Which Way Will LA's Housing Prices Go?

[* SEE UPDATE BELOW]

DataQuick News reported today that housing sales in Southern California for July 2006 dropped to their slowest pace in nine years. In addition, it reported the rate of price appreciation also dropped, hitting its lowest level in almost seven years.

July now marks the eighth consecutive month that year-over-year sales comparisons in the Southland have shown a decline.

Marshall Prentice, DataQuick's president, said in the story on DataQuick's website:

"The relatively large drop in sales last month may be nothing more than a statistical blip, but it could also be a sign of fast-petering demand for homes at today's prices [...]"

Last month the CEO of the nation's largest mortgage broker, Countrywide, suggested the more dismal possibility. Said Countrywide Chief Executive Angelo Mozilo in a July conference call as reported by the Los Angeles Times:

"People are overly optimistic about this 'soft landing' as to real estate values."

[See blog post: 'Overly Optimistic' on Housing Slowdown?]

Robert Toll, chief executive of the luxury home builder Toll Brothers, sounded similarly discouraged, a marked change in the outlook he'd previously expressed. As the LA Times pointed out in its piece (published Aug. 10, 2006), "Toll had been among the industry's bulls, saying as recently as last spring that real estate would rebound later this year."

Said Toll to the Los Angeles Times:

"It appears as though [the slowdown] will last for at least six months more, it may last for two years more. We don't know."

It remains to be seen whether any of these factors and opinions portend a major or minor change in the housing market. Reports like these have been appearing for the past couple years of this market and yet the cost of housing has continued to rise.

The law of gravity may prove an apt metaphor for slowing sales momentum amid price increases, but the comparison has to stop there. What goes up in real estate may slow as it approaches its apex, but it doesn't necessarily fall back to where it started. Whether this market levels off, drops or begins to climb again is, at best, someone else's educated guess.

Below is a list of relevant reports and factoids:

• $128,000 INCOME NEEDED

… In November 2005 the California Association of Realtors reported that an annual income of nearly $128,000 was needed to purchase the median-priced home in the state *(the median price is now higher). CAR said:

"California households, with a median household income of $54,140, are $73,810 short of the $127,950 qualifying income needed to purchase a median-priced home at $545,910 in California."

CAR said its figures were calculated assuming a 20 percent downpayment.

I've searched the CAR website for more recent "Homebuyer Income Gap Index" reports, but the site's search engine returns none. Likewise, I could find nothing on the site to explain why they might have stopped doing these reports, nor do I know for certain if they have stopped.

• 21 OF 25 LEAST-AFFORDABLE CITIES IN CA

… The California Building Industries Association reported in May 2005 that California was home to 21 of the top 25 least-affordable metro areas during the first quarter of 2005.

• LESS THAN 12% CAN AFFORD HOME IN LA

… About 14 percent of the households in California make enough money to afford the median-priced home (Source: California Association of Realtors February '06 report):

Los Angeles:
12% Dec '05… 11% Nov '05… 17% Dec '04
Orange:
10% Dec '05… 11% Nov '05… 13% Dec '04
Riverside:
16% Dec '05… 17% Nov '05… 18% Dec '04
San Bernardino:
20% Dec '05… 21% Nov '05… 26% Dec '04
Ventura:
13% Dec '05… 13% Nov '05… 16% Dec '04

• OVERCROWDING

… An Associated Press analysis of US Census data revealed that more than 15 percent of CA households were overcrowded in 2000. Among rental households, the figure was higher, about 24 percent statewide, with some communities hitting 30 percent.

• NOT ENOUGH APARTMENTS

… California isn't building nearly enough apartment buildings. The state Department of Housing and Community Development sited this in its February report titled "California's Deepening Housing Crisis [ PDF file ]," which said:

The greatest production gap is in multifamily housing. Multifamily development only accounted for approximately a quarter of all new units during the 1990s, a drop of nearly 70 percent from the levels of the 1980s. Since 2000, the number of multifamily units has increased slightly, totaling approximately 28 percent of all new units constructed.

• MEDIAN PRICES EXCEED HALF MIL

… Median prices for Greater Los Angeles in June 2006. (Source: CAR):

State of California: $575,800
County of Los Angeles: $580,140
County of Orange: $725,190
Counties of Riverside and San Bernardino: $400,390
County of Ventura: $707,690

• MEDIAN PRICES RISE IN JULY '06

… Median home prices for Greater Los Angeles in July 2006 (Source: DataQuick):

County of Los Angeles: $520,000 (+6.6% from July '05)
County of Orange: $639,000 (+6.3% from July '05)
County of Riverside: $414,000 (+7.5% from July '05)
County of San Bernardino: $366,000 (+11.6% from July '05)
County of Ventura: $634,000 (+9.5% from July '05)

San Diego's median home price of $487,000 (-1.8% from July '06) was the only year-over-year decline in Southern California for July.

• HOME SALES SLOW IN JULY '06

… The number of homes sold in July '06 in Greater Los Angeles (Source: DataQuick):

County of Los Angeles: 10,711 (-24.9% from July '05)
County of Orange:4,341 (-36% from July '05)
County of Riverside: 5,762 (-23.3% from July '05)
County of San Bernardino: 4,084 (-21.3% from July '05)
County of Ventura: 1,406 (-36.9% from July '05)

The northernmost and southernmost coastal SoCal counties (Ventura and Orange) posted the worst year-over-year stats for July.

• FORECLOSURE RATE INCREASES

… The foreclosure rate in California during the second quarter of 2006 rose faster than it has in 14 years. [See blog post: CA Foreclosures Spike Fastest In 14 Years] (Source: DataQuick)

• PUBLIC HOUSING FOR LAWYERS?

… The city of Santa Barbara is considering affordable housing for people with an annual income of up to $160,000. The move is an effort to combat the housing crunch in that community, where the median housing price is a startling $1.2 million. (Source: LA Times).

• CA HOMEOWNERSHIP 3RD LOWEST IN US

… The US Census Bureau said California in 2004 had the third lowest rate of homeownership in the nation with 58.6 percent of households being owner occupied. The national average that year was 67.1 percent. The rankings are at the Census Bureau's American FactFinder website. Right behind LA were New York City and the District of Columbia.

• LARGEST SINCE DEPRESSION

… California now has the largest homeless child population at any time since The Great Depression, according to the Department of Housing and Community Development, which said as much in its February report [ PDF file ]. DHCD estimated there are 360,000 homeless people in the state. The California Housing Law Project then took that data, factored that about 1/3 of the homeless population are families, and deduced using average family size that there are probably 80,000 to 95,000 homeless children.

[* UPDATE: LA Times story Wednesday, Aug 16, quotes Los Angeles philanthropist and KB Home founder Eli Broad saying "I think we're in for a period of a year or two years where housing prices are going to go down or stay stable, but certainly not go up." Same story quotes DataQuick analyst Andrew LePage saying "current trends suggest that the market is heading into a lull."]


Email