Wednesday, December 31, 2008

Manhattan Beach-Beach Cities Real Estate: Good-Bye to 2008...Hello 2009

In just a few hours 2008 will be gone. I don't think many will be sad to see it go. No one has escaped unscathed from the financial and economic turmoil of 2008. Our local Manhattan Beach-Beach Cities real estate market has certainly been adversely affected by the disruption to the economy. While we have fared better then other communities in Southern California we have not escaped the problems that affect California real estate.

In our little slice of Paradise prices are down in all the Beach Cities and sales volume is lower then last year at this time. Interest rates have dropped, but jumbo loans( $625,000+), with few exceptions, are still at high interest rates when compared to overall rates. This is a real problem in our Manhattan Beach-Beach Cities real estate market with median prices in most of the Beach Cities over the $625,000 hybrid conforming level.

While conforming rates are lower then at any time since 1971, the requirements to obtain a mortgage are probably stricter then they have been in the last 25 years. It is a bit ironic that lenders who gave loans to anyone who could fog a mirror are currently refusing loans to people who are are well qualified for sometimes inane reasons. As with all things in the financial community... this too will change.

There is a lot of speculation about what will happen in the Manhattan Beach-Beach Cities real estate markets in 2009. While there are those who are predicting a complete collapse in housing with markets returning to 1990 levels, most of us who have lived here for a long time are not quite so pessimistic. We have seen these market dives before and will no doubt see more in the future. If the recession gets worse then we could see more problems but so far we seem to be holding up fairly well. Could that change... of course it could. The market may be slow but it hasn't died.

Thoughts on the housing market of 2009 in the South Bay- Beach Cities.....

Consumers will exercise more discretion in spending. Buying a home will once again be about shelter rather then a short term investment where you expect the value of your home to double in 2 years. 25 years ago an entry level home was not a new 4000 sq ft home in the tree section of Manhattan Beach. People bought small older homes and worked their way up to big new homes over years. I think we will see a return to consumers buying below their means rather then above.

Foreclosures continue to be on the low side in the Beach Cities. Interest rates are at their lowest level since 1971 which means that many of the loans that will be resetting may do so at rates that will not be a problem for owners. Inventory continues to be much less then many had anticipated. As of today there are 507(total) homes and townhomes for sale on the MLS in the Beach Cities.... Manhattan Beach((178), Hermosa(78), N. Redondo (85), S. Redondo (124)and El Segundo(42). While you can expect the number of homes on the market to increase in the spring, we would need to see the economic crisis worsen considerably in the South Bay to create a scenario that dumped vast numbers of homes on the market. This doesn't mean we won't continue to see prices moving downward... we will. It just means we probably won't see massive numbers of foreclosures and the devastating loss in value that happened in the '90's as long as the employment situation in the South Bay remains fairly stable.

The new Administration seems committed to stabilizing the housing market. The question is whether or not they will be able to do what the old one couldn't... namely bring stability back to the financial sector by buying up toxic assets and creating jobs with programs like the old WPA? If they can accomplish these goals without inflation rearing it's ugly head then the South Bay-Beach Cities real estate market may just squeek by with a minimal amount of problems. Once again only time will tell what awaits us in the future...




mookie said...

Kay - I appreciate your comments and the willingness you state your projections for 2009. While I don't agree with all of your thoughts, I like the fact that you are sharing it with a wide audience. I also like your comments related to the current interest rate environment and the availability of credit to buyers. As you state, sure, rates are low, but few in the South Bay are using conforming loans and the ease of access is as difficult as its been in 25 years. Imagine how difficult it must be for Jumbos...

One point I'd like to opine on is your comment that says "if the recession gets worse." Well, is there really any doubt that it will? Seriously, just read the economic numbers that come out weekly/monthly. Retailers just went through the worst season in years, the ISM data that came out to day was the worst in 25 years, unemployment is rising quickly and will rival early 1980 numbers at some point. Is it really a question of if?

As you state, with people living below their means, the savings rate increasing, and job insecurity increasing, that will put plenty of pressure on home prices in 2009. No, there won't be a crash in MB, but 10%+ is a very reasonable assumption. I'm more bearish, but saving 10% is hundreds of thousands of dollars for somebody who typically moves to MB.

Kaye Thomas said...

The current economic crisis is bad but nothing like the economic situation we saw in the 1990's in the South Bay. I don't believe you were here at that time.

In the 90's about 2/3 of the residents in the South Bay were unemployed. Every other home on many streets was on the market and most were foreclosure properties. These were not last hired-first fired but people who had worked in aerospace for 25+ years who found themselves without jobs and no prospect of finding new employment.

Other parts of the country did not face anything near the problems we saw here. Think Detroit... South Bay version.

There is a good chance that we won't see a similar scenario this time around. The South Bay has a much better employment situation then other parts of LA and Orange County because we became very diversified after the downturn of aerospace.

I was talking with a client today who said he knows things are bad but it just doesn't feel as bad as it did in the 90's. I think a lot of people who have lived here for a long time have similar thoughts. It doesn't mean they are not concerned. Almost everyone I know is cutting back and being very cautious. People lost a lot of money in the market but most didn't lose everything. As with home appreciation what a lot of people lost was the paper appreciation not their initial investment. They still have resources just not as much as they had counted on at this point in time.

I agree that 10% is not out of the question over next year if the new Administration can't bring back a measure of confidence to the marketplace.

Anonymous said...

Remember Baghdad Bob, the Iraqi Information Minister who gave one report after the next of Iraqi battle triumph while the U.S. was mowing down everything in it's way? That's how I see you with regards to the local real estate market. You always put the most amazing spin on the worst news, and time always proves you wrong. It does give some picture of the future, though. When you allow 10% reduction as a possibility, I presume the reality is going to be worse.

The highlight of this blog 2008: 8/25/08, when you said that sellers had come to terms with reality, and buyers were the ones now out of touch with market values.

"The Americans are not there. They're not in Baghdad. There are no troops there. Never. They're not at all!"

Kaye Thomas said...

Anonymous 6:06,
Interesting how people can see what I write so differently...
I'm sorry the market is not responding as you had hoped but the reality is that as bad as things are they are not nearly as bad as you wish them to be...

I stand by my post.. a number of Sellers realized they had to bite the bullet and lower prices if they wanted to sell... they got it. They didn't like it but they got it. That's why prices have been declining in the Beach Cities. It doesn't mean that every seller has seen the light but many have.

I also stand by the fact that despite the declines in value there are still a number of buyers who don't get it and will continue to be disappointed by a market that never meets their expectations.

However none of this is new or shocking. This is how the real estate market has always been. In the 70's, 80's, 90's and in 2000 I had buyers waiting for prices to decline to 1960, '70, '80 and '90 levels as they were too high. There will always be "buyers" who never buy because they keep waiting for prices to drop to "reasonable " levels.

At the same time there are people who do buy homes... even in declining markets. 10 years after the market adjusts the ones who buy and hold are always "lucky". They were not lucky... they took a chance that paid off and they did well because they were willing to take the risk that another buyer would not take.

Here's something to think about... market value is not determined by Sellers or Real Estate agents. Buyers determine market value. A property is only worth what someone is willing to pay. If the market hasn't declined enough to meet your expectations then that is because a number of buyers disagree with your outlook..

Anonymous said...

Well, the market actually seems to be progressing even faster than I expected, and it fits my personal timeline for buying pretty well, so I can't say I'm disappointed. I think you've been proven many times over to have been overly optimistic and will be again, nevertheless, I do applaud you for having had the guts to publish my comment.

Kaye Thomas said...

Anonymous 12:22,
I don't think I'm overly optimistic .. in fact so far I've been fairly accurate about the Beach Cities market...

I've speculated we would likely see 10%-20% declines over the normal course of the market but that if we hit a recession we would see higher declines... MB has seen about a 15% overall decline... higher in some sub markets and lower in others. We will probably see another 10% if things don't get a lot worse. If the bottom falls out and the employment picture looks like the 90's in the South Bay then we will see that reflected in the market.

However in the 90's, with massive unemployment and foreclosures, the overall loss was about 30% in MB. If you are expecting a 50%-60% decline in Beach City prices then you are right I am optimistic as I strongly doubt you will see those figures in our market.

Anonymous said...

Hi Kaye: Your argument about things being "not as bad" as the 90's decline is just not relevant....although it is the one that is always trotted out.

In 2006, the chief economist of realtors said (over and over), that they we would not see house prices drop, particuliarly since we had not seen job losses.

And yet, US housing prices have fallen continously for several years. This is the first time that this has occured since the great depression.

The reason housing is falling at the national level is because they went up too much due to speculation and easy money.

I'm saying your comparison to the 90's is irrelevent. For you to make that argument, you have to clearly spell out why it applies to the current situation (S. Bay now). I say that we are part of the national bubble, and that is what we should watch.

The reason that we know the 90's S.Bay analogy is irrelevant is that prices have started falling without any real job losses. This is unlike what happened in the 90's, and exactly like what happened on a national level.

Kaye Thomas said...

Anonymous 9:27,
Actually I agree with you that we are seeing the fallout from a nation housing bubble. That has never been at issue... what has been an issue in the South Bay is the magnitude of the problem. That issue has a lot to do with employment.

I refer to the 90's because of the high number of foreclosures that followed the economic consequences of the loss of jobs in the aerospace industry. This is what creates major market issues in real estate... supply and demand. It's hard to have a market crash when inventory is low. Prices go down when demand is low but they crash when demand is low and supply is high.

In the South Bay we are seeing an orderly decline in prices as there are not a lot of owners forced to sell at this point. There is a large gulf between wanting to sell and having to sell. Prices are falling but not crashing and that makes the difference in the South Bay market compared to other area markets.

Orange County and parts of the Valley were the headquarters for a number of major financial institutions. When that market segment took a dive a lot of folks who worked in those areas lost their jobs. No income and few prospects for new employment make it tough to keep up the house payments. The end result is that these areas have seen values decline harder and faster then we are seeing in the South Bay.

I believe that while we will see prices decline over the next year, you will not see a major crash in South Bay home prices without very high levels of unemployment.

Contrary to popular belief most people who own homes in the South Bay are not financial idiots and did not buy with 100% financing. They will hang on to their homes as long as they are employed.

mookie said...

Kay, I'm curious. You stated that prices have more or less dropped about 15% from peak. You've also said you wouldn't be surprised to see another 10% on the downside. What do you tell your clients who want to buy? Are you telling them to hold off, to only buy if they can afford a short term hit? Depending on the buyer, it could mean a decline in equity of 300k for someone in the 3mm price range. So, do you take the approach and say that it is always a good time to buy or do you actually ever tell clients to hold off and wait for lower prices? Have you ever told a client to wait for lower prices? Ever? Do your peers ever do this? I'm not trying to be antagonistic, just curious how one of the better realtors advises clients - you being one of the better realtors.

Anonymous said...

Kaye, no one is saying there are more stupid people in S. Bay. My guess is that every place has there share of stupid people.

That being said, I was not aware that "stupid people" were one of the suspect causes of the housing bubble.

I also dispute your claims that San Fernando Valley and Orange County dropped because of problems in the financial companies. If anything, the percentage of financial types is higher in MB.

It is as I said above....prices far outstripped affordability, due to loose lending standards. Probably some mania in the end (remember any crazy bidding wars here in MB?).

Prices nationwide are down 24% from the peak, not counting inflation. That is without significant job losses. That means that JOB LOSSES DON"T PARTICULIARLY MATTER FOR THIS DOWNTURN. The scary thing is that job losses are kicking in now. I think they are calling for another 20% drop nationwide for 2009.

I went to a new years eve party that one of my neighbors gave. About one third of the guests were fairly standard professionals. Engineers, dentists. One third were real estate related. One third were entrepreneurs. From these demographics, I don't see MB getting through this unscathed. I don't think realtors even show up on the unemployment statistics.

Someone (without any skills in my industry) asked me to give them a job. Kind of weird.

I'm not sure what tomorrow brings, but I do not think that we can predict it by looking at what happened in the '90's. That has been pretty clearly proven not to apply.

Kaye Thomas said...


Oh dear this is one of those.. do you still beat your wife questions... but I'll give it a shot.

First, anyone buying a $3mm home is well aware of the market. Clients buying in the Beach Cities are not naive about the current economic situation. My clients know exactly what is happening in the financial and housing markets. I know you may not believe this... but people who are ready to buy are going to buy for reasons that don't have much to do with where prices are headed. That doesn't mean they are not going to bargain... believe me they are!

It would be very presumptous of me to tell someone making the kind of money that most of the buyers in our area make... that maybe they should wait to buy. Buying a home is a very personal decision. I can't make that decision for anyone...nor should I make that decision. I have clients who have been looking for 2-3 years and are not ready to buy. They are watching the market and waiting for prices to reach the level they feel is right. I have others who want a house now and don't find the current market to be a deterrent.

My personal philosophy is that I treat my clients the way I want to be treated. I always tell them the truth good or bad. It seems to work fairly well as I get a lot of repeat business and referrals from my clients.

If I think a home is well priced I tell them... and if it isn't I tell them that too. The same is true for the condition of a property. Even at the top of the market none of my clients waived a building inspection unless they were going to tear down the property.

Contrary to popular opinion no agent can make someone buy a home. If I had that kind of power believe me I would be very wealthy and play golf three times a week.

My clients will tell you that one of the things I stress is that there will always be another home. I've told clients to walk from properties that had issues. Frankly there is no such thing as the perfect home... there are just homes that fit some people better then others.

Everyone I am working with knows that prices are going to go down more next year and that I have no idea when the market will stablilize. There are just too many variables. They also know that I don't think we will see an uptick in prices for 4-5 years. The best they can hope for at this time is a flat market. Remember... I post this on my blog for all to read so I'm not exactly hiding my opinion.

Are there good things about this market... yes. I think low interest rates combined with a number of sellers who are ready to negotiate is a big plus. But that doesn't mean you should buy if you are not ready to take a risk on prices falling lower. The client has to determine how much risk he/she is willing to take.

The truth is good agents give their clients good information... they would be incredibly stupid not to do so. You don't get repeat business or referrals by giving out bad information.

mookie said...

Thanks - I truly didn't mean to sound antagonistic, but after reading my post again I'm not sure I was overly successful. That being said, thanks for your response. What I really enjoy about reading your comments is that you are willing to state your opinion about the market and to your point, you open yourself up to second guessing by being public with your blog. I agree with your comments about there always being another home and also appreciate you taking a stand when you say that you believe we will be in a flat market. For what it's worth (and I realize it probably isn't worth much), I believe that is the reason why your clients like you and refer you more business. There are other realtors who post on MBC who will comment that it isn't in their job description to talk about the direction of the market and that they don't get paid to have an opinion. I disagree, and for that, think that you'd be someone who buyers would gravitate toward. Thanks for the comments.

Kaye Thomas said...

Anonymous 6:37,
Gosh... I looked at my reply and I can't find anything I wrote that included the word stupid.

I'll have to find the reference( about 2 weeks ago) but if I remember correctly it was from the American Bankers Association that puts the #1 reason for homes going into foreclosure ... even in this market.. as unemployment. It was followed by investors walking away, then the big three... divorce, death and serious illness.

I never said we would be unscathed... in fact quite the opposite. We are in for our share of problems, they just might not be as bad here as they have been in other areas of So Cal.

I find it interesting that so many people who appear to want to live in the Beach Cities also want to see total chaos in the market. One of the reasons people like this area is that even in the worst of times property maintains value better here then other areas. Seems to me that stability should be very important if you plan to invest in a home in our community.

As for OC and the Valley... I know a number of agents who work in those communities and the demise of major financial institutions and the resultant layoffs definitely affected their markets.

I guess I wasn't clear about what I said about the 90's. I don't believe the current situation is the same... in fact they are quite different. My point was that for a huge market crash you have to have something more going on then a decline in prices. There are simply too many owners who don't have to/want to sell. The picture changes drastically if you suddenly have a lot of people losing their jobs. Discounting the employment factor could be a flaw in your analysis.

If you look back at some of my posts you will see that I find this current market far more like the one in the late 70's and early 80's. Credit was so tight you could not get financing... no matter how much money you had or how well qualified. The lenders just didn't have cash to lend. If you didn't fund by Wednesday you often had to wait weeks for the banks to get more money to lend. Contractors were going broke by the second. However prices didn't drop by 50% then either.

Kaye Thomas said...

Thank you for your kind words.... blush...blush.

I really do appreciate your thoughts as I know you are house hunting in MB. Finding the right home at the right price is a daunting task in the best of markets. The only people who think it's a piece of cake are those who haven't gone through the process.

Anonymous said...

Sorry, you used the phrase "financial idiots". I used "stupid".

The GAO disagrees with that report. They indicate that DROPPING HOUSE PRICES are the leading cause of foreclosures. Particuliarly for states that saw high rates of appreciation (specifically included is CA)

They list loss of jobs as the second leading reason. For states like Michigan and Ohio (not california).

They list loose underwriting standards as the third leading cause, and mortgage backed securities as the fourth leading cause.

The report is a year old, but still fun. And a few things have changed...S. Bay now has dropping house prices, increasing unemployment, significantly stricter lending standards. Also effectively an end to super-jumbo mortgage backed securities.

Kaye Thomas said...

Anonymous 12:38'
We seem to be at the apples -cucumber stage...I don't disagree with you that high prices and the decision by buyers to not buy at those prices started the downturn in prices.

We certainly saw that in 2006 from May-October when buyers literally said NO.

My point is that the decline in value based solely on prices, while initiating price declines in the Beach Cities, did not bring about a major price nose dive. That's why the local market has not lost as much value as other communities.

The areas with a lot of new construction in CA were the ones that got hit really hard... the IE, Sacramento along with the Central Valley saw prices drop drastically because of large unsold inventory coupled with declining values. We just don't have that scenario in the Beach Cities.

The uncertain financial market of the last year coupled with tight credit and the virtual disapperance of jumbo loans created more issues in our market then the national decline in home values.

There will always be pockets that react differently then national or state markets. The South Bay is one of those. We have lost value but barring massive unemploymnet or a further decline in the economy as a whole we will not see nearly as much damage in our market as other areas of the state have seen.


Anonymous said...

So, when a client has decided to buy, you never volunteer the opinion that it's a good time to hold off, because that would insult them. What about the clients who aren't sure they want to buy immediately? Surely you must have clients who aren't sure and are interested in their own realtor's opinion of the market...

The question was if you EVER counsel someone not to buy. I'm not sure why you didn't answer it.

In answer to Mookie's other question though, you do have at least one peer who is willing to counsel clients not to buy:

Leo Nordine

A realtor willing to tell people to hold off. And whose predictions have been good so far. Maybe he's going too far in saying 2000 prices in 2010. But the fact that he'll make a forecast not in his immediate best financial interest makes me more inclined to trust his objectivity and believe him if and when he says the time is right.

Kaye Thomas said...

Anonymous 9:09,

Actually I did answer Mookie's questions... and he seemed to think I answered them to his satisfaction.

What I said was that it would be presumptuous of me to tell a knowledgeable buyer that he should hold off... that is a bit different from being afraid I might insult him.

I thought I made it clear that I do counsel buyers who are unsure about the market that they might want to wait until they are more comfortable. No one should ever buy anything they are not dead certain about.

I believe Leo's business is exclusively on the listing side and as far as I know Leo isn't working with buyers unless they are friends. I like Leo... he is a good guy but as you noted he isn't 100% accurate on what he said either as far as the Beach Cities go. You just like his opinion better then mine.

Anonymous said...

No, I didn't note that he hadn't been accurate, I noted that it was possible his prediction for 2010 would be off. Because I don't trust anyone 100%, even someone whose track record has been far better than yours, and is making a prediction detrimental to his own profit.

I do pay attention to people who have more positive predictions for 2009. Just not yours, because you predict sunshine 365 days a year, and have an obvious conflicting interest that might compel you to do so. While that's to be expected of a salesperson, you blog as some kind of objective source.

I respect that as far as I can tell, you don't censor your blog.
But I feel you are a fundamental part of the syndrome that inflated this bubble in the first place that is having such a painful effect on homeowners in the beach communities and nationwide. And seeing it happen doesn't seem to have caused you any regret or
taught you much of a lesson.

Kaye Thomas said...

Anonymous 1:54,
I guess we have finally reached the point where we will have to agree to disagree....

I believe that if look over more of my posts you might find that so far my perception of value in the Beach Cities market is pretty accurate. We have lost around 15% overall... a bit more in some areas and a bit less in others. I suspect that is what any figures you find will show as of this date for property in the Beach Cities of El Segundo, Manhattan Beach, Hermosa Beach and Redondo Beach.

I believe we may see another 7%-10% unless the economy falls totally apart. I also think that will prove to be pretty accurate if the new administration can bring back a bit of stability.

While you don't like what I post I'm not far off current numbers in our area... so rather then be "365 days of sunshine" what I try very hard to be is accurate about what is actually happening. If the numbers get worse I'll say that. But until then I will continue to post accurate figures even if they don't match your expectations.