

(1) - State Budget Crisis means higher taxes and spending cuts (a combination of both).

(2) - $300 Billion in Pay Option ARMs set to recast in the state.

(3) - Declining price momentum - 3 measures show prices crashing

(4) - Market psychology. Why buy today when prices will be cheaper tomorrow?

(5) - Real estate prices do not always go up.

The combination of these factors is going to stunt any supposed recovery for the California real estate market. Yet for all the negative news on the economy and housing there will be a housing bottom at a certain point in time. When will housing actually hit a bottom? Some think we are already there. For those that are actually putting their money where their mouth is, there is the real estate futures market. And their bet is that housing for Los Angeles and Orange Counties will not hit a bottom until May of 2011.

For those of you really impatient to get into the market, it does seem that there will be a bottom forming as of the fall of 2009. I went ahead and took the available futures contracts on the Chicago Mercantile Exchange (CME) which are based on the Case-Shiller Index and constructed a chart adding the actual Case-Shiller data and the futures contracts:

What is fascinating by the chart is that most people that are betting on the futures markets do not see a bottom for the Los Angeles index which also includes Orange County until May of 2011. Yet the more fascinating trend is that some are actually betting on a minor summer bounce in 2009. Are people betting on a suckers rally? Maybe.

The index itself isn’t necessarily looking at price but looks at a single home through time in relation to the base year of 2000. So given the bottom number of 152 in May of 2011, the last time the Case-Shiller Index faced that number for LA was in May of 2003.

I’ve collected data for Los Angeles dating back until 2000 so we can then see what the actual median price of a home was at that point in time. According to DataQuick the median price of a Los Angeles County home in May of 2003 was $313,000. Is this far fetched? Not necessarily given that the median price of Los Angeles County is:

CAR data (June 2008): $396,560

DataQuick (June 2008): $415,000

Let us use the $313,000 bottom price and look at the current DataQuick price since it is data from the same measure. The current price of $415,000 would have to drop an additional 24.5% to reach the bottom price of $313,000. If we are to apply this same drop rate for Orange County we get the following:

Orange County Media Price

DataQuick (June 2008): $495,000
Bottom median price: $495,000 and 24.5% correction = $373,725

The rate of decline in price is a fair assessment since Orange County is actually out pacing Los Angeles County in the rate of sales declining and the rate in price change is nearly identical:

June 2008 data

Los Angeles County drop in sales year over year: 25.1%

Orange County drop in sales year over year: 26.9%

LA County year over year median price drop: 23.9%

OC year over year median price drop: 23.3%

Now my assessment is that we will see major abrupt movements to the downside once the pay option ARMs start recasting in fall and winter of this year. These loans are viciously toxic and will prove to be more destructive than people can imagine. If we are to take a look at the WaMu folder and look at recast dates here in California, we get a sampling of what is to come:

That right there is $26.3 billion of the overall $300 billion in loans that will start recasting. In addition, the state unemployment rate is already at 6.9% and given that the Governator just fired thousands of part-time workers, that number will jump. The way employment data is calculated, part-time workers are factored into the overall employment rate even if they are seeking full-time employment and are underemployed. This will bring them onto the books quickly. Now why is this going to prove to be more destructive? Take a look at the recent employment data released on August 1^st:

The only three sectors that saw job growth last month were government, health services, and leisure and hospitality (barely here). Clearly in California job growth via the government won’t be happening with the job cuts and also the Governor has put out hiring freezes. Lesirue and hospitality? Who will be spending when most sectors are contracting?
With this as the backdrop for Los Angeles and Orange Counties, there is no reason to believe that the market will reach a bottom anytime soon. I haven’t seen many articles attempt to pick a bottom but here you have it with actual price points. My guess is even after hitting a bottom, we may see a lost decade similar to Japan where prices simply move sideways for years. Given how our current government is trying to prop up institutions that should collapse, we are going to divert resources to organizations that clearly have mismanaged their own balance sheets. Money that can go elsewhere to improve the overall ability of our society to be competitive in research, infrastructure, and science. This money will now be spent on propping Fannie Mae and Freddie Mac and giving tax breaks for people to buy homes.

Should you buy a home today in Los Angeles County or Orange County? Look at the data above and tell me what you think.

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