California Housing Prices Down 41%: Examining the Summer Selling Season and Future Trends
What a difference a year makes. In May of 2007 the median price for a California home was $595,000. Today the median price stands at $350,140, a drop of 41% from the peak. The drop in itself is stunning but what is more amazing is the speed in which this correction has occurred. The previous bubble which was seen in Southern California saw prices drop over a period of 6 years following a gradual trajectory. This time, that is not the case. There are many reasons why this correction has happened so quickly and in contrast to the other one, is very different even though it occurred in the same location.
Here are 3 reasons:
1. Subprime and Exotic Mortgages - This goes without saying that these loans setup people to fail quickly and miserably. These loans were almost designed for flipping and were essentially ticking time bombs. If you didn’t unload the home in time, you were going to face major payment shock and we have now seen one year of payment shock in the state and clearly that was enough to sink the market. It was for all intents and purposes a Ponzi Scheme and like a Ponzi, they grow slowly sucking in people one by one but when they fail, it usually unravels quickly.
2. Employment - The last bubble that burst was caused by the weak employment situation in the state. Recall the aerospace engineering falling behind and many people were left unemployed. The exotic mortgage market did not exist so people had more steady 30 year fixed mortgages. Given that, the employment situation contracted and methodically the market started to correct. There was a slight bubble but nothing like the current market. On the other hand, this current bubble popped and led to further employment cuts which we are now seeing. In addition, many people here in the state were employed with industries tied to real estate so we are in fact getting a one-two punch.
3. Psychology - People have anger towards lenders and Wall Street. The zero down movement made people more susceptible to walking away from their home. When I say walking away I mean consciously making the executive decision that you will no longer pay your mortgage. It may be a year before they boot you out. This will only intensify as the economic situation for the state becomes worse. The market is saturated with distressed properties and this has an impact on your psyche. And think about the global nature of this crisis. You are not alone in this pain so sometimes it makes it easier for people to walk away in community. If you see that your neighbor has foreclosed, you know that you can do it and survive.
The market is really horrific. Let us take a look at some quick numbers:
August 2008 California
Sales: 37,988
Notice of Defaults: 44,278
Notice of Trustee Sales: 24,241
Real Estate Owned: 33,205
Total Distressed properties: 101,724
The reason prices are falling so dramatically is the above equation. When over 50% of all sales are foreclosures and distressed properties you are not going to get top price. Keep in mind that this is the summer selling season data which supposedly is the apex number for the year. The next 6 months are always a slower selling season simply because of seasonal factors. Add into the mix the current crisis and it will only increase ten fold.
JP Morgan Chase took over WaMu yesterday. Aside from the biggest S & L collapse ever, JP Morgan just did what the current bail out plan cannot. That is, give a mark to market of the value of the current assets of a distressed institution:
Well as we just reported, California is now down 41% so we are well within the current estimates. Clearly this is not the bottom. So we are either going to get a deep recession or a severe recession. Meaning, it is possible that California will see a 58% peak to trough loss. So what would that bottom be?
Severe Recession: $249,900 median price for a California home
Housing is correcting and correcting fiercely. That is why institutions like Wachovia who have similar portfolios to WaMu are being hammered on the stock market. JP Morgan just put their estimates on the table. The denial is officially over.
If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!Total California Housing Inventory 159,898: Or is it Higher? Foreclosures and Playing with Actual Inventory Numbers.
Many readers to this site know that I am fascinated with trying to get an actual overall housing inventory number for the state of California. Conflicting reports, REOs, and inventory that doesn’t show up on the MLS makes it very difficult to get a handle on what is going on in the market. We do know however that nearly half of all sales in California are made up by foreclosure resales. That is, homes that have already gone through the rather lengthy foreclosure process.
There are various ways on trying to arrive at current inventory rates. One is to use MLS listing sites and run a quick check on all the counties in the state. This can be cumbersome and some MLS sites may not have all the data for certain counties. Movoto.com puts out a monthly report with sales prices and inventory numbers. Here is a glance at the current inventory in California:
Pretty straightforward right? We tally up all the counties and we see that California has 159,898 homes currently for sale on the market. But hold on a second. In mid August we did a quick report trying to get an inventory breakdown for California by gathering data from ZipRealty. Here is what we found:
As you can see, at a minimum in that query we found inventory at 219,482. So what gives? Let us do a quick check. For the 6 counties in Southern California Movoto tells us that there are 105,743 for August. Yet from the ZipRealty data we gathered 118,062, a difference of 12,319 homes in Southern California alone! I’m not trying to say one is better than the other but this is why California is having the problems it is having. There is no one central hub for information to find this data and it makes monthly inventory data somewhat suspect.
That is why looking at sales and price is a better indicator of the current health of the market. Given that many REOs are simply not making their way onto the bottom-line of many of these inventory reports, you can rest assured that there are many distressed homes in California looking to be sold. Last month, we had this distressed data:
August 2008 California
Notice of Defaults: 36,373
Notice Trustee Sales: 12,506
REOs: 23,406
Total: 72,285
If we are to take the 159,898 number as current inventory, in one month we’ve had nearly 50% distressed action to counter any sales that occurred during the month. This is only going to get progressively worse as we are entering the option arm and Alt-A fiasco that will send the California economy into a mini depression. Interesting how Lehman Brothers, the struggling investment bank mentioned today in their conference call that California may fall 50% from peak to trough when all is said and done. Banks say the weirdest things when they are struggling. Sometimes, they actually say the truth.
