Friday, May 30, 2008

Housing Bubble and Bust: A Tale of Three Cities

by Calculated Risk on 5/30/2008 10:47:00 PM

OK, really just one city - but three different house price ranges.

Los Angeles Real Prices Click on graph for larger image in new window.

This graph show the real Case-Shiller prices for homes in Los Angeles.

The low price range is less than $417,721 (current dollars). Prices in this range have fallen 34.9% from the peak in real terms.

The mid-range is $417,721 to $627,381. Prices have fallen 30.7% in real terms.

The high price range is above $627,381. Prices have fallen 22.8% in real terms.

In the recent bubble, the areas that saw the most appreciation are seeing the fastest price declines.

This seems to fit with some new research from David Stiff, Chief Economist, Fiserv Lending Solutions: Housing Bubbles Collapse Inward

During the housing bubble, as home prices appreciated at record rates in many metro areas, housing market activity was pushed outward to distant suburbs and ex-urban areas. Many homebuyers, who could no longer afford to purchase homes close to urban centers, were forced to “drive until you qualify” – trading longer commutes for lower mortgage payments.
...
Because of the reversal in trends that boosted demand for housing in outlying suburbs, since they peaked in 2005 and 2006, home prices have generally fallen more in towns and neighborhoods located farther away from urban centers.
Los Angeles Prices
[Figure] shows the change in single-family home prices from their peak until the second half of 2007 ... for the Los Angeles and Oxnard, CA metro areas ... for 330 zip codes. Between September 2006 and the second half of 2007, single-family home prices in the Los Angeles metro area dropped by 8.9%, according to the S&P/Case-Shiller index. ... the decline in home prices from their peak has had a very distinct geographic pattern. In Los Angeles, this pattern is more complex because instead of having a single “downtown”, the metro area has more than one large concentration of workplaces. Home prices have fallen less in neighborhoods near Los Angeles’ two largest employment centers – West Los Angeles and downtown. ... During market downturns, home prices fall the least in the most desirable areas of a metropolitan region.
But look at the first graph - all three price ranges saw similar appreciation and price declines during the previous bubble. This suggests this bubble was different than the earlier bubble - this time the extremely loose underwriting for subprime loans, boosted appreciation more in the least desirable areas than in the more desirable areas.

So Stiff's conclusion: "During market downturns, home prices fall the least in the most desirable areas of a metropolitan region." will be true in this housing bust, but was probably not true in previous busts. Also looking at the first graph, it appears all three price ranges are close to the same level, and they will probably now start to decline at about the same pace.