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Why Home Prices Fall More in Low-Priced Neighborhoods

Posted by: Chris Palmeri on March 19, 2009

A couple of days ago I published stats on the Southern California housing market. An exec with research provider MDA DataQuick noted that median home price numbers are skewed because homes far away from the metro areas are selling at distressed, foreclosure prices. While homes in more expensive urban areas aren’t selling at all.

I’ve got some more specific numbers from HomeData Corp. that expand on and further illuminate what’s going. In Lancaster, Calif, 72 miles north of L.A., prices in February fell 59% to a median price of $118,000 in the 93535 zip code, based on 87 sales. In Beverly Hills’ famous 90210 zip code, prices fell only 4% in February to $1.9 million, based on just 6 sales.


Of course it’s not just commuting distance that impacts prices. In L.A.’s tony Brentwood neighborhood, home to Arnold Schwarzenegger and countless celebs, prices fell just 10% to $1.7 million, based on 3 home sales. In gritty Compton, an area famous for celebrities of a different sort—gangster rappers, prices fell 62% to $140,000, based on 19 sales.

So what’s happening is more homes in low-priced neighborhoods are getting foreclosed on and sold. I’m sure many people in those more rarified zip codes are up to their necks in debt and have seen their earnings pinched, but somehow if you’re able to borrow $1.7 million in the first place, you’re able to figure out a way to hang on to your home.

Reader Comments

The Mad Hedge Fund Trader, San Francisco, CA

March 20, 2009 2:50 PM

I am more convinced than ever that real estate has another 25% to fall, and best case, it is dead money for another five to ten years. The New York Times produced some insightful data on inflation adjusted home prices for the last 120 years, which baselines at a $100,000 for a single family home in 1890. Few people realize how superheated the recent real estate bubble really got. Past bubbles very consistently peaked at $125,000 in 1896, 1979, and 1989. This last one peaked at $205,000 in 2005, almost double the previous record highs. And while we have dropped 34% since then, to $135,000, we haven’t even fallen to the past all time highs yet. If you look at historical lows, my call for a further 25% slump looks positively bullish. We saw lows consistently around $66,000 in 1920, 1932, and 1942. Postwar lows came in at $105,000 in 1976, 1983, and 1996. These figures suggest the best case low is down a further 28%, and the worst case is down another 51%. I think I’ll go find something else to trade.


March 21, 2009 12:21 PM

You have to be careful how you interpret changes in median sale price. Example:

Year1 3 sales: a 1,000 s.f. home for $100,000, a 2,000 s.f. home for $200,000, a 3,000 s.f. home for $300,000.

Year2 3 sales: a 2,000 s.f. home for $200,000, a 3,000 s.f. home for $300,000, a 4,000 s.f. home for $400,000.

The median sale price went from $200,000 in year 1 to $300,000 in year 2 but a 2,000 s.f. home still sold for the same price in both years.

Maybe these data sources control for the mix of houses that sold but you don't say in your blog.

Without controlling for type of houses sold the change is an indicator of the amount of house buyers can afford to buy rather than an indicator of home values. Of course this does affect values, but not necessarily by the amount of the change in median.

leanne finlay

March 31, 2009 3:43 PM

Why do lower priced real estate properties lose more value than higher priced ones? I think it depends first of all on which lower priced real estate neighborhoods.

During the past 8 years, more new construction sprouted up in outlying areas, at far too high of prices than what made sense. While it makes sense for the close-in "hot" neighborhoods to increase higher/faster than the outlying neighborhoods, that didn't happen. In far too many cases, the shiny, new construction homes/condos sold for the same price as their close-in cousins, proving once again, that location is critical.

Another obvious factor is that most lower prices properties sell to people with little savings. If they lose their jobs, they have little to fall back on. As the real estate markets crumbled, the rise in unemployment caused both further price deterioration and higher unemployment.

What a mess.

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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