More doom and gloom...

Here's some of the recent dreary, depressing views on the state of the economy and real estate:

1) L.A. is already the worst and will get worse still. According to Fortune magazine, L.A. is the worst housing market for 2009. Well, 2008 wasn't too grand, my friends.

2) In the WSJ on Monday, a Russian professor predicts the end of the old U.S. of A. Hmm, hasn't that long been the dream of many Russians.

3) "The Black Swan" author Nassim Nicholas Taleb (start watching at 15:30) said about the same on Charlie Rose earlier in the month. (To me, he often seems to be making it up as he goes along).

When I start to hear so many people jumping on the doomsday bandwagon, I wonder if some are stretching their ideas beyond the boundaries of reality. There are terrible things and terrible trends going on in this economy. But instead of "irrational exuberance" have we hit the point of "irrational discouragement" with statements like this?

I don't know the answer, but I certainly agree with this quote from a RE developer today in the San Francisco Chronicle: "...in the long-term, we're going to find that real estate in the infill areas of San Francisco and Los Angeles will be harder to penetrate and more valuable."

2008: The Year in Los Angeles Condos

2008 was not a pretty year for condos in Los Angeles.

It wasn't a pretty year for real estate in Los Angeles in general. But condos were hit especially hard. Among the many reasons for this, two loomed large. One, recent years saw a boom in condo building, many which were just coming available in 2007 and 2008. Two, the ideal buyers for many of these condos would have been buyers with lesser incomes and lesser downpayments -- a market which evaporated when the credit crisis hit in late 2007.

In many prime areas of Los Angeles, condo prices were still holding relatively strong in the early part of 2007, but then dropped once the loan problems hit. Those drops in prices continued throughout 2008, and took another big hit at the end of this year when the rest of the U.S. economy collapsed.

Overall, condos in prime Los Angeles areas* were selling on average at $583 per square foot in the second quarter of 2007. But that number has fallen to $485 per square foot in the fourth quarter of 2008, according to sales reported in the MLS.**

This pattern was true for most neighborhoods. But some neighborhoods were hit harder than others.

I analyzed condo sale prices per square foot in some of Los Angeles' best neighborhoods. I looked at them on a quarterly basis because I think it makes no sense to look at monthly pricing trends. It's too short of a time period to gauge any meaningful changes when the average escrow lasts a month.

The areas that held their prices the best were 90048 (Beverly Grove), 90067 (Century City), 90404 (Santa Monica), and 90064 (Cheviot Hills/Rancho Park).

The areas that were hit the hardest: Downtown and Beverly Hills.

You could read either end of this chart in completely opposite ways. Perhaps, the ones that have fallen furthest are the ones you want to buy in 2009. Or perhaps, the ones that have held their value best are the ones to bet on long-term.

By looking at additional figures to these sales trends -- rate of sales in a given neighborhood, available inventory and the number of foreclosures -- I have my own opinion about which condo markets you might want to consider buying in 2009, and which you might want to wait. But I certainly could be wrong.

Truthfully, nobody knows for sure what's going to happen to condo sales in 2009.

==

* For this report, prime Los Angeles areas included: Beverly Hills, Sunset Strip, Bel Air, Westwood, Century City, Brentwood, West L.A., Cheviot Hills/Rancho Park, West Hollywood, Venice, Marina Del Rey, Santa Monica, Pacific Palisades, Beverly Grove, Miracle Mile, Hollywood, Silver Lake, Echo Park, Los Feliz, Hollywood Hills, Malibu and Downtown.

**The numbers come from the MLS. This means some new condo sales are excluded as many builders don't list all their condos in the MLS. But I think relying on MLS data gives a good indication of the overall condo market, as it includes both new condos and re-sales.

When will housing prices bottom?

When will housing prices bottom? When will the housing market recover? Those are the questions everyone who works in real estate, owns a home or wants to buy one wants to know.

Things have gotten so scary in this economy, that answering these questions have become the only way many people would even think of buying real estate right now.

Obviously, there's some good reasons to buy real estate right now. Prices have come down so much that everybody is thinking about it (NY Times Story). But many people are doing nothing more than thinking. Fear is holding them back. True, if you're having trouble qualifying for a loan, that will hold you back, too. But if you have the money and aren't buying amid this severe drop in housing prices and the historically low interest rates, fear must be the only reason.

But it's a very, very good reason. So let's look at some new and some old predictions about where real estate is headed from here.

Let's start with Doctor Doom.

NYU Professor Nouriel Roubini famously predicted the economic problems we're now facing -- even when nobody else was listening to him. He has answered the question in two ways:

1) Because housing (overall) doubled, Roubini says it needs to come down 50%. If you account for inflation, this means a drop in real dollars of 40%, he says. So housing prices have dropped 25%, and Roubini expects another 15-20%. (In the Greater Los Angeles region, prices overall have fallen 44 percent and many things are much more affordable. But this of course means some areas are above and some are below this. Some have farther to fall, some probably don't have much more to go, it's just a question of how long before they rebound. But if you're buying long term, then that's less of a concern.)

2) Roubini has thoughts on just how long this downturn will last: "My view is that that recession is going to continue at least through the end of 2009 ... If our policy reaction is appropriate, by 2010 there will be some recovery of growth." (For more from Roubini, CLICK HERE)

Chris Thornberg, founder of Los Angeles research firm Beacon Economics, predicts that housing prices will fall another 10-15%. As does Patrick Duffy, principal for MetroIntelligence Real Estate Advisors. (MORE)

Then, there's Sam Zell, the beleagured Tribune Company owner, who seems to know little about newspapering, but has an amazing track record with real estate. He's a tad more optimistic on timing than Roubini: "I believe ... we will see the first signs of equilibrium in the housing market in the spring of 2009 and I will expect by spring 2010 the housing market in the U.S. will look a lot better." (MORE) -- (Side note: I wonder if he still goes on his yearly motorcycle trek through Italy. If not, I'll be happy to go to keep his place)

The UCLA Anderson Forecast was previously more optimistic than things ended up. At the height of the real estate market in December 2005, they predicted cooling real estate but no recession. Their gloomier report earlier this month says: "The outlook for California calls for a very weak first three quarters of 2009, with the glimmer of a recovery in the fourth quarter."

OK, so the consensus of these three very different sources is that things may start to get better later in 2009 and very likely get better in 2010.

Wait a second.

Wasn't that the same thing many were predicting before the stock market, banking system, world economy, auto industry, retail sector and everyone else collapsed?

You mean to tell me that maybe all this unprecedented pain, this unheard of economic catastrophe is still on track for the same recovery timeline?

SEE MY POST FROM JANUARY (And remember, this is before any of the credit crisis spread beyond housing.)

Hmm.

I have not been the least bit optimistic about things this year -- particularly, real estate -- SEE MY OWN QUOTE IN THE L.A. TIMES HERE.

But maybe this isn't the end of the world. Maybe there really is light at the end of this tunnel.

And maybe it really is time to buy something -- before it becomes obvious to everyone else.

Hmm.

Blaming the right people for housing ills

As this country examines the causes of the Great Real Estate Bubble and attempts to place blame on the shoulders of those who acted irresponsibly and led us into the Great Real Estate Collapse, it's important to keep perspective.

There were many things that contributed in small ways and large ways to the Great Real Estate Bubble. But not everything that was done was bad.

A key example comes to mind after reading the recent NY Times article about the role of the Clinton-Republican capital gains tax cut on real estate in 1997: SEE STORY HERE

Clearly, this policy change caused an increased interest in buying real estate. But that's not a bad thing.

Remember, many policy initiatives such as this one, or some revised lending policies by Fannie and Freddie were not done out of greed. These policies were DESIGNED to encourage and promote home ownership. Policy makers believed that increasing home ownership was a good thing and policies should be changed to encourage it. Increasing home ownership is NOT a bad thing. It should be encouraged. And some policies that encourage home ownership are a good thing, a very good, undeniably good thing.

The problems we're dealing with now were not caused because more people DESIRED to buy and sell real estate. They were not caused because more people could benefit tax-wise from buying and selling real estate. They were not caused because more people could make more money in real estate.

The problem with the real estate bubble was caused because people who should not be buying real estate were able to get loans they never should have gotten.

The problem came from lenders and Wall Street. Lenders created unconscionable loan products. And Wall Street found new ways to securitize them. This was the GREED factor. This was where things went wrong. Promoting increased home ownership and giving a tax break to do so is not a bad thing. Selling crazy loans that borrowers could never really pay back and re-selling them as securities is bad thing.

That was greed. That was dishonesty. That was wrong. That, my friends, was the problem.

8-Figure Home Sales Crater

The mega mansions of Los Angeles have taken a big hit.

In an indication of just how far and how fast our economy has fallen, sales of 8-figure homes – those priced $10 million and above – have fallen tremendously in the second half of this year.

For much of the year – while the rest of the world suffered – the mega-mansions of L.A. continued selling. Through the first quarter of 2008, sales of $10 million homes were on a record pace. Even through the first half of this year, sales of $10 million+ homes were still on record pace. But since July 29th, just one home has sold for $10 million or more, according to the Combined Los Angeles-Westside MLS. This includes the prime areas of Beverly Hills, Bel-Air, Malibu and Brentwood.

That home was the unfinished mansion at 37 Beverly Park, which was originally listed for $49 million but ended up selling for $36.7 million.

One other home – “The Esquire House” at 1859 N. Doheny in the Sunset Strip – sold but didn’t report a price. (It was listed at $11.5 million.) One home – 12300 Mulholland – just went into escrow this week (listed at $15.9 million).

Even with those, it’s a sad case of the Nobody’s Buying Blues for L.A.'s most expensive homes.

To emphasize, January through July of 2008 there were 26 sales of $10 million or more. August 1st to today: there were 2 (and 1 more pending). 26 vs. 2. Whoa!

The upside of this is that (and I don't mean to sound like a real estate agent here, but...): There’s some great deals out there. Seriously. You'll see.

The people I talk with frequently already know that I think there’s one very special mega mansion that happens to be caught in this crazy market and is a downright steal right now at $35 million. There are others beyond that. There are still more where frustrated owners have taken their homes off the market (or tried to lease them) but would like to sell.

Want some numbers? My blog readers always want some numbers. So here goes. There are 106 separate properties in the CLAW-MLS areas listed at $10 million or more. At the rate they’ve been selling the last 5 months (3 total), it’s going to take nearly 15 years to sell them all. And if you include the outlying areas of L.A., there’s more than 100 more properties. Is this the end of the world?

No. There’s still a lot of people with a lot of money in this town. And still more who want to live in the greatest city on earth. Sales will pick up again. But these kind of irrationally slow sales can only suggest that, yes, there are some real deals to be had among even the highest priced homes in L.A. There I go, sounding like a real estate agent again. (Hey, at least there’s some numbers to back it up.)

And I even believe there are ways to increase your chances of selling your home in this market -- even when it appears nobody but nobody is buying. But to do that, your agent will have to do more than the usual to get your home sold. It involves some very simple but very effective (just not cheap) strategies that most luxury real estate agents don’t do. And a few things homeowners might not like, too.

So yes, write it down, things are dismal right now, even for the most expensive homes. But it simply can’t stay this bad for long.