Here's recent history of the Fed’s policy committee and its Fed Funds rate. Next Fed decision is June 24/25.
SoCal home woes could mean 50% price drop
June 20th, 2008, 12:02 am · 64 Comments · posted by Jeff Collins
Economist Chris Thornberg said Southern California home prices likely will continue falling until mid-to-late 2009. When the dust settles, he added, homes here could end up being worth half as much as they were at the peak of the housing boom.
“The reason prices are falling is because of gravity,” Thornberg (pictured here) told the Register after delivering the UCLA Extension Real Estate Forecast at the Skirball Cultural Center in Los Angeles. The run-up in home prices over the past decade was “ludicrous,” he said, noting that the increase wasn’t accompanied by a comparable increase in income.
(Thornberg’s not alone. CLICK HERE to read an interview with another observer who thinks a 50% drop is possible!)
By Thornberg’s math, a typical Southern California house payment equaled about a third of its owner’s gross annual income in 1999. By 2007, it equaled about 70%. “That’s why prices are coming down. They have to come down.”
Thornberg, founding partner at Beacon Economics and former UCLA economics professor, said home prices would have to fall about 40% from peak to trough to return to the historical norm. But add in the impact of rising gasoline prices, the subprime mortgage meltdown and rising foreclosures, and it’s likely prices will fall 50% peak to trough.
The S&P/Case-Shiller index shows that prices for the L.A./O.C. area are down 24% from the peak, so the region is about halfway to the bottom, Thornberg said.
In Orange County, price declines will be more severe at the bottom of the price spectrum than the top end, but “the top end is going to get hit, (too),” he said.
That will be a rude awakening for many homeowners suffering from what he called “homallucinations,” or the ability to convince oneself that while the price of everyone else’s home will fall, your neighborhood is clearly different.
Said Thornberg: “That’s what people go through — until reality kicks them in the butt.”
Other forecasts we’ve heard recently …
- This brokerage CEO thinks housing to be ‘healthy’ by ’09’s end
- No SoCal home-price rebound seen before 2010
- O.C. houses may face another 14% price dip
June 20th, 2008 at 12:07 am
I always wondered what the local bulls here thought of the run-up in home vlaues over this last run:
Do they think it was warranted?
Do they think it was excessive?
Does it seem strange at all that homes can double in value in 3 to 4 years in absence of income growth and significant popultaion growth?
This thing fed itself down here in the OC - with this place being an epicenter for mortgage brokers - whom were making bank - there were plenty of people that had the cash to throw around. Yet - so many still used zero down loans.
What were people thinking?
June 20th, 2008 at 1:43 am
Wow, feels good to be right this whole time. Sorry current OC home owners. Your house and your neighborhood are not different. And people like shockg, thoughtless, truthi, and sighburfool are nowhere to be found with their insane predictions of many months ago being exactly the opposite of reality. Hate to say I told you so, but I did.
June 20th, 2008 at 4:11 am
Income Price Lending, basic
June 20th, 2008 at 5:01 am
Sounds about right. A 100% increase is a 50% decrease (400k->800k = 100% inc. 800->400 = 50% drop).
If you spent 30% on your home, and now spent 70% (assuming wages are the same) you’re actually spending more than a 100% increase.
I just dont think some people realize how out of control things got:
http://photos1.blogger.com/blogger/6089/1833/1600/shiller.gif
Where will this line come back down and level off?
June 20th, 2008 at 5:10 am
guy must be a renter. i see renters every day. renters think they can low ball a beach town house. they dont have money. they dont have good income. they waste my time. beach town house owners laugh at offers 1/3rd under listing. renters dont get it. please go away. try santa ana or tustin or orange or anaheim.
June 20th, 2008 at 5:22 am
trs you must be a realtor I sold my home last year for 90K less than I wanted to. I have 120K cash, a 768 FICO, 150K income and I am low balling 20% on every house. I see realtor telling me to negotiate no less than 5% to 10%. Give me a break, your industry is in the tank, stop being so arrogant, otherwise you will be renting in Santa Ana!
June 20th, 2008 at 6:23 am
And you must be a bitter real estate agent who can’t close any deals trs. Your statements are laughable. Renters are the ONLY ones low balling your beach town homes and renters don’t have good income? If someone is looking at beach property they have money so I’m sorry they didn’t offer you more than what you wanted for your grossly overpriced property.
June 20th, 2008 at 6:34 am
I am glad we got out of the OC when we did. We bought in 1980 for $95,000, refinanced once to do a new roof, sold for $500,000 in 2004, bought a huge house in a rural area in another state, paid cash and no longer have to worry about the value of our house on the market. I feel badly for others that played by the rules and are now seeing the value of their home decrease because of unscrupulous buyers and lenders. 70% of their income for housing? What were they thinking!
June 20th, 2008 at 6:39 am
Funny- I just got told yesterday- you’d better buy now, because the prices won’t go any futher down than this, in NB. I didn’t offer a response.
trs- I wonder how many beach OWNERS actually have money (and I’m talking beach towns- not beachfront). how many of those actual owners could afford to buy their own house ? haha!!! let’s spend 70% of our income on housing. My kids don’t need to go to college.. haha.
those beach town owners who laugh at lowball offers will be laughing while they lower their prices little by little, until they wished they had that lowball offer back on the table.
sorry, trs. I just had to share that one. Oh, you make me laugh. Thanks for that morning bit of irony!
June 20th, 2008 at 6:40 am
It is the cleansing of the loonies. Dumb people did dumb things from 2004 on. The smart people could only sit back and watch the mania from the sidelines.
Even friends and relatives fell into the mania trap…dumb people.
well we are finally cleansing the rif raf back out of OC. Yes we will end up with a lot of both unoccupied or investment owned properties with this excess pile of homes and no buyers, but over the next decade we will have a nice trickle back of the smart, educated, life loving people that traditionally made up OC.
And just for fun, lets define OC again…’OC Prime’ is everything within a mile of the beach…you can not put a price tag and should not…it is like the antique road show…it just does not make sense to those of us that do not have 50mil in the bank.
‘OC Proper’ is all the rest of OC and is the average joe communities.
well…then there is Santa Ana, we keep that in there to maintain good standings with the ethnic standards crowd
June 20th, 2008 at 6:46 am
Thornberg speaks the truth.
People buying in this market over the last few years knew they couldn’t qualify for the asking price but instead speculated on homes continuing to break away from real incomes with no end in sight.
Talk about moronic.
They didn’t care if prices met fundamentals because, like a cult, they were brainwashed with grand illusions of homes continually going up and outpacing incomes forever by putting all of their faith in risky financing, unqualified borrowers and loan scams that would eventually collapse right on top of them.
The people that bought in the last 4 years overdosed on stupid pills and are now paying the price for it, literally.
June 20th, 2008 at 6:55 am
Ouch!!!!
June 20th, 2008 at 7:08 am
San Francisco and Manhattan, NY are starting to get hit…
Hey, Beach Cities of The OC, your no SF or Manhattan!
Pretty funny how some fools think that the beach cities will not get hit.
Every city of the OC will be hit before this pig bottoms. It’s happened every bust, and it will happen on the mother of all bust!
Next!
June 20th, 2008 at 7:18 am
trs: given the rate of sale in the beach communities - as a realtor limiting yourself to beach communities I assume, you’d probably make more money this year collecting unemployment
good luck with that
I live about a mile from the beach (as the bird flies) - Monarch Bay area - there are plenty of folks in my neighborhood that still have barely a pot to piss in after they struggle to pay their mortgage.
trs - by the way, no one is laughing
Lastly, you are doing your frickin’ job - nobdody is wasting your time but the sellers.
Aren’t you wondering why those homes are not selling?
With that kind of insight, you’ll last, what? another 6 months in this business?
Time is wasted on you, buddy. No longer…
June 20th, 2008 at 7:22 am
Blackbox: Manhattan is taking a hit because of the finance related job market - incomes dropped, bonuses dropped, layoffs, etc.
Make no mistake about it - SF and Manhattan home owners enjoy the fact that equivalent rents are right in line
Go check out what it takes to rent a home in NYC -
The rents in the Bronx are more in line with the OC than Manhattan
June 20th, 2008 at 7:38 am
You are clearly lost….
June 20th, 2008 at 7:44 am
trs Says:
June 20th, 2008 at 5:10 am
“guy must be a renter. i see renters every day. renters think they can low ball a beach town house. they dont have money. they dont have good income. they waste my time. beach town house owners laugh at offers 1/3rd under listing. renters dont get it. please go away. try santa ana or tustin or orange or anaheim.”
As they say, pride goeth before the fall. Sooner or later, bulls will be begging renters/first time home buyers to stabilize the market. Beggars can’t be choosers.
June 20th, 2008 at 8:12 am
SoCal home woes could mean 50% price drop…good seeing the homes are 80% overpriced, the house should be of a realistic market value in 2-3 years. Keep putting up those open house signs and giving away the free sandwhiches and candy for a couple a more years….oh and they Hummer is no longer a icon and nice studio upclose photo Mr. Cheese.
June 20th, 2008 at 8:16 am
Now is a good time to sell. Sell your house this summer. Start looking for a short sale this winter…or next.
June 20th, 2008 at 8:47 am
i still say its gotta come down more than even his 50% prediction. and its the homeowners that will prolong the slump by refusing to accept reality for longer. its simple there is no cash to buy homes with anywhere near the prices they were going for. income levels are way too low, and lending standards are now stricter than they were pre subprime, and population is moving out of the area. its a real estate perfect storm. you shouldnt pay anything more that 80k for an sfr in santa ana, stanton. all you condo and townhouse owners in south OC. 60-150k. nellie gail, 300-600. coto sfrs 200-1.5mil, mission viejo sfr 180-220k, lake forest sfr 150-200k aliso viejo sfr 180-220, laguna hills sfr 170-220. once the avgs hit those levels we will have hit the bottom and a recovery can begin. my prediction, based on current OC income levels.
June 20th, 2008 at 9:00 am
CME housing futures based on Case/Schiller predict another 28% decline bottoming out in 2012.
June 20th, 2008 at 9:00 am
“Hey, Beach Cities of The OC, your no SF or Manhattan!”
oh, come on. SF and Manhattan homes don’t come with a view of the power plant or oil rigs. There has got to be a premium price for that, right?
The people who think that beaches here in the OC are nice, have never been to a nice beach in Florida or Hawaii and even those places are hurting with the housing slowdown.
June 20th, 2008 at 9:17 am
50% declines TO GET TO THE HISTORICAL NORMS. But what if we overshoot to the downside by 25%?? It seems reasonable to think that homes will become dramatically undervalued after this mess as many who would otherwise have been able to buy won’t be, i.e. the walk-aways who could have afforded less house but splurged and now can’t qualify for anything for five years.
I believe given the economic environment we are heading into, we will see 66% to 75% declines.
June 20th, 2008 at 9:21 am
OK let me get my crystal ball out - I project that the real estate values will be 10% higher over the next 50 years. Thats what I think of this “prediction”. You can predict anything you want and it might come true. OC Register takes all these predictions that people make and publishes them to sensationalize the news. It’s all a bunch of BS. Hopefully most intelligent people can see through this.
June 20th, 2008 at 9:21 am
And he is right on about the homalucination. Everywhere you see 50% reductions, but people you talk to still think their home and neighborhood, or even just their street is still close to bubble values.
Or they think that this is only temporary and prices will bounce back to bubble values. Meanwhile, they can’t buy groceries because they are completely broke after paying the mortgage, property tax and buying gas.
Without the cash out refi supplement, most of us really don’t have that much to spend every month.
June 20th, 2008 at 9:42 am
“Thats what I think of this “prediction”. You can predict anything you want and it might come true.”
Chris Thornberg’s prediction is not based on wishful thinking like Gary Watts or Steve Thomas. Furthermore, this guy doesn’t seem to have an agenda like Watts and Thomas.
He is telling exactly why he feels prices could fall 50%
“By Thornberg’s math, a typical Southern California house payment equaled about a third of its owner’s gross annual income in 1999. By 2007, it equaled about 70%”
isn’t this a good reason for prices to come down?
June 20th, 2008 at 9:46 am
I started reading Thornberg’s analyses in 2004/2005 and I am very glad I did. He has been correct with his predictions to this point.
trs, lol - you feather ruffler!
June 20th, 2008 at 9:47 am
Thornberg was predicting this drop before most thought it possible. He was ridiculed, (as was Jon), and called an alarmist, among other things, for seeing the foolishness that was happening in real estate long before it became obvioust.
I saw this bit by Thornberg from last year and couldn’t help but think of Cdm booster Jimmy and of course PacificHills Mulligan, among a couple others here who think their neighborhood is immune to the inevitability of reality returning to the marketplace.
Is this apropos or what? :
–
“Every place takes the hit in the long run,” said Christopher Thornberg of Beacon Economics, a consulting firm in L.A.
If prices in high-end markets do not bend while prices fall in adjacent areas, many buyers will at some point choose the cheaper neighborhood, he said.
“If the gap between Riverside and Orange County becomes too great, a person will say, ‘Forget it, I’m not going to live in Orange County,’ ” he said. “If prices get too high in Beverly Hills, it drives demand to Santa Monica.” Such movement eventually drags top-end prices down, he said.
Data gathered by Edward E. Leamer of UCLA’s Anderson Forecast back that up. Since 1989, Leamer has tracked housing prices in the 20 least expensive and 20 most expensive ZIP Codes in Los Angeles County.
He found that all areas fell by about the same percentage when they hit bottom in the 1990s downturn.
June 20th, 2008 at 9:54 am
pdu, do you think someone will live in Riverside instead of CdM because they can get a foreclosure in Riverside for 200K?
June 20th, 2008 at 10:02 am
speaking of CDM. Take a look at this guy who paid $1,950,000 for a house in CDM back in 5/06 and is now trying to get out of it at a loss. Good luck buddy!!
http://www.redfin.com/CA/Corona-Del-Mar/409-COLUMBUS-Cir-92625/home/4731788
paid $1,950,000 May 01, 2006
now listed for $1,799,000
It looks like foreclosure might be the only way out.
June 20th, 2008 at 10:03 am
People will live where they can afford to live. Not where they can’t.
June 20th, 2008 at 10:12 am
damn this guy doent pull any punches does he
its about time we got a realistic opinion backed
with sound reasoning on this blog
notice the permabulls are avoiding this thread
like it was the black plague I guess the truth hurts
June 20th, 2008 at 10:21 am
“notice the permabulls are avoiding this thread like it was the black plague ”
Well, the permabulls are currently busy trying to sell their homes this summer before the market collapses.
lol
June 20th, 2008 at 10:22 am
The upside of the waves of foreclosures is (as long as we don’t have a massive federal bailout) they alone will force prices to correct to approximately where they should be, without deluded sellers having to budge at all. It’s not like keeping your house on the market at the same price for more than 30 days is going to result in a sale; if it hasn’t sold by then, people think it’s overpriced. Soon REO’s will be the majority of sales in most places, banks will be cutting prices to keep their inventories even, and anyone waiting for the market to go up again before they sell will be waiting a long time, or joining the foreclosure flush.
Oh, and before any of the realtors trolling here respond, I’m an owner in LA, not a renter (FYI).
June 20th, 2008 at 10:50 am
# Jimmy2 Says:
“pdu, do you think someone will live in Riverside instead of CdM because they can get a foreclosure in Riverside for 200K?”
–
Jimmy,
Are you being facetious? I hope so.
Try as I might I see no relation between what I posted and what you ask me.
June 20th, 2008 at 11:17 am
Rants says
“notice the permabulls are avoiding this thread
like it was the black plague”
I guess when the puppeteer leaves so do the puppets.
Plus the FBI is on the hunt for these guys.
Does anybody know if Veiling, Watts and Thomas are still in the country?
June 20th, 2008 at 11:20 am
Heard Thornberg speak about RE back in Oct 2006 and asked if he thought it would be better to buy now or rent for a few years…his answer unequivocally…rent. I took his advice and it saved me both financially and personally (I had to convince my wife that renting vs. buying was the right thing to do). Initially it looked bad as prices actually rose marginally for a few more months into 07. Ultimately, as we can all plainly see what occurred, it was the best financial decision I have ever made.
June 20th, 2008 at 11:26 am
WOW, you guys get one rogue “economists” and your all ready to Genuflect to him and name your first born after him. His analysis reeks of vested interest. Reminds me of the Pimco bond trader that sold his Newport home near the peak to cash in on the crash like so many here are trying to do.
June 20th, 2008 at 11:31 am
PDU, Your still clinging to the 90’s. Open your eyes.
June 20th, 2008 at 11:45 am
trs
“guy must be a renter. i see renters every day. renters think they can low ball a beach town blah blah blah.”
NOTICE: The smart money is renting. Renters have all the savings. Mortgage owners have the high maintenance lifestyle.
Don’t embarrass yourself. you’re lucky to get those offers. Today’s renters laugh at mortgage owners every day.
June 20th, 2008 at 12:13 pm
and you know what, trs? With global warming Costa Mesa will be the new beach town and all west of PCH will be under water…only CDM will survive…bye bye Balboa…..
Waiting for the Ross Ice Shelf to melt…
Joe in Costa Mesa
June 20th, 2008 at 12:40 pm
Not to worry Joe…there is so much money all Balboa Island that they’ll either build a giant sea wall around it or jack the whole island up.
June 20th, 2008 at 1:12 pm
shockg Says:
June 20th, 2008 at 11:26 am
“WOW, you guys get one rogue ‘economists’ and your all ready to Genuflect to him and name your first born after him.”
Tough call. Listening to a “rogue economist” who has called it right or listening to mainstream economists who blindly walked hand in hand with the RE bulls? Oh heck, let’s be adventurous and lose some money by buying now.
“His analysis reeks of vested interest. Reminds me of the Pimco bond trader that sold his Newport home near the peak to cash in on the crash like so many here are trying to do.”
Yes, Thornburg, Pimco, and Rants have effectively brought the RE market down. They’ll inflate it back up by 100% as soon as they buy again.
June 20th, 2008 at 1:33 pm
I guess i was conservative 6 months ago… I only claimed it would be 40%
June 20th, 2008 at 1:39 pm
Wow! This is some scientific thinking. So house prices must fall 50% because they currently cost 3/4 of income instead of the 1/3 of income they used to and thats….tough for people to manage. Would that fairness determined the prices.
Prices are set by supply and demand. Right now the demand is artificially low primarily because of fear of potential homeowners about their ability to make payments and not lose money and the reticence of lenders to lend money. This has been accompanied by an artificially high increase in supply.
I say artificially low demand because most of the main drivers of demand are still there and likely as strong as ever (desire to live in SoCal with its climate and lifestyle,desire to live in neighborhoods with good schools,low crime, desire to live in areas with easy access to jobs, shops and recreation). I say artificially low supply because if you look around, there just aren’t that many good places to build more homes and there’s no sign of any significant shrinking in the number of people.
Remember also that this uptick in supply comes primarily from the people who were unable to afford their houses. At some point, this will level out. The remaining people, who can afford the payments or can afford to re-finance would have little incentive to sell their house at a loss or even for what they paid for it. They still have a nice place to live and a great tax break while they wait things out. So, once the over-extenders has given up their homes, I would bet that supply will tighten up and stay at a level commensurate with the general economy (i.e. don’t expect 50% price drops on any large scale unless you see 50% unemployment).
Does this mean prices like we’ve seen in the near past will return. Yes, eventually, if due to nothing other than inflation, I believe they will return but it may take 7 years or more. Meanwhile, more conservative lending policies and the health of the general economy will produce a dip in prices but certainly nothing like 50%, at least in the areas that have the desirable qualities mentioned above.
June 20th, 2008 at 2:08 pm
“pdu, do you think someone will live in Riverside instead of CdM because they can get a foreclosure in Riverside for 200K?”
not Riverside dingleberry… if they want CdM but can’t afford it, then low end of Newport, if still too high then HB
June 20th, 2008 at 2:12 pm
Anybody got any idea what banks are lending people now a days.
Its back to 3x salary , with high 700/800 credit and no real debt. For most it doesnt get you much and for those of us who make a good living, for half a mil we expect much, much more in terms of quality, area, price etc…
I wouldn’t buy one and I can’t sell mine for exactly all the reasons that are so obvious now “post bubble”.
From what I read all of the economist who predicted just whats happening would happen, are still predicting further declines.
I have not heard one say expect prices to go up this year so I think that says it all.
June 20th, 2008 at 2:27 pm
I’d rather live in Riverside than CdM, and that’s where I’m looking now. Even if I could afford CdM, I’d rather have a mansion on Magnolia Ave in Riverside than live in CdM. But that’s just me. I don’t like smelly beaches or coastal attitudes.
June 20th, 2008 at 2:28 pm
“WOW, you guys get one rogue ‘economists’ and your all ready to Genuflect to him and name your first born after him.”
That’s utter BullS***! As this thing unfolds we are seeing who the REAL economist were.
June 20th, 2008 at 2:37 pm
shockg: “sold his Newport home near the peak to cash in on the crash like so many here are trying to do.”
I see how you have problems- you have flawed logic.
First of all, they cashed out at the top to cash in the rise - not the crash - people don’t earn money by cashing in on a loss (unless you are referring to a tax write off)
Second - where’s the beef? Woopdie frickin doooo. That’s what people do - they speculate. Some do it well and others do it horribly.
Hate the game not the player.
June 20th, 2008 at 2:43 pm
“one rogue economist”
Are you kidding me? ONE?
Man - do you get out much? Read the frickin’ news. There are plenty calling for further price drops. There are way less calling bottom - and each and every one that is calling bottom is heavily biased.
It is their logic that you must analyze - not their motives…. EVERYONE HAS A MOTIVE
If the logic is subjective - then its pure bias - this applies to every single one calling bottom - especially those based on opened escrows only - especially when the closed sale numbers are still half of what they’ve been historically and foreclosures are still hitting the market.
If its based on strong fundamentals and are using an objective approach to forecasting - then by all means - read on.
What is it with people - are IQ’s dropping this fast because it got hot out?
June 20th, 2008 at 2:53 pm
Remember the clue that Gene Paul Getty said was the secret to his wealth, “Sell when everyone is buying and BUY when everyone is selling…” If the herds are doing it, it is too late. Getting rich in OC & SD real estate, how about you?
June 20th, 2008 at 3:05 pm
Particularly OC as about all it had was the mortgage industry.
June 20th, 2008 at 3:13 pm
I’ve said it before, all say it again. Were not even close to the collapse. Just look at world economics, oil especially. The world economies are driven by oil. Oil rich nations that pumped money into the American Mortgage industry are taking a beating right now.
Oh, and three years ago when I said this was going to happen and backed it with facts my associates and friends thought I was nuts.
Then when I turned around and sold every property I owned including the one I was living in they thought I was certifiable.
Frankly I have a daily headache from listening to all these people complaining about how bad they have it. Upside down mortgages, foreclosure notices. Hey, don’t look to me for sympathy. Like I said, “I told you so!”
June 20th, 2008 at 3:36 pm
“Particularly OC as about all it had was the mortgage industry.”
So what are people doing for jobs now? Your comment makes no sense.
June 20th, 2008 at 3:50 pm
I love the bulls here. They just validate Chris Thornberg’s point that they are hallucinating with the comments they make. Good job bulls, by being yourself, you have proven Chris to be correct as he always has been.
June 20th, 2008 at 4:27 pm
Lived in OC 20 years ago. Had to move back to Chi-town for the job. Lived in SA, had a house for 5.5 years, sold it for $35K more than we paid for it and I thought that was inflationary but a nice profit. HMMM, I own 2 homes here; maybe it’s time to move back for retirement now that it’s becoming affordable and where I live in Chicago there’s no real estate price plunge! God, I miss OC!
June 20th, 2008 at 6:53 pm
I find it extremely humorous that the 2-3 bulls find the analysis worthless. Their ignorance is laid bare when you consider that, essentially, to disagree with the analysis you have to assume that there has been some shift in the historical rate of return that justifies long term valuations above the trend.
RE is a crappy investment. Always has been. Unless you get lucky or unless you are levered. And it is the only thing joe schmoe can lever. But leverage works on the downside too and it isn’t pretty.
The losses thus far are just from bad loans. What happens when good loans turn bad because people lose their jobs? Or lose a ton in “investments?” Or get a divorce or get sick? That is what we have to look forward to in the expensive parts of towns.
This exact phenomena occurred in in the late 80s. It is too bad one can’t short the housing market.
June 20th, 2008 at 7:47 pm
CALIFORNIA DISTRESS EPICENTER
A snapshot of home foreclosures exposes the continuing nightmare, nowhere near end, with California at the epicenter. On an annual basis, foreclosures ran at 112% above 1Q2008 versus Q1 of last year. The pace continues, as May national foreclosures rose by 48% versus a year ago. One might expect the pace to level off, but the increases continue. According to RealtyTrac, almost 650k properties