Southland home prices tumble fast
Southern California home prices are now 19% below their peak last year, and the surprisingly rapid decline is leading experts to predict that the housing slump will be worse than initially thought -- surpassing the severe downturn of the 1990s.
Home values also plunged 19% during the last real estate bust, but that was over a six-year period ending in 1997. Prices have now fallen just as much in less than a year.
That trend is causing analysts to rethink their previous forecasts.
Delores A. Conway, director of USC’s Casden Real Estate Economics Forecast, last fall predicted a 15% decline in home values. But now, “20% to 25% looks more likely,” she says, “and that’s not to say we won’t see 30%.”
Los Angeles economist Christopher Thornberg is even more bearish. He projects that home values will sink 40% from their peaks reached last year, double his previous estimate.
“It’s the speed of the decline,” said Thornberg, of Beacon Economics, a consulting firm.
Betty Palacios has no doubt that the slump is worse than originally thought. She’s trying to sell her Upland condo for $140,000 -- or close to 40% less than what similar units in her complex were selling for two years ago.
Palacios, 46, said she had received only one offer, for $90,000.
“I’m keeping my fingers crossed” for a higher bid, said Palacios, who has already dropped her asking price once. “It’s all I can do now.”
Palacios has owned her condo since 1991 but still expects to take a loss because of home equity loans and refinancings over the years.
Billie Tircuit, 26, has already taken a hit. She bought a house in Altadena two years ago with 100% financing at the urging of her husband, a mortgage broker, she said. His income vanished with the housing crash, and the couple soon could not make their payments.
Tircuit split with her husband and unloaded the house last month for $455,000 -- a 22% loss and less than what she owed on the property.
With the falling prices putting many more homeowners “upside down” -- that is, owing more on their homes than they are worth -- analysts expect foreclosures to continue to escalate as homeowners abandon their properties. That could further weaken the market as lenders sell these foreclosed homes at discount prices.
Property records show that foreclosures are growing as a proportion of the home sales market. About one-third of Southern California homes sold in February had been foreclosed since January 2007, up from 3.5% of sales a year earlier, according to La Jolla-based research firm DataQuick Information Systems.
DataQuick said the median price for a Southern California home last month was $408,000, down 17.6% from a year earlier and 19.2%, on average, from peaks reached last year. The median price is the price at which half of all homes sold for more and half for less.
The number of homes sold in the six-county region in February -- 10,777 -- was the second-lowest monthly total since DataQuick began tracking sales in 1988. The record low came in January, when just 9,983 homes changed hands.
Continuing a trend, the sharpest price declines have come in outlying areas “where prices got pumped up artificially with the sort of crazy loans that no longer exist,” said Marshall Prentice, DataQuick’s president.
Home values in Riverside and San Bernardino counties, for example, plunged by about 21% last month compared with year-earlier figures. Losses were less dramatic in Los Angeles and Orange counties, which dropped by 13% and 16%, respectively.
Cal Poly Pomona real estate finance professor Michael T. Carney had predicted last year that home prices in Southern California would fall at least 15%. Now, “it’s going to be more than 20%,” he said. “We don’t appear to be leveling out.”
USC’s Conway said one reason for the sharper-than-expected declines is that loan defaults caused more trouble than many had anticipated, causing investors to lose their appetite for pools of these loans bundled into securities.
Now, “there is a shortage of investors to back mortgages. The market has seized,” she said. That means mortgages for would-be home buyers are harder to obtain and usually come at higher interest rates, she said.
Before home values plummeted, of course, many people benefited from a dramatic run-up in prices.
Home values in Southern California multiplied 3 1/2 times from 1997 to 2007, peaking at the median price of $505,000, according to DataQuick.
Because prices rose over such a long period of time, it will also take a long time for the market to correct, said Tom Davidoff, a real estate expert at UC Berkeley’s business school.
“Prices rose more dramatically in real terms, and the 10 years of annual returns was unprecedented,” he said.
Davidoff didn’t hazard a guess on how long prices would fall, but he said that affluent areas -- where prices have not fallen as sharply -- would eventually feel the pain as well.
The higher end of the market has seen only modest price declines in large part because most longtime homeowners in these areas have plenty of equity and aren’t under financial pressure to sell, Davidoff said.
So they are sitting on the sidelines, waiting for the market to turn around before they plant “For Sale” signs in their frontyards.
But eventually, more and more homeowners in these areas will choose to sell, deciding they no longer want to defer plans such as retirement or a move to another region.
“They’re going to start selling, and prices will get to their true market level,” Davidoff said.
The fact that relatively few homes in affluent areas are being put on the market or sold could also overstate the price declines so far, cautions Edward E. Leamer, director of the UCLA Anderson Forecast.
Leamer notes that DataQuick’s numbers are heavily weighted with sales of low-priced homes, many of them foreclosures.
He thinks a better gauge of the downturn may be the Case-Shiller index, which compares a home’s most recent sale to its previous sale and, unlike DataQuick, does not include newly constructed homes.
That index shows home prices in Los Angeles and Orange counties are 15% below their peak.
Leamer, however, also believes that things will get worse -- with home values declining 20% to 25% from peak levels.
For Billie Tircuit, the real estate crash has been painful but also an instructive lesson in practical economics.
“We had no business buying that house,” she said, “but everybody was buying a house, and the loans were there.
“Don’t get caught in the hype. It bit me hard.”
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