by Susan Barretta
Read Part II | Read Part III
In a series of articles earlier this year entitled The Real State of Real Estate, I talked about what living in a housing mania and related bubble was like, but I didn't include many details about how living in a market spiraling downwards will psychologically affect the players.
As I write this, foreclosure graphs for many areas of the U.S. show rocket-like trajectories. Yet many still insist on calling this a "healthy" cycle correction.
According to some monthly data providers, median prices in Los Angeles County are still chugging upward, despite the steep drop in sales volume evident for over a year. So will prices stay levitated? If not, what will the market participants say and do as the slump progresses?
The last time Los Angeles and much of Southern California experienced a housing downturn that came anywhere near being described as "ugly" started about 1988, and for the most part was a memory by late 1997. A review of local newspaper archives can tell us much, but only if the content is examined with socionomic eyes.
Social mood is endogenously created, but what I read in the archives of the Los Angeles Times blamed many exogenous factors on the housing market downturn. Social mood drives what gets press, and that was the case from 1988 and beyond.
If the media felt bearish about the housing market, then it printed hard-luck housing related stories whether or not they were market related. Fears of job loss (a valid concern); riots; every twist and bump in interest rates; destructive wildfires; earthquakes; and other problems were all "reasons why" the downturn was prolonged. But California has experienced troubling phenomena during housing booms. So it's not natural disasters or riots that trigger booms or slumps. It's the prevailing social mood of the people experiencing them and how they react to them that shape the trend.
Now, let's go back in time and peruse the newspaper archives. You'll feel like you're reading Dr. Jekyll and Mr. Hyde. And, if you've been observing the market at all, you'll be struck by how much the past is like the present, and you'll see that the archives may well serve as a roadmap for what we can expect in the future.
** 1988 **
This year is identified as the last housing market peak. Camp-outs, lotteries, and multiple bids for sought-after properties were a regular occurrence. Realtors hurried prospective buyers to various properties and pressured them to make instant offers. The elevated buying mood pushed up prices.
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Many sellers were aghast, ecstatic, and gleeful, but also conflicted, describing themselves as "embarrassed" because they didn't think the buyers knew the houses they bought could have been obtained for much less. In that state of euphoria, sellers were uninhibited about boasting to others about the sales prices they got. But a realtor omitted telling a buyer that he overpaid because he "didn't want the buyer to feel bad."
According to one study, homebuyers were buying from fear of getting priced out of the market. The same report described a 32% price surge in Orange County within a year, a "speculative fervor based on little more than the widespread expectation that housing prices will continue to rise indefinitely."
News writers were feeling perhaps overly confident – maybe downright cocky, about the future. One news writer scolded Barron's for stating that prices were too high and consumers were far too deep in debt for homes to keep appreciating:
"Those dire predictions in Barron's financial weekly that the U.S. housing market is headed for a crash don't apply to California. That's the consensus of nearly two dozen real estate lenders, escrow and title insurance representatives, consultants, investors and brokers in the Southland."
The authors of a book called A Day in the Life of California were quoted as saying, "California is America's future. To see where California is today is to know where America will be heading tomorrow."
At the end of the year, the papers went on to predict:
"For 1989, all indications are that Riverside and San Bernardino counties, Los Angeles, San Diego and the Anaheim area will continue to remain among the nation's most active housing markets, although an overall drop in building permits and starts are expected."
** 1989 **
This was the first year were signs of trouble started to emerge, but alarms were not raised. NAR economists expected sales in California to remain "hot" even though existing home sales volume had started to decline.
Homeowners who had turned to adjustable rate mortgages (ARMs) to avoid being priced out of the market were now starting to feel the consequences coming home to roost through higher mortgage payments.
Summer stories reported that existing home sales were falling, and first-time buyers were particularly hard hit. The California Association of Realtors (CAR) expressed hope that a recent drop down in interest rates would stir up the market again, though a repeat of the fervor of 1988 wasn't expected.
Realtor Fred Sands, who had the same foresight that Charles Merrill had in 1928 and 1929, wrote a letter to his clients telling them: if you need to sell your house, now is the time.
Condominiums continued to make price gains, as they were viewed as the last thing frustrated entry-level buyers could afford.
The slowdown, and how to deal with it, was a major topic for discussion at CAR's annual meeting that October. Realtors were actually earning more in commission rates because of extra time they had to spend marketing and showing properties, but homesellers had become very unhappy about the rising commissions.
To convey the reality of the changing market to their clients who were expecting quick sales and top dollar, realtors tried to be logical -- simply present clients with printed statistics of market conditions, and they would see that things were different. But applying such simple logic didn't always work. Realtors started rejecting listings, knowing they couldn't sell the properties for what the owners were asking. Homeowners remained unwilling to cuttheir asking prices. The 1987-1988 market was still a recent fond memory.
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Read Part II | Read Part III
Next week's article in this three-part series will look at the Southern California housing market downturn starting in the year 1990.