How Low Will Prices Go?

Updates, March 31:

1. We wrote this post four months ago, & the passing of time has only proven our point. We think it’s as relevant today as it was when it was written.

2. We now have a direct link from our blog into the So Cal Multiple Listing Service’s database of currently available homes, so you can check prices on listings in your neighborhood at the speed of light. It’s in the column to your right, under “Great Links.” The So Cal M.L.S. covers most of Orange County and Southeast Los Angeles County. We are working on getting additional direct MLS links as well.

Yesterday (11/27) the Los Angeles Times front page asked “Homeowners’ big question, How low will prices go?”

Today, they gave us a partial answer: “L.A., O.C. home prices decline sharply.”

We’ve got a better answer: “Nobody knows.” We first heard it at the California Association of Realtors’ economists panel in Anaheim last month. It came from Frank Nothaft, chief economist at Freddie Mac, as he was discussing how low prices would go and when things would turn around: “We just don’t know,” Nothraft said. “We’re in totally uncharted territory.” His point being that the problems brought on by sub-prime lending make this “correction” a new animal.

In a way, however, Northaft was just restating the conventional wisdom regarding any market’s cycles: “They don’t ring a bell when it hits the bottom. Or the peak.”

The concensus seems to be we’ve got 1 – 3 down years ahead of us, more if a major recession hits. Most economists also predict that Southern California real estate will take a bigger hit than the national average, just as we went up more. Prices are predicted to “correct” between 15% and 40%, with most economists in the 20% to 25% correction range. Maybe worse for outlying areas like the Inland Empire or Palmdale, and for entry level condos everywhere.

Having a bit of a contrarian nature, when everybody gets on the recession bandwagon, we start thinking about getting off. To be honest, we’ve already seen price corrections of as much as 20% in Lakewood, Los Alamitos, parts of Long Beach and Orange County and some other markets we serve.

That’s from peak to current low, and it’s comparing like homes (similar location, size, & condition), not the almost useless median selling price that takes comparing apples with oranges to an insane new level.

With interest rates dropping again and prices already down, we wouldn’t be surprised to see prices start moving upward this coming February. But we wouldn’t be surprised if they kept dropping as well. (We’re talking about prices on homes going into escrow in February, not closings. So the increase that may come this February would show up in March or April closing statistics.)

Why don’t we know? “Uncharted territory.” Too many variables: interest rates are dropping, prices have dropped, but more foreclosures are coming, and Congress may be making the “liquidity crisis” worse with the House’s proposed “reform” bill. We just don’t know. Nobody does. If they say they do, they’re either lying or deluded, or God.

What to do when nobody knows when we’ll hit bottom? That’s in the post which follows this one, (”What to Do When Nobody Knows What’s Next”).

3/31 update: Nobody knows what’s next, but that doesn’t stop us from making our best projection, which we try to update regularly as needed. For our latest projection, click here: “What’s Next for So Cal Housing?” For a recent example of unanticipated surprises in the housing crisis, see “Pragmatic White House Ready to Help Out?”

On a more uplifting note, you might also want to check out “A little perspective.”