Housing Prices Will Continue to Fall, Especially in California

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The latest house price data indicates no respite in the continuing price declines, especially where the declines have been the most severe. But no place has seen the devastation that has occurred in California. As median house prices climbed to an unheard-of level – 10 or more times median household incomes – a sense of euphoria developed among many purchasers, analysts and business reporters who deluded themselves into believing that metaphysics or some such cause would propel prices into a more remote orbit.

Yet gravity still held. A long-term supply of owned housing for a large population cannot be sustained at prices people cannot afford. Since World War II, median house prices in the United States have tended to be 3.0 times or less median household incomes. This fact should have been kept in mind before – and now as well.

By abandoning this standard, California’s coastal markets skidded towards disaster. Just over the past year, house prices in the Los Angeles, San Francisco, San Diego and San Jose metropolitan areas have declined at more than three times the greatest national annual loss rate during the Great Depression as reported by economist Robert Schiller.

But the re-entry into earthly prices is just beginning. In the four coastal markets, the Median Multiple has plummeted since our third quarter 2008 data just reported in our 5th Annual Demographia International Housing Affordability Survey. The most recent data from the California Association of Realtors would suggest that the Median Multiple has fallen from 8.0 to 6.7 in San Francisco, in just three months. In San Jose, the drop has been from 7.4 to 6.3. Los Angeles has fallen from 7.2 to 6.2 and San Diego has slipped from 5.9 to 5.2.

Yet history suggests that there is a good distance yet to go. California’s prices will have to fall much further, particularly along the coast. Due largely to restrictive land use policies, California house prices had risen to well above the national Median Multiple by the early 1990s, an association identified by Dartmouth’s William Fischel. During the last trough, after the early 1990s bubble and before the 2000s bubble, the Median Multiple in the four coastal California markets fell to between 4.0 and 4.5. It would not be surprising for those levels to be seen again before there is price stability.

Using this standard, I expect median house prices could fall another $150,000 to $200,000 in the San Francisco and San Jose metropolitan areas. The Los Angeles area could see another $100,000 to $125,000 drop, while the San Diego area could be in store for a further decline of $50,000 to $75,000.

Is there anything that can stop this? Yes there is – the government. This is the same force that caused much of the problem at the onset. Now with the passage of Senate Bill 375 and an over-zealous state Attorney General more intent on engaging in a misconceived anti-greenhouse gas jihad, it may become all but impossible to build the single-family homes that, according to a Public Policy Institute of California survey, are preferred by more than 80% of California. Instead we may see ever more dense housing adjacent to new transit stops – exactly the kind of housing that has flooded the market in recent years. Many of these units, once meant for sale, have been turned into rentals. Many others lay empty.

In the short run, however, even Jerry Brown’s lunacy will have limited impact. The continuing recession will continue to reduce prices even though the supply remains steady. The surplus of dense condominium units will expand the swelling inventory of rentals, as prices continue to drop towards a 4.0 to 4.5 Median Multiple or below.

The one place which may benefit from this will be some of the less glamorous inland markets, that are suddenly becoming far more affordable. Sacramento earns the honor of being the first major metropolitan area to reach a Median Multiple of 3.0, as a result of continuing declines. Riverside-San Bernardino is close behind, and should be in this territory within the next year.

But many other overpriced markets have yet to experience this kind of pain. Prime candidates for big reductions include New York, Miami, Portland (Oregon), Boston and Seattle. These areas may not have suffered the extreme disequilibrium seen in California, but their prices have soared. As the economies of these regions – New York and Portland in particular – begin to unravel, prices will certainly fall, perhaps precipitously.

This may not make Manhattan or Portland’s Pearl District affordable for the middle class but could drive prices to reasonable levels in the outer boroughs, Long Island or the Portland suburbs. This may be a disaster for the speculators, architects, developers and some local governments, but for many middle class families it may seem like the dawning of a new age of reason.



HOUSING AFFORDABILITY RATINGS UNITED STATES METROPOLITAN MARKETS OVER 1,000,000
Rank Metropolitan Area Median Multiple
AFFORDABLE  
1 Indianapolis 2.2
2 Cleveland 2.3
2 Detroit 2.3
4 Rochester 2.4
5 Buffalo 2.5
5 Cincinnati 2.5
7 Atlanta 2.6
7 Pittsburgh 2.6
7 St. Louis 2.6
10 Columbus 2.7
10 Dallas-Fort Worth 2.7
10 Kansas City 2.7
10 Mem[hios 2.7
14 Oklahoma City 2.8
15 Houston 2.9
15 Louisville 2.9
15 Nashville 2.9
MODERATELY UNAFFORDABLE  
18 Minneapolis-St. Paul 3.1
18 New Orleans 3.1
20 Birmingham 3.2
20 San Antonio 3.2
22 Austin 3.3
22 Jacksonville 3.3
24 Phoenix 3.4
25 Sacramento 3.5
26 Tampa-St. Petersburg 3.6
27 Denver 3.7
27 Hartford 3.7
27 Las Vegas 3.7
27 Raleigh 3.7
27 Richmond 3.7
32 Salt Lake City 3.8
33 Charlotte 3.9
33 Riverside-San Bernardino 3.9
33 Washington (DC) 3.9
36 Milwaukee 4.0
36 Philadelphia 4.0
SERIOUSLY UNAFFORDABLE  
38 Chicago 4.1
38 Orlando 4.1
40 Baltimore 4.2
41 Virginia Beach-Norfolk 4.3
42 Providence 4.4
43 Portland (OR) 4.9
SEVERELY UNAFFORDABLE  
44 Seattle 5.2
45 Boston 5.3
46 Miami-West Palm Beach 5.6
47 San Diego 5.9
48 New York 7.0
49 Los Angeles 7.2
50 San Jose 7.4
51 San Francisco 8.0
2008: 3rd Quarter  
Median Multiple: Median House Price divided by Median Household Income
Source: http://www.demographia.com/dhi.pdf

Note: The Demographia International Housing Affordability Survey is a joint effort of Wendell Cox of Demographia (United States) and Hugh Pavletich of Performance Urban Planning (New Zealand).

Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris. He was born in Los Angeles and was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley. He is the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.



















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Absorbing post - thanks. You

Absorbing post - thanks. You always write a riveting post. I wish to read more such in the near future.
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What would be a place where

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Tim

This is a superb list but I

This is a superb list but I think these figures are just for residential properties and do not consider commercial property prices and affordability.

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James Anderson

monitor stands

Really appreciate this post. It’s hard to sort the good from the bad sometimes, but I think you’ve nailed it!

reality

Sad but true. This is really a bad economic crisis. Real estate investors are greatly affected by this. There's nothing we can do but to deal with it.

By the way, I'm Aileen. I am training how to jump higher for I am a basketball player.

Los Angeles property

The real estate market has fallen sharply over the few years ago.
The prices have fallen in all states especially in California, I believe Los Angeles was the most affected city, I think rich people will start thinking about staying at the Small Luxury Hotels Los Angeles instead of buying properties at loss.
They can enjoy the elegance of the place, the warm hospitality & the charm.

Sounds like the perfect time

Sounds like the perfect time to buy a house in Los Angeles, most likely real estate Los Angeles is already boiling with customers that want to reach a good deal. Things have gotten an interesting turn in the real estate industry but if we strictly refer to the Los Angeles are I don't think the prices will remain low for too long.

Property Prices

I think that whenever there is a recession property prices slump but normally they do pick up sooner or later. I'm really hoping that it will but if prices are low then it's a good time for first-time buyers to get onto the property ladder (assuming they can actually get a mortgage!)
Sige

Great article

I love this article.
Well written and LOTS of data.
Me like data.

Dave Barnes
+1.303.744.9024
http://www.MarketingTactics.com

"Instead we may see ever

    "Instead we may see ever more dense housing adjacent to new transit stops – exactly the kind of housing that has flooded the market in recent years. Many of these units, once meant for sale, have been turned into rentals. Many others lay empty."

So, the single-family housing market is doing just fine in the US and California? It's just TODs and higher density rentals that are hurting the housing market?

I'm still waiting for Cox to

I'm still waiting for Cox to reconcile his pet theory with the trend of single-family home starts over the past 10 years. He seems to ignore the fact that the unprecedented price increases over the last decade occurred during the unprecedented growth of single-family home building. This, of course, would force him to admit that the housing bubble was a demand-side, not supply-side phenomenon. But then again, he's hardly the first writer to ignore evidence that doesn't jive with his view of the world. (I did however notice that Cox took take my advice from his last post and is no longer misrepresenting Paul Krugman).