Beverly Hills witnesses a 23 percent annual decline in home values – Low interest rates do not mean long-term housing prices will go up. Just look at Japan and their historical interest rates.

Talk of a US housing bottom has been in the press for all of 2012.  Interest rates keep making incredible lows allowing current mortgage holders and new home buyers to max out on the price they pay for a home.  Banks in California are definitely more willing to offload quality properties via the short sale avenue realizing that the summer of 2012 is a good time to offload distressed inventory.  The fall and winter will be the true test to see if this really is a rebound for the housing market.  Low rates do not necessitate home prices going higher.  You can look at Japan and realize that low mortgage rates are not the panacea for reviving a housing market.  At the end of the day a $500,000 home with a large mortgage is still a hefty sum.  Overall California home prices are up.  I wanted to get a glimpse at what markets are under performing in this hot summer.

Los Angeles falling zip codes

I found it interesting that some notable quality communities showed up on the list with largest annual price declines.  I went ahead and highlighted areas where at least 10 or more homes sold in June of 2012:

los angeles county top falling zip codes

Source:  DataQuick

I found the 23 percent year-over-year fall in the prestigious 90210 zip code fascinating especially over 23 sales.  The median price is $2.49 million for Beverly Hills and this likely signifies that wealthier clientele are still in the hunt for this prime zip code but at a lower price point.  Since many pay in cash, a low interest rate is not all too important for these buyers.  A 23 percent decline in one year is already almost to the level of what the entire US housing market fell from the peak (30+ percent).  So you can understand that in mid-tier and upper-tier markets price declines are still very much likely to occur as demonstrated by the data above.

You can also see in mid-tier Topanga that home prices are down 34 percent over the year.  A $650,000 home is still a hefty sum even for the low six-figure households looking to purchase in this area.  A prime area in Pasadena (91105) saw prices fall by a significant 39 percent and this was with 21 sales.  Countywide in Los Angeles prices are up 2.2 percent year-over-year but the median price is $325,000.  So what we are seeing is a big hit is being taken at the higher side of the market but so few sales take place here, that little change occurs for the county median price.  The low range is picking up since most buyers here are leveraging up with mortgages but the mid-tier and upper-tier are still correcting.

Even a place like Calabasas saw their median price fall by 40 percent year-over-year with 15 sales.  This is happening in what is the hottest summer for the housing market in a few years.  Why are these above zip codes seeing sizeable price cuts?

First, the jumbo loan market is still constrained.  Most of the Fed action and MBS buying is happening with conventional loans.  Even today, the only game in town is the government.  FHA insured loans are the number one player for getting first time buyers in with a tiny 3.5 percent down payment.  Current owners have been refinancing like maniacs to benefit from the lower interest rates:

We are reaching a point where US Treasury rates are so low that interest rates may be reaching a bottom.  The Fed can step in with QE3 and purchase more MBS but how much lower can rates go?  If you think low rates are a way to boost home prices just look at Japan:

japan mortgage and interest rates

Japan has had mortgage rates in the 3 percent range going back to the early 1990s and home prices have done this:

japan real estate values

Low interest rates coupled with a controlled leaking out of inventory (our version of zombie banks) has definitely pushed home values higher in 2012.  As you can see from the data above, not all areas are seeing a bottom this summer.  Ultimately income matters and the economy is still very weak.  That is really the key indicator to look at for future sustainability of the housing market.  So you can get a $500,000 mortgage for less than 4 percent but you still have a loan obligation for 30 years of half-a-million dollars.  I can see how nationwide purchasing a home for say $150,000 at 3.5 percent is a smart move given all the tax breaks.  No disputing that (hey, you can even buy a home in the Inland Empire for that price).  Yet for California home prices are still out of sync in many locations and as you can see some of these areas are still undergoing double-digit declines.

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41 Responses to “Beverly Hills witnesses a 23 percent annual decline in home values – Low interest rates do not mean long-term housing prices will go up. Just look at Japan and their historical interest rates.”

  • Tired of your old home.. don’t settle.. see this program for Pardee homes. They will rent your existing home, take care of maintance for three years so you can purchase a new Pardee home. Why settle..You Deserve the best!

    Check this out:
    Smart move advantage Pardee Homes

    Who thinks of this stuff??

  • The expiration of the Bush tax cuts are looming. The this is going to affect bot the appetite and ability of even the affluent to purchase luxury housing. How this will work its way down the housing ladder will be interesting to watch.

    If million dollar homes fall to $750,000 will people who were looking in the $500,000 range be enticed to stretch for grand home and will that cause the bottom to fall out of mid range houses, allowing those in the $300,000 market to strive for the next level up.

  • Low-end homes are being snatched up very quickly now because most cash flow positive in this market as rentals. And this is creating pressure on the mid-priced market because people that want to live in their home have almost no other choice. I think that’s really about it. How long will it last……maybe not even into next spring?

  • you know what? wake me when the houses in sierra madre or north monrovia make ANY sense. I have been waiting four years with my 20% down and 800 credit score and reading this blog and waiting . . . and waiting . . . and what happens – the price went UP!

    • Totally agree. Prices in northeast Los Angeles have increased by nearly $100,000 in a year. Everything in this blog makes perfect sense to me, but the market in some areas seems to be reacting completely the opposite, completely unpredictable and (honestly) a little nutty.

      • You missed out on the bottom once again. There are those who take risks and those who sit on the sidelines waiting until its safe to cross. The risk takers often met rich or go broke. But the usually enjoy life a lot more. They are in the home while everyone here blogs about their woes.

        Sadly I’ve been blogging for 10 years from an apartment.

      • notbuyingjustyet

        Again, NO INVENTORY drove prices up. The banks still have not released all the foreclosed homes. The only homes on the market are overpriced or crap, which we laugh at. It is nutty, makes no sense, so we walked away and happily rent.

      • Sean, they are not happier. You don’t want their stomach ulcers as they hope/pray for their crazy speculation to pay off. You do realize they are all secretly hoping for a capital gain, even if they say they don’t care about that.

    • I love it up there in Sierra Madre. I was driving around up there last evening. If I had to move out of So. Pas, I’d rent a little cottage up there…

    • The drop of 30 year fixed mortgage rates from 4.5% to 3.5% is adding about $100,000 to the house price, on top of very low controlled inventory…

    • That is what happens in a bubble. The second wave upward right before the bottom falls out.

    • notbuyingjustyet

      Yes, prices have gone up in some areas of Los Angeles, ONLY because there is no inventory. Actually, inventory is down here 34% lower than this time last year. The sellers right now are dreaming, thinking there homes are back in 2006/07. They can ask whatever they wish, most educated buyers won’t buy them knowing there in no inventory. We sold 3 years ago, happily rent on the Westside and will continue renting until we retire out of LA or the market changes. Renting is a great place to be right now.

  • I am living in Calabasas for a short period. I don’t get how people can buy houses in these areas. If the medium income in Los Angeles is about $50,000 where does the money come from? This is a beautiful place but the hills are covered with hunks of stucco everywhere you look. The asphalt has made the place so hot it is unbearable for me and evidently everyone since the ACs run day and night spewing more carbon into the atmosphere. The formerly beautiful hills look like there was a stucco hurricane with the debris scattered all over the place. No stores nearby. Everyone has to jump in the car for any little thing and hit the freeway. This is a ’50s community that just doesn’t get it.

    • Calabasas is a little far out on the 101 for me… But its got great schools.. Relatively close to malibu beach… And its not too hot! Ok maybe in july and august … But where in the us is it comfortable that time of year!? Its a dry heat… Far better than humidity… Gross!

      I love people talking down areas they would like to live… In hopes prices will drop!

      • I’m not going to tell you where it is comfortable that time of year but your not too far from it if you are writing from here in Southern Calif.

    • Calabasas median income are not $50k either… Median income for LA includes Lancaster and south central neighborhoods…. Where more people per square foot live.

      I think median income is around $100k in calabasas. So with 3.5% rates.. A $500k home is about the same per month as a $300k home at 8% rates.

  • It’s funny how that blue shade shows that the recession ended in 2010, but I hear the word recession used by all sorts of people every few days. Nobody but the NBER (probably after arm-twisting by the gov) actually ever said the recession. Everything about the situation is perverted. Is there any relevance here:

    “War is peace.
    Freedom is slavery.
    Ignorance is strength.”
    ― George Orwell, 1984

    • Yeah, Dark Ages, I hear ya. Here’s another good one. A piece of paper printed in the bank room of a private bank is a ‘dollar’, lol. They get around this technicality by printing ‘federal reserve note’ on it, and the sheeple lap it up like beer at last call for alcohol.

      The problem is how to flood the system with enough of these phony dollars to pay off everybody’s debt, at a time when wages can’t rise due to globalization. Quite frankly, I don’t think Einstein could figure that one out.

      Rep. Ron Paul said, “When Alexander Hamilton wrote the Coinage Act of 1792, he simply made into law the market-definition of a dollar as equaling the silver content of the Spanish milled dollar (371.25 grains of silver), which is the dollar referred to in the Constitution.”

  • Shriveled Raisin

    Several questions for the good Dr. and other interested parties:

    Imho from what I have read in this blog, supply of houses is pushed down by zombie bank hoarding and controlled leakage, as well as the many millions of underwater homeowners who decide not to sell, along with the general market decline over the past few years that discourages putting properties up for sale . At the same time, demand is increased by government guaranteed FHA loans with 3.5% down and historically low interest rates, by Fed policy for reasons of its own (to say nothing of real estate industry propaganda). Therefore, both supply and demand are fundamentally skewed to maintain prices. This is sustainable in the short term (5-12 years or so), but what about the long term? Mortgages are for 30 years typically. Is this accurate? What other supply and demand figures am I missing, other than the inevitable real estate agent shenanigans? And what would happen to the market if interest rates jumped to 7% and all of a sudden a 20% down payment was the legally enforced norm? So here then are the questions:

    (1) Is it not true then that a home purchase is essentially a bet that current conditions listed above last for 30 years? Those who do not plan to or cannot pay off their mortgage in 5-12 years then essentially claim that these conditions will last for 30 years or the life of their loan (otherwise, the value of their home declines, resale will be difficult, etc.) To what extent is this a good and knowledgeable bet?

    (2) Connected with this, what are the alternatives for the prospective mid-tier homeowner? One suggestion (if possible) might be to purchase a lower-end home at 2-3X income rather than 4-8X income as is the norm in CA. The former homes will see increased demand from young workers indentured by student loans; the latter will decline because of lower demand, baby boomer retiring, etc. as discussed. Other alternatives of hoarding cash do not make sense in an era of QE1,2,3,4, etc., and stocks and bonds are often not liquid, while money market accounts pay low rates. What about the idea of instead while waiting for the mid-tier home to decline in prices (which they will) purchase a lower end home and rent it out? At least this way it might be possible to break even, and home ownership in any form has its advantages.

    Apologies to the non-options experts, myself included:

    (3) Finally, it seems that for non-professionals in finance the home market is one in which it is possible to only buy and hold. This is medieval simplicity; even state-mandated car insurance is a put option. What possibilities are there for the individual investor to take advantage of price declines, volatility or lack thereof, etc. and apply the same kind of options strategies used in stocks to real estate? For example, straddles (bets on volatility) written straddles (converse of straddle), collar, etc. For instance, given that mid-tier home prices will decline in CA in the next five years, how can an individual make a leveraged bet that this will be the case? There are also many, many other possibilities other than buy and hold, at least I hope. The key word is a leveraged bet, not an indirect consequence of the trend, which is easy enough to figure out.

    thanks in advance

    • Lord Blankfein

      Shriveled Raisin (I like that name), when you say this manipulation can go on for another 5-12 years in the shortterm…NOBODY on this blog is going to wait another 5-12 years in HOPES of normalcy returning to the market. And if rates shot up to 7% and 20% down was required, the housing market would crash overnight. Given the actions of the powers that be from the last 4 years, that will never happen. Housing is seen as a holy grail, without a healthy housing market you can’t have a healthy economy. Trust me, politicians, Wall St., the Fed, the FIRE industry, big business all know this.

      Today’s buyers are just buying the monthly payment (which is much lower than 5 years ago). I don’t think most of them care or have even given thought to “what happens if rates are 8% when I want to sell my house in 2020.” Until then, they get to enjoy living in a house and can build some equity with the low rates. And from what we’ve seen, the powers that be will ALWAYS side with homeowners…they will give them every advantage known to man. I think many people on this blog overanalyze homebuying (which is a good thing), but you are definitely in the miniority. Your average person has no idea what 8% interest rates will do pricing or monthly payments.

      We’re in uncharted waters right, navigate very carefully!

      • NOBODY on this blog is going to wait another 5-12 years in HOPES of normalcy returning to the market

        THAT is the idea. Jump in now, so we can cancel out your bubble windfall sooner than later. The game is rigged to Hoover up every last dime in equity or cash-outs that speculators and the lucky bunch managed to keep squirrelled away on the sidelines up to now. It will dislodge even the most stubborn with low-rate inducements to abide the tremendous pressure to own RE!

    • If you could get a lease with the option to buy, that would protect you for the length of the option, from both deflation and inflation. If house prices drop, you buy another home at the end of the lease, or even during it, and sub lease out the place for the remainder of the lease.

      If we get hyper inflation (50/50, I’d say), you exercise your option and buy.

      I went to a small food market today. they said that all their prices are going up 30% across the board, in about three weeks. Remember for years, that plums, peaches, and nectarines were always $1/pound when in season? Now it is $1.50/lb. that is a 50% increase!!!

  • @Pammy

    I was exactly in the same boat but I gave up and finally baught 1624 sq feet typical Cerritos house for 509K and put another 25 K t (school API score 10,10,10).

    • That is the perfect reaction to the Government and Realtor, Bank industry shell game…..You have now guaranteed that your children or future children will be brilliant and successful if you just purchase an overpriced old home and maintain and upgrade it for 5 – 30 years. They love good tenants theat pay all the expenses including water and gardener. How does a school score make an individual a well rounded person? The latest shooter went was in the best school district in San Diego county and had grat test scores.

      We fell for that when we were young too. It pains me to see the next generation just getting in line for the same scam.

      Enjoy Home Depot and Lowes

  • @Pammy

    I was exactly in the same boat but gave up and finally baught 1624 sq feet typical Cerritos house for 509K in March 2012. I am perfectly ok if the house price goes down
    to 450K or 400k as I was wasting 2200 on rent. My house is in prime area where school API scores are 10,10,10 and there is lot of compition. Good luck…

    • We Don't Make Those Drinks No More

      “I am perfectly ok if the house price goes down to 450K or 400k as I was wasting 2200 on rent.”

      Just wow. For me, this typifies why SoCal RE prices are irrational and will remain so…when asked why buy in SoCal, people mention weather, born here, school test scores (funny how many of high scorers become adult kids boomeranging home after college with huge student loan debt, low paying jobs/no job in a very tough CA job market). Many potential buyers don’t seem particularly concerned if house significantly goes down in value, as they “own” it, rationalizing they’re not “throwing money away” on rent, etc. Potential UE in a shaky CA job market/economy, taking a big financial gamble doesn’t seem particularly troubling. The decision to buy often seems steeped more in emotion, not financial reality or common sense.

      Suzanne Researched This! I love that house! Plus the Schools! This listing is special John! Did you see the size of that garage? YES!!!

      Plus I believe many think that if the RE market declines, if a job is lost and the mortgage can’t be paid, they’ll continue living in the property indefinitely, surely they’ll be a RE bailout, a govt program, etc. that will save them, reset. Why not?

    • Lord Blankfein

      So let me get this straight, you would be perfectly fine to lose 100K value in your house instead of throwing rent money away. This sounds more of an emotional decision than financial one. Examples like this are exactly why the LA real estate market is so effed up. People will literally do anything just to “own” in certain parts of town. A nice reset button in the form of 7.0 earthquake is what this place needs!

  • Some really great comments on this post! I’d love to see the Dr. respond to a few of them in detail.

  • 500,000? is actually ove a million after the 360 payments. Fools and mortgages make the bankers very fat.

  • The house market is barely budging at zero interest rates and lenders are still handing out near zero down loans to people with meager incomes. What happens when rates regress back toward the mean (that’s about 7.5%)? How about the 10,000 seniors who retire every day who want to dump their large 2-year-old outdated empty house for a smaller one? Who’s going to buy?

    Kids are so deep in debt now most know better then to tie a 30-year lead weight around their ankle especially when the job market is so flexible now the chances of them moving far away for a job are high. Try to sell in this market on top of the 8% selling cost hickey from RE commissions and closing fees….

    This housing recession will likely last at least ten years as GS and DB and Shiller have said or implied based on facts…not spin or pumpers.

  • Don’t know the details about your chart, but we have been following Redondo Beach and lack of inventory has driven up prices about 10% this year. Many are bidding without loan appraisal contingencies. It is a boiling market. We decided to buy, not in Redondo Beach, but we did pay 5k over appraised value mostly because we could afford it and found significant issues with the appraisal. In the end, we will save $1k per month over renting. I doubt the house will depreciated that fast. The house is older than what we are renting, but bigger.

  • Here’s the future, as Dr HB keeps gently reminding us: for California, what is the inflation adjusted total gdp 2000-2010 or 2011, and what is that per capita? I have been trying to find a proper analysis of it, found several I don’t agree with due to too many assumptions. But if you take various measures of inflation 2000 to 2010, the high unemployment, the population growth without any wage growth total (before inflation), how can there be surplus money for housing? Also, the median California family is paying much, much more in taxes overall from 10 years ago, if one digs out all the obvious and all the “hidden” taxes, and gasoline is pretty pricey, education is costly, and on and on.
    Maybe someone reading this can come up with better numbers that will stand up to some scrutiny, but the income per capita inflation adjusted (arguably, aftertax only) is the key to the future of home prices when all is said and done. In other words, the money has to be earned and be enough to support a California-priced palatial estate, however small that is. Any one aware of a more exacting study? Oh, this helps show how the unemployment rate nationally causes loss of gdp to homeowner classes:


    Thank God the worst is finally behind us and things are heading back to near normal. But wait, no so fast. For housing to recover, the overall economy has to recover and unfortunately, that’s not the case. The worlds economies are based on expansion and more consumption, that’s all been interrupted by a massive debt burden saddling not only Federal, State and Municipal economies but also households worldwide. The banks have a plan in theory, but its just more dyke filling. The total collapse is predictable and immanent.

  • A home purchase today is either a put or a call on Ben Bernakes big mouth.
    I wrote an equation for clear ambiguity.
    The Fed -> x -> you
    Solve for x
    A renter.
    The Fed-> The Landlord = (( landlord investments + landlord tax position + landlord debt)/ landlord income)-> your rent -> you
    A 3.5% FHA homeowner.
    The Fed-> the bank (that made sure you signed every form and application 100% correctly and spent 99% of its time and effort on making sure no mistake was made on their part in case the FHA tries to put back the loan they gave you, back on them instead of leaving the tax payer on the hook for extend and pretend) -> your mortgage -> you
    Since the bank has no exposure the value of the bank to the equation is zero so
    The Fed -> YOU.
    Cut out the middlemen, I say.

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