California’s Housing Problems Are Huge

Implications: The threat to California is that the growing supply of existing homes and the adjustable rate mortgages of the most recent active market will combine with the problems of the home builders to further accelerate foreclosure, deed-in-lieu or short sale activity.The way this thinking goes is that if lenders’ portfolios of distressed property grow to numbers that threaten the operations or stability of the institutions, they will be forced by prudence or regulation to bulk up these REO portfolios and sell them into the market at disadvantageous to the seller prices.  Once this starts, an acceleration factor may come into play. Then the drop off in prices may be precipitous.  The last such California market was in the early 90’s where the initial softness in the market lasted for about two years before the final drop got to numbers which averaged over 25% off the peak prices.  Even though the excesses of the speculative housing market of the late 80’s were extreme, they didn’t match the fever of 2003, 4 & 5.  If this speculative market returns to the base year at an extreme, we could be off 50% in values – a zero sum investment.  No doubt California’s current affordability issues don’t counter this contention as ratios in the coastal markets range from 84% to 102% of current household income levels in San Diego, Orange County, Los Angeles and San Francisco.  The inland markets now range from 55% to 90% to which you must add on the huge transportation costs to get mom and pop to their job in the coastal areas.  These numbers may be unsustainable in the long term – in the 90’s home owners met the pain for about two years before the cash and energy ran out and the defaults accelerated price declines.

Analysis:

The counter often heard here is that California’s 90’s problems were driven by the withdrawal of the aerospace industry and other employment difficulties.  The current employment market is thought to be different.  But I point out to the reader that the wages generated by the current new jobs may not sustain as many home buyers and these jobs may be shorter duration/less stable opportunities.  You can point out California’s huge immigration and population growth and I can counter with the lesser numbers of the upcoming Generation Y buyer pool just to get those factors on the table.  We’re getting good at making lists of the possible factors that may affect the result, but I think the above is the threat on the downside.  Hopefully other factors foreseen or unforeseen will enter the market to stabilize activity and prices, but I see the downside illustrated here as the higher probability.