When Californians say housing prices are insane and belong in a mental asylum wrapped up in a straight jacket, they usually are correct. Even as housing prices swiftly correct we are so conditioned to living with a bunch of crazies that many are actually starting to think current prices make some sense. This […]
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When Californians say housing prices are insane and belong in a mental asylum wrapped up in a straight jacket, they usually are correct. Even as housing prices swiftly correct we are so conditioned to living with a bunch of crazies that many are actually starting to think current prices make some sense. This strikes at the relativity of how we associate things in our minds. When I arrived back in town after being in Manhattan for three weeks, I thought Los Angeles traffic was like a day at the mini golf course. Yet when I fly out to Texas and drive around the rural countryside and come back to Los Angeles, I feel as if my car is a can and I’m just one of the millions of sardines moving along the human conveyor belt otherwise known as the 405. Such is the way we view life. After seeing boxes sell for $500,000 we are ready to pounce like rabid hyenas on a home simply because it is listed for $350,000.
In this article we are going to examine multiple points regarding the state of California and point out that we still have a long way to go down. In fact, we are going to draw in new data points to further solidify the argument that buying a home in today’s market is simply the wrong economic decision. There is a long report called Locked Out discussing California housing put out by the California Budget Project that I highly recommend you read in its entirety. In this article, I’ll try to give you a brief summary of the 60 page report. First, let us examine a graph:
From 1988 to 2000, the median home price in California was relatively unchanged and a rather boring figure to examine. Now that we have the peak data point, we can start examining the entire wonderland scenario over 2 decades. For someone to purchase the median priced California home in August of 2007 at $465,000 would require an income of $113,162 while the statewide household income was $56,645; the price of buying a home with 5 percent down and a 30 year fixed mortgage was nearly twice the income that California households actually had. Looking at taxpayer records the median income for those filing jointly is $66,810 for 2006.
Even though we think Southern California housing is crazy we have nothing on Northern California:
Take a look at how many counties in Southern California are over the median price home. Also, I’d like to point out that the data in this chart is from August of 2007 which was very close to the peak of California housing prices. Here Los Angeles was over $505,000 and the current median price in Los Angeles County is now $440,000. The variance in this one state is so extreme. On one end, you have homes with a median price slightly over $200,000 and on the extreme, you have a median quickly approaching the $1 million mark. If we break down the data further, not one county in the entire state has a local median income that can support the median priced home of that county:
It is the case that in many places people are twice to even three times below the needed income to purchase a house with a modest 30 year mortgage! It is now becoming more and more apparent that all the exotic mortgage products were a way to squeeze people without adequate income into homes they simply could not afford. And we say this with actual data backing up this point because take a look at this information and you shouldn’t have any doubt why the market is now fiercely correcting. We need only look at the rise in banana republic loans during this time:
In some areas junk loans tripled from 2004 to 2006. Ironically this chart is almost a perfect inverse from the other chart showing the cost of housing in different California counties. What occurred is lower price areas had the highest level of fraud and flat out market corruption going on. In these areas craptastic loans were pushed on to folks that were already financially stretched too thin and had a very small cushion to fall back on. That is why we are seeing alarming foreclosures in the Inland Empire and also the Central Valley of California. Of course even so-called prime areas are now taking it on the chin but some areas are seeing foreclosures rates that have never been recorded at such a large magnitude. We relied on housing for jobs and also the health of the California economy to a large degree:
How coincidental that after the market started to decline and building started to slow we almost had a perfect decline in housing related jobs. Just take a look at the chart above. Housing related jobs will continue to decline this year. Keep in mind these were high paying jobs, which meant high consuming folks, which means good tax revenues. Now that these jobs are gone we lose the consumption and the tax base. This next chart is rather incredible:
We went from 2,920 foreclosures statewide in 2005 to a whopping 84,326 in 2007! From nearly non-existent to a very big problem. Also, you simply need to take a look at the notice of defaults to give you an idea of how things are going to play out in 2008. There is no way we are near a bottom. Yet California is still one of the states with the highest amount of renters:
This shouldn’t come as a surprise given the absurd cost of housing in the state. The stunning statistic is that the state’s median priced home nearly tripled from 1989 and 2006 going up by an amazing 193.4 percent while the state’s median hourly wage increased by 60.3 percent and the state’s median household income went up by 67.6 percent. Let us not even get into the hammering of the U.S. Dollar. The reason you feel poorer is because you are. The cost of living has gone up while income gains have simply not kept up not even by any standard of comparison. How many times did housing outpace income?
Sorry Greenspan, I’d give you five bucks but my home equity line was just closed. Maybe you can kick me down with some of the profits from your new book; you know the one in which you talk about all the wonderful policies that you didn’t do? Now you tell folks to diversify into foreign currencies and how weak the dollar is. You came close and if you had it your way, we be at a zero percent interest rate policy and a home in California would cost $1 million and people would need to bring a wheelbarrow to their local bank if they ever needed cash. Of course Greenspan isn’t the main reason for this bubble but he was like the main conductor of an orchestra leading the American people in Credit Delusion in C minor. Fascinating opera that starts out slow and melodic, builds in the middle to a furious mix of sounds and insanity, and ends with a massive explosion. It’ll be playing for a few more years.
I’ve been sent a few e-mails from readers telling me that they have had a hard time getting withdrawals from their local branches. Given the withdrawals were in the few thousand dollar range, it really makes you wonder if people are starting to horde cash? I don’t mean placing it in a safe FDIC account but folks simply stuffing the money into the mattress. This isn’t likely an easy stat to measure but it will be interesting if we hear more about this.
Clearly the $16 billion budget deficit in the state is not going to improve. In fact, recent reports of housing show the decline only getting worse and accelerating here in the state. It looks like some areas of California are going to see 40 to 50 percent drops from peak to trough. This doesn’t seem like an unlikely scenario since many areas are more than half way there already. Count the job declines, the incredible budget deficit which guarantees further job cuts, the tanking housing market and you have for a very long 2008 in the Golden State.
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Related Posts:
■The Genesis of the Credit Bubble: Advertising, Deception, and $163 Billion in Subprime California Loans Resetting in 1 Year.
■Real Homes of Genius: Today we Salute you Covina. Banks Learn a Lesson in Mark to Reality and the $300 Billion FHA Bailout.
■Are You a Bitter Bubblehead Renter? The Evolution of Housing Psychology.
■Parallel Universe: Housing Still Hurting on Main Street while Wall Street Celebrates.
■New Century files for Chapter 11.
Via [DrHousingBubble]
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The FBI says that deceptive practices at hedge funds and some banks may have made the subprime disaster worse. According to Reuters, the head of the agency said the bureau’s investigation of potential fraud in the U.S. home mortgage industry now encompasses 19 companies in “cases that may have a substantial impact on the marketplace.”
The deal for 
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