Chuck Ponzi July 17th, 2006

Then… August 17, 1981

A word to the wise: The great Los Angeles housing boom is over. The real estate price explosion in southern California, which sparked a national boom still continuing elsewhere, has stopped. The bubble that everyone said could never burst has burst. All over Los Angeles and Orange County, home buyers can buy a property for less than it would have cost a year ago, although there are exceptions. Buyers who can pay cash can almost steal houses and real estate. The days when ordinary citizens got rich from buying houses are gone, at least for the time being and at least in southern California.
But what a bubble it was. In the 10 years from 1970 to 1980, the price of the average house in Beverly Hills went up by a factor of almost seven. The average house in West Los Angeles, a region of by no means opulent homes, rose by almost six times. Houses in Malibu routinely doubled in value every year in the late 70’s. By the end of the decade, newspapers advertisted ‘’starter houses,” for families who had never owned before, in remote desert suburbs starting at $200,000.
Any lucky person who got in on the boom in the early 70’s saw his paper profit reach about 30 times his down payment by 1980. People who had never earned more than $40,000 suddenly found that they were millionaires just from that little house with a pool in Pacific Palisades. Ronald Reagan is said to have paid $29,000 in the early 50’s for a house in Pacific Palisades that is now for sale for $1.7 million and cannot be sold, which is the whole story.
The boom went on for such a long time because the economics were right. All through the 70’s the cost of owning a house in the better neighborhoods of Los Angeles was negative. That is, the cost of servicing the mortgage plus taxes was less, usually far less, than the increase in the price of the house. Figure it out: mortgages were less than 10 percent for almost all of that decade, under 7 percent if you count the tax features, and houses were increasing in value all over the West Side of Los Angeles by a good 20 percent a year on a compounded basis. The banks, savings and loan institutions and and the economy generally were paying families to live in the better neighborhoods of Los Angeles. The economics of housing inflation were such that for a long period, lenders made mortgage loans at rates substantially below the appreciation of the houses they were loaned upon and in some years, noticeably below even the trend line for inflation. This cheap credit fueled the takeoff of the boom. As prices rose to stratospheric levels, the price history itself fed the boom. Real estate agents assured buyers that however high prices were, they would go even higher.
Wives went to work. Second mortgages were drawn up. People would do anything to get in on the boom, which looked as if it would never end. Even when prices got so high that ordinary citizens could no longer afford to get in, rich people came from all over the country and the world to get in on the one true never-ending bubble.

And Now July 17, 2006

The market also began to fade first in San Diego. The craziness seemed to peak about two years ago, when bidders routinely submitted letters saying that they and their children would be forever honored if the seller would consent to choose them.
Whatever happens here, optimists and pessimists agree, will happen later in the rest of the state.
That’s about the only thing everyone agrees on. The size of the coming hangover is a particularly contentious matter.
Most analysts and people in the real estate industry insist it will be mild. The housing bears say the bulls are either misguided, uninformed or shills.
At a Century 21 sales office in the Ocean Beach neighborhood, broker David Davis said the market had already bottomed out. The spring was weak, he acknowledged, averaging only one or two sales a month — half the office’s usual rate.
But things are already back on track, Davis said. He expects four sales this month, about normal.
The last San Diego real estate collapse, which hit in the early 1990s, was triggered by convulsions in the aerospace industry. The post-Cold War downturn caused widespread unemployment and a generalized exodus from much of Southern California. High interest rates contributed to the misery.
“Our No. 1 industry is now tourism,” Davis said. “Unless they take away the sun, we’ll be fine.”
He’s putting his money where his optimism is, spending $187,000 over the winter for a downtown condo he’ll live in. He knows other agents who are buying too. “I think they see a good thing,” he said. “Buy low, sell high.”
If Davis radiates cheer, the fliers taped to the window outside the office door tell a different story. “Huge Price Reduction,” one says. Another says both “Reduced” and “$15,000 Credit.”
In some cases, the prices are dropping faster than the fliers can be reprinted.
A two-bedroom town home has its price of $324,900 crossed out with a marking pen, replaced by $309,900. Another house, a four-bedroom in suburban La Mesa, has a printed price of $575,000.
Below that is handwritten $549,000.
Scribbled below that is a new minimum: $499,000.
What helped supercharge the San Diego boom was the spread of unconventional financing methods.
Some adjustable-rate loans allowed buyers to postpone payments on the principal. Sometimes the loans allow the buyer to pay only part of the interest, tacking the remainder onto the loan itself.
The advantage of these loans is that buyers can afford much more house. The disadvantage is that they reset quickly, which is why critics call them suicide loans. After the grace period expires, the payments can skyrocket — particularly if it is a time of rising interest rates like the present.
Holders of these loans can’t afford to see prices decline. Yet for everyone who has been shut out of the market, the only hope is a drastic slide.
“Houses really need to fall by 50% to become affordable again,” said Tom Scott, executive director of the San Diego Housing Federation, a coalition of nonprofit and advocacy groups. “It would be better for everyone if the price of housing fell.”
Buck, the homemaker, said she and her electrician husband, Andre, might start looking at foreclosures. Notices of default, the precursor to foreclosure, reached 1,533 in San Diego County in the first quarter of 2006, up 60% from the year-earlier period, according to DataQuick Information Systems. The number is still low by historical standards, however.

The most surprising thing of the second article is that Rich Toscano drives a silver Miata…. Rich? A Miata?

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