Southern California Housing Still Not Finding a Bottom: Worst Decline Ever, no Exaggeration. Examining the Numbers in Great Detail.
If anyone was expecting a spring bounce from the housing Easter Bunny they’ll need to wait for another year. Frankly, all this hyperbole of reaching a bottom is wishful thinking and is completely devoid of the economic realities surrounding us. But what can you expect from an industry that kept chanting a mantra of “home prices only go up” for a decade? Now, it is a primitive form of the argument that “we are inches away from a bottom.” Well guess what? Many folks actually bought this line in California and will realize very quickly that we are nowhere near a bottom. In after hours, which now seems to be a daily occurrence, Washington Mutual announced an unprecedented $1.1 billion loss for the quarter. I think the Chief Executive Kerry Killinger says it best:
“Nothing of this scale has happened since the Great Depression,” Chief Executive Kerry Killinger said at WaMu’s annual meeting. “This is the toughest credit cycle I have seen in my years in the industry.”
In fact, as of the third quarter of 2007 in their single-family residential portfolio worth $105.9 billion according to a presentation, $57.9 billion of these loans were Option ARMs. As I discussed yesterday in the Wachovia debacle, much of these loans have as much risk as sub-prime loans yet the market is treating these loans as much safer. At least that is what they want to wishfully believe. I attribute this to the absolute lack of insight many of these people have of the ridiculously inflated prices here in Southern California. Their lack of insight stems from the fact that they don’t know this area. They simply do not have the depth of understanding of how different cities and regions can be yet their nice financial engineering models didn’t account for that. They didn’t heed their own advice that real estate is all about location. Let us take a look at the absolutely abysmal numbers for March that were released by DataQuick today:
March 2008:
| All homes |
March-07 |
March-08 |
Change % |
| Los Angeles |
$540,000 |
$440,000 |
-18.50% |
| Orange |
$629,000 |
$506,000 |
-19.60% |
| Riverside |
$420,000 |
$306,250 |
-27.10% |
| San Bernardino |
$369,000 |
$265,000 |
-28.20% |
| San Diego |
$490,000 |
$395,000 |
-19.40% |
| Ventura |
$566,750 |
$430,000 |
-24.10% |
| SoCal |
$505,000 |
$385,000 |
-23.80% |
*Souce: DataQuick
Every region is off by $100,000 or more from their peak. The entire Southern California region is now off on a year over year basis by a stunning 23.8%. We are now back at levels not seen in 4 years. Now the reason prices are plummeting so quickly is based on a few different circumstances that I will go into detail further but one of them that we can look at is the massive drop in sales activity:
| All homes |
March-07 |
March-08 |
Change % |
| Los Angeles |
8,353 |
4,263 |
-49.0% |
| Orange |
3,130 |
1,663 |
-46.9% |
| Riverside |
3,680 |
2,691 |
-26.9% |
| San Bernardino |
2,476 |
1,534 |
-38.0% |
| San Diego |
3,218 |
2,108 |
-34.5% |
| Ventura |
999 |
549 |
-45.0% |
| SoCal |
21,856 |
12,808 |
-41.4% |
Sales are practically at a stand still. Current inventory for Southern California is 151,224. With the current sales rate we have a whopping 11.8 months of inventory. At the peak of the housing bubble in 2005 we had months were less than 2 months of inventory were on the market. Now the opposite is true. Let us dig deeper into the report:
“La Jolla, CA— The onset of spring did little to thaw Southern California’s semi-frozen housing market: The seasonal boost in sales between February and March was less than half its normal level and a record low. The weak start to the home buying season also saw another record dive in the median sales price, the result of depreciation, slow sales for higher-priced abodes and growing sales for discounted homes fresh out of foreclosure.
A total of 12,808 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in March. That was up 18.8 percent from 10,777 the previous month but down 41.4 percent from 21,856 in March 2007, according to DataQuick Information Systems.”
Actually we had record heat in Southern California this past weekend so it was enough to thaw any market if prices were reasonable. But we are still miles away from the bottom and this report again is putting holes into the bottom chaser’s theory like Swiss cheese. From this report and simply given the sales numbers, we can expect another disappointing spring and summer for Southern California housing. I love the rhetoric used here. “Depreciation” instead of correction. And who in the world calls their home abodes? Are we now buying homes constructed out of brick and reinforced straw? Let us examine the report futher:
“We continue to believe a lot of people who could be buying or selling right now are opting to sit tight until they sense we’ve hit bottom. Often what we’re left with, especially in inland areas, are sales driven by foreclosure or the threat of it. Although prices have fallen off their peaks in most places, the magnitude of the decline continues to vary widely, with the largest discounts concentrated in markets rife with foreclosure resales,” said Marshall Prentice, DataQuick president.
In recent months, foreclosure resales typically sold for about 15 percent less than other homes in the surrounding area. When these foreclosure resales dominate a market, accounting for more than half of all sales, they tend to tug home prices down by an extra 5 to 10 percent when compared with communities where foreclosure resales are less common.”
People are sitting out for these reasons:
1. They don’t have enough income to get a government loan (rock bottom rates still).
2. They are worried about their employment since California’s economy was highly based on FIRE (finance, insurance, and real estate).
3. People are stuck in their homes, some with negative equity.
4. Many are living paycheck to paycheck with only 1 to 2 months of emergency funds.
Plus, people that are in banana republic loans don’t have a choice to sell. They either get a short-sale approved, eat the payment on the albatross mortgage (assuming their income can support it), or let it ride and sit tight until the foreclosure process runs it course. The brief report makes it seem like many people are strategically planning their next move. And their isn’t much variance in the magnitude of prices dropping. You either get stunning year over year drops like Orange County dropping 19.6% or breathtakingly stunning year over year drops like San Bernardino dropping 28.2%. The report goes on further talking about the credit crunch:
“The sharp and sudden drop of the Southland median price reflects a combination of factors, mainly depreciation, especially in areas hammered by foreclosures, and a big shift in the types of homes selling. Since last August, when the continuing credit crunch hit, sales have plunged for more expensive homes financed with “jumbo” mortgages, which until recently were defined as loans over $417,000.
Sales financed with these larger loans, which the credit crunch made more expensive and harder to get, accounted for just 15 percent of Southland sales last month, down from about 40 percent a year ago. It is unclear how much home sales might be affected this spring and summer by the recent increases to the limits for so-called conforming loans and FHA loans.”
Bwahaha! This is so absurd! In their own data, they just tell us that the entire Southern California median home price is now $385,000 and the implication is that the problems started really to hit hard because of the credit crunch. Heck, with the $417,000 previous conforming limit we can now cover the median home price for the region. Why in the world did we have to go to $729,500? That is nearly twice the median price of any home in the already overpriced Southern California market. If you still think that lifting caps was innocent and in no way a bailout for the wealthiest speculators both intentional and unintentional, then the above data should give you pause. Of course, we get a glimmer of hope in the report that the increase in limits will help later this spring and also in the summer but from the current data, there is no reason to believe this. Why? Oh let me count the ways…
1. Does anyone remember that California is in a $14 billion state deficit? It probably has ballooned since the last time the number was reported. The fiscal year doesn’t start until July 1st and that is when many government agencies will need to cut back or raise taxes.
2. If Wachovia and Washington Mutual are any early indications, the Option ARM debacle is only beginning. Given the “depreciation” we’ll be seeing and the fact that many of these lenders over leveraged themselves in California, we have a lot more pain heading our way.
3. People are maxed out. Reports of people raiding their 401ks to stay afloat. Rise in foreclosures. Rise in auto repossessions. These are not signs of a healthy economy and people tend not to buy when things go south.
4. Recession. Did we forget that we are in a recession? With sky high energy costs and prices soaring on everything except housing, disposable income is getting sucked into daily necessities instead of putting boob implants on the house. The massive lift kit for your F150 will need to wait now that you have to pay $100 a week to fill up.
5. People don’t want to buy because they simply do not have the income. The fact of the matter is many of these people bought homes in California with mortgage products designed by fantasy economics; you might as well pretend you’re in the movie Fantasia to think that people with $60,000 incomes can pay for a $500,000 home. It was a Ponzi Scheme! One of the earlier posts I did in October of 2006 saw that this entire housing scheme was being built like a Ponzi Scheme. Why? Simply put, the only way the housing market would keep going up is if people actually believed in the bubble. Well now that belief is shattered.
Let us now take a look at the ending paragraph in the report:
“Indicators of market distress continue to move in different directions. Foreclosure activity is at record levels, financing with adjustable-rate mortgages is at a six-year low. Down payment sizes and flipping rates are stable, non-owner occupied buying activity has risen in recent months, DataQuick reported.”
Yes, we have two directions; bad and worse. What in the world do they mean that down payment sizes and flipping rates are stable? Does that mean that instead of 2 episodes a night of Property Ladder we get 1? But fear not you perma-bulls. Apparently some savvy investors think they have timed the bottom and are now buying non-owner occupied housing. I haven’t found one property in the entire region that will cash flow but then again, these folks think the bottom was here. If you are planning in jumping into the shark tank, be ready to stay put in your home because all indicators are pointing to a prolonged slump. Maybe they’ll be able to flip into the stable market (whatever that means). The bottom line is housing will not hit a trough until incomes, market lease rates, and employment start to reach an intersection and we are miles away from reaching that street. After all, if unemployment starts spiking even the rental market will start hurting. The worst drop on record for the region and some still want to call it a bottom.
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24 Responses to “Southern California Housing Still Not Finding a Bottom: Worst Decline Ever, no Exaggeration. Examining the Numbers in Great Detail.”
That’s “abode,” not “adobe.”
Moved to SoCal last July from VA (husband had a job transfer) and have been renting in Riverside this past year. We are in the position of strategically planning our next move, and we’ve decided to make the jump into this shark tank; we’re putting 60,000 down on a 300,000 REO, 3/2 1500 sq. ft. with pool in the RUSD. Fixed rate 5.7, 30 year loan. Has the market reached bottom? Probably not. But we’re not speculators–this is where we plan to retire. Hope we don’t regret this decision.
Obviously, the Good Doctor is in! Isn’t it awesome???
To Riverside Renter,
Japan’s real estate deflated for nearly 12years.
We have the largest SPECULATIVE bubble in the history of the world…and are barely 2 years in…
You will live in this home for a long, long time… unless you choose to default… $60,000 down will be gone in 12mo. or less!!!!
and you could pay MUCH, MUCH less for it in a few years while you save up enough to but it outright… instead of paying 5.7%on 240K$ for a $90,000 dollar house.($60/sq. ft. x 1500 sq ft= $90,000= FAIR Value…)
YOU ARE a just SPECULATING that the cost to buy land and build a 1500 square foot house is $200/sq. ft.
I hope you don’t regret this decision too…. You could walk away now… or pray you don’t qualify for the house…
Good Luck,
Scott
trytothink1st@yahoo.com
PS Renting is the way to go for quite a while….
People were not out of underwater conditions for 10 years during the last bubble. It keeps the sharks distracted.
Man, those numbers are UGLY!!
The only positive side is that folks like me that have always wanted to live in So Cal can now buy at prices well below where they have been in the last few years.
DRHB:
“The massive lift kit for your F150 will need to wait now that you have to pay $100 a week to fill up.”
Hilarious, and very-So-Cal!!
I didnt need the reminder that I fall into category #4.
Keep up the great work.
Excellent blog… I like the fact that you engage in critical analyses, rather than simply rehash news like a certain other housing bubble blog.
Keep up the great work!
Riverside Renter, I want to dig into your decision making process a bit if you don’t mind, to try and gain a better understanding.
Why would you choose to buy now, knowing that you’ll very likely lose tens or hundreds of thousands in equity over the next several years? Why not rent for a few more years at a fraction of what you’d pay for a mortgage, save the cash, and then buy at a huge discount in 2010 or 2011? What is it that you’ll get only by buying today, that you wouldn’t get in two years or so, or even just another year, that’s worth an extra $50,000 to $100,000 plus which you could otherwise save for retirement or use for other things?
Uh, is it me or is it insane that the senate is giving tax breaks to big business as part of the foreclosure relief bill? Why are they giving huge tax breaks when clearly states and surely the federal government are in need of collecting more taxes? Why do I have the feeling that those increased taxes will be paid solely by working folk? I”m nervous about the proposal to release criminals from jail. Won’t that endanger citizens who are already down on their luck?
Please tell me none of these housing relief bills have actually passed. Do we have time to contact our reps still??
Riverside Renter: I’m originally from VA too…been here for 18 years now. My advice: Don’t buy until 2010. It’s not that far away. You will be glad you waited. ( And make sure you are in a good school district. :o) )
The Dr rocks,
by the way does anyone know where I can find a good rent calculator for comparable rents in my area?
Doc –
Another great post. And the numbers certainly don’t lie, my only wonder is who in the world would want to buuy now. Riverside Renter – WAIT! what have you got to lose???? Invest that 60K, get what you can in something safe, and let that subsidize your rent. Remember, if we have another year like this last that 300K REO will be selling for 240K March of ’09, and you can buy then. Think you can rent for less than 5K a month? I do.
And Keith Jr – dude – what does this mean? The only positive side is that folks like me that have always wanted to live in So Cal can now buy at prices well below where they have been in the last few years. Well, so what? That’s like saying betting on a horse who finished last yesterday makes sense because it should be more rested than the other horses in the field. NOW IS NOT THE TIME TO BUY! Wait until you see volume tick up, YOY, and then you MIGHT be at the bottom, but as volume continues to drop YoY prices are sure to follow.
Thanks, Scott, for the thoughtful/thought-provoking input.
I can already hear this bringing a big “Bwahaha!” my way, but just throwing it out there: what do you think of Esmael Adibi’s quote in today’s LAT article by Peter Hong that while Los Angeles still needs a 20% drop in the market to reach the historic mean of home expenditure equaling an affordable 37.5% of income, the Inland Empire is already seeing the market get close to the bottom?
There’s a time-lag on my posts–thanks to ALL the helpful input popping up in the comments.
Realestate Agents and Homeowners love to think the bottom is near. I get into arguments all the time as to why prices went up so high and why they are not sustainable. Most folks have no clue. I mention Median Family Income and Median Home Price and still no clue. I guess I have to carry the 2 Tsunamis of Mortgage Resets chart in my wallet so they can picture what the hell is going on. Those Dataquick numbers will only get worse in the next couple of months with the highest amount of resets coming up. Those zillow house value charts will stop looking like the Colossus Roller Coaster and start looking more like Free Fall. Thanks DHB.
Hello Dr Housing Bubble and company,
So big fan of the site, love to read iTulip.com etc.. I get it.
However, my big question is how will peak oil… or the end of cheap oil effect this….
Meaning if the avg so cal has to drive 40 miles one way to work… and the price of gas is 5 to 6 dollars a gallon…
My reasoning would be that less money will be availible to buy a house… driving the price down even more…
@Riverside Renter
Define “bottom”. Adibi, or rather Hong, doesn’t define the term. In what terms? There are several metrics to determine pricing ‘curves’ – each of which was blown up during the bubble, and any of which might be used to predict when ‘bottom’ might be reached and therefore where prices might revert to. Irvine Housing Blog from a short while ago has a good description of them, but in short, they are: gross rent multiplier (use 160 to 180 times the rent for a property to come to price. Some say 100, but in SoCal it’s north of that); income multiplier (2.3 to 3.5 time annual income); inflation track (properties historically beat inflation by just under 1%, so pick a 1997-2000 price and figure from there).
If rent on that 300k property is presently, say $1875, then 160x that is $300k. If only $1400, then value needs to head to $224k using that metric. If income is $86k, the 3.5x makes a $300k price about right. find out what the price was in 1998 and track about 5% per year – that the 3rd metric.
But I agree with the other commenters – keep your powder dry.
Riverside Renter – you ask about the Adabi comment in Hong’s article. I have previously posted the income groups and the prices which are affordable for the incomes in different areas, and how to calculate them. Doc runs them all the time. Adabi is looking at the Census data for a specific neighborhood (usually by zip code) and calculating what those incomes can afford. Now, there is a cathc in defining what is affordable. The California Realtors group uses some pretty loopy numbers like figuirng that a household can spend 50% of income on the mortgage payment alone but not including taxes and insurance. If you want to see if the prices in an area are ‘affordable’ for the people who live there, pull up the income data for that zip code on the US Census site (most complete datat is for 2006 – there is a year lag in numbers) and see how many people can afford the median priced house if they do 10% down with a 30 year fixed at the interest rate du jour – and still not spend more than 31% of their gross income on mortgage taxes and insurance. To add in taxes, a working nmuber is to add an amount equal to 1% of the purchase price and for insurance, figure $50-60 per $100,000 of insured value.
****As for me,I’m going back to painting the living room, dining room and kitchen. Too chilly here yet to go to the beach.
I think the effects are alarming. We are at the mercy of the secondary markets and investors. They have taken away that which financed so many. I too hope the taxes start to fall to help us somehow.
I want to know why the banks continue to sit on all these properties (more than 11 months inventory!) It’s hard to understand how they seem to think it’s better to get nothing than to get a little bit, given that most of these houses are simply not selling at all.
Riverside renter, if you’re in a position to do so, what about offering 50K less on that house? If they say no, you can up your bid.
——Many are living paycheck to paycheck with only 1 to 2 months of emergency funds.——-
You probably don’t hear this very often, but you’re being optimistic here. =) A helluva lot of people don’t even have one to two WEEKS of emergency funds. One missed paycheck–just one–and their house of cards topples.
Why not compare the current performances of Texas and California?
California has severe land scarcities and excessive land use regulation – creating a fertile environment for housing bubbles to form. Texas does not have these artificial scarcities.
Unless these land scarcities and excessive regulations are dealt with – California can look forward to more destructive housing bubbles in the future.
If these artificial scarcities push housing above the affordable maximum of three times household income – housing bubbles will likely form – pop – then deflate.
Check out the latest 2008 4th Edition Demographia Survey http://www.demographia.com of the 227 major urban markets of the United States, Canada, Republic of Ireland, United Kingdom, Australia and New Zealand.
Hugh Pavletich
Co author – Annual Demographia International Housing Affordability Survey
everything is fake,folks. we just happen to live in a paralel universe. just our luck to draw the shitty one.
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