977,000 Mortgages in California are Toxic Waste: The Misleading Headline Numbers and New Home Sales Increase because of a $13,000 Price cut.
Posted by: admin in Real-estate newsWith any more spinning we would be in a financial carousel. New home sales data was released on Monday and showed a “whopping” increase in sales. This is the primary headline on all mainstream reports. Little is mentioned that the median price of a new home fell to $206,200 in June from $219,000 in May […]
With any more spinning we would be in a financial carousel. New home sales data was released on Monday and showed a “whopping” increase in sales. This is the primary headline on all mainstream reports. Little is mentioned that the median price of a new home fell to $206,200 in June from $219,000 in May (small caveat). A drop of over $13,000 in one month apparently is not important enough to discuss.
This is pure economics with prices falling you will expect new home sales to increase especially in the spring and summer months which are normally stronger. So even if we may be reaching a bottom nationwide in terms of months of inventory the coming wave of Alt-A and option ARM toxic waste will guarantee that we have years of pricing pressure on the downside. In the last 2 weeks, the S&P 500 has rallied by over 11 percent. What would constitute an above average year in terms of gains was accomplished in two weeks. Not because of spectacular earnings but because people want to believe in the financial idols of Wall Street. Mixed earnings is not reason enough for this massive rally but Wall Street as you may have noticed does not reflect main street reality.
Let us however focus on housing. The increase in sales is good but is largely being driven by massive price discounts and foreclosures which dominate in many markets including California:
A couple of things we should highlight. Existing home sales make up the bulk of sales at any given point. Existing home sales look like they have stabilized but keep in mind that 30 to 40 percent of all homes sold for the past few months have been foreclosure resales (in California the number is more like 40 to 50 percent). So prices have been falling like a lead balloon and we have yet to experience the Alt-A and option ARM hit that will take down more prime locations in areas in California but also in places like Florida. The next thing to understand is historical context. The jump in new home sales is largely a price driven jump based on tax incentives and a deep cut in prices. Even with that, you can see from the chart above that the jump merely highlights that we aren’t starring into the abyss. Yet this increase does not mean happy days are around the corner. It is simply a reflection that housing prices aren’t going to fall to zero yet many market observers somehow think we are back on solid ground. What about rising unemployment? Over $3 trillion in commercial real estate debt? State budget deficits? All minor trifles to the Wall Street crowd. You have many states like California with budget deficits that are being patched up for the short-term but will only solve the issues on a temporary basis.
The headline on Monday should read:
“New home sales increase because of steep price cuts.”
But that would be honest reporting. There is nothing more distressing to the housing market than foreclosures. And nationwide foreclosures are still in record territory:
What we are seeing is foreclosures keeping a lid on any sort of pricing power on the upside. Foreclosures are the kryptonite to any housing recovery. And until the foreclosure situation stabilizes, it is much too premature to call a housing bottom especially in a state like California. As we have highlighted, the foreclosures are now starting to hit higher priced homes in more prime locations like:
Santa Monica , Culver City , Palms , Rancho Park
And much of this has to do with the Alt-A and option ARM wave that is now striking. Let us first take an overall look at the California housing market:
First, 76 percent of owner-occupied homes have a mortgage. This is higher than national data which comes in at 68 percent. Also, there isn’t a large amount of newly built homes in the state. In many of the prime areas homes are multiple decades old; in some cases homes were built prior to the Great Depression. So the dynamics of the California housing market are unique. But what is also important is to look at the makeup of those 5,381,874 mortgages. Let us dig deeper:
Subprime loans still active in CA: 345,505
Average balance: $321,745
Alt-A loans still active in CA: 632,215
Average balance: $443,223
Total toxic mortgages still active: 977,720
This is where you should take pause. 18 percent of all current mortgages in California are toxic waste or near toxic waste. That is a gigantic number. This isn’t including the many jumbo “prime” mortgages out in the market which are equally at risk. So when we talk about the Alt-A and option ARM tsunami this is what we are talking about. The only place you will find a new home in California for $200,000 is out in the Inland Empire or Central Valley but those areas unfortunately are facing massive economic problems. The state itself is in tatters but these areas are reeling. That is the new home market for California and it is a small subset.
And the home vacancy rate for California is still trending higher:
The vacancy rate is the highest it’s ever been for California since data was first tracked starting in 1985. So that trend is unmistakable. This is in large part due to the massive amount of foreclosures the state is seeing (or not seeing depending on how lenders are hoarding inventory). Either way, the data is rather telling. California home prices will be falling for mid to upper priced regions in the upcoming months. But don’t expect to read that in the headlines.
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