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The Bubble Doctor Makes A Pasadena House Call
What is the future of Pasadena Home Prices?
Therefore, I thought I would rebut some of the assertions and defend the honor of our fair city. I realize some of the naysayers will point out the fact that I am a Pasadena real estate broker and therefore subscribe to the National Association of Realtor motto that “It’s Always a Good Time To Buy” campaign and credo of never speaking negatively about the housing market. I can assure you I don’t. Projecting a false sense of optimism to mask reality is not in the kool aid around here.
The Dr. states that Pasadena prices will be coming down late this year and into 2010 due to a several factors:
If 48% own a home, the owner occupied inventory would be at 24,500 units. Pasadena will report approximately 900 home sales this year which represents about 3.7%. So if we use median income as a barometer, it’s safe to say that home ownership is not linear across income levels. Pasadena and much of California have always been expensive housing markets. People in the upper income levels are buying houses, people in the lower income brackets rent. At least they do today.
Now before you minimize my argument consider this: If prices in Pasadena are unsustainable then Beverly Hills must be about to implode. The median income in Beverly Hills is $82,669, with 15,000 households and the median price is well in excess of $1 million.
The argument that local incomes do not support housing prices doesn’t seem to be a good prediction of future housing prices.
Distressed Property in Pasadena Inventory is down and Prices are up in Pasadena Option Arms – as the Housing Bubble states, the “tsunami is building” due to the option arm, which was yet another innovative mortgage product. Business Week reported that California holds about 60% of these loans which are now beginning to reset including higher rates, and higher payments. The presumption being another wave of foreclosures. I don’t see this happening. The current administration is taking a very activist role in usurping the free enterprise system that would allow homeowners and industries to fail. If programs can be designed and customized to aid banks and car companies, can they selectively design programs which would only apply to states with the highest rates of foreclosure? The current programs which have not been very beneficial to Californian’s may just be delaying the inevitable biggest bailout of all. Tags: California home prices, local incomes don't support area home prices, pasadena housing bubble, real estate outlook for Pasadena CA
There have been rumors that banks were going to turn loose of their repossessed property, flood the market and drive down prices. This isn’t happening. It’s also not likely to happen. If you are a homeowner in foreclosure on a second home or investment property, you may be less likely to receive any lender leniency. However if your primary home is in foreclosure, the empirical data I am seeing doesn’t suggest that banks are in any hurry to take the property. Data does suggest that banks are taking as long as 5-6 months after the first payment is late to issue the NOD. Additional data also shows that some properties have been in the auction stage now for 5-6 months. Furthermore banks seem more willing to work with sellers and approve short sales as an alternative to foreclosing.
June 29th, 2009 at 2:49 pm
By my past comments, I’m clearly in agreement with much of what Dr. Housing Bubble has to say.
Your comments regarding median price/median income, comparing Beverly Hills and Pasadena, is a flawed argument in my opinion. The main problem with this is Pasadena is not Beverly Hills. This argument is flawed in that the vast majority of Los Angeles cities have median prices out of line with median incomes. While some cities like Beverly Hills can support this, not every city can support these “unsustainable” median price/income ratios. You might be able to make that argument about South Pasadena, but I don’t believe Pasadena is one of those cities. So the if-Beverly-Hills-can-do-it-why-can’t-Pasadena argument doesn’t work.
With foreclosures, I’m tracking a fairly large volume of shadow inventory. While I don’t see banks flooding the market all at once so as not to put prices in a free fall, slowly they’re dumping inventories which will place downward pressure for years to come. Of course, government intervention is a wildcard, like with Option ARMs, however, I don’t see Obama bailing California housing due to nationwide anger at bubble states. You can see the evidence in his refusal to bail out the state of California.
As far as the brave souls still making offers, they may be out there, but it doesn’t seem like there are many. Look at the late 80s housing bust. There were brave souls still “finding deals” for a couple of years into the 90s even though prices were still falling. Then we saw flat home values until the late 90s and our current bubble. So I’m not sure what kind of a barometer this is.
June 29th, 2009 at 11:41 pm
Hannah,
I think you could apply the income/median price ratio’s to any city in Los Angeles or Orange Counties and make the case that home prices are not based upon average incomes. If that were true, a home in Atlanta should cost the same as a home in a California city, provided their average incomes were comparable.
Also regarding a bailout, it probably would not be a bailout in the terms we normally think of, but rather where the federal government might assume / originate a second at a very low interest rate with very favorable payment terms.
June 30th, 2009 at 11:49 am
Doug,
You sarcastically mention Beverly Hills “is about to implode” but you should be careful of what you wish for. There’s another blog site that is tracking the “West Side” http://westsideremeltdown.blogspot.com and I do think they will implode not far after the Pasadena’s of the medium markets hit the wall. This “thinking” that areas are immune to the rest of the market is the kinds of thinking agents need to be stop selling their clients. There’s an extreme disconnect in home prices, it’s either affordable (low end) or not. The low end isn’t going to be the only market affected, your rebuttal to Dr. HB has little facts. You say “The argument that local incomes do not support housing prices doesn’t seem to be a good prediction of future housing prices.” is pure opinion and the kind of thinking that made people jump into a home they couldn’t afford.
Your offers on a home in the “mid $800’s” is typical agent talk. I’m not saying you didn’t have the offers, but who knows how many of those would’ve been approved? What if the house was really worth $1 million and they wanted a bidding war for a quick sale. Throwing numbers out means nothing without showing the house in question along with comparables. I have no problem spending the money on a house that I think is worth it. My price range for a home will not change as the market drops; I just expect to buy more house in the same area for a better price. There will always be homes worth $800k or $1 million, just because someone thinks their home is worth that today, doesn’t mean it will be worth it 2 years from now.
You mention prices increases and lower inventory, that data is a bit stale. I agree inventory has dropped slightly but the numbers on your chart don’t make sense. Look at the CURRENT numbers (as Dr. HB did). Anyone can do a search on ziprealty.com to find about 300 SFR and almost the same amount of condo/townhomes and some MFR sprinkled in. A price going up is typical for the May selling season, kids are getting out of schools and families are trying to move for the summer. This single month of data is hardly argument for a housing recovery or justifying the high prices.
Dr. HB made the prediction of the bubble bursting years before anyone saw it coming and has strong facts to support his Alt-A and Option Arm tsunami of foreclosures. Unfortunately not all buyers are as informed as the readers of his site (or sites like his). There will always be buyers willing to buy, that doesn’t make it a good time to buy…just look at when people bought at the peak.
-David
June 30th, 2009 at 12:57 pm
I realize Southern California housing has always been higher priced when compared to incomes. So in that sense, I partially agree with your comment about Atlanta. But I think what you are missing is that the disparity between median income and price is currently too far past any reasonable multiplier. I think historically in many parts of the country (non-major Metros), housing is generally 2-3 times income. In places like California, I think it was historically around 4-5 times income. We’re still at a point of 10 times or more of income in many Southern California cities. This is the part that’s unsustainable.
In fairness, Dr. Housing Bubble’s post is missing (though he says it elsewhere) high unemployment, high DTI and low availability of qualified buyers or jumbo loans, which is a problem for your argument that income/price ratio is not a reliable home price indicator. Considering most people are not cash buyers, not to mention most still don’t have sufficient down payments, I assure you banks do care about income and debt in relation to home price.
As for your bailout idea, I worry that something like that may happen. The problem I see with that is that low interest rates and/or favorable payment terms is essentially kicking the can down the road. Many people got into problems with teaser rates and 40 and 50 year loans were just starting to get popular at the end of the bubble. There is a huge risk of re-default and/or the “homeowner” being a perpetual renter.
June 30th, 2009 at 1:30 pm
Just for fun, Jim Cramer has predicted today as the end of the housing bust. Considering his poor predictions, that’s a pretty bad endorsement. Business Insider compiled his poor predictions: http://www.businessinsider.com/cramers-greatest-hits-2009-6#wake-up-bernanke-1
Here’s a link to his prediction: http://nymag.com/news/businessfinance/bottomline/49938/
June 30th, 2009 at 1:43 pm
David,
I am not wishing for anything as you refer to “Beverly Hills”. I was merely addressing the two groups we have in the housing market. The ones that are optimistic who are buying houses and the ones who are pessimistic and who are also much more vocal in expressing their opinion that we are headed for another meltdown.
The pessimists have always referred to unsustainable levels of buying activity by referring back to the inequity that exists between incomes and home prices. My point is that Southern California being a very expensive housing market will always have the disparity known as income and affordability. Also if you look on the charts in which I track Pasadena home prices, you will see that the increase is not limited to one month.
Furthermore you state that a price going up is typical for the May selling season. Where were you in 2007 & 2008? That certainly did not happen then. That is why I am more optimistic, because recent events have reversed two year trends. And the fact is, we can quote previous history all day long, but unless someone’s crystal ball is any clearer than anyone else’s, its all opinion.
June 30th, 2009 at 1:53 pm
Hannah,
Regarding your multiplier of median income. I think there are probably many other variables that would have to be considered such as population growth compared to other states along with employment opportunities. But to suggest that prices and incomes are not equivalent by some multiplier would also suggest that someone moving to California, from some other state in the southeast would expect to earn “x” amount more money would be false. Typically salaries in California do not adequately adjust for the increased cost of living. When you come here you better be prepared to lower your standard of living for the tradeoff you perceive as quality of life. Which seems somewhat oxymoronic.
June 30th, 2009 at 2:37 pm
Doug,
No matter what cities we’d choose to name, the L.A. Times said it best, it’s a “Tale of Two Markets”. There are always going to be lower, middle, and upper class divisions, but the problem is that there isn’t much of a middle class right now. It’s either lower or upper class which is why there needs to be a gap closed. I know there are homes valued in the “middle”, but I don’t think they’re valued properly either.
I agree to a point when you say, “unless someone’s crystal ball is any clearer than anyone else’s, its all opinion”. Unfortunately, there is so much instability and risk, I can’t see the sense in buying anything right now (in the higher end). Unfortunately we’ll only know the facts when it’s all history. You mentioned sales for May and I neglected to see that your chart shows 3 months of data (increasing). However I do see inventory on the rise again. I have also noticed the price jump in Pasadena, I don’t think it’s justified but we’ll see if they can be sustained.
As for “2007 & 2008″ May selling seasons, those are the exceptions as the bubble reached it’s peak and sales across the board plummeted. Although sales are “up” now, I can also argue that they’re no where near 2005 & 2006 numbers. But like you said, we’d be quoting history all day.
No matter what someone’s perspective or opinion, you can’t but be a little curious as to what happens to the rest of the housing market with those record breaking NOD’s for potential foreclosure.
-David
July 2nd, 2009 at 3:00 pm
“But to suggest that prices and incomes are not equivalent by some multiplier would also suggest that someone moving to California, from some other state in the southeast would expect to earn “x” amount more money would be false.”
I’ve never suggested this and would never infer this, to me it’s an illogical assumption. I realize cost of living is higher and wages are not. My point in the multiplier was to agree with your earlier point that many Southern California areas will always be more expensive than elsewhere, however, I disagree that they will remain as expensive as they currently are.
As for considering many other variables, I agree with that and I’ve advocated it here many times. I remember back when you questioned my statement as to why unemployment or underemployment should be a factor in home prices. As for right now, considering how California’s and Los Angeles’ unemployment rate is among the highest in the nation, I don’t see how that will be a positive indicator for home prices for many years to come.
July 3rd, 2009 at 3:17 pm
Maybe income did not matter so much when the no documentation loans were all the rage but
I don’t know where anyone is going get a loan today for ten times their annual income.
Prices in the Pasadena area remain many times what comparable homes are selling for in
areas only 30 or 40 miles away so anyone who does not need to work here can
buy a lot more house within easy driving distance.
I have been seeing more houses coming on the market and many with price reductions so
I don’t see how anyone can claim the “botton” has been reached. Also many
previously “sale pending” listings are showing up as “back on the market” because the
buyer couldn’t get the mortgage, possibly because their income was to low.
July 6th, 2009 at 5:18 pm
I understand that there are about 1500 tax leins on Pasadena
properties which is a lot more than the current number of
foreclosures. How do these tax leins affect the market since they
can prevent sales from occuring?
Do tax lein homes qualify for the government refinancing programs
and if so who pays the back taxesI am really curious about this because I never hear
tax leins mentioned in the reporting on the housing crisis but
obviously a huge tax bill could severly limit the ability of a cash-strapped
homeowner to make their mortgage payments even with a new loan
and payment amount.
July 15th, 2009 at 12:55 am
Well, let me step back and quote some facts from way outside of Pasadena. I recently met with the folks who post the Notice of Defaults in the Central Valley, such as Fresno, Visalia and Bakersfield
( and I did say way outside, right)and they noted that they were informed that NOD will double in filings as of Sept 2009 and the volume of posting will just increase from that point. I have also been informed that about 500 to 550 REO homes were pulled off the market in Tulare and Kings county. It was also confirmed that REO was pulled off the market in Kern County. In all these areas, agents have confirmed that inventory is tighter in the last 3-4 months, and that they are seeing multiple offers on homes, with pricing starting to increase. The market is being controlled
by the supply that lenders are allowing at this time.
Does this appear to be the exact same market changes or manipulations as in Pasadena? You can tell me. I’m just citing some news from outside the city.
I have also noted that prior loan modification clients are falling behind on their agreements and may be forced into foreclosure in the next 3- 6 months as they race to keep up with their payments, yet their incomes have been either cut by 50% or decreased by 20-30%, with state and corporate budget cuts. If they default on their loan modification, then add that inventory to the list.
I have heard of other loan modification and short sale clients who are into the process about 6 – 9 months now, and some with no concrete answer from their lender. They are, in essence, on hold until further notice. In fact, I have one client who was denied for a loan modification due to lack of income for a new lower payment two times, and Bank of America issued another letter asking him to try again. He is, this time with another family member to bump his income up more to qualify. Yes, this is a strange one but they have asked him to reapply. No foreclosure yet. In all these cases, I have noted a backlog of short sales, and loan mods, that will come due soon — the concern is when will this actually happen, after Sept 2009, as indicated by the agents posting the NODs?
Then, add the Alt A and Option Arm loans that will come due. That is a fact. IndyMac Bank not only issued billions of Option Arms, but they also issued Stated Income loans on commercial and multi-family properties. That sector of the market will soon be hit hard from defaulting owners. But that is another topic for another day.
So, as I see it, the inventory of soon-to-be-foreclosure will hit the bank and filter back onto the streets as REO. The question will be how will this pending build up of REO inventory aid in supporting higher prices in homes in Pasadena or Beverly Hills? This question is based on the assumption that the same fact patterns are evident in Pasadena. Posters can inform me if you have REO pulled off the MLS, slight bump in prices, a bidding war on homes, loan mods that are taking 6-9 months for any type of answer, declining income, longer short sale deals, and people who bought homes based on a 1% teaser rate that will soon find themselves way under water, and with a payment 3x the basic interest only payment?
If a portion of these issues are true, then you should see an increase in REO in the next 6-12 months. That appears to be correct, from what I have outlined. I may venture that the Banks/Lenders will manipulate the market once again (and they do since they are the dominant seller at the moment)for another bump in prices for the Summer of 2010 if they hold back inventory in March-April in preparation for the Summer selling season.
Thus,I may be way outside Pasadena ( and I admit it) yet some of these patterns are evident all over the state if you talk to enough agents/brokers, appraisers and, most especially, the person who posts all those NODs and NOTS on the doors.
July 17th, 2009 at 12:45 am
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