Top-price homes' values go down the most in recession.

Study reveals the priciest houses taking hardest hit

The owners of large homes in Los Angeles -- houses of 2,500 square feet or more -- have been hit hardest in the Southland residential real estate slump, and have seen $29.5 billion in property value evaporate in the last two years, according to a new survey from Dataquick Information Services.

This elite group of homeowners -- just 138,000 homesteads in all -- makes up about 10 percent of all homeowners in Los Angeles County.

On average, the homes they own are worth about $663,000 today, off 24.3 percent, or $213,400 from $876,600 in the peak month of March 1990.

But as they are owners of the largest and generally most expensive homes, the fates of these usually wealthy consumers spell concern for restaurateurs, upscale retailers, stockbrokers and others who cater to the wealthy -- indeed, for the whole economy, say some experts.

"When you talk about a 25-percent decline in value, that's serious, because it means many people have little or no equity left in their homes," said Larry Kimball, UCLA economist. "It's the sort of thing to be very worrisome. They are not going to spend."

The "wealth effect" -- people feel less affluent -- will depress expenditures of even those homeowners who have kept their jobs and income, said Kimball.

With upscale homeowners feeling wary across the Los Angeles basin, serving them has become a shortcut to the poorhouse.

Such well-known spots as Lew Ritter and Amen Wardie, the Beverly Hills clothiers, to Gumps, the specialty store in Beverly Hills, to Trumps, the long-time West Hollywood dinery, to Eureka, chef Wolfgang Puck's new pub, to Stringfellows, the Westside jet-set nightclub, have been deep-sixed of late as the big-buck spenders have pulled in their horns.

To be sure, there are other causes for the spending slump in Los Angeles -- job rolls are declining in the Southland, and consumers in general are timid, awaiting the national elections.

But the huge size of equity losses for large homeowners -- $29.5 billion since 1990 -- helps explain why wealthy consumers, who have the most discretionary income, in particular are slowing down. The equity loss is more than five times total retail sales in Los Angeles County in August of $5.66 billion.

The rise and fall-
Prices of large homes in Los Angeles County
Year/Month                  Average Price
1992 August                    $663,200
1991 August                    $678,000
1990 March (peak)              $876,600
1989 August                    $712,100
1988 August                    $546,300
1987 August                    $458,700
1987 January                   $367,800
Note: Based upon a three-month rolling average of average house
sale prices for homes with 2,500 square feet or more in Los
Angeles County
Source: Dataquick Information Systems, LaJolla

Moreover, the direction of large-home values is still south, warned John Karevoll, publisher of the Running Springs-based Southern California Real Estate Observer. "Right now, large-homes prices are decreasing at a 10 to 12 percent annual rate."

It's been a roller coaster for the owners since 1987. The typical home with 2,500 square feet or more sold for a mere average of $367,800 in early 1987, prior to the great late-1980s speculative bubble in Southern California.

Prices for the big houses soared through the following months, eclipsing $400,000 and then $500,000 in 1988, then ripping through $700,000 in 1989, before touching a record $876,600 in March 1990, based upon a three-month rolling average of large house prices.

Total price run-up in the three-year-span: 138.3 percent. An owner of a typical large home who held on for the ride had an additional half-million dollars in equity in his or her home.

"At times, people were making more money on their homes than at their jobs," commented economist Kimball. "They may have set aside less money for retirement or whatever, thinking their nest egg was their home. They went out and spent."

The big houses were the fat part of the market -- a bazaar made giddy by a decade-long economic expansion and the prospect of ever-rising house prices into the future.

"People were speculating, and the high end was the very portion of the market that was flying high, and it is exactly this portion of the market that is now coming down," said Karevoll. "The entry-level and middle-market homes aren't seeing anything like this."

The declines in value hitting Los Angeles County's largest homes may in part explain an interesting phenomenon noted of late in real estate circles -- while "everybody" says house prices are off 25 percent or more in their neighborhoods median house prices, until recently, were stable as a rock, and have only dipped slightly in the last couple months.

Thus, the riddle: Why are median prices steady, in the face of a chorus of complaints about tumbling house prices?

The answer may lie in the nature of large homeowners -- despite being 10 percent of all homeowners, and a smaller fraction of total residents, they are generally an affluent lot. They are opinion-makers, the influential segment of society able to press its perspective upon the whole.

"They (owners of expensive homes), as upper-income people, are the most influential group. They tend to be influential at their work, in their circle of friends, they may control whether they hire people or not," said Stan Plog, founder of Reseda-based Plog Research, an economic and marketing consulting firm. "And when you talk about taking a $30 billion hit, you are talking about a lot of money."

But the relative stability of the monthly median price for all homes sold in Los Angeles County -- about $200,000, virtually the same as in 1989 -- reveals a steadiness in house prices in the low and middle range, said Karevoll. "The smaller homes are not appreciating, but they are not plummeting in value either," he said.

Karevoll professed some indifference to the house-price plummet for big homeowners. "They made money on paper," he said. "And now they lost money on paper."

The future of house prices remains murky, with the Southland still posting declining payrolls and retail sales with each passing month.

Ironically, a national economic recovery could make things worse for owners of expensive homes in Los Angeles.

"If other sections of the nation revive, you are going to get an exodus from Los Angeles as people seek jobs in other regions," said Kimball. "If the whole national economy is depressed, people might say, 'Why move?' But if there are jobs in the Midwest, people might say, 'Why not?'"

The outflow of jobseekers could worsen existing migration trends and further soften house prices, said Kimball.

Others see a house-price rebound -- but not before mid-1994.

"There are continuing layoffs in aerospace, in finance, and people (who would buy large houses) are wary of this area anyway, due to the school systems," said Ken Funston, money manager with Wertheim Schroder in Beverly Hills who has been studying Southland real estate. "Nobody is buying a home for an investment. They are buying -- if they are buying -- because they need a place to live. They are looking for bargains. I don't see a change in that soon."