Big Housing Players Turning Bearish

Submitted by Rich Toscano on February 27, 2006 - 10:13am

Thanks to a reader who pointed me at a Business Week article called Jitters on the Homefront (warning: this is BW subscriber access only). The article interviews famed housing bear Robert Shiller along with Countrywide CEO Angelo Mozilo and KB Homes CEO Bruce Karatz. Shiller's thoughts are no surprise, but I was pretty shocked by the bearishness of the two CEOs, especially Mozilo. Here is a brief excerpt; emphasis is mine:

How severe are the price declines you are expecting?

MOZILO: I would expect a general decline of 5% to 10% throughout the country, some areas 20%. And in areas where you have had heavy speculation, you could have 30%...

SHILLER: In Los Angeles in the last cycle, prices peaked in 1989 and bottomed out in 1997. In that interval, L.A. lost 40% of its real value. I can see that happening there again or in any of the cities that have had tremendous price increases, and there are quite a number of them in this country. I think a pullback of as much as 40% is plausible in many places.

The fact that the CEO of the nation's biggest lender is calling for a 30% home price drop in some areas is not a bullish development.

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Submitted by PorkmanDelardo on February 27, 2006 - 6:36pm.

In my opinion, residential property in San Diego is way over-valued and primed for a steep drop. I agree that a 40% pull back is within reason. I sold a 600 square foot condo in 2000 in Normal Heights for 90,000. The buyer resold 2 years later for 180,000 and it sold again recently for 280,000. This was a tiny, closet sized, apt conversion with a one car garage and a small 4 X 10 patio. All I did to dress it up, was to reface the fireplace with faux river rock.
My point is that the run up of prices is unrealistic and not sustainable. I would never want to pay over 100,000 for a tiny condo with no amenities. However, I think prices could drop to this level again. Porkman

Submitted by Bugs on February 27, 2006 - 9:06pm.

A 40% drop in values in a market where the average price is less than $200k - as it was in 1991 - is bad, but at that price range a seller has a couple options, like renting or selling short (with the lender's cooperation). Worst case scenario, a wage earner who is forced to sell and book the loss can recover from such a loss without going into bankruptcy.

I think what's different this time is both the sheer dollar amount of the potential losses and the increased liklihood of forced sales because of the abuse of the financing. A 40% loss on a $600k home is $240k, which is an amount a wage earner here in SD County could probably never recover from without going into BK. I don't even know that most folks could financially survive a 20% hit at these prices.

Submitted by 4plexowner on February 28, 2006 - 7:58am.

People are talking about declines of 20% or 40% as if the decline will affect all housing equally.

What is more likely (and what I'm planning for) is that the GOOD stuff (west of I-5, views, prestige areas, etc) will decline by 20-30%, the AVERAGE stuff (bread-and-butter housing in Clairemont, North Park, Mira Mesa, etc) will decline by 40% or so and the TRASH won't sell at all or will be available for dimes on the dollar.

Any guesses as to which category a 600 SQFT condo falls into?

Property that won't sell becomes rentals. I'm expecting the rental market to be affected by lots of condos becoming rentals over the coming years.

Submitted by powayseller on February 28, 2006 - 9:09am.

Makes sense, if the increases were varied by good/average stuff as well. Were they?

Submitted by barnaby33 on February 28, 2006 - 9:58am.

I have heard this argument before, during the last crash. There is a problem with that line of reasoning. If its true then over time good/prestige areas would leave all other areas behind. They jump up first in a boom and collapse latest/the least in a bust. This hasn't seemed to be the case (Price divergence over time). It seems that the premium people pay to live in these areas is some sort of function of how available housing is elsewhere that suits their needs. Most people want to live in La Jolla/Del Mar etc if all things are considered equal. They don't because they can't afford it. So it seems to me that the real question of prices in those areas comes down to how this will effect the top income earners and the wealthy. Its safe to surmise from your last post that you think in this recession they will fare much better than the rest of the sweating masses.


Submitted by Californiabrownbear on February 28, 2006 - 12:13pm.

It's merely anecdotal evidence, but I had to run home for lunch today and it's pooring rain on a Tuesday at 10:15am and a realtor down the street is holding an open house!! Has anyone seen an open house on a Tuesday morning? They've overpriced the house and it's been on the market for months, but she's placed signs all over the neighborhood like it's a Sunday afternoon.

Submitted by Farls on February 28, 2006 - 5:35pm.

I think the drop in housing values would be across the board...It's a chain reaction. If the entry-level condo declines in value then that owner cannot sell and move up to a better condo or entry-level house unless that segment is coming down too... The entry-level home-owner can't sell and move-up to a bigger house....Then the bigger house owner can't sell and move to an even bigger home or more ideal location...and on and on...

Ideal locations can still be hit hard....and yes, rich people can lose money too. (Here's an interesting example...although not from San Diego)I had a real estate license in Hawaii a several years ago and was researching the tax records of oceanfront property in Maui...and found a house that Magic Johnson had previously owned (and sold during the last decline) oceanfront.....He sold it for $800K less than he bought it...about a 40% decline at the time.

Regarding the Tuesday open house...It's possible that's the time of the weekly neighborhood brokers caravan. If the house has been on the market for a long time and the listing is about to expire the agent may be trying anything to show the homeowner he/she's working. (When in reality all that really matters is the price of the home. EVERY home if priced properly for its condition and location is salable). Also....there's a saying something like.. "See what everyone else is doing...and do the opposite". So, a Tuesday open house is really not a bad idea because chances are the agent wasn't doing anything at that time anyway. Maybe he/she will meet a neighbor who may want to sell. ( open houses agents aren't really expecting to sell the house...They are typically fishing for new clients...either neighbors wanting to sell...or buyers).

Sorry for the rambling.....

Submitted by powayseller on February 28, 2006 - 5:42pm.

Farls - don't you think that more desirable neighborhoods hold their resale value a bit better? By the same token, if they went up 60% vs. 40% rise in Clairmont Mesa, they have 54% to fall, vs 36% in Clairmont Mesa, or something like that.

My Help-U-Sell broker, a realtor since the 1970's, told me it's a little secret that only 3% of house sales result from Open Houses. I bet too that the realtor was just trying to show her client she was working hard. In the spring of 2000, when prices were really going up quickly, a realtor had an open house every day for months, trying to sell his parents' house in Escondido. It was priced too high, but did sell for the price they wanted due to its uniqueness. Open Houses, as well as listings, are opportunities for a realtor to make new contacts.

And Farls, don't apologize for rambling. I learn so much from people like you, who have seen past cycles and are more knowledgeable than me.

Submitted by Californiabrownbear on February 28, 2006 - 9:00pm.

Interesting take on the Tuesday open house. Our realtor told us the same thing about 3% of homes are sold via open houses.

Submitted by peterm on March 1, 2006 - 10:27pm.

LA area prices dropped 40 % in real value from 1989 to 1997! That should be a chilling wake-up call to the LA Market, which has to be one of the areas at biggest risk of a market downturn. Main reason is that the LA county $53.000 average/median household income is 1/10th of the $500,000 +/- median home price. The disparity between household jobs/income and home prices is greater here than anywhere. Probably vast majority of recent LA homebuyers got into market as subprime borrowers using adjustables, i/o's,100 financing, stated inc. Except in the westside entertainment sector, there is not a lot of high-paying jobs in LA which can support the outlandish $500,000 mediam home. If anything, the recent buyers here have been ethnic immigrants, who pack 3-4 families together in order to afford the mortgage. Many of these novice homeowners will go bankrupt, sell at a loss, or just walk out next 2 years. Another note: LA is not that desirable to live in despite the weather. Nasty traffic, rampant criminal gang activity, illegal immigration , heavy-duty truck traffic, ect all have a negative impact on quailty of life here which is why i believe that LA home priceS WAY OVERVALUED!! how much? 30-40 %.

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