It is clearly no surprise to anyone that housing is in a major slump across the country. What seems to be taking people by surprise is the rapidity of how quickly the market is retracting all the gains that it had made during the previous years. California faced many of the benefits during the peak of the housing bubble. Conversely, it is now facing major pains as the correction works itself through the system.Let us examine the numbers released by the California Association of Realtors in greater detail to see exactly what is happening:

“LOS ANGELES (March 24) - Home sales decreased 28.5 percent in February in California compared with the same period a year ago, while the median price of an existing home fell 26.2 percent, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today.

“Although sales rose for the fourth straight month in February by 9.5 percent compared to the previous month, they continue to be dragged down by the ongoing effects of both the credit/liquidity crunch and tighter underwriting standards that have reduced the pool of qualified buyers who can obtain a loan,” said C.A.R. President William E. Brown.

“It is crucial that FHA reform legislation currently under consideration by congress include higher loan limits for high-cost states like California,” he said. “The proposed legislation also includes a reduction in the down payment requirement for FHA loans and will include condominiums in the FHA single-family program, which will make it easier for buyers in the condominium market to qualify for loans.”

It is hard to understand why in the same month that prices fell at a record pace, that in the same news release this organization is also calling for higher loan caps. If anything, the median price of a single family home in California is now at $409,240 within previous conforming loan limits and the state is now an eternity away from the $554,280 reached in February of 2007. The changes are drastic and rather stunning. Let us take a look at some specific counties:

Incredibly, these drops are very similar to the numbers reported this Tuesday in the Case-Shiller Index. The numbers that came out on Tuesday showed Los Angeles down by 16.5% and San Diego by 16.7%. The interesting factor is that multiple housing measurements are now forming an intersection of agreement on certain market measures. This is highlighting that the market is facing challenging times.

Sales are also showing significant weakness. Sales for the entire state are down 28.5% from a year ago. What we will most likely be seeing in the next few months is prices experiencing significant pricing pressure on the downside but we should start approaching a bottom in home sales. The only reason for this is that year over year prices are now essentially swallowing their own tail; that is, we are comparing poor numbers from last year with poor numbers from this year which should mitigate significant year over year drops. Keep in mind that this won’t stop the slide in prices simply because many of the current sales are distressed properties.

Another important highlight in the report is that rates are slightly moving lower for mortgages:

“Thirty-year fixed-mortgage interest rates averaged 5.92 percent during February 2008, compared with 6.29 percent in February 2007, according to Freddie Mac. Adjustable-mortgage interest rates averaged 5.03 percent in February 2008, compared with 5.51 percent in February 2007.”

Interesting that within that same time frame that rates went from 6.29 to 5.92 a drop of .37 basis points the Federal Reserve has cut the funds rate from 5.25 to 2.25, a drop of 300 basis points. What this is showing us is in effect, that cutting rates is no longer having the same impact as it once did. Take a look at graph below and you can clearly see this effect:

Why focus so heavily on California? The reason so much focus is on California is rough estimate show that 20 percent of mortgage debt resides in this one state. Considering that most of the riskiest loans are here including all the sub-prime mixtures and so called Option ARM mortgages, many eyes are fixated on this state and how it weathers the storm. The above numbers do not bode well for the near future.

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The Case-Shiller Index, which tracks same home sales over a period of time instead of aggregate median prices per month, has dropped nearly 10.7 percent on a year over year basis.  Most analyst favor the Case-Shiller Index because it looks at a single home and tracks it historically over time giving a better and more reliable indicator of the health of a home’s value.  The drop is the largest drop ever experienced by the 20 city index since its inception in 2000.  The index also tracks a 10 city index which dropped an astounding 11.4 percent which is a record drop since data started being tracked in 1987.Nearly all cities in the index reported losses.  Here is a brief list of some of the year over year drops:

Miami:            19.3%

Las Vegas:     19.3%

Phoenix:         18.2%

Los Angeles:  16.5%

San Diego:      16.7%

Tampa:           15%

The only area in the entire index that reported a gain was Charlotte North Carolina coming in at a positive 1.8%.  Otherwise, across the board the housing decline is accelerating and picking up steam.  Keep in mind that we are still experiencing record mortgage resets and excess inventory.  It is looking more and more that we are going to hit analyst predictions of 20 to 30 percent national median price drops once the housing market bottoms out.  Let us look at the rate reset chart:

As you can see from the above chart, we still have many more subprime loans to reset which will only increase pressure on prices and also, the excess inventory by builders is again forcing them to cut and slash prices.  We’ve never had a run up in real estate as we have witnessed and at the same time, we have not seen a correction take speed this quickly either.  No one really predicted housing would go up as quickly as it did so to assume analyst can predict and exact bottom is presumptuous at best.  We can very likely overshoot on the downside just like we went into price ranges never before seen.  Let us look at the graph for the 20 city index:

The peak was reached in July of 2006 and we are now off by 12.5 percent from the peak.  Yet the acceleration is picking up.  For example, with the current data we see for the last month we saw a 2.35 percent drop from the previous month.  Clearly at this rate, we are going to see a 20 to 30 percent drop by the end of this year which I really don’t see.  I do see continued drops but at a more moderate pace reaching bottom in 2009 and 2010 nationally.

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