SoCal home woes could mean 50% price drop
June 20th, 2008, 12:02 am
Economist Chris Thornberg said Southern California home prices likely will continue falling until mid-to-late 2009. When the dust settles, he added, homes here could end up being worth half as much as they were at the peak of the housing boom.
âThe reason prices are falling is because of gravity,â Thornberg (pictured here) told the Register after delivering the UCLA Extension Real Estate Forecast at the Skirball Cultural Center in Los Angeles. The run-up in home prices over the past decade was âludicrous,â he said, noting that the increase wasnât accompanied by a comparable increase in income.
(Thornbergâs not alone. CLICK HERE to read an interview with another observer who thinks a 50% drop is possible!)
By Thornbergâs math, a typical Southern California house payment equaled about a third of its ownerâs gross annual income in 1999. By 2007, it equaled about 70%. âThatâs why prices are coming down. They have to come down.â
Thornberg, founding partner at Beacon Economics and former UCLA economics professor, said home prices would have to fall about 40% from peak to trough to return to the historical norm. But add in the impact of rising gasoline prices, the subprime mortgage meltdown and rising foreclosures, and itâs likely prices will fall 50% peak to trough.
The S&P/Case-Shiller index shows that prices for the L.A./O.C. area are down 24% from the peak, so the region is about halfway to the bottom, Thornberg said.
In Orange County, price declines will be more severe at the bottom of the price spectrum than the top end, but âthe top end is going to get hit, (too),â he said.
That will be a rude awakening for many homeowners suffering from what he called âhomallucinations,â or the ability to convince oneself that while the price of everyone elseâs home will fall, your neighborhood is clearly different.
Said Thornberg: âThatâs what people go through â until reality kicks them in the butt.â
