UCLA economist Christopher Thornberg, who is one of the most pessimistic of the real estate analysists, concedes that local home prices aren't likely to fall this time around. "We're not due for that kind of collapse," he says. Prices will probably flatten by year's end, he predicts.
Four years ago, the median was half what it is now. By doubling in such a short period, it's no surprise that Los Angeles County is considered to be one of the most overvalued home markets.
To buy a house at the median price, a household would need an annual income of at least $120,000 to qualify for conventional financing with a 20% down payment. The county's median household income is only about $47,000. High prices and low affordability have raised concerns about a repeat of the last time the Los Angeles real estate market went cold. After a boom in the late 1980s, Los Angeles County home prices fell nearly 20% between 1991 and 1996.
Economists state that the huge loss of jobs due to defense cutbacks sparked the early-1990s real estate collapse. That situation is not likely to occur again, since the region is no longer dependent on any one industry.
There also has been much less home building here than 15 years ago, so builders aren't sitting on large amounts of newly built homes that they can't sell. In addition, mortgage rates are much lower then they were in the 90's.
Hopefully homeowners have learned a few things about the market since then as well. Especially that a slowing market is not cause for panic. When the market slows, many just won't sell.
Still, some people think that history is starting to repeat itself with the number of homes being sold slowing down while more homes are coming on the market. In March, about 9,800 homes were sold in Los Angeles County, a 10.3% decline from the same time period in 2005, and the fifth straight month of declining sales.
Thornberg states that "Prices are still going up, because they always go up even when the market starts to cool," he says. "It will take six to nine months for a cooling market to start to see lower prices. It happens time after time."
Leslie Appleton-Young, chief economist for the California Assn. of Realtors says, "Inventory is definitely up, but it's not swamping the market".
But while more homes are on the market, it's not necessarily a bad sign, other analysts say. This February there was only a 7.2 month supply of homes for sale. And prices were up 3% from the month before.
According to Appleton-Young, in February 1991, at the start of the last real estate downturn, there were so many homes for sale in Los Angeles County it would have taken 28 months to sell them all. Layoffs in the defense industry layoffs forced many people to sell their homes because they could no longer afford the mortages. "Homeowners had to get out at any price," she says.
It appears that a large percentage of homeowners may be testing the waters to see what price they can get for their homes. They'll sell only if they can get the price they want, and otherwise they'll just take their homes off the market. This means that there will be more homes on the market for longer periods, but without any widespread price reductions.
This is obvious in some Santa Clarita neighborhoods where homes are being listed at prices well above the last sales price for the area, sometimes as much as 25% higher. Wishful thinking on the part of the sellers doesn't translate into buyers who will be willing to pay those inflated prices!
As in any market, the buyers will pay what they consider to be a reasonable price for a home based on current market conditions. They are doing their research, and so should the sellers! |
