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Tuesday, November 27, 2007

LA Times: How Far Will House Prices Fall?

by Calculated Risk on 11/27/2007 01:35:00 PM

Peter Y. Hong at the LA Times writes: Homeowners' big question: How low will prices go?

Case-Shiller Home Prices Click on graph for larger image.

The LA Times article focuses on California. This graph shows the Case-Shiller home price index for several selected cities. If SoCal prices fall 25%, then prices in other areas - like Miami and Las Vegas - will probably decline a similar amount. These are nominal prices, I'll have more on Real vs. Nominal prices later today.

From the LA Times:

No one knows how severe the slump will be, but economists and real estate experts interviewed by The Times, and who were willing to make predictions, said prices could fall 15% to 25% before turning back up.

Most said values would continue falling through at least next year, and some thought the market wouldn't reverse course until 2010.

That could translate to big declines for home buyers who bought at the peak of the market, which various measures place in late 2006 or early 2007.
Some analysts, including UC Berkeley professor Kenneth Rosen, believe the severity of the downturn will vary by region.

Areas such as the Central Valley and the Inland Empire will be the hardest hit, he said, because these attracted a higher percentage of new buyers with shaky credit, and many of them are now defaulting on their loans. He believes values in these communities could fall by 15%.

But "in areas where there is very little new housing, where it's hard to build and a lot of wealthy people live, there will be little decline or maybe none at all."
But others call this wishful thinking, saying low prices eventually work their way to even the most affluent areas.

"Every place takes the hit in the long run," said Christopher Thornberg of Beacon Economics, a consulting firm in L.A.
[Edward E. Leamer of UCLA's Anderson Forecast] and Thornberg are among the most bearish of analysts, saying the recently ended housing boom pushed prices out of sync with incomes.

Los Angeles County median home prices are about 40% to 50% higher than the median income justifies, Thornberg said. He said the market would settle when prices and incomes became more closely aligned.

"Southern California prices will fall 25% from their peak and won't find their bottom until the end of 2009," Thornberg said.

Leamer also sees a drop-off at the high end of the range -- 20% to 25% -- and sees the downturn lasting into 2010.