The Los Angeles Housing market is one of the major markets in the Pacific Division, which according to the Housing Price Index (HPI) for April 2009, published recently by the Federal Finance Housing Agency (FHFA), has registered the worst by far house price decline of 17.1% among all US Divisions.
The second worst annual performance in April 2009 was registered in the South Atlantic Division where average single-family house prices dropped 9.8% from their April 2008 levels.
The latest HPI data by metropolitan area refer to the first quarter of 2009. According to this data, it seems that the rate of price declines in the Los Angeles housing market is decelerating.
In the first three months of 2009, Los Angeles house prices decreased by 2.6%, a rate that is less than half of the rate of decline that was registered in the fourth quarter of 2008, when home prices dropped by 5.7%. The fastest rate of decline in Los Angeles house prices was registered in the second quarter of 2008. During that quarter, home prices dropped by 8%.
On an annual basis though, prices in the Los Angeles housing market dropped 19.3% in the first quarter of 2009 compared to the first quarter of 2008. The highest annual decline so far was registered in the third quarter of 2008 when home prices were 23.5% below their third quarter 2007 level. This was also the highest annual housing price decline in the Los Angeles residential market since 1991 when FHFA started the HPI.
Historical Behavior of the Los Angeles Housing Market
Looking at the behavior of the Los Angeles residential market historically on a calendar year basis it is obvious that 2008 has been so far the worst in the last 18 years. In particular, Los Angeles house prices dropped in 2008 by 22.9% following an 11.3% drop in 2007. In the early1990s, the Los Angeles housing market was again in trouble due to the 1991 national recession.
As the graphic above shows, home prices were declining until 1996, but the worst annual decline registered during that period was no more than 9.8% registered in 1993. Los Angeles home prices turned up in 1997 and stayed on that rising path for 10 years, that is until 2006. The Los Angeles housing market had an extraordinary run during that period with annual value gains in most years close to or exceeding 10%. In fact, annual house price increases in 2003-2005 ranged between 20% and 25%.
The question in everybody's mind now is how soon the market will recover. Looking at the behavior of the market in the previous recession in the early 1990s, we see that house prices were declining for at least five years before they turned around. However, the pace of decline then was slower compared to what happened in 2007 and 2008. This time around the decline in the market was considerably faster, and there is a chance that the return to house price stability and growth may be faster as well.
Predicting when prices in the Los Angeles residential market will stabilize is very difficult and will depend on how fast the economy of the Los Angeles basin will start recovering. The quarterly data show deceleration of house price declines and if this trend continues it is likely that the return of the market to price stability and growth may not take as long as it did in the early 1990s.
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