Stumbling across the April, 2007, issue of Los Angeles Magazine, I found a key to the disaster we see before us. The title of the cover article was Real Estate 2007, When Will the Bubble Burst? And Other Burning Questions.
It is a game, as they say in the article. The game is "Do I Buy/Sell Now?" In 2007, the key to the bubble not bursting was that our local economy was still good. In hindsight, we can see that the real estate market "bubble" has actually been slowly deflating since 2005. The number of properties sold has been going down since then, even though prices appeared to remain high overall. The prediction in 2007 was that we would see prices soften and modestly decline through 2008, maybe by 2 or 3 percent per year. Today, December, 2008, we see prices have dropped anywhere from 15 to 50 percent, depending.
Depending on what? Real estate is a local business, and in my neighborhoods of Northeast Los Angeles and the San Gabriel Valley, the housing stock varies on a street-by-street basis - no two homes are alike and so no two values are alike. The Case-Shiller index measures the value of a home that sold at a particular time compared to that same home that sold at another time, which is meaningful for that particular home and not many others. See how tricky this all is?
The key to everything is the health of the local economy. Last year, Los Angeles was doing fine. This year, the whole world is in economic disarray. In the early 1990s, the scene of the last big downturn in the Southern California market, we had more local problems that were not felt so much in the national scene, like earthquakes, fires, riots, and the complete restructuring of our economy from defense-related to service-based. So we had an exodus of folks finding jobs elsewhere. I don't think we are seeing that now - times are tough almost everywhere. Now, we have been living in an economy where businesses operate on a line of credit as a matter of course. This was not risky behavior, it was standard operating procedure for any number of law firms, medical practices, and other businesses all over the world. Today, some of these businesses have had to lay off hundreds of people because they can't get their normal credit anymore. This is just one example of the kind of unexpected fallout that is affecting our own little piece of paradise. I know people who have had their own lines of credit on their homes and credit cards reduced or eliminated for no apparent reason.
Credit is basically a promise to pay. The givers of credit have lost faith that those people will repay. This in turn causes the very problem the creditors seek to prevent the loss of the ability to repay. It's all very well to say that we should all return to a cash economy, but few of us operate that way. I feel like I'm watching Jimmy Stewart in "It's a Wonderful Life" all over again. I'm actually feeling a little like Donna Reed, dependent upon Jimmy's ability to restore his depositors' faith in the system for her family's survival. Only today, our Jimmy is President-Elect Obama.
Look at the decline of companies like the Los Angeles Times. They've laid off dozens and dozens of people as their product has become affected by the change in the global way of obtaining information and by the downturn in advertising dollars spent. And this affects me personally because I have many clients who work or have worked for the Times.
And so it goes, from the big picture to our own backyard. In the next installment, I'll talk more about our own microcosm of real estate here.