SoCal home price declines escalating

One of the reasons that builders of new homes were so quick to drop their prices was to collapse the time period between peak and trough. Owners of resale homes, however, were typically more psychologically attached to peak prices and so have been much more loathe to decrease prices, at least until recently. That's why we're now seeing price declines for existing homes continue and even escalate. From a story in the L.A. Times:

Southern California home prices continued to fall at a record pace in February, and are now at 2004 levels, a real estate information service reported today.

The median price for a Southland home last month was $408,000, down 17.6% from a year ago, according to DataQuick Information Systems. Area home prices have now fallen 19% on average from their peaks last year.

The steep price declines are putting many more homeowners "upside down" -- owing more on their homes than their homes are worth. Forecasters say foreclosures will likely continue to rise and prices will fall further.

About one-third of Southern California homes sold in February had been foreclosed since January 2007, according to DataQuick. A year earlier, previously foreclosed homes accounted for 3.5% of sales.

So what does this mean moving forward?

The rapid pace of the decline has led Los Angeles economist Christopher Thornberg, who last year predicted a 20% decline in Southern California home prices, to revise his projection. He now thinks prices will fall 40%.

But it's important to remember that is an average, and while your neighborhood is unlikely to be spared completely, the value of your home depends on a variety of factors beyond regional affordability statistics. One barometer I look at -- and which remains largely ignored by the media and most economists -- is the underlying value of a property based on its potential monthly rental income. For example, if I can rent out a townhome in Sherman Oaks for $2,000 per month (which is reasonable), then, using a common 200x multiplier, it would be worth around $400,000, perhaps $350,000 if the HOA fees are high, interest rates rise or rents decline because of short-term over-supply. But if its price peaked at $425,000 and declines by 40% to the mid-$200,000s, suddenly I've got a great income property that's throwing off very decent cash flow each month. At the point that rental income costs provide a certain pricing floor value that attracts income property investors.

UCLA's Leamer thinks the decline will be much smaller than 40%:

UCLA Anderson Forecast Director Edward E. Leamer also believes home prices are still declining. He had predicted a 20% to 25% decline from the peak.

Leamer thinks his prediction is still on target, and that other indices show a slightly smaller price decline so far. The Case-Schiller Index, for example, shows Los Angeles and Orange County home prices to be 15% below their peak. That index, Leamer said, shows the market is still correcting itself.

The typical monthly mortgage payment that Southland buyers committed to paying was $1,821 last month, down from $1,889 the previous month, and down from $2,303 a year ago, DataQuick reported. Adjusted for inflation, the current payment is 18% lower than the spring of 1989, the peak of the previous real estate cycle. It is 28% below the current cycle's peak in June 2006.