The Crash That Wasn’t

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With this issue of the Business Journal, you can review the big local business events that occurred in 2006. But lately, I’ve been thinking about the big local event that didn’t occur in 2006.


House prices did not collapse.


You might remember that a year ago there was widespread talk about how house prices were expected to droop in 2006. Some got carried away and foolishly opined that we were in the midst of a housing bubble and it was about to pop. That would have meant a price plunge of 50 percent or more.


In fact, the median home price in Los Angeles County flat-lined at about $550,000 since April, according to HomeData Corp., which provides data or house sale prices that the Business Journal publishes each month. (A caveat: Home sales data for December is not yet out, so it is still possible that we’d see a decrease for 2006.)


So why didn’t house prices skid like so many expected?


Many assumed we’d have higher interest rates and maybe a recession. Those would fall particularly hard on borrowers who had gotten the new creative loans, the ones with negative amortization or low introductory teaser rates and the like. With higher interest rates or a recession, more homeowners would be unable to keep up.


As their homes got dumped on the market, the thinking went, prices would drop. As prices dropped, homeowners with little equity in their homes would suddenly find they were upside down in their home loans, and some would walk away from their houses, exacerbating the slide in prices.


Of course, we didn’t suffer higher interest rates. In fact, mortgage rates have been trending down since June. They stood at 6.12 percent for a 30-year fixed mortgage as of mid December. That was down from 6.27 percent one year earlier.


And, of course, we didn’t have a recession. In fact, L.A.’s unemployment rate hit a decades-low 4.2 percent in November. And with the Dow Jones industrial average hitting new highs last week, it’s hard to see how a recession will clobber us soon.


One market force we did have in 2006 was a pronounced slowdown in sales in Los Angeles. That and the resulting bulge in inventory probably explain why prices stayed tethered to that $550,000 level. In other words, the slowdown in sales, by itself, was powerful enough to stop the escalation in prices but not powerful enough to knock them lower.


Now, the question is: Will prices drop?


Obviously, that could happen. But as time goes on, the likelihood of a steep and deep drop becomes fainter. A short and shallow drop seems more likely. Even Alan Greenspan has said the worst may be over.


For what it’s worth, I’ll add this note. When I moved here a year ago, my wife and I decided to rent. We didn’t want to buy a house just as prices seemed poised to drop. But we’ve kept an eye on homes for sale in our neighborhood. Suddenly, homes some of which sat for months are starting to sell.


We’re still not ready to buy just yet. We’re betting that prices will go down. But I’m starting to wonder if that’s the wrong bet.



Charles Crumpley is editor of the Business Journal. He can be reached at

[email protected]

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