Home Price Slide Hits Even The Best Areas Of LA

There’s an interesting article in the LA Times this morning about home prices in the tonier areas of LA starting to fall. It seems that some of the areas have seen price declines of up to 30%.

You’re probably saying so what else is new. Actually, this news represents a sea change and buries the notion that had prevailed that these areas were somehow immune to the real estate flu. So now we know that it’s an equal opportunity disease. What caught my eye, though, was this little bit of the story.

The downward trend is no surprise to economist Christopher Thornberg, principal of the Los Angeles consulting firm Beacon Economics, who for years angered many real estate agents by repeatedly saying the Westside would eventually see price declines just like the rest of Southern California.

“It was never a function of if,” Thornberg said. “It was always when.”

When people in entry-level homes can’t sell their properties to move up, there is less demand in the middle tier and eventually at the high end, he said.

“It takes a while, but the markets are all linked,” Thornberg said.

The numbers were bound to go down, he and others said, for the same reasons they did in less wealthy neighborhoods — prices rose beyond what incomes could reasonably support.

Wealthy areas can stave off market woes for a while, in part because well-off homeowners usually have the resources to sustain high mortgage payments and weather downturns longer than people with less money. In many cases, the affluent can afford to hold on to a house longer while waiting for a better price.

But eventually the market catches up, and those who want to sell their expensive houses have to cut prices.

This is something I’ve harped on a bit as have others. Barring some unforeseen turnaround in the housing market, 2009 is going to be the year that we see the housing crisis move upscale. The linkage Thornberg alludes to is a very real part of the market and one that has been overlooked. In fact it could be quite some time before the markets dynamics are restored.

It appears increasingly likely that we will come out of this recession with a fairly wide swath of homeowners trapped in their homes due to negative equity. That group is likely to be largely composed of owners towards the lower end of the price scale. As natural move-up buyers they’re going to disappear from the mix which probably infers that pricing will remain weak on up through the chain. Over time, those that do enter the market now will come to constitute the demand for higher priced housing but that is going to take more than a little time to occur.

Not only does this imply a period of modest price increases (if, indeed, there are any at all) but it also suggests that the real estate industry is going to have to adjust to lower transaction volumes. Move-ups tend to generate multiple transactions as their homes are sold to entry level buyers and the seller of the higher priced home purchases alternative housing. Extracting even a portion of this dynamic from the market will have important economic consequences for the entire chain that profits from real estate activity.

Just one more example of the semi-permanent alterations you might expect to see from the economic dislocations we’re not experiencing.

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