This weekend, I was having a conversation with an investor colleague and they brought up a crucial observation regarding the California housing market.  New home buyers are jumping in head first into the drained pool thanks to FHA insured loans and investors are picking up many homes side stepping banks, but the move up buyer […]

This weekend, I was having a conversation with an investor colleague and they brought up a crucial observation regarding the California housing market.  New home buyers are jumping in head first into the drained pool thanks to FHA insured loans and investors are picking up many homes side stepping banks, but the move up buyer and seller is now fear stricken.  Do people sell their current home in this market and pay a higher price for a home in a more prime area even though prices are still inflated?  Or do they wait and hope for lower prices and at the same time, see their own equity dwindle?  The low end of the market, meaning sub-$250,000 is moving briskly thanks to FHA and investors.  The other part of the market is at a high risk of distress with the Alt-A and option ARM wave recasting in full force in 2010 and 2012.  We can discuss how this will play out, but make no mistake it will not be good.

The market dynamics are fascinating.  I put together a comprehensive chart examining Southern California breaking out counties:

So what is happening?  The overall median price for the region is still near the trough.  The hardest hit regions of Riverside and San Bernardino are still near the bottom.  The slight uptick in these regions are based on first time homebuyers and investors.  In many of these areas, buying is on par with renting.  So that is one facet of the market.  On the other end, you have a county like Orange bouncing from their bottom.  Still a far cry from their peak but you are seeing more homes sell.  A couple of patterns here.  More lenders are willing to do bigger ticket short sales and this is moving prices up.  It is fascinating that they are hovering around the $417,000 mark.  The jumbo market is non-existent.  It will be fascinating to see what it does at this point.  Los Angeles has moved up slightly from the bottom.

We are still far from ever reaching a peak sales month like the few months we cracked the 35,000 mark.  Sales are also being dominated by foreclosures re-sales and first time buyers.  Some data on last month sales:

SoCal Data – October 2009:

Foreclosure re-sales –   40.6%

FHA Insured loans -         38.3%  (two years ago this number was 2 percent)

It is hard to extrapolate any normal market trends from this because the market is anything but normal.  We have HAMP trial mods and most are in California.  You can bet your money that the majority will not stay permanent and will add more inventory in 2010 once they fall out of HAMP (the government will probably make another program to modify failed HAMP mods called RE-HAMP).  The numbers are fluff on the front-end.  Expect this to hit at the same time as the recast wave.  As we now know, banks can game the system but that doesn’t mean that the market is going to boom or even stabilize.  Take for example the MLS inventory trend:

Since September of 2007, the MLS inventory has fallen dramatically.  Good news right?  Not exactly.  Because most of the inventory is now part of the shadow inventory.  Nearly half of all sales are foreclosure resales so many of these homes don’t even make the public list.  So we now have to adapt to the new reality of the market.  If you have any doubt about this, just take a look at recent distress data put out by TransUnion:

Over 10 percent of all California mortgage borrowers are 60+ days late!  This is uncharted territory.  Clearly there is little dispute that growing foreclosures is not a good thing.  California having the second largest average mortgage balance of $354,000 puts an enormous amount of money at risk.  How distressing is this data?  Let us break it down further:

California homes with a mortgage:           5,290,000

10 percent 60+ days late              =             529,000 homes

Current Seasonally Adjust Annual Rate of Home Sales    =            530,520

In other words, we have a year of distress inventory and who really knows where this is at.  Some of it is REO.  Some of it is in HAMP.  A lot of it is sitting pathetically idle in the balance sheet of banks in a form of toxic mortgage stalemate.  People aren’t paying and banks aren’t moving.  Everyone is now waiting for a bailout thanks to moral hazard central.  The only data where it shows up is in the distress data of the 60+ days late because it certainly isn’t showing up in the MLS.

Another chart showing the new reality of the California housing market is the monthly nut metric.  Don’t expect to find this in any economics books but this is another good measure of how much debt the current buyer is willing to take on:

At the peak, the typical California home buyer was willing to take on an insane $2,500 principal and interest charge.  Actually, this data is completely misleading because this was based on crazy mortgages including option ARMs which didn’t even include principal!  Or even all of the interest for that matter.  Now, with FHA insured loans being the bulk of the mortgage market people are committing to a typical payment of $1,196.  Try finding something that fits into that data in the Westside.  Of course the market is correcting.  But some people are obsessed with niche areas that they miss the larger trend.  I get the sense that some people want to buy a Beverly Hills mansion for $200,000.  Not going to happen.  Yet the reality based market is adjusting as the above data is showing.

Since people seem to forget why the market is taking such a big hit, let us take a trip down foreclosure alley.  Today we salute Compton, El Monte, and Downey with our Real Homes of Genius Award.

Foreclosure Alley

Our first home takes us to Compton California.  Compton has been devastated by the subprime mortgage fallout.  This home is no exception:

Ah yes!  The very common garbage can photography technique.  Banks are so motivated to move inventory that they don’t even bother to move trash bins out of the way to market the home.  I’m glad banks are trying to get the most bang for their taxpayer bailout buck.  The above home is a 2 bedroom and 1 bath home listed at 576 square feet.  Let us look at the sales history here:

This home is currently listed for sale at $54,400.  Lost decade for this home.  Can it reach the double lost decade figure?  A 74 percent price cut would make anything seem possible.  What do you think this home is going to do once it sells at a low price?  Lower comps.  The backlog of distress inventory assures us downward pressure on prices in future data measures.

Let us move on to home number two:

Are we buying a home or vegetation?  Thanks banks for taking the time to take quality pictures!  You were more than happy to make loans on these places and you can’t spend some time on taking a few quality shots?  Last time I checked eBay has some quality digital cameras for $200 or less.  I’m sure you can use some of the trillion in bailouts to purchase some decent photo equipment.  Just saying.  This home has an interesting history:

The homes is currently listed at $85,000.  A 1 bedroom and 1 bath home listed at 910 square feet.  Let us look at the ad description:

“Great opportunity for investor or owner/occupant. This property has great potential and is priced right for a quick sale. Surprisingly spacious with great utility. Requires significant repairs.”

You’d probably get $700 a month for this place as a rental.  Great investment right?  Well you need to factor in those “repairs” and also, many areas have higher vacancy rates because unemployment is sky high.  Many novice real estate investors right now are jumping in having no clue how volatile being a property manager can be.  They look at the rent, multiply it by 12 and subtract their principal and interest payment and suddenly it looks fantastic.  It isn’t that simple.  But hey, this is California housing math!  Why let little details get in the way like the 22 percent underemployment rate?

The third home takes us to El Monte:

This home is a 1 bedroom and 1 bath home listed at 760 square feet.  It looks bigger because of the yellow grass and the size of the lot.  But it might be hard sleeping on the lawn.  Feel sorry?  Let us look at some sales history:

The person who bought in 2005 just lucked out.  They lost some money but hey, not like the recent buyer.  The current list price is $206,900.  Keep in mind that $500,000 in many other parts of the country would buy you a castle like mansion and here, it gets you 760 square feet with yellow grass.  Real Home of Genius indeed.  Who is the next lucky buyer?

Our final home takes us to Downey:

This home is a 4 bedroom and 2 baths home.  It is listed at 1,372 square feet.   So what caused this home to go into foreclosure? Many reasons including the home equity machine:

Ah yes.  100 percent financing for a $517,000 home.  Of course, this didn’t end well.  Zero down for this place.  The ending is very common.  The current list price is $274,900.  Chalk one up to the California dream gone insane.

These are homes currently selling and we have thousands more.  What do you think is going to happen to median prices when they sell in their local areas?  Today we salute you Compton, El Monte, and Downey with our Real Homes of Genius Award.

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Real Homes of Genius: Today we Salute you Compton, El Monte, and Downey. Four Examples of Foreclosure Alley. The Hesitant California Housing Market.

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This entry was posted on Wednesday, November 18th, 2009 at 10:55 am 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.