“Anyone who lives within their means suffers from a lack of imagination” -Oscar Wilde

The housing market in Southern California is similar to skydiving, except with a small caveat of course. You are told by the expert skydiver that you are all ready to go once you reach maximum elevation. As you get ready to jump, starring at the open air, you are told that for maximum excitement you shouldn’t take a spare parachute. So you agree and remove the extra security measure. Right when you jump you hear a fainting voice, “there is no parachute!…” As you start to panic, free falling in descent you try to pull your ripcord and nothing. You try to be creative and make something out of your empty parachute holder. Nothing. Try as you may, there will be a crash.

Then I think of lifting caps, mortgage freezes, or dropping the Federal funds rate and I think of the above comparison. For a brief moment, we like to psychologically think that these measures will help but the end result is unavoidable; there will be a crash simply because that is the inherent nature of all bubbles. Trying to intervene will only force the historical economic river of reversion to find another way to correct itself. There has to be an adjustment simply because the fundamentals never existed to justify current prices. The irony of all the new proposals is that they now examine income, verify employment, and do all these fact finding measures after the person has jumped from the plane. It may feel like it is helping but the economic momentum is clear and it wants and needs to correct. We will continue to face problems because the fundamentals were never there to begin with. The Southern California housing numbers released on Wednesday show a free descent:

Aside from the reality that two of our counties are already seeing 20 percent year over year losses, we also notice that other counties are quickly following. We went into detail exposing the numbers for Southern California in January so this continued trend should not be a surprise to anyone that is paying attention to market indicators. These numbers without context do not examine the entire picture. In fact, Los Angeles County did not go year over year negative until October of 2007. Did housing problems only start at this time? Of course not. Even a few years ago, I was carefully examining sales numbers because this would be the first leading indicator to tell us where prices would be heading. Take a look at this chart comparing sales numbers versus the median sale price in Los Angeles County since December of 2000:

*Click to see full graph

What should be incredibly obvious is that the sales number trend broke in the forth quarter of 2005! I talked about the above cyclical sale trend in the following post:

When the Housing Clock Stops Ticking: Why the Median Price is Going up While Sales are Going down.

The above post discusses the above cyclical fall and winter drop in housing. Yet the drop in the winter of 2005/2006 was more than your typical seasonal downturn. This was the breaking point that led to the current slowdown. Amazingly, it took roughly two years before the median sales price in Los Angeles County caught up to what the sales numbers were telling us. Of course the pundits ignored the sales numbers at their own peril and now after only 4 negative year over year months, want every government measure to support the housing market. Keep in mind that we have seen month over month of amazing gains since 2000 without any hesitation; in fact 7 years of constant growth and only 4 negative months is enough to destroy a decade of appreciation? Clearly, this was a house of cards predicated on perpetual housing motion.

What is the bigger story is the drop in sales. I’ll leave it to DataQuick to summarize the information:

“Last month’s sales total was the lowest for any month in DataQuick’s statistics, which go back to 1988. Since September, sales for each calendar month were a record low for that particular month.”

In Los Angeles County, only 3,398 homes sold in January. Compare this to the peak high of 12,324 reached in August of 2001. In fact, I ran a quick average for the entire series from December of 2001 to the present and we arrive at the amazing number of 9,138 sales per month. Now, do you see us coming anywhere close to this average anytime soon? It looks like Los Angels County will continue to be a renting majority county.

And regarding the Oscar Wilde quote, it appears that our imagination led us to believe that exotic mortgages would give us the ability to fly on the wings of equity forever. And as Wilde unfortunately found out in his last three years of life going about penniless, even those who have great intelligence and wit cannot defeat economic laws. Eventually your spending habits do catch up with you. Even Sir Isaac Newton gambled in the South Sea Bubble telling us after his disastrous investment:

“I can calculate the motion of heavenly bodies, but not the madness of people.”

This is a quote all financial engineers should post above their workstations for a little perspective.

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Related Posts:
■The Church of the Fed: Praying for Rate Cuts and SoCal Short Sales
■Riding in the Short Bus of Housing: Southern California Short Sale Numbers. 1 in 10 Homes is a Distress Sale.
■San Diego Down 4.5 percent YOY - or $42,000 from Peak.
■Is Housing the Next Rocky Balboa? Only 2007 Will Tell…
■Yearly Income, $14,000. Purchase of House, $720,000. Have we All Lost our Minds???

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This entry was posted on Thursday, February 14th, 2008 at 4:13 pm and is filed under Real-estate news. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.