From the LA Times:

The median price paid for a single-family home in the state dropped by almost $210,000, from $594,530 in May 2007 to $384,840 in May 2008, the association reported. That drop represents a decline of $3,800 per week, or $549 per day, and is the highest ever measured by the association. The price decline appeared to be accelerating from April to May, as median prices dropped by 4.7% in that period.

Wow.

A warning from the BIS (Bank for International Settlements):

“Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.

“To deny this through the use of gimmicks and palliatives will only make things worse in the end,” he said.

To which one can only say, Amen.

There was an industry conference in Las Vegas Thursday and Friday on the subject of distressed real estate. A blogger who is a professional property manager wrote about the conference (and is continuing to write more, here and here).

1. No one has any idea when we will reach a bottom simply because no one knows how many classes of real estate are going down. The most optimistic guess was 2010 but most wouldn’t even hazard a guess. Some of the grey hairs think 5 or 6 years.
2. The problems in the residential side are quickly spilling over to the commercial real estate market.
3. The spread between bid and asked prices is as large as the Grand Canyon. Banks and particularly the community banks can’t afford to take the write-downs the bid price implies.
4. Aside from say multi-family and really solid income producing properties (producing solid verifiable income now, not projected income) there is no debt available. There is lots of equity looking for 20% and up returns. Since these will have to be largely unleveraged, the asset price required to deliver the return is abysmally low. Further driving down implied valuations is the fact that the equity is Wall Street money with 3 to 5 year time horizons. No one thought that was achievable (with the exception of the Wall Street boys in the audience, of course).

The bottom line is his summary of the outcome:

As I mentioned in the first article, one of the reasons for attending the conference was to network and hopefully get a line on some attractive investment opportunities. The conference convinced us to pull in our horns for the time being. One of the best comments I heard from the panelists concerning distressed real estate was to always remember that when you buy in a market like this you are not stealing anything; you are buying at market prices.

All those folks who are snapping up foreclosed property in the belief that they are getting bargains should read that last sentence. And then read it again, and again, until they have absorbed the implications.

Where are we going, S&P 500 wise. Just to put a mark on the wall, really, so that we know when we have arrived at a point of some significance.

• The very long term trend line (from 1932; touched in 1943, 1972 and 1983) will be at about 500 by the end of this year.
• The last two nasty bears ended at about 7 times peak earnings, in 1974-75 and 1982. That would be 594 currently.
• The P/E 10, “Undervalued,” line is at 662 on current near-record earnings. If 2nd. and 3rd. quarter earnings are no worse than 1st. quarter, a robust assumption in my view, then it will be at 544 by the time we move into the 4th. quarter.
• We’ve been above the “Undervalued” line since 1982, the beginning of the twenty-five year 1982-2007 bull market, as interest rates started to move down. We were below it for the preceding 5 years, and also in 74-75.

So these numbers converge on the low 500s as a 2009 kind of target. These are 1995 prices (nominal, of course). The Japanese market, just for reference, has recently been around the price levels of twenty-five years ago. That doesn’t mean that the low 500s is the bottom, it just means that if we go lower than that, we’re plowing new ground by violating the long-term trend line and setting lower valuations that the last two nasty bears. Conversely, there will be nothing exceptional or surprising in reaching the low 500s. At two thirds down from the peak and 60% off present levels, it might cause a certain anguish in the “buy and hold” contingent. Just for comparison, the 73-74 bear peeled off 48% in just 21 months. We’re in the ninth month of this bear, and we’re down 18% from the peak. To match the 73-74 bear, we need to drop 37% from Friday’s close over the next 12 months, to 800 or so. Morceau de gâteau, I say. Let’s show that 73-74 that it was just a cub, eh?

Edit: Time to shoot grouse.

Calculated Risk reproduced Bill Fleckenstein’s comment today. The TED spread is creeping up, so is the iTraxx Europe Crossover which is as good a one-number index of credit market pain as there is. The ABX indices are horrible, the CMBX (commercial mortgage) spreads are rising quickly. The KDP daily high-yield index is very close to a new daily high. Default rates on the Alt-A, no-doc and low-doc, mortgage loans are rising rapidly. The bank stocks are just getting creamed. Oh, and by the way, American Express says that more folks aren’t paying their bills.

The Fed’s measures to restore order to the credit markets are clearly failing. Be careful out there. There was more to today’s selling than the price of crude.