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November 17, 2005

Are the headlines ahead?

Chris Palmeri

A headline on the front of today's Los Angeles Daily News caught my eye. "Housing sales finally slowing," it said. It almost sounded like relief. The information in the story wasn't necessarily discomforting for home owners. The paper said home sales in LA's San Fernando Valley had dropped 16% in October. Prices though were up 26% year over year to $600,000. One of the complaints I often hear is that the media creates trouble that isn't really there. Maybe the Daily News' headline was leading a little bit in the direction the paper's editors thought it should. I think the surge we've seen in real estate prices wasn't created by sensational headlines however. If anything the media was kind of late in reporting on the phenomenon of the housing boom. Home prices climbed more because of word-of-mouth, cocktail party chatter. Published reports of surging prices added fuel to that already lit fire. I'm not sure if dramatic headlines like today's Daily News will cause prices to fall. They may. Or maybe they will only reinforce what people are thinking--and the market is doing--anyway.

09:45 PM

Bubbles

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you said: Home prices climbed more because of word-of-mouth, cocktail party chatter...........

I disagree (in part ) while word-of-mouth may have contributed some, I believe toxic Stated income Interest Only Mortgages are the culprit. Stated income mortgages have made every questionable borrower in the US able to purchase a home (or multiple homes) that they cannot afford. Monopoly money! Now any Joe Blow can own a piece of Park Place. If prices go down and rates go up to where they can no longer afford it........they can hand in the keys and walk.

Posted by: OC Consultant at November 17, 2005 10:47 PM

The Daily News piece is the first article I've seen in local California newspapers that presents an honest picture. That is, it points out that the downturn that is now undeniable is far greater than the typical "seasonal" downturn. The CAR/NAR controlled content of the LA Times Real Estate section will try to spin it as seasonal for a while, until it's too obvious that the bubble is deflating. The New York Times ran a leaving California piece a week or two ago and profiled a couple that traded in their CA mountain of debt for a mansion and a stay-at-home mom lifestyle in Kansas City. A quick check of one way rental rates on the U-Haul site confirms that the one way rates from LA to Dallas or KC are about nine times as high as the rate from Dallas/KC to LA, confirming that U-Haul is having a hard time keeping trucks in LA. Indeed, anyone with kids would be insane to stay in California when they can cash out their equity (if they hurry), take a small pay cut, and live like royalty in a great school district in one of the states without the huge budget deficits that will be hitting them where their kids study. This was approx the state of affairs after the 1990 bubble burst, but one must remember that in 1990 the affordibility index was 14% with 30 year loans at 11% and back then Interest Only loans and option ARMs were no more than tools for professional investors and not ways to sell middle class people mortgages they cannot possibly afford if any one of several inevitabilities occurs. Now interest rates on regular loans are clearly and obviously rising and those financing schemes account for 2/3s of loan originations in Southern Cal and this bubble bursting is going to make that one (house prices in West LA declined 40% over 6 years) look like a hiccup. The common CAR/NAR spin on this comparison is to say that the 1990 bubble burst because of the defense industry downturn, but there are many more jobs in the mortgage/construction industry that are about to be lost or moved to other states now than there were aerospace jobs in 1990.

I also own property in Europe and the more I see the more I believe the Economist article of last June 16 that said the RE bubble was global and represented the biggest asset bubble in history. A lot more will be lost in real estate in the coming years than was lost in the NASDAQ meltdown of 2000.

Posted by: DaveinCA at November 20, 2005 07:51 PM


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