If anyone was expecting a spring bounce from the housing Easter Bunny they’ll need to wait for another year. Frankly, all this hyperbole of reaching a bottom is wishful thinking and is completely devoid of the economic realities surrounding us. But what can you expect from an industry that kept chanting a mantra […]
Related Posts:
■Housing in Graphics and California $16 Billion in the Hole: The Genesis of the California Housing Market.
■Southern California Housing Numbers Exposed: The Bottom Falls out of the Housing Market, Again.
■Real Homes of Genius: Two For One in Compton. Southern California Housing Bubble Hangover.
■Top 55 Housing Resource Blogs: Gaining a Solid Foundation in Housing and Finance Information.
■C.A.R. says 2007 will see a -2% Drop in California. Does This Feel like a 2% Yearly Drop?
If anyone was expecting a spring bounce from the housing Easter Bunny they’ll need to wait for another year. Frankly, all this hyperbole of reaching a bottom is wishful thinking and is completely devoid of the economic realities surrounding us. But what can you expect from an industry that kept chanting a mantra of “home prices only go up” for a decade? Now, it is a primitive form of the argument that “we are inches away from a bottom.” Well guess what? Many folks actually bought this line in California and will realize very quickly that we are nowhere near a bottom. In after hours, which now seems to be a daily occurrence, Washington Mutual announced an unprecedented $1.1 billion loss for the quarter. I think the Chief Executive Kerry Killinger says it best:
“Nothing of this scale has happened since the Great Depression,” Chief Executive Kerry Killinger said at WaMu’s annual meeting. “This is the toughest credit cycle I have seen in my years in the industry.”
In fact, as of the third quarter of 2007 in their single-family residential portfolio worth $105.9 billion according to a presentation, $57.9 billion of these loans were Option ARMs. As I discussed yesterday in the Wachovia debacle, much of these loans have as much risk as sub-prime loans yet the market is treating these loans as much safer. At least that is what they want to wishfully believe. I attribute this to the absolute lack of insight many of these people have of the ridiculously inflated prices here in Southern California. Their lack of insight stems from the fact that they don’t know this area. They simply do not have the depth of understanding of how different cities and regions can be yet their nice financial engineering models didn’t account for that. They didn’t heed their own advice that real estate is all about location. Let us take a look at the absolutely abysmal numbers for March that were released by DataQuick today:
March 2008:
| All homes |
March-07
|
March-08
|
Change %
|
| Los Angeles |
$540,000
|
$440,000
|
-18.50%
|
| Orange |
$629,000
|
$506,000
|
-19.60%
|
| Riverside |
$420,000
|
$306,250
|
-27.10%
|
| San Bernardino |
$369,000
|
$265,000
|
-28.20%
|
| San Diego |
$490,000
|
$395,000
|
-19.40%
|
| Ventura |
$566,750
|
$430,000
|
-24.10%
|
| SoCal |
$505,000
|
$385,000
|
-23.80%
|
*Souce: DataQuick
Every region is off by $100,000 or more from their peak. The entire Southern California region is now off on a year over year basis by a stunning 23.8%. We are now back at levels not seen in 4 years. Now the reason prices are plummeting so quickly is based on a few different circumstances that I will go into detail further but one of them that we can look at is the massive drop in sales activity:
| All homes |
March-07
|
March-08
|
Change %
|
| Los Angeles |
8,353
|
4,263
|
-49.0%
|
| Orange |
3,130
|
1,663
|
-46.9%
|
| Riverside |
3,680
|
2,691
|
-26.9%
|
| San Bernardino |
2,476
|
1,534
|
-38.0%
|
| San Diego |
3,218
|
2,108
|
-34.5%
|
| Ventura |
999
|
549
|
-45.0%
|
| SoCal |
21,856
|
12,808
|
-41.4%
|
Sales are practically at a stand still. Current inventory for Southern California is 151,224. With the current sales rate we have a whopping 11.8 months of inventory. At the peak of the housing bubble in 2005 we had months were less than 2 months of inventory were on the market. Now the opposite is true. Let us dig deeper into the report:
“La Jolla, CA— The onset of spring did little to thaw Southern California’s semi-frozen housing market: The seasonal boost in sales between February and March was less than half its normal level and a record low. The weak start to the home buying season also saw another record dive in the median sales price, the result of depreciation, slow sales for higher-priced abodes and growing sales for discounted homes fresh out of foreclosure.
A total of 12,808 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in March. That was up 18.8 percent from 10,777 the previous month but down 41.4 percent from 21,856 in March 2007, according to DataQuick Information Systems.”
Actually we had record heat in Southern California this past weekend so it was enough to thaw any market if prices were reasonable. But we are still miles away from the bottom and this report again is putting holes into the bottom chaser’s theory like Swiss cheese. From this report and simply given the sales numbers, we can expect another disappointing spring and summer for Southern California housing. I love the rhetoric used here. “Depreciation” instead of correction. And who in the world calls their home abodes? Are we now buying homes constructed out of brick and reinforced straw? Let us examine the report futher:
“We continue to believe a lot of people who could be buying or selling right now are opting to sit tight until they sense we’ve hit bottom. Often what we’re left with, especially in inland areas, are sales driven by foreclosure or the threat of it. Although prices have fallen off their peaks in most places, the magnitude of the decline continues to vary widely, with the largest discounts concentrated in markets rife with foreclosure resales,” said Marshall Prentice, DataQuick president.
In recent months, foreclosure resales typically sold for about 15 percent less than other homes in the surrounding area. When these foreclosure resales dominate a market, accounting for more than half of all sales, they tend to tug home prices down by an extra 5 to 10 percent when compared with communities where foreclosure resales are less common.”
People are sitting out for these reasons:
1. They don’t have enough income to get a government loan (rock bottom rates still).
2. They are worried about their employment since California’s economy was highly based on FIRE (finance, insurance, and real estate).
3. People are stuck in their homes, some with negative equity.
4. Many are living paycheck to paycheck with only 1 to 2 months of emergency funds.
Plus, people that are in banana republic loans don’t have a choice to sell. They either get a short-sale approved, eat the payment on the albatross mortgage (assuming their income can support it), or let it ride and sit tight until the foreclosure process runs it course. The brief report makes it seem like many people are strategically planning their next move. And their isn’t much variance in the magnitude of prices dropping. You either get stunning year over year drops like Orange County dropping 19.6% or breathtakingly stunning year over year drops like San Bernardino dropping 28.2%. The report goes on further talking about the credit crunch:
“The sharp and sudden drop of the Southland median price reflects a combination of factors, mainly depreciation, especially in areas hammered by foreclosures, and a big shift in the types of homes selling. Since last August, when the continuing credit crunch hit, sales have plunged for more expensive homes financed with “jumbo” mortgages, which until recently were defined as loans over $417,000.
Sales financed with these larger loans, which the credit crunch made more expensive and harder to get, accounted for just 15 percent of Southland sales last month, down from about 40 percent a year ago. It is unclear how much home sales might be affected this spring and summer by the recent increases to the limits for so-called conforming loans and FHA loans.”
Bwahaha! This is so absurd! In their own data, they just tell us that the entire Southern California median home price is now $385,000 and the implication is that the problems started really to hit hard because of the credit crunch. Heck, with the $417,000 previous conforming limit we can now cover the median home price for the region. Why in the world did we have to go to $729,500? That is nearly twice the median price of any home in the already overpriced Southern California market. If you still think that lifting caps was innocent and in no way a bailout for the wealthiest speculators both intentional and unintentional, then the above data should give you pause. Of course, we get a glimmer of hope in the report that the increase in limits will help later this spring and also in the summer but from the current data, there is no reason to believe this. Why? Oh let me count the ways…
1. Does anyone remember that California is in a $14 billion state deficit? It probably has ballooned since the last time the number was reported. The fiscal year doesn’t start until July 1st and that is when many government agencies will need to cut back or raise taxes.
2. If Wachovia and Washington Mutual are any early indications, the Option ARM debacle is only beginning. Given the “depreciation” we’ll be seeing and the fact that many of these lenders over leveraged themselves in California, we have a lot more pain heading our way.
3. People are maxed out. Reports of people raiding their 401ks to stay afloat. Rise in foreclosures. Rise in auto repossessions. These are not signs of a healthy economy and people tend not to buy when things go south.
4. Recession. Did we forget that we are in a recession? With sky high energy costs and prices soaring on everything except housing, disposable income is getting sucked into daily necessities instead of putting boob implants on the house. The massive lift kit for your F150 will need to wait now that you have to pay $100 a week to fill up.
5. People don’t want to buy because they simply do not have the income. The fact of the matter is many of these people bought homes in California with mortgage products designed by fantasy economics; you might as well pretend you’re in the movie Fantasia to think that people with $60,000 incomes can pay for a $500,000 home. It was a Ponzi Scheme! One of the earlier posts I did in October of 2006 saw that this entire housing scheme was being built like a Ponzi Scheme. Why? Simply put, the only way the housing market would keep going up is if people actually believed in the bubble. Well now that belief is shattered.
Let us now take a look at the ending paragraph in the report:
“Indicators of market distress continue to move in different directions. Foreclosure activity is at record levels, financing with adjustable-rate mortgages is at a six-year low. Down payment sizes and flipping rates are stable, non-owner occupied buying activity has risen in recent months, DataQuick reported.”
Yes, we have two directions; bad and worse. What in the world do they mean that down payment sizes and flipping rates are stable? Does that mean that instead of 2 episodes a night of Property Ladder we get 1? But fear not you perma-bulls. Apparently some savvy investors think they have timed the bottom and are now buying non-owner occupied housing. I haven’t found one property in the entire region that will cash flow but then again, these folks think the bottom was here. If you are planning in jumping into the shark tank, be ready to stay put in your home because all indicators are pointing to a prolonged slump. Maybe they’ll be able to flip into the stable market (whatever that means). The bottom line is housing will not hit a trough until incomes, market lease rates, and employment start to reach an intersection and we are miles away from reaching that street. After all, if unemployment starts spiking even the rental market will start hurting. The worst drop on record for the region and some still want to call it a bottom.
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Related Posts:
■Housing in Graphics and California $16 Billion in the Hole: The Genesis of the California Housing Market.
■Southern California Housing Numbers Exposed: The Bottom Falls out of the Housing Market, Again.
■Real Homes of Genius: Two For One in Compton. Southern California Housing Bubble Hangover.
■Top 55 Housing Resource Blogs: Gaining a Solid Foundation in Housing and Finance Information.
■C.A.R. says 2007 will see a -2% Drop in California. Does This Feel like a 2% Yearly Drop?
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Sales of existing homes fell slightly in March 2008, 
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