SoCal Home Prices Will Travel South!

Implications: The Inman News feature article was correct on the continued rise in lender and builder inventories due to spiked foreclosure numbers, purchase cancellations and borrower credit qualifiers. However,the small blip upward in median home prices for California to $594,260 (June 2007) from $592,780 (June 2006) was just that, a blip, which will be quite short lived. The lending industry's rush to "fix" the subprime problems of increased inventories, pricing declines, and new construction halts, by imposing  more  restrictive lending requirements,may very well exacerbate the situation if a "one size fits all" policy implementation is adopted without regard to geographical market conditions.  Government intervention supporting these credit restrictions may further disrupt the residential sales market, particularly in Southern California.

Analysis: The recent changes in underwriting for subprime loans and the exit of 100 % financing are facts of life that are slowing the current real estate activity by at least 50% in Los AngelesCounty. Source: (California Association of Realtors) Most of the current buyers are first timers who need access to the 100 percent and subprime products or they will continue as renters. In short, they cannot qualify under the current restrictions imposed since the subprime mortgage collapse. Time on the market figures is also lengthening for Realtors, FSBOs and lender REOs. Lender executives and government policymakers must understand that most of Southern California properties reached their highest value when the interest rate was at 5.25% fixed for thirty years. Today, the average rate is 6.25%, again, for 30 years. In the current LA County real estate cycle, for every 1% rise in loan rates, there is a 10% reduction in the value of the property considered affordable by the prospective purchaser. For example, a $100K loan at 5.25% yields a monthly payment of $552. Using today's rate of 6.25%, the buyer working within that same monthly mortgage budget allocation of $552 could borrow only $90,000 yielding a payment of $554. Longer term, what this indicates is that Southern California properties will fall 10% in value from the apex prices that were acquired during the same time period in 2005 when rates were at 5.25%, because the pool of ready buyers simply cannot afford to pay more.

The hope here is that mortgage industry leadership, along with concerned legislative lawmakers, takes a reasoned and thoughtful approach in establishing credit policy. Additionally, they should take into account the regional market differences which exist across the country. If they do not, their actions will certainly bring about the demise of investor portfolios in that REO numbers will swell and the shelf life of these properties will continue to increase.