UCLA Anderson Forecast

[startingout]

Long time reader, first time poster.

This article has me a bit worried. From all the data on this website, I had really come to believe in the CA housing market sustaining a serious decline- could the UCLA forecast be right in saying that CA house prices will be the same in 5 years as they are today?

Since I’m new in the forums, I suppose a small intro is in order. I am a frequent visitor to Piggington, and really enjoy everyone’s advice, forecasts, and banter. 24 yrs old, better than median household income, current renter, hopefully future owner.

Thanks!

[Daniel]

Boy, will you get a thousand replies to your post…I’ll try to be first, because everybody else following will disagree with me, so it’s better that I start.

My view: I think it’s entirely possible that home prices won’t decrease by much, but there are substantial risks that they will. You may believe that home prices 5 years from now will be the same, or 5% down, or 50% down, or any percentage you like. You may even entertain the possibility that they will move slightly up, say 5%. In any case, unless you believe that they will SHARPLY go up (and nobody in their right mind believes that today), it is still better to rent than to buy, because carrying costs are higher when buying (which is historically abnormal, as it is usually cheaper to buy than rent).

So it’s all about risk, in my view. Today, the risk of being burned by the downside is higher than the risk of missing out on the upside, so waiting out is probably best.

[North County Jim]

I wouldn’t worry too much. Here’s what I consider to be the nut graf from a more expansive version of the story:

Leamer cautioned that the outlook was based on data trumped by recent reports showing that housing sales and starts were sliding more rapidly than the group had projected.

If the trend accelerates, he said, “then our forecast is too optimistic.”

As we’ve discussed here previously, can these guys really issue extremely bearish forecasts?

[MaxedOutMama]

The same dollar figure five years from now would indicate a significant drop in real dollar value, meaning that you would have done better to rent and put the extra in a CD.

So that’s not really a bright forecast. A bright forecast would be housing at least appreciating at the rate of inflation, or the rate of return you would receive from putting your money into a CD for 5 years.

[DrHousingBubble]

In a way UCLA was way to early in predicting the peak for housing. Unfortunately this has discredited them from many mainstream media outlets but their early predictions are starting to pan out. That of increasing inventory and prices dropping. In regards to employment, hard to believe one would think that the local economy would have a factor on this, never has housing played such a crucial role in the overall economy of the country. Think of the industries that are primarily linked to housing:

-Home Development (for example Home Depot, Lowes, Bed Bath and Beyond)
-Lending and Banking
-Real Estate Brokering and Agents
-HELOC and the secondary market for spending. This feeds into another issue regarding easy credit which has added the main fuel to this red hot burning real estate market.

Access to quick equity has never been so easy. And thus the multiplier effect of quick money extraction and quick consumption has propped the economy up. Take a look at Los Angeles County median income: $50,035. The median home is $547,500. And this is for what one would consider starter homes. Think of a couple wanting to purchase their first home, they would need a down payment of over $100,000 for an entry house (homes that are in areas such as Glendale, Covina, Downey, or even Culver City). Not exclusive areas by any stretch of the imagination.

The fundamentals have been knocked out of whack but we are trending down and trending down much quicker than I had thought. Case and point, my uncle purchased a home in 2001 for $140,000 – at the time the same house would rent for $1,100 a month. That boils down to a 9.4% annual cap rate. Fast forward to 2006, that same house would only rent for $1,400 but has appraised for $450,000. Cap rates reflect the value of a home in rental equivalents meaning his home at a respectable 9.4% cap rate should be valued at $178,000. Think about that and ask yourself why would you purchase a home in the current market where appreciation is nearing zero and may go negative by the end of the year? No rush to buy since we are trending downward.

Enjoy life and wait this bubble out. The fundamentals are on our side and UCLA will be vindicated as being correct. Kind of like Schiller predicting the tech bust.

http://drhousingbubble.blogspot.com/

[lindismith]

Startingout,
You can do a search for “ucla” and find a bunch of posts on their past forecasts.

[sdrealtor]

Time to stir the pot a little:

How many of you out there would be happy buying a home at 20% off current prices at the bottom of the market? I suspect, most if not all of you would be very, very disappointed.

If we asssume prices are already down 10% off the peak. This is very reasonable and probably understates the decline.

Add 15 to 20% inflation over the next 5 years as mentioned in the Anderson Report. (DrHB uncle’s property is renting for close to 30% more today than 5 years ago so this seems like a reasonable assumption for inflation/increasing rental rates).

Then take 20% off the current prices and VOILA!

We effectively have close to a 50% decline in the Real price of housing.

Discuss…

[DrHousingBubble]

sdrealtor:

Agreed. Keep in mind we’re talking about 20% off a property that is overvalued by possibly 50%. Now looking at last months figures from DataQuick we have a median of $482,000 for San Diego county. This is down by 2.2% from August of 2005. Current median income (this is family) for San Diego is $59,520. In 2000 median income was slightly over $40,000. In six years income went up approximately 45% and housing went up 150%.

Assuming inflation and average appreciation matching inflation a home in San Diego should run about $255,000. A drop of 20% only gets us to $385,600. Not sure about you but that is still overpriced. Looking at it realistically, a 40% drop would get us to $289,200 which is about right for the market.

Slowly but surely we’ll get there. Even a 1% drop each month (our current trend) for two years will get us close to that 20% drop. Death by a thousand cuts although I’m thinking it’ll be more like 1% each month accelerating to 2% drops for a couple of months.

[(former)FormerSanDiegan]

sdr – I’d be happy to buy more property at 20% off current prices at the bottom of the market. Perhaps I missed the point ?

I’d also be happy buying property at current prices 5 years from now, if that’s the bottom of the market.

I’d also be happy buying at 10% above today’s nominal prices in 5 years if that’s the bottom of the market.

Could you explain why anyone would be “very, very disappointed” by purchasing at the bottom of the market ?

[R3venge]

I have to say that UCLA is wrong. I have been telling my friends from an economic standpoint I didnt undertand the boom for years. Real wages have been stagnant for years, yet real estate has gone nuts. With the affordability index being so low (I think it is at 10% for SD area) we have a long way to go to reach the 70% historic rate. To many people used RE as a short term investment. RE is not liquid like the stock market.
We are gonig to see a worse bust than the housing bust in Japan. At least the 100 year fixed morgages in Japan were fixed. A lot of people are going to go bust when options arms reset in the next couple years and RE has depreciated and real wages have remained stagnat.
It is also hard to forecast what effect Option ARMs will have on the market as there is no historic data for it. Without the data economists cant make acurate predictions.

Just my 2 cents.

[(former)FormerSanDiegan]

DrHB –

Median income went up 45% in the last 6 years in SD in this era of “no” wage growth ? That sounds pretty healthy to me.

If we assume the same wage growth over the next 6 years, I see that prices would only have to come down another 13% in nominal terms to meet 2000 price to income ratio.

[(former)FormerSanDiegan]

R3venge – I don;t think SD ever hit 70% affordability. More like 50%.

[sdrealtor]

DRHB,
Who cares about reported medians. prices are down 10% or more just about everywhere in my world.

FSD,
Many on this blog are expecting 40 to 50% declines and believe they will buy todays $1M homes for $500K or less.

[powayseller]

I’m so sick of the poor conclusions put out by the Anderson Forecast. For example, they say, “Without severe job losses forcing home owners to sell houses, home prices in California in five years will be about the same as today”. To this I say, “with *severe payment shocks* forcing home owners to sell houses, home prices in CA in 5 years will be 30% – 50% less than today”. Because they exclude exotic lending from their vocabulary and analysis, they think that housing prices can only drop in a recession.

The big BS about them is they do not consider exotic lending at all! To them, home prices can drop ONLY if people lose jobs in a recession, and according to them we will NOT have a recession because: 1) a recession involves big job cuts in 2 sectors, manufacturing and one other, and 2) we don’t have a lot of manufacturing jobs anyway so we can’t have enough job cuts in manufacturing to cause a recession.

Well, Anderson Forecast, take some notes from me: Home prices fall when supply exceeds demand, regardless of the reason! It doesn’t matter whether a job loss or a resetting ARM is the cause of being forced to sell a home: both result in distressed sellers and a lot of inventory. ANY situation causing distressed sellers and high inventory will cause price drops. Job losses are only ONE reason this could happen!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! Geez, I am so annoyed with these people. They are supposed to be damn economists, but they don’t mention at all the one big reason for this housing bubble: exotic lending. They just ignore it completely. Let’s move along, nothing to see here….

Second, we will have severe job cuts, because construction and MEW-related job will be eliminated and cause a recession. Even Leamer’s housing market/recession charts show that every single housing market bust has caused a recession (except when we had the Vietname or Korean War). Even the IMF is predicting a global recession due to US housing market bust.

Now get this: their forecast brochure contains a chart which misleadingly shows San Diego home prices in the 90’s did NOT DROP, but stayed level!!!!!! That is the only chart in the entire forecast brochure that did not have a source, and it is obviously wrong!!!!!!

Last, the San Diego conference was opened by Wachovia CEO Ernest Rady, who announced the next week that he bought out Golden West, the biggest subprime lender in So. CA. I suspect their banking industry ties keep them from saying what needs to be said about the exotic loans.

I asked Thornburg about loan resets and payment shock at the conference, and he got so made, he started waving his arms around and people were just aghast. The San Diego Labor Department spokesperson told me a month later, in a phone call, “Was that you who asked the question about the loans? I couldn’t believe how badly he handled your question!” He was very defensive. Now he left the UCLA Anderson group, to start his own company.

So the data they use, and the analysis they have, is very good and impressive. They talk about MEW and construction and retail jobs driving the economy, our dependence on China to fund our deficit, the problem with our federal and trade deficit, the lack of savings, the problem with flat wages, and so on. But then they leave out exotic lending and say housing prices will NOT go down, they will merely stop rising.

I’m with Roubini. His analysis is much better than Anderson Forecast! Any economist who considers exotic lending and payment shock is worried about a recession. Here’s my spoof: “Hey, let’s just pretend there are NO exotic loans, and then we can bury out head in the sand and tell everyone including our banking sponsors that banks will be fine and safe and there is no recession. Then we can get more money from Wachovia and our other buddies, and when things get really bad we’ll just say we changed our mind in light of incoming data. Signed, UCLA Anderson Forecast”

[sdduuuude]

sdrealtor said:
“How many of you out there would be happy buying a home at 20% off current prices at the bottom of the market? ”

sdrealtor – I don’t care how much it has fallen off. If it is truly the bottom of the market, I’d like to buy because I look to the future when making investments, not the past.

sdrealtor said:
“If we asssume prices are already down 10% off the peak”

I’d just like to point out I think my Clairemont neighborhood has been pretty flat for the last year. I did looked at Zillow and ran some comps on the house I sold last year and it hasn’t really budged more than a couple percent.

I hear alot of the North County folk talk about 10% decreases so far, which I can’t dispute, but it is interesting that I don’t see that in my neighborhood – yet.

[Author]

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