The DataQuick numbers for Southern California were released today and the numbers were astounding. Yes, I’m sure that you’ve heard that line probably a thousand times in the last year but in reality, each month gives more and more insight into the absolute corruption and malfeasance that propelled this housing bubble to its current levels. In this article we are going to examine in detail, the overall housing numbers for the region and dig deeper into Los Angeles County to find out what really is going on. Los Angeles County with its 88 cities and 10,000,000 residents is a solid indicator of how bad things may get for supposedly economically diverse areas with high priced housing. In addition, the retail sales numbers came out today and once again show cracks in the overall consumer economy. Bottom line? All stars are aligning to a severe market correction. Let us take a look at some of the highlights in the DataQuick report:

“Of the homes that resold in February, about one-third, 33.5 percent, had been foreclosed on at some point since January 2007. A year earlier the figure was 3.5 percent. At the county level, the percent of homes resold in February that had been foreclosed on since January 2007 ranged from 25.3 percent in Orange County to 48.1 percent in Riverside County.”

In only one year, distressed sales jumped from 3.5 percent of sales to an incredible 33.5 percent of all sales. Again, this is why looking at the amount of short sales on the market is so important in determining how the market is going to trend in the future. Let us take a look at the current short sale numbers for the Southern California region:

*Click to enlarge.

We may be swimming in muddy waters regarding the credit bubble, CDOs, CRE, MBS, and the entire alphabet soup of credit problems but nothing can be clearer than the above chart. What we see in the above chart which is a tiny snapshot of the market, is that short sales jumped 92 percent since September of 2007. The rapidity of the market deterioration is astounding. Short sales now make up 11.51 percent of the entire Southern California home inventory. The trajectory of this is only increasing and until short sales start decreasing, not much is going to change. According to the DataQuick report for last month, only 10,777 homes sold. There are currently 148,103 homes for sale in the Southern California market. At the current sales rate, that means we have 13.7 months of inventory! No where are we remotely close to a bottom. Let us take a look at another section of the report:

“The median price paid for a Southland home was $408,000 last month, the lowest since $402,500 in October 2004. Last month’s median was down 1.7 percent from January’s $415,000, and down a record 17.6 percent from $495,000 in February 2007.

Last month’s median fell 19.2 percent shy of the $505,000 peak reached last spring and summer. The sharp decline in the median reflects two things: depreciation, especially in areas rife with foreclosures, and a substantial shift in the types of homes selling. Most notable in recent months is the big dropoff in sales of more expensive homes financed with “jumbo” mortgages.”

I love how DataQuick frames certain aspects of the market. First of all, prices are depreciating but not only in areas that are “rife” with foreclosures. Let us take a look at the actual numbers:

First, every single county is down in the double-digits. The sales numbers are even worse with the entire county seeing a yearly drop of 39 percent. Then we get DataQuick’s second reason for market deterioration blaming jumbo mortgages. Every county aside from Orange County, with the above median numbers, a person can get a conventional (the old school conventional) mortgage of $417,000 with 10 percent down - so there isn’t any need for jumbo mortgages with the new $729,500 cap. It is misleading really to say that the reason prices are dropping is because of the “dropoff” in jumbo mortgages. If you want to buy a house in practically every county above and have a measly 10 percent down, you’ll be able to get a conforming loan with historically low interest rates. No need for jumbo.

I’ll give you my two reasons for why the market is tanking and I’ll let this chart of Los Angeles County wet your appetite:

The first reason, as you can see from the above is the median priced home in Los Angeles County went from $200,000 in January of 2001 to a peak in August of 2007 of $550,000. As of 2004, the median income for a Los Angeles County household is $43,518. At its peak, the median priced home in the area was 12.6 times the local median household income. See, in 2001 the ratio was approximately 4.5 times the local median household income. Of course the current median priced home is now $460,000 but we have a long way to go before affordability ratios make any sense, even after a 16 percent drop in 7 short months. I understand that DataQuick reports aren’t intended as commentaries on the overall economic situation but you can see how quickly people can miss the forest for the trees. There is such a major disconnect from market fundamentals that we are now witnessing a fierce correction now that the bubble has popped. When mainstream articles start looking in depth at local area incomes in relation to housing, then we can start seriously having a debate of substance. Right now they keep reverting to a philosophy that is rooted in the belief that current prices are somehow justified and are being harmed simply because of lack of credit.  What about lack of income?  NINJA loans anyone?

The next argument I’ll make for Los Angeles County is the growth of the County has slowed down to historical proportions:

*Source: Wikipedia

Currently there is only a 4.2% growth rate for the decade and we are now in 2008; it is the slowest population growth rate since records started being kept in 1850. As we all know, another argument being made about sky high prices is how we have a growing population. There have been many reports showing a net migration out of the county from middle to upper class families being replaced by immigrant families. Now tell me, are these the people that are going to be looking for jumbo mortgages? What we have is a lack of affordable housing. Los Angeles County and pretty much all of Southern California is failing in this regard.

The second reason prices are falling, is the crushing debt burden many people are now facing. There is a reason why people in record numbers are now raiding their 401k plans and maxing out their credit cards. They are using the money to hold themselves over.  It isn’t being used on consumption given today’s retail numbers. It would be one thing if they were taking out the money as a short term loan but they are actually full out taking the money out of 401ks, tax consequences and all, because they need the cash for various reasons including paying the mortgage. It is a very sad commentary given that we keep hearing how poorly people are doing in saving for retirement. In fact, prices will need to fall overall in Southern California by 40 to 50 percent to even be back in line with economic fundamentals. This branded many as doom and gloomers a few years ago but now it is the party line of such places like Goldman Sachs who are predicting 30 percent drops.

Many cities are now becoming Real Cities of Genius. It looks like more and more people are now saying don’t catch a falling knife, or in the case of Southern California, a phrase I’ve seen used which is more apropos, don’t catch a falling guillotine.

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This entry was posted on Thursday, March 13th, 2008 at 7:46 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.