June 20, 2008

Curbed Prices in the Valley: Slow-Bursting Bubbles Back to Back?

Our bud Dakota Smith over at the Curbed LA blog tipped us off to a look back at a roundup of open houses Curbed ran in January.  Curbed reader Starchy wanted to see how these half dozen Valley homes, all in Sherman Oaks (or adjacent) and Studio City, had fared since they were first featured some five months ago.

Of the six properties, three have been sold, two are still listed - at reduced prices - and one has been pulled off the market.  Since only “sold” prices really have much significance to the bottom line, let’s focus on the sales.

At first glance, it might appear that a pair of mid-priced properties that sold this spring in Sherman Oaks - a 3+2  ~1,500 sq. ft. home on Buffalo Ave., and a 2+2 ~2,300 sq. ft. traditional on Huston St. - were picked up at good prices for the buyers.  Both sold for around $350 per sq. ft., a steep discount off Sherman Oaks’ longstanding $500-plus median price-per-sq.-ft. standard.  Sold for $555,000 and $782,000 respectively, the Buffalo and Huston St. properties could pass for bargains compared with comps in the recent past.

But viewed from a longer perspective, a 20-year span which includes the last major housing downturn in the 1990’s, the picture changes dramatically.  Digging into the archeology of home price histories (courtesy of Redfin’s data), we can unearth the fact that the Buffalo Ave. home was sold in 1989 - just as that era’s housing wave was cresting - for $207,000.  The same house sold for just $173,000 some eight years later, long after the wave had crashed and was still ebbing.  By coincidence, the Huston Street house also sold in 1989, for $445,000.  Nine years later, it too changed hands - this time for only $371,000.  

Both properties suffered a nominal loss in value of 16.5% over eight or nine years.  But adjusting for inflation, the decline in value is far greater, roughly double that percentage.

Back to the future:  Now, in 2008, we are only two or three years into the current decline.  The tide of expert opinion lately has been strongly trending toward the view that this bust, too, will be long and protracted.  I happen to share that view.  

We could be wrong, and the buyers of those homes in Sherman Oaks may never find themselves underwater.  But I doubt it.  I think it’s much more likely that a few years down the road both will be worth 10-20% less than they are now.

The third home that sold is a harder call, because it’s basically a new house, a million-dollar McMansion built - or totally rebuilt - in 2007 (13537 Morrison St., Sherman Oaks).  Its price history bears no relation to its value now, just as its hulking frame bears no relation to the neighborhood.

A note of concession:  there are many, many buyers who operate on the principle that a house is not an investment, it’s a place to live and call home.  They plan on buying and staying in a home for many years, and many say they are not concerned with the vagaries of price.  The market value of their home is irrelevant to them because they have no plans to market it. 

I can understand that view - up to a point.   That point is where the real and growing possibility of future market declines threatens to wipe out a hard-earned 10% or 20% down payment.  If history tends to repeat itself, and I think it does (with infinite variations) that point is here now.

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