For several months now, the good news has been trickling into Southern California. Sales are up and unemployment is dropping. The entertainment industry continues to boom and, by all appearances, our economy is growing a little faster than the nation's as a whole. Southern California is back.
But a curious phenomenon resides at the bottom of these optimistic numbers. While sales of houses are up, prices are down. Down even from the abysmal figures of a year ago when they had dropped as much as 25% from their peak in 1989.
For the last three years the economists at the UCLA Anderson Business Forecasting Project have predicted that real estate prices would begin to rise as the economy recovered. And each year thus far, they've been wrong. For some reason, house prices have "de-coupled" from the economy, leaving the experts bewildered.
"It's a total disconnect between growth and a steady increase in property values," says UCLA economist Tom K. Lieser. "We have experienced the largest capital losses in Southern California real estate since the 1930s, and the losses continue to mount. The situation is unprecedented."
While real estate price figures can be notoriously tricky, TRW Property Data has developed a system to compare sales of similar houses in neighborhoods over certain time periods. Here's TRW's conclusions about prices in a handful of neighborhoods this year compared to last:
* Glendale--down 6%.
* Pacific Palisades--down 3.4%.
* West Hollywood--down 2.6%.
* Van Nuys--down 2.4%.
* Beverly Hills--down 5.9%.
These figures present a mystery. If more people are buying and sales are up, why aren't prices rising with demand? In the answers lie some uncomfortable truths about Southern California and the heavyweight blow it has taken since 1990.
In fact, if you own a house, you want to avert your eyes at this point. It ain't pretty watching the icon of home ownership writhe and die. Remember how it was going to guarantee both our financial security and our social standing? Remember the 1980s, when people at dinner parties stopped asking each other about their jobs and inquired instead, ever so delicately, about their equity position?
Gone, all gone. It appears that several factors have conspired to produce our sad situation, and the most potent of them remain alive and well.
First, according to economist Nima Nattagh of TRW, personal income growth remains anemic in Los Angeles, far below the levels of the 1980s, and shows little promise of dramatic revival.
Second, many--if not most--of those who bought houses in the boom of the late 1980s find themselves trapped by "negative equity." Their houses are worth less than their mortgage. So they can't move out and move up.
Third, the population of 24- to 35-year-olds--the baby bust generation--is too small to provide any momentum to the first-time buyer's market.
Lieser also has a theory. He believes that the Los Angeles real estate market has evolved into an enormous game of chicken. Each buyer is waiting for others to wade into the market, thus signaling a turnaround. Since everyone is playing the same game, no turnaround occurs.
All of the above could be true, and probably is. But none of it explains the high sales figures. Someone out there is buying. Who are they and why aren't they driving the market upward?
The answer is intriguing, an artifact of our era. It appears that the great majority of sales are taking place at the low end of the market, many of them involving distressed properties. In other words, people are buying foreclosed houses, properties with bankrupt and desperate sellers, earthquake-abandoned properties and the like. The sellers of these properties do not go out and buy larger houses because the sellers are banks, governments or what-have-you.
For example, February sales in the San Fernando Valley show 150 houses were purchased for less than $100,000. Another 144 houses were purchased for prices between $120,000 and $139,000. In all, 812 properties sold in the Valley, a hefty increase over last year.
Of those, how many were sold in the $800,000 to $899,000 range? Exactly two.
That's why sales are not pushing prices upward. And that's why many in the real estate business believe prices will continue to fall. Michael Hart, a Realtor in the Valley, notes that a buyer in Philadelphia or St. Louis or Chicago can still get much more for his money than he can in Los Angeles.
Before the great real estate boom began in the mid-1970s, in fact, Los Angeles houses commanded only a small premium over their equivalents in heartland cities. During the 15-year boom that followed, that premium grew to absurd proportions. Are we headed back to the historic norm?
No one knows. But we do know that the days of the house-as-icon have ended. Not in our lifetimes will couples go into the market looking for the sure thing to a secure future, for a ticket to social standing, for membership in the equity club. They will simply go looking for a nice place to live. That's not the boom times, but it's not the worst of times either.