Risky Business

Dataquick, the company that supplies the LA Times with housing activity statistics, released their report for December last week. The headline was “Southland home sales: New price peak, slowest December in ten years”. Now that doesn’t sound too bad until you look at the numbers in detail.

Home price appreciation was 3.3% for the 6-county, Southern California region. However, when corrected for the 2006 inflation rate of 3.24%, home price appreciation was .06%, not exactly the stuff headlines are made of. What’s more disturbing, though, is the data for San Diego County. Most economists consider San Diego to be the region’s bellwether. And the median home price there declined at an inflation-adjusted, annual rate of -9.6%. Ventura’s decline was -9.1%. Orange and San Bernardino counties just about broke even. Only LA and Riverside showed modest gains of 3.3% and 1.9% respectively. And according to the experts, we have a couple of years to go before the market begins to stabilize.

The correction has begun. Affordable housing is on the way. We don’t need government intervention or greedy downtown property owners, developers, and real estate brokers to aggravate the problem. Lower prices and a record supply of vacant, available homes are already here according to the Wall Street Journal. Thing’s are going to be bad enough without further over-development making it worse.

If you want to see what could happen, go to www.dqnews.com. Go down the left side of the home page and click on “ARCHIVED ARTICLES”. On the page that comes up, click on “1995 Releases”. Then click on the first article under “1995 Releases”, “California Homes Being Sold at a Loss”. The article, Dataquick’s first press release, says that, in May of 1995, 30.7% of the homes sold went for less than what the sellers had paid for them. That’s an improvement over April, when 32.4% were sold at a loss, or May of 1994 when the figure was 35.4%. The personal tragedies in those figures are unimaginable for those who did not go through it. It should be noted, however, that one of the cardinal rules of economics is that history repeats itself.

People will say; “It’s different this time. Back then, cutbacks in defense spending caused a recession, and Southern California lost thousands of jobs.” My answer to that is the same one Christopher Thornberg gives in the closing remarks of his video presentation. There has never been a real estate boom in history of a magnitude like the one we went through in the first half of this decade. Never! And there’s no historical precedent for the exotic financing that supercharged it.

We are in dangerous, uncharted waters. All I am suggesting is that we proceed with caution rather than “full speed ahead”, like council members Buchanan, Joffe, Mosca, and the rest of the pro-development clique are dictating. They must be insane, or else, utterly ruthless.