Last month the economy added over 150,000 jobs yet the unemployment rate remained steady nationwide. How can that be? The economy needs to add approximately 150,000 jobs a month just to keep up with population growth and people entering the workforce. It has been so long that we’ve seen a six-figure private sector inspired employment month that some have forgotten the actual bigger picture. Yet this was nationwide and California still faces a 23 percent unemployment and underemployment rate. Some are confusing nationwide trends with local movements. It is amazing that even though California home prices are off by 45 percent from their peak you still have people thinking that the market hasn’t corrected or is poised for a jump again. Do they not see the 23 percent unemployment and underemployment rate? Do they realize the state budget will be a mess for years? Maybe they forgot that close to $5 trillion in real estate equity has been wiped off the books since the first quarter of 2007. Today I want to look at a market that some people think is immune simply because of demographics. Today we will examine Cerritos California.
One thing is painfully clear about this housing bubble bursting here in Southern California and that is many of the 20 million residents never venture off their beaten path. Hit the freeway to work, stay inside, clock out, and head back to your segmented area. Variety is having lunch within a few minutes or miles from the hub. You have to wonder how many people are blind to the economic destruction that is hitting from all corners like a financial tornado. Foreclosures are raging and yet you have people gleefully acting as if real estate is heading back to 2006 and 2007 price levels. Those days are gone. If people would only venture out a few miles to see what is happening in their own backyard it would add a new level of perspective.
There was an interesting study out of Arizona showing that many underwater homeowners don’t walk away from their mortgage because of moral reasons. Well they have yet to get a taste of the Alt-A and option ARM problems that will hit California in the next few years. Another study showed that many in California and Florida had no qualms walking away from their obligations. We now know that being underwater is the biggest risk factor in predicting a foreclosure. This should go without saying because if you had some equity you would merely sell the home and exit the game. I can understand the moral argument if say someone had a $120,000 mortgage and the home is now worth $100,000. In that case, walking away isn’t a big deal. But in California with a $500,000 option ARM on a home that is worth $250,000 walking away is the right economic move.
In a brilliant move, the California home builder lobby has won a $10,000 tax credit costing the state $30 million. But there is a major caveat here.  This only applies to new home sales. Of course the industry salivates and is falling over one another in excitement but overall, this should boost sales by another 4,300 buyers. This doesn’t do much to fix the glut of foreclosures in the state but what the heck, why not spend more money on horrible economic policy? In fact, you can combine the $8,000 Federal tax credit with this and you now have an $18,000 tax credit! Senate Bill X3 37 is crony capitalism at its best and is horrible public policy.
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