Mighty kings rise and fall like the sun. Southern California decided to take an ancient recipe from the books of history and followed in this time honored path. Except our king came riding in on a pair of 24 inch spinning rims in a Cadillac Escalade. The only problem is all of it was mortgaged […]
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Mighty kings rise and fall like the sun. Southern California decided to take an ancient recipe from the books of history and followed in this time honored path. Except our king came riding in on a pair of 24 inch spinning rims in a Cadillac Escalade. The only problem is all of it was mortgaged on a kingdom of sand that is now quickly eroding. For anyone in Southern California the minor consolation we can take is that this will go down in the history books of financial exuberance like those who lived through the Dutch tulip mania in 1637. Tulip contracts were selling at 20 times the annual income of a skilled craftsman. Remember the story about a farm worker who made $14,000 a year and was able to buy a $720,000 home back in May of 2007? Why stop at a 20 ratio when we can go over 50 times?
Now this is the story of glamour and glitz. The rise and fall of a housing market in a few short years. In today’s article I am going to use graphs and data to try to examine the Southern California housing market. I have been covering the housing market since 2006 in the heat of the insanity and the psychology now is incredibly different. Prices declining by 40 percent in one year will do that to you.
Southern California according to DataQuick reached a peak median price of $505,000 in July of 2007. Since that time, the median price has fallen to $300,000. Keep in mind the median household income for Southern California is under $50,000. So at the peak, it would take the median household income 10 times their annual earnings to purchase a home in the region. 20 times for a tulip contract, 10 times for a glorious shack. We will now have our place in the history of magnificent bubbles right their next to the tulip bulb mania from 371 years ago.
So let us get to work since we have a lot to cover. First, I have compiled a chart showing the median prices for each county in Southern California since the start of the decade. I have yet to see a chart break out the counties individually like this so the chart should provide a fresh perspective of the data:
(Click for a sharper image)
As you can see from the chart, the pace of growth for the entire region was uniform up until the summer of 2007. Like a plateau, we hit a steady pricing trend from 2006 to 2007 before falling off the cliff. The dotted yellow line is the aggregate of all counties in Southern California. Many counties are now back to 2003 price levels without adjusting for inflation. Given the last few months of data, we are looking at least in the short term to heavy and strong deflation in practically every investment vehicle on the market. What this means is price drops are even worse than they look.
What else can we learn from the chart? Without prejudice every region rose at nearly the same pace. This is the stunning thing to notice when you break the data out. Every upward county trend in the chart above shows a similar movement upward. It didn’t matter whether it was Orange County or San Bernardino, the bubble took hold of each county. The actual nominal price peaks for Orange County and Ventura are simply stunning.
The next chart should sum up nearly an entire decade of housing mania for the region. I’ve put together a chart showing the median price for Southern California and the monthly sales for the region:
A couple of things I want to highlight first. You will notice that for sales, there is always a seasonal drop in the winter and peak in the summer. That is typical. It goes up and goes down based on common real estate sales patterns. Why? Many people move during the summer season and most people buy homes during their “family forming” years so pulling a kid out of school isn’t the smartest move. In addition, many people buy homes who are planning on having a family so in general it causes an upsurge during this time.
What you’ll notice that since 2000, the troughs were higher during the winter and the peaks were stronger in the summer all the way until 2006. That is the first time the summer bounce wasn’t as strong as it once was in the heat of the bubble. It is also the time when you see the median price plateau. Once this happened, it took about one year for the entire market to collapse and as you can see above, both prices and sales fell off a cliff.
So why are sales now moving up? Simple. Prices have gotten cheaper. Drastically cheaper. Even with the amazing upsurge in sales, you can see that we are still very far behind the curve from the bubble days. Keep in mind we are now entering the typical slow season of winter so it will be interesting to see what happens here. I maintain that housing prices for Southern California will not bottom out until 2011. Now sure, we may hit a bottom in price in 2009 or 2010 but that price will probably be the same in 2011. The problem with finding the bottom is you won’t know until maybe one year has passed. But when bubbles burst, especially one this size that has caused so much financial trauma, we will be swimming in scuba gear near the bottom for a few years.
Most kings have a sense when they are facing trouble. In most cases, a king won’t look out his castle’s window and see thousands of angry peasants with pitchforks and say, “wow, I didn’t see that coming!” We have many early warning signs. One thing that is simply laughable from the mainstream media is when they say, “no one can possibly have seen this coming.” Well many economists, bloggers, and some politicians saw this coming so there goes that “no” one argument. In many cases, that is why many media outlets are slashing and burning staff because how can they claim to be credible when many independent sources have done the research they didn’t and have issued many siren calls in the past? Many readers are smart enough to see who is credible and who is simply playing catch up. Why pay a writer a high six figure salary when a blogger knowledgeable in the subject is already writing about it?
What was one thing that was missed that approached like an angry mob screaming and chanting? Notice of defaults and foreclosures:
Take a look at the chart above very carefully. You notice that tiny red sliver of foreclosures in Q2 of 2006? That was the wake up call. These foreclosures were probably the most egregious fraud cases because look at the peak prices above. Practically anyone could sell a home at peak price with little work. After this point in 2006, a trend was noticeably appearing. No one saw this coming? Maybe they didn’t but many who actually understand these trends tried to echo a warning but bubbles are hard to burst. It is like the party with no parent and the punchbowl needs to be taken away because people are way too drunk. Who will be the one to end the fun? You would hope that regulators such as the Fed or our government would have something to say but instead, we have Alan Greenspan saying how fantastic adjustable rate mortgages are! So that has already passed. Yet the problem is they are still doing the same mistake! How so? For example, during these last few upsurges in sale they made it appear that it was somehow a gigantic jump. No, if you pulled data back from 2000 where the bubble started, you would quickly see the “upsurge” was simply a trend back to normalcy.
You’ll notice with the above chart that as time went on, many of the notice of defaults (NODs) started going into foreclosures. This is significant. If you look at say Q1 of 2005 we have nearly 17,025 (NODs) but practically no foreclosures. Why? Anyone in trouble can just sell their home. Simple. Not the case anymore. You may be wondering why NODs suddenly fell off in Q3. This as I have stated is because of SB 1137 which is simply a dull legislation requiring lenders to kick the can down the road a few more months. It basically tells lenders, “hey you. Contact the borrower and tell them what’s up. Now go forth and collect.” Yet how are you going to squeeze cash out of a cash strapped California homeowner? That is why each subsequent bailout gets dumber and dumber on an exponential scale because consumers simply are financially strapped.
Another key chart to look at is the median price versus the California unemployment rate:
What you’ll notice almost perfectly is the unemployment rate dropping sharply right at the peak of the bubble. Right when the bubble burst, you see unemployment rising sharply. So what came first, high unemployment or the peak price? No need for a chicken or egg debate but let us point out the obvious. First, you’ll notice that once the plateau of peak prices was reached it stayed high into 2007. Unemployment started creeping up in 2006. Why? Well many builders were getting out of dodge while the going was good while many people were still pretending they lived in Wonderland hoping a borrower would jump into the rabbit hole and pay their outrageous price.
This above chart is crucial since the trend is almost perfect now. That is, higher unemployment will lead to lower prices. That is normally how housing markets play out during tough times. This case is unique in that California built an industry around this bubble with construction, finance, home building, equity withdrawals, and industries that catered to the housing bubble. Now that the bubble is gone there isn’t enough other jobs in the non-bubble economy to absorb these people back. That is why I just don’t see how California gets out of this bubble until 2011. Maybe nationwide we may see a price bottom in 2009 or 2010 but certainly not for us.
The above charts paint a rather clear picture of the longer term trend. But how are things today? Well let us look at the current market snapshot:
This next chart has data from September of 2007. You’ll notice an upsurge in July of 2008 but you should ignore that because I added San Diego county distress sales at this point. However, the trend is unmistakable. Inventory is falling and distress sales are rising. The only reason you have seen then taper off recently again is because of the legislation. But even then, you can see how tiny this is even when it is simply pushing problems 1 or 2 quarters away.
This chart also shows that psychologically those that do not need to sell are pulling their homes off the market. Why in world would you sell right now? This is a horrid market. Yet, waiting until a few months down the road you may actually lose even more. Think of it this way. The chart with price above shows massive gains since 2000. That is across all counties. A high percentage of people that own bought before this time so they would still make a profit today. Now you have people willing to wait hoping next summer the bubble makes a triumphant return. Or you can sell now. This chart above tells you one major thing. Many think they’ll be able to get higher prices tomorrow. Yet distress properties keep hitting the market because these are forced sales.
I hope the above gives you a deep perspective of Southern California and hopefully provides you some insight in where we are heading. We haven’t seen this kind of economic turmoil since the Great Depression so it is hard to say when we will bottom out. Yet one thing is certain and that is we are going to go down in the history books for generations to come right next to those beautiful tulip bulbs.
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Post from: Dr. Housing Bubble Blog
The Rise and Fall of the Southern California Housing Empire: Foreclosures, Bad Investments, and Psychological Deception.
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Related Posts:
■Foreclosures? Housing Bubble? In Southern California? Impossible!
■Short Sale Report Volume 3: Another Week and Another Record. SoCal Short Sales up over 12,000.
■Think Housing Can’t Go Down Significantly in Southern California?
■Southern California Housing Report: New Housing Motto: Foreclosure Data is so Bad, it has to be Good! Median Price Down 31% to $348,000.
■Foreclosures jump statewide by 40% in California in just one quarter! Welcome to California’s Gold!
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