Monday, December 22, 2008
Worst Housing Markets for 2009
Fortune published their predictions for the worst housing markets in 2009. Not surprising to me eight of the ten cities are based in California. Number one on the list of course is my hometown of Los Angeles.
What may be surprising to some is the extent that the forecast is so negative. The article is predicting that the market will correct to the downside about 25% in 2009 and 5% in 2010. I'm assuming these are year over year numbers so if you take their calculation it means the median price in Los Angeles will be about $282,000 in 2009 and 265,000 in 2010. How do these numbers compared to what I think is reasonable?
Even given this horrific prediction, I still think the numbers are a little high. What is my reasoning? Well the average home price in Los Angeles was about $162,000 in 2000, the beginning of the real estate boom. The high was reached at about $573,000 representing a 350% increase. Even at $265,000 it represents a 164% increase in about 10 years. Is that really justified? Not really. If you believe, like I do, that housing should track inflation, then it would mean that there was an average of 5.5% inflation over those ten years. Considering we had very little inflation over the last several years, and we are likely to have deflation for at least 2009, I think the 5% number is still pretty high.
In addition, housing needs to track income. The traditional measure of housing is that housing prices should be 3x gross income. That means the expectation is that the average income in Los Angeles will be $88,000. There is NO chance of that happening in the next two years (average now is just a little over $40,ooo), so the number is still a little high. Now of course, I expect housing to retreat slowly, not in one big bang, so the prediction may be valid only if we continue to see price declines moving forward. But they are predicting a significant slowing of the price decline in 2010, and I just do not see how that is possible considering I actually think we will OVERSHOOT to the downside like we overshot on the upside. It happens in every market.
So in short, I think we will see even worse numbers then predicted. The employment outlook in Los Angeles looks bleak and is getting worse. You combine that with the overbought nature of this market, and you have the recipe for some pretty significant decreases over the next two years.