A "new era" in real estate

Image above ran with the LA Times story

If there is one thing we hope to show you by reading this blog (apart from all the interesting things going on in and around South OC) it is this: History tends to repeat itself, and almost nothing is without precedent.

See what you make of this story that was published in the LA Times in June of 1930 - right on the precipice of the last national real estate meltdown that was to go on for years after this story ran. Its themes are being repeated time and time again even today.

We're not saying we expect what we're experiencing today to mirror the type of hardship seen during the Great Depression, but we want to show you that even entering one of our nation's toughest times (if not the toughest time), some still believed that a real estate rebound was right around the corner, and that a "new era" in real estate was at hand that could shield property investment from the ills plaguing the stock market.

We've added brief commentary to pinpoint parallel themes between this story and ones showing up today. They are in italics inside parentheses.

Developments indicate new realty era
What is the outlook for real estate here? Careful analysis of all the factors and records of past similar periods tell plain story

What is the real estate outlook? ... In general, conservative observers regard the indications in soundly-based localities as favorable and cite the following as reasons for their belief: (Location, location, location...the high end is more immune!)

(1) Stabilized and higher prices customarily follow quiet or depressed periods, making this a good buyers market (Buy low, sell high...it's a great time to buy!)

(2) The increase of land-absorptive power through population increase (we're running out of land in good locations)

(3) The increasing importance of realty paper in the national financial structure (real estate is a vital part of any savvy investor's portfolio)

(4) Business and industrial developments which tend to favor real estate (If real estate is good enough for them, it should be good enough for you too)

A broad underlying fact emphasized by the recent stock market declines is that land-ownership has brought financial independence to more persons in this country than has any other form of investment. (OK, did they steal this line from the NAR and its "real estate is the key to long-term wealth" campaign? Hmm...maybe it was the other way around)

PRICE AND VALUE
The present is called a buyer's market not because realty values have sagged to new low levels, as in the case of many stocks, but because there has been a leveling-out period which is considered a logical approach to another era of ascending values... (Real estate always goes up. Buy now or you will be priced out again)

(The story continues on to describe previous real estate rises and falls across the country, and that population growth will provide continued demand for properties. The point is that, in the past, when real estate stalls or drops, it is usually quick to rebound. Below are snippets from the last section of the article.)

WHAT IT MEANS
...the market in land runs in cycles, not of time so much as of economic conditions, and that there is a very definite relation between the business curve and that of real estate values. Periods of depression in business generally, expressed by a drop in the prices of stocks and other securities, have almost invariably been followed by an improvement in the real estate market...

Various explanations have been advanced by economists to account for this phenomenon, the one most favored being that, when other forms of investment appear shaky, idle money goes into real estate as offering a safe and solid place for it to grow. (They said it pretty clearly: Real estate is a "safe" investment) Realty values, where the location is well chosen, are apt to be fairly stable and subject in a much smaller degree to the influence of temporary economic conditions which send stocks bobbing up and down like so many corks. (Again: location, location, location, and the high end is immune. It's also an interesting coincidence that they described stocks as "bobbing up and down," considering just how bad things would get)

...the country's business has suffered a depression resulting from the period of inflation and speculation which ended in the stock market crash last fall. (Speculation? Inflated values? Sound familiar?) Unlike some past occasions of the kind, this depression has not been accompanied by an acute money stringency - in fact, money for permanent investment has been more plentiful and has commanded a lower rate... (Interest rates are low and credit is available...reasons not to wait to buy)

While it is too early yet for the cumulative effect of several factors to be felt in the realty market, it is conservative to say that conditions are unusually favorable for investors in real estate, not only for appreciation in the value of their present holdings but for well-considered additions thereto. (Bold is our emphasis. Think about that for a minute...the author was extolling the virtues of real estate investment right at the beginning of a severe economic depression that would last until WW II.)

We wonder what became of the writer, Charles C. Cohan - what would he have to say about today's conditions? Would he be as bullish about real estate now as he was then, after experiencing the Great Depression firsthand?

Match Game: The sequel

Back in January, we used past and present headlines to create this post, which pointed out that today's issues tend to have parallels to the 1990s downturn that plagued the area. Now, we're back with some more examples of stories from the present, and how they link up with the past - specifically, early-to-mid 1991 (and one story from 1992). Enjoy...

Today's story: NAR public awareness campaign - Good Time to Buy
Date: Ongoing
"Many real estate markets across the country have recently experienced rising home inventories and stabilizing prices. In these markets, home buyers have increased negotiating power, but may be unsure of how to structure the best deal – they need a professional to help guide them through the transaction. 'Good Time to Buy' emphasizes the value that REALTORS® bring to home buyers in this environment. Of course, every market is different, which is why the ads recommend that potential home buyers call a REALTOR® in their local market to learn more about what’s happening with real estate in his or her community."

Yesterday's story: Making the best of it
Date: Feb. 13, 1991
"Coldwell Banker Residential Group, the Mission Viejo-based real estate giant, will begin a groundbreaking national advertising campaign this week that acknowledges the sluggishness of the current housing market while suggesting that there's never been a better time to buy or sell. While many advertising and real estate experts agree with the campaign's central theme -- 'Now's the time to make your move' -- some consider the campaign risky because it's pegged to what might be a temporary market condition and it might generate business for Coldwell Banker's competitors."

The connection: Whenever conditions exist that may threaten a group's business, they rush to convince the public that, contrary to what many think, real estate is still a great buy - and it's important to utilize their expertise to do so.

Today's story: No relief on mortgage rates this week
Date: March 6, 2008
"Homeowners and would-be buyers hoping to take advantage of lower mortgage rates were disappointed –again — this week. Orange County mortgage rates climbed for the fourth week in a row." Conforming rate: 5.929%. Jumbo: 6.983%

Yesterday's story: Home mortgages get more expensive
Date: March 7, 1992
"One-year start rates for adjustable home loans averaged 5.764 percent March 5, up from the 5.398 percent average Feb. 28. The average fixed-rate loan jumped to 8.829 percent, up from 8.720 percent."

The connection: As always, financing plays a crucial role in the home buying process. If mortgage rates rise, it is more difficult for borrowers to afford properties.

Today's story: Downey Financial swings to a loss
"Downey Financial in Newport Beach said today it lost $56.6 million in 2007, which compares to a profit of $199.7 million the prior year...The big culprit: a $283.5 million addition to loan loss reserves, which dings earnings. And the lender suffered from a $94.8 million drop, or 18.3%, in net interest income due to a drop in assets that earn interest and a lower interest-rate spread."
Date: Jan. 23, 2008


Yesterday's story: Downey Savings sells properties at a loss
Date: Feb. 13, 1991
"Downey Savings and Loan Association said Tuesday that it generated $10.2 million in the fourth quarter by selling off troubled real estate properties originally valued at $42.2 million...However, the lender said it still owns substantial amounts of real estate, much of which it already has recorded as a loss."

The connection: When things go bad, local companies that invested heavily in local real estate or made lots of loans can get burned.

Today's story: O.C. home reportedly goes for record $35 million
Date: Jan. 11, 2008
"Nicolas Cage sold his Newport Beach, Calif., house last week for $35 million — a new record for Orange County, local brokers say. The movie star, who has bought and sold many houses, paid $25 million for the nearly 0.6-acre property in 2005."

Yesterday's story: Home's record-setting sale has OC agents optimistic
Date: Feb. 5, 1991
"Whether it'll kick off a new frenzy of trophy-house buying is debatable, but a few real estate agents are happy that a price record has been set in Orange County's housing market."

The connection: No matter how bad things may be for virtually everyone, excessively rich people still have loads of dough and can buy really expensive stuff whenever they darn well please.

Today's story: Home buyer who overpaid sues real estate agent
Date: Jan. 25, 2008
"Legal and real estate experts say that Ummel and her husband, Vernon Ummel, should have done their homework better before purchasing their four-bedroom home in a luxury development outside of San Diego in 2005 for $1.2 million, a price that the Ummels say was as much as $175,000 more than what similar houses in the development sold for. They contend it was not their fault."

Yesterday's story: More buyers unhappy with agents
Date: June 10, 1991
"In the past two years the action in Orange County's housing market has shifted from writhing disco to ballroom dance. Now it looks like real estate agents are getting the rap. In a survey of home-shopper attitudes conducted in April for The Orange County Register, nearly 46 percent of the respondents who bought a house in the past year said they wouldn't use the same agent again."

The connection: Mad about a poor home purchase decision? Duh - blame anyone else but yourself...starting with your real estate agent!

This week in OC history: 2003

Below is a sampling of headlines and summaries of stories that ran this same week in the OC Register five years ago.

OC real estate data, for the 22 business days ending Feb. 7, 2003
Median: $365,000 (up 21.7%, year over year)
Sales volume: 3,405 (down 0.7%)
4-week home payment for SFR at average 30-year interest rate: $1,487 (up 6%)

Size matters, or does it? Parents and teachers fight to save the state's class size reduction program amidst budget issues. "Several studies on smaller classes, including four years of research on California's 20-1 program, have failed to make the case that improvements are due to smaller class sizes alone. "

PacSun's rise falls to girls. "At a time when many retailers are struggling because of the soft economy, 791-store Pacific Sunwear is on a hot streak...Pacific Sunwear's focus on building its girls business is the single biggest reason for the turnaround..."


Job cuts deeper than thought. A revised report showed the county's job losses were nearly 20,000 more than estimated. "The county averaged 19,800 fewer jobs than initially estimated based on an annual revision...For the year, the county lost 10,700 jobs, the first time in a decade the job market did not grow on an annual basis. The best the usually optimistic (Chapman University economist Esmael) Adibi could say about the numbers is that the worst appears to be over." (click to enlarge chart)

Kohling all shoppers. Kohls opened 28 stores in Southern California, including 8 on the same day, attracting a frenzy of shoppers. "They have good products at good prices," said Tina Viray, 51, of Huntington Beach. "It's crowded with long lines, but I'm sure it will die down when the grand opening is over."


County budget cuts coming. County supervisors committed to cutting $25 million from the 2004 budget. Areas seeing reduced support: affordable housing, health and adoption programs and the promotion of business, arts and tourism. "The cuts were decided upon as supervisors wrestled with uncertain finances, increasing costs of providing services and the belief that the county will suffer as the state considers solving its budget troubles." Click on the image at the right to enlarge.

Gas tops $2 mark. The average price of a gallon of gas broke through the $2 barrier, and experts warned it could go as high as $3 by the summer. "Orange County's gasoline was up nearly 34 cents from a month ago and nearly 67 cents from last year. 'It's time to look for additional ways to conserve,' said Jeffrey Spring, a spokesman for the Automobile Club."

OC RE timeline: boom, bust, boom, bust

Jon Lansner of the OC Register put this together for Sunday's paper. The headline is "Price movements in O.C. homes, 1988-2008." Our (brief) comments at the end also are in italics. Enjoy:

"Here’s a timeline looking at key dates since 1988 involving the volatile movements in the Orange County median pricing by DataQuick’s math (overall for all residences, single-family homes, condos and new homes):

THE PEAK OF THE PREVIOUS BOOM …
January ’90: New-home price peaks at $256,000
August ’90: Single-family resale price peaks at $244,750
June ’91: Overall median price peaks at $220,000
February ’92: Condo price peaks at $155,000

… THEN THE PAIN OF THE EARLY ’90S SLUMP …
February ’93: New-home price bottoms at $183,000 for a peak-to-valley drop of 28.5% in 37 months.
January ’96: Single-family resale price bottoms at $191,500 for a peak-to-valley drop of 21.8% in 65 months.
January ’96: Overall median price bottoms at $184,000 for a peak-to-valley drop of 16.4% in 55 months.
March ’96: Condo price bottoms at $114,750 for a peak-to-valley drop of 26.0% in 49 months.

… TO A REBOUND AND THIS LATEST BOOM …
August ’97: New-home price passes old peak at $265,000 for a valley-to-new-peak time of 54 months, or 91 months between peaks. (Or how long it took to “break even.”)
May ’98: Overall median price passes old peak at $221,500 for a valley-to-new-peak time of 28 months, or 83 months between peaks.
June ’98: Single-family resale price passes old peak at $255,000 for a valley-to-new-peak time of 29 months, or 94 months between peaks.
January ’99: Condo price passes old peak at $158,750 for a valley-to-new-peak time of 34 months, or 83 months between peaks.

… AND ITS EVENTUAL PEAK …
February ’05: New-home price hits current peak at $864,000 for a valley-to-peak gain of 372% in 144 months.
March ’06: Condo hits current peak at $470,000 for a valley-to-peak gain of 309.6% in 120 months.
June ’07: Single-family resale hits current peak at $734,000 for a valley-to-peak gain of 283.3% in 137 months.
June ’07: Overall median hits current peak at $645,000 for a valley-to-peak gain of 250.5% in 137 months.

FINALLY, THE ENSUING REVERSAL
Through January ’08:
Overall median price of $520,000 is off 19.4% from the peak of 7 months ago. Single-family resale price of $583,250 is off 20.5% from the peak of 7 months ago. Condo price of $375,000 is off 20.2% from the peak of 22 months ago. New-home price of $506,000 is off 41.4% from the peak of 35 months ago."

Peak-to-trough drop, overall median, in previous bear market:16.4% over 55 months

Current drop in overall median, 7 months and counting: 19.4%

History lesson over.

Let's play...Match Game

OK, so this isn't really like the real Match Game. Here, we're matching stories from the real estate downturn of the 90s with eerily similar ones that have come out recently. All of the old stories are from the OC Register archives. Enjoy...

Today's story: OC real estate/finance jobs at 33-month low
Date: Jan. 21, 2008
"Orange County’s real estate and related finance businesses lost 14,200 jobs in the year ended last month, putting employment in this niche at 245,000 workers, the lowest level since March 2005." ...

Yesterday's story: OC real estate slump putting thousands of sellers out of jobs
Date: Jan. 15, 1991
"As many as 5,000 people have dropped out of the home-selling business in Orange County during the past year, according to reports from local real estate associations and the state trade group's employment estimate for 1991." ...

The connection: Professionals in real estate-related jobs are either leaving or being forced out of the industry.

Today's story: Lennar loses $1.25B in Q4
Date: Jan. 25, 2008
"Orlando's third largest production homebuilder posted a $1.25 billion fourth quarter loss, as its home deliveries and new home orders fell by half." ...

Yesterday's story: J.M. Peters reports loss of $7 million
Date: Dec. 22, 1990
"Home builder J.M. Peters Co. on Friday issued its weakest quarterly report since becoming a public company in 1986, reflecting a downturn in home sales and added costs from trying to sell its existing inventory." ...

The connection: Homebuilders are suffering big time as demand from buyers wanes.

Today's story: Humbled Homesellers
Date: Jan. 20,2008
..."It's a story about bad timing and bad luck – a tale of woe that many 2007 home sellers are telling after enduring the slowest housing market in at least two decades."

Yesterday's story: Hopeful home sellers sweeten the bait for buyers
Date: Aug. 11, 1990
"Orange County homeowners haven't taken to riding hippos or elephants but, like some used-car dealers, they might gladly saddle up if they thought it would help sell their houses.

"This summer, with homes in some parts of the county staying on the market longer than at any time since the early 1980s, sellers are turning on charm and creativity to move their homes." ...

The connection: Builders aren't the only ones who are desperate. Sellers are, too.

Today's story: Foreigners love U.S. real estate
Date: Jan. 28, 2008
"Many Americans are anxious about the real estate market. But foreign investors see U.S. apartments, hotels, shopping centers, warehouses and offices as good investments, according to a new survey."

Yesterday's story: Europeans prefer Southern California
Date: June 14, 1990
"California is the No. 1 state for real estate-related activities, according to executives of European firms in the United States. Los Angeles is the No. 1 city, they said."

The connection: The foreigners are coming to bail us all out of our real estate problems!

Today's story: Report Reveals 8 Signs of a Real Estate Recovery
Date: Jan. 22, 2008
"Encouraging signs that a meaningful recovery in the overall U.S. housing market could begin later this year are found in HouseHunt’s fourth quarter, 2007, “Current Market Reports” survey of member-agents and in year-end statistical data compiled by the National Association of Realtors (NAR)."

Yesterday's story: Housing report hints at end of OC slump
Date: March 28, 1991
"The county's new-home market caught fire during the first 2 1/2 months of this year, as sales shot up while inventory went down.

"If both trends continue, real estate analysts said the county's housing slump could be over by the end of this year."

The connection: It's never too early to call a bottom, right? By the way, the bottom of the last slump didn't come until about 1995 - four years after this story was published.

Today's story: Credit crunch really starts to hit home
Date: Aug. 18, 2007
"As more lenders collapse, the skittish survivors are continually raising their rates and changing the rules for getting a loan as they scramble to stay alive.

"The upheaval has made it nearly impossible to secure financing for scores of borrowers who would have easily qualified for mortgages just a few months ago, creating a lending drought likely to deepen the housing slump."

Yesterday's story: Credit crunch now hitting homebuyers
Date: March 26, 1991
"The 'credit crunch,' long decried by real- estate developers, is now moving toward homebuyers, threatening to disrupt the economy.

"...underwriting standards are tightening steadily and mortgage- interest rates are rising relative to other rates, Jolson wrote in a recent report."

The connection: You thought this summer's credit crunch was a brand new phenomenon? Think again.

Eye on "Eyeball '07"

In case you're following real estate here in Orange County, you've probably also been reading Jon Lansner's blog over at the Orange County Register and reading his "Eyeball '08" - a set of opinions about how the market will fare in 2008.

Since he also did this feature last year, we're checking up on some of the posts to see how things panned out. Below is a sampling of interesting tidbits - including some big misses and surprising hits - from Eyeball '07. To kick things off, first is Lansner's column from the December 31 newspaper that sums up some of the expert sentiment.


Will '07 housing surprise us all?
"...Almost every knowledgeable person in and around the industry whom I've talked with seems to agree on the coming year's outcome: Orange County home values will simply slip - but not tumble - in 2007. Even somewhat outside observers draw largely similar conclusions." ...

"O.C. housing circa 1997-2005 was clearly an asset that may have gotten a little too hot. In 2006, we saw the first signs of the market correcting itself: the end of double-digit appreciation, growing choices for buyers and a growing number of owners missing mortgage payments.

It's not rocket science to guess 'more of the same' for '07." ...

"Momentum and shopper psyche are weak. Some owners are in trouble, too, placing added pressure on the market. It feels like it would not take much to turn 2006's skittish housing market into a full-fledged 2007 fire sale."

Now, here's how a variety of his guests answered the question "What’s your outlook for the local housing market for 2007?" plus some interesting responses to others.

Note: For the 22 business days ending Dec. 14, 2007 (most recently reported data), the DataQuick median was down 7% from last year.

Lender/investor Bruce Norris of The Norris Group
Outlook: Orange County prices down 5 percent. ...

What might be the housing surprise we’ll be talking about a year from now?
Bruce: The greatest year-over-price year decline since the Great Depression, nationally.

Anil Puri of CSUF business school
Outlook: 3 percent to 5 percent drop in median price, monthly data, year-over year.

Reader comment on that post: "Anecdotal 10% drop doesn’t equal a 10% drop in mean. I would suggest you take advantage of those individual 10-15% drops (they’re bargains!) rather than complaining that the entire market hasn’t come down that much.

The sale is ending soon."

Consultant Walter Hahn
Outlook: A slow drift downward in terms of sales to a bottom in second half 2007. Slow recovery thereafter. Price change in 2007 of zero percent, plus or minus, based on Dataquick data.

How would you describe the risks for a huge drop?
Walter: 2 percent probability.

Talk show host Mike Roberts
Outlook:Most likely, stay close to what it has ended at this year. I see little in the way of further price declines or any real measurable appreciation. The wild card is whether or not sellers believe that the market is indeed falling and start a wave of panic selling. As you know, very little inventory is actually selling. Many people have dropped their prices up to 10 percent without getting an offer. Many of them have just taken the property off the market to wait for another day. However, if a few buyers start to actually buy some of these properties, they could set into motion a whole wave of selling. Most of those that would panic sell are investors trying to cut their losses. Unfortunately, it will still create a new set of comparable sales that everyone else will have to live with.

Pimco portfolio manager Saumil Parikh
Will loans be harder to get in 2007?
Saumil: We believe the subprime mortgage market will re-price credit risk during 2007, thereby making it more expensive and onerous for first-time homebuyers to enter the market.

What might be the housing surprise we’ll be talking about a year from now?
Saumil: The surprise will likely be that activity will not rebound meaningfully upon realization of lower mortgage rates....

Bill Plattos, executive VP at First Team Real Estate
Outlook: I think along with (ex-Fed boss Alan) Greenspan that we have hit bottom. But it does not mean we will now start back up next year at the previous pace. Rather, prices and sales will coast through 2007. We really have not seen the prices fall, such as they did from 1990 to ‘95. Nor do I expect that to happen. I think the latest (2007 price) forecasts that I have seen sound reasonable at flat to maybe minus 2 percent. I also believe that it could go up a few points, especially in pockets, because everyone is starting to become more secure where the market is going and that there is still a lot of normal pent-up demand.

What events might change your outlook, pro or con?
Bill: I do not see anything that would shake things up in O.C. I believe we will work ourselves out of Iraq as we know it now and that inflation fears are overblown.

Charles Rother of American Strategic Capital
Outlook: Orange County home prices are likely to decline 5 percent in 2007. To sell their homes, homeowners may need to price their homes 10 percent or more below the highest price ever paid for a similar property on their street.

How would you describe the risks for a huge drop?
Charles: For 2007, there is a 26 percent probability that Orange County home prices will decline more than 7 percent, and an 11 percent probability that prices will drop more than 10 percent.

UCLA economists
Outlook: "From 1990 to 1995, the median sales price of an O.C. home fell 9 percent. We don’t see anything like a 4.5 percentage point jump in unemployment in the next year or two in O.C., so I think that 9 percent drop over five years is the worst case scenario — worse than anything we’re likely to see given the current economy. Without any recession-sized job loss in O.C., we expect more of what we’ve already seen in 2006: flat prices and falling sales. ... Nationally, I expect low levels of sales of both existing and new homes, aggressive pricing of new homes (e.g., a 10 percent decline in price), but very little erosion (2-5 percent) of sales prices of existing homes."

Real estate broker Gary Watts
Outlook: Both sales and prices will be up from 2006. Sales should rise to our 10-
year average of 40,100, which puts sales up 10 percent, and prices should rise 7 percent for homes and the 4 percent-5 percent range for condos.

So inventory will be … ?
Gary: Our housing supply (inventory) should average three to four months this year. (That’s homes for sale divided by the sales pace.)
Note: Inventory now in January 2008 is double what it was last year - 14 months worth

Veronica Hicks of Condos Etc.
Condo market outlook: I still believe there is some instability in the condo market, particularly for first-time homebuyers....

CAR VP and chief economist Leslie Appleton-Young
Outlook: Sales statewide will be down about 24 percent in 2006 and another 7 percent in 2007. Orange County will see slightly larger declines because the run-up in sales activity was initially stronger than the state as a whole and the median home price in Orange County at $699,200 is well about the statewide median of $555,290. Affordability issues also will work to constrain sales activity in 2007. We are projecting a 2 percent decline in the statewide median price (this) year as the market continues to normalize. Orange County prices may be slightly softer because the inventory of unsold homes for sale is higher in Orange County than in many other parts of the state.

For you visual types...

Here is how the Orange County median single family detached home price has changed over the years, as reported by the Calif. Assocation of Realtors (CAR). Some things on this chart:

• Minimum value is $129,641 in 1982. Max (peak) value is $721,190 in February 2007. The rest of the data points are each October's median price - October 2007 is the last month we currently have CAR data for.
  
  
• The other two points labeled on the chart ($241,708 and $209,400) are the peak and trough of the last downturn. However, these are not the absolute peak and trough - just the highest October median and lowest October median during that period.
  
  
• The median increased nominally by 61.5% between 1982 and 1995 - that's around a 3.8% average increase each year. It then proceeded to appreciate by 72.0% between 1995 and 2001, and then by another 87.1% between 2001 and October 2007. To arrive at the 2007 median, the 1995 median would have had to increase by an average of about 10.2% each year.
  
  
• CAR's latest reported median (October) was $673,770 - exactly the same as the September one.
  

The second chart is mostly for my amusement, since it's of the "what if" variety (click on it to enlarge):
This graph speculates what the median would be now if it had increased by:

• 4% every year since 1982 (pink). If this had happened, the median home price would now be $345,602.
  
  
• 5% each year (yellow). The median would now be $439,010.
  
  
• 6% each year (cyan). If this had happened, the October 2007 median would be $556,402.
  

Notice the 90s downturn took the actual median value below all three of these projected median value lines - the actual median did not catch back up with the 3% line until October 1997. The recorded median then proceeded to surpass the 6% yearly appreciation line in October 2002. It kept shooting up after that.

Feel free to use these charts for your own purposes - just cite this Web site as the source, please.

Let's play: "Now...or Then"

It's the weekend, so let's have a little fun. Do you know the Price is Right game "Now...or Then?" In case you don't, the premise is quite simple. The contestant has to decide whether the price provided on certain products is current, or whether it's from a specific date in the past.

We'll do something similar, but with a different twist. Some of the statements below are recent, while others were made in the LA Times in the spring of 1991 - early on in the last real estate downturn. Read each quote and decide for yourself: now...or then?

1. “It is going to be a gradual process of bringing the inventory (of unsold homes) down, but things look quite good for a rebound to begin.”
   
   
2. Brokers say reduced housing prices and low mortgage rates appear to have finally stabilized the real estate market. “The worst is very much over," said Clarence Bales, manager of Century 21 Central Coast Realty…"At the low end…people are attracted by prices that are still soft and by low interest rates," (Fred) Priebe said.
   
   
3. "I think, but it's just a gut -- there's no data that can prove this to you -- that things will turn around (next year), that prices will stop falling, inventory will start decumulating and prices will come back. But that's a gut.”
   
   
4. "I'm not seeing the market fall apart. Are we having a correction? Absolutely”…"I don't think this will go on much longer.”
   
   
5. Speculative home buying is risky in our current market. If you're not planning to hold on to your new acquisition for five years or more, invest your money elsewhere. But, if you're renting and you're tired of paying ever-increasing rent, getting little if any tax break and you have a good income with excellent prospects for continued employment, then I recommend that you consider buying now.
   
   
6. …Local housing prices just got higher than most buyers could afford or were willing to pay. This happened as investors, builders, landowners, lenders, government regulators and existing homeowners with huge amounts of equity tried to cash in on the boom. The bust then fed on itself, forcing builders to stop construction, sellers to lower prices and lenders to carefully scrutinize loans. These events will help bring supply and demand back into balance, leading again to an improvement in the market.
   

How did you do? Let's find out...
1 - THEN, Leslie Appleton-Young, chief economist for CAR, March 26, 1991. From the same article: "The modest drop in sales of existing homes from January was the smallest decline in sales locally since August. That showing has some real estate officials saying the slump that has devastated the industry has hit bottom and the worst is over."
2 - THEN, April 22, 1991. Funny note: The "low" interest rates they're talking about were 9.5%
3 - NOW, Karl Case on MSN Money. Case also said: "It (the downturn) could go into 2009."
4 - NOW, Long Beach broker Dick Gaylord, who will become the 2008 NAR president, in the OC Register
5 - THEN, Dian Hymer, March 24, 1991. I feel sorry for people who took her advice and bought then but couldn't hold the property long enough, considering prices took another six years or so to rebound.
6 - THEN, John O’Dell Q&A called "What Led to Lag and When Will It End?"March 17, 1991

How bad is it now?

Here is the median price per square foot of a single family detached home in Orange County from 1980-1993, according to the LA Times:
1980: $73
1981: 84
1982: 85
1983: 84
1984: 85
1985: 88
1986: 93
1987: 104
1988: 125
1989: 149
1990: 152 (108% increase since 1980)
1991: 147
1992: 142
1993: 133 (Prices would not reach $130 again until 1997)

Here are median price/sq ft numbers for Orange County from the following years, which I collected from other sporadic LA Times stories. Since this data is from different articles, it's not going to be perfect; the importance is not the exact data points themselves but their directionality.

1994: $124
1995: Not available
1996: 124
1997: 129 (This was the highest point in two years)
1998: 147

These numbers suggest Orange County real estate prices were highest in that cycle in about 1990, and hit a bottom in about 1996. Yes, there were concerns about the market well before 1990, but median prices were still going up until that point (sound familiar?).

The 1990s downturn, then, took about six years to go from peak to trough. The median price/square foot of an OC house fell from $152 in 1990 to approximately $124 in 1996 (this was the lowest number I could find). That's a nominal decline of roughly 18% over the course of about six years.

Also notice that despite the huge rally in 1998, the median still had yet to top the number it had achieved eight years earlier.

"South OC" (Laguna Beach, Lake Forest, Newport Beach and San Clemente) had an average price per square foot in 1992 of $234.70, according to an LA Times story. This number was 64% higher than the county median at the end of 1992 and "bucked the trend" of price declines in other regions. Since Laguna, Newport and San Clemente were on this list, it is not surprising this area fared best, since the luxury market tends to hold up better.

Fast forward to now. Vincent Bindi recently posted on ocrealestateblog.com about South County price/sq ft numbers for all detached homes. The short answer: Not good news. How bad? Here are his numbers:

2006 at the peak: $4o7/sq ft
Now: $356
Decline: 12.5% from the top. Bindi goes on to say, "...since closed sales prices are always a lagging indicator, and given the recent sales that I have seen in certain areas, I predict this number will show prices having already fallen to a level of 15% to 20% for certain areas and product types." Wow.

To sum up: OC's nominal peak-to-trough, six-year decline in the early '90s, in terms of price/sq ft, was about 18%
Nominal decline from the peak to the current price for South County only, in a little more than one year, has been estimated by a real estate pro to be as high as 15-20%, depending on the type of product and its location.

Sure, individual regions can certainly be more volatile than the overall county. Bindi's numbers include detached condos, while the previous data was for single family detached homes, so that culd easily factor in as well. And yes, this is an apples to oranges comparison, since the information is from two different sources and tracks two different sets of data.


The point, though, is that the magnitude of the median price/sq ft decline estimated to have already taken place in segments of South County real estate is very close to the amount of decay OC as a collective whole witnessed during the entire length of the 1990s housing slump.

Pretty interesting stuff, especially since many think this latest downturn is still in its beginning stages. But considering how much faster and further prices escalated during the recent upswing, is it really that surprising how quickly they're falling back down?

Laguna Beach: immunity or ridiculosity?

There is talk about the possibility of high-end immunity in real estate - that is to say, more expensive properties (usually either on the coast or in a prestigious area) can get the best of both worlds: They appreciate along with traditionally less-expensive areas during bull markets, but when the inevitable correction comes, they don't seem to fall much in value at all (or even show gains). Perhaps it's because "land is scarce," or that "there is never-ending demand for these exclusive places."

This demand, some would even argue, means escalating prices of luxury homes are of little concern to those with excess cash who want to buy coastal properties and don't care how much more they have to pay for the privilege. In that scenario, these types of properties really could go up in value perpetually, assuming more people with huge cash reserves are ready to step in and continue to bid prices up.

We will use Laguna Beach as a case study of what can happen to prices in a luxury market before, during and after the past two real estate bull markets. This city is one of the most expensive areas of South OC, and home values are still generally holding up fairly well in comparison to the rest of the region (though the median here has been getting clobbered recently, if that means anything).

After a few clicks on Redfin, it's very apparent that even sellers who purchased in 2004 and later think their properties have not only staved off any sort of depreciation, but that they've instead continued to steadily increase in value.

We'll use the example of 1089 Miramar St., since the past two times it was sold happen to coincide with bottom of the market in 1997, and the general peak in mid 2005. Note: We assume the house has not undergone any extreme renovations (e.g. a teardown and rebuild situation), but instead the homeowners renovated as necessary to maintain and update the property to keep it in good condition as it aged. Here is the sales data:

7/18/1997: $260,500
5/24/2005: $1,195,000

The realized appreciation for that eight years of ownership was $934,500, or 21.4% per year. Notice the years of ownership include a few (1997-2000) that occurred before values really shot up. That means a large amount of appreciation probably occurred in the final few years of ownership as real estate in general took off.

By the way, the current owners are now trying to unload this place for $1,425,000. If they sold at full asking price, it would equate to a gain of about 19% since 2005 (about 12% per year annually). Not exactly 20% per year, but not half bad for only holding a property at a time when most other areas have seen prices fall precipitously.

So, then, is the "normal" appreciation rate for a Laguna Beach property with a killer ocean view that has been held for more than a couple years still running at about 21% per year?

Well, let's look at 21673 Ocean Vista Drive #27. This property also, coincidentally, saw an appreciation rate of exactly 21.4% between the sales in 2000 and 2003. But check out the sale before that: $225,000 on 8/2/1988, which means an appreciation rate of 5.5% per year for 12 years (1988-2000). Yes, the property was going up in value, but at a much more modest rate than it did later on.


To sum it up:
*Laguna Beach was always a nice place to live and commanded a justifiable premium before the real estate boom. What really changed between the time before and after the market started shooting up (other than the town being the scene of an MTV show) to justify the types of price run-ups experienced here? If places like Laguna Beach participated in bubble behavior that catapulted prices, it seems only natural that it would have to take at least some tangible hit as the market deflates.
*If the first property we mentioned had seen the 5.5% yearly gains the second one experienced during 1988-2000, it would only have been worth $399,786 when it sold in 2005, not $1,195,000. The appreciation rate it actually saw between 1997-2005 was almost four times higher than the one experienced by the second property between 1988 and 2000.
*If the second property had continued to rack up 21.4% appreciation every year since 1988, it would now be worth a whopping $8,960,610. Instead, the actual appreciation rate between 1988 and 2003 was a much more modest 7%.
*Some current sellers believe the area still warrants appreciation rates similar to those seen during the boom years. If these asking prices are still in line with what buyers can and are willing to pay, they will sell. If these prices are out of line with the current market, these properties will sit unsold.

It's likely that, when all is said and done, well-appointed, ideally located properties like these that were held long-term will keep some of the paper gains recorded during the real estate boom even after a down market (after all, our second example weathered the storm of the 1990s bust quite nicely). But it's not realistic to assume that recent appreciation rates are, in fact normal, and that they could somehow continue on at a rate even close to what we've recently seen in a non-bubble environment.

What would prices be like...

...If there was no So Cal housing bubble? Here are some properties for sale now that were last sold in 2000, which happened to be the last year before the bubble started taking off.

An explanation: Projected prices are estimated assuming a very generous appreciation rate of 7% per year, every year for seven years until now.

Projected income required is a conservative estimate of how much money an owner should make per year. Difference is the amount between the current asking price and the projected 2007 price.

34041 Aurelio, Dana Point, 92629
2000 purchase price: $349,000
Projected 2007 price: $560,418
Projected income required: $140,104.50
Current asking price: $989,000
Difference: $428,582


34458 Calle Carmelita, S. Clemente, 92624
2000 purchase price: $289,500
2007 price: $464,874
Income required: $116,218.50
Asking price: $645,000
Difference: $180,126


47 Via Barcelona, RSM, 92688
2000 purchase price: $194,000
2007 price: $311,522
Income required: $77,880.50
Asking price: $479,000
Difference: $167,478