A story in last week’s Los Angeles Business Journal about home sales in L.A. County ends with this wisdom from UCLA economist Christopher Thornberg.
[Thornberg] said there’s been too much focus on upcoming resets in subprime mortgage – as low teaser rates are replaced by higher permanent rates – when the real problem is that homeowners at all ends of the market can’t afford their mortgages.
At the peak of the last home price bubble in the late 1980s, a median income homeowner in the region earned about 20 percent less than they needed to in order to comfortably afford a median-priced home. At today’s prices, a median income homeowner is stretched even thinner, earning 40 percent less.
“2008 is going to be worse than 2007 because prices are still way too high relative to income,” said Thornberg, now the L.A.-based partner at Beacon Economics. “Forget all the nonsense about ‘Not at this price point. Not in this neighborhood.’ You’ve got a wave of foreclosures that’s causing a meltdown in the Inland Empire and that’s eventually going to start to spill over here.”
Unfortunately, in this context “here” means the more affluent areas of L.A. County.