People are realizing the problems in the housing market are simply a bigger reflection of the lingering issues in the overall economy.  There have now been a few stories comparing California with the issues being experienced in troubled Greece.  JP Morgan Chase CEO Jamie Dimon echoed his concerns regarding California.  The markets seem to underestimate how profound the issues are in the California economy.  What is more troubling is California is merely a reflection of other states.  The Legislative Analyst Office projects deficits deep into 2014 and each year we experience a deficit will require higher taxes or deeper cuts.  That is why focusing on jobs is such an important barometer for the improvement of the overall economy.  Without one net added job in California people are already counting the next housing boom.  The numbers simply do not reflect this assumption.

I want to examine some of the nuts and bolts of the market because this is where the real story is.  We know that millions of foreclosures have flooded the market.  We can understand how toxic option ARMs have become to the market even years after they were originated.  But what does this mean going forward?  First, let us examine the median sale price and monthly sales of Southern California over the decade:

Source:  DataQuick

This is a fascinating look at the market.  Even during the boom we clearly see the seasonal pattern in sales.  Each fall and winter sales drop as more people take inventory off the market.  Spring and summer overall are bigger sale months because of school schedules, family commitments, and just a general acceptance that this is when more inventory enters the market.  But you’ll notice in 2006 that the trend radically shifted.  The crash hit and sales plummeted.  An interesting phenomenon occurred where the median sale price didn’t peak until the middle of 2007 well into the monthly sale crash.  So it would appear that sales would actually lead future prices.  So the jump in sales would indicate much higher prices going forward right?  Not necessarily.  Even with the jump in sales, we are nowhere close to the average sales per month over the decade.  I ran the monthly sales number for the past decade and the average monthly sale number for Southern California is:

24,604 Sales

This includes fall, winter, spring, and summer.  In January we had 15,361 sales and the last time we had 24,604 sales or higher was back in August of 2006.  Prices have come down but the bulk of the drag to the lower side has been in lower priced home sales.  Much of this has been driven by foreclosure re-sales.  But another important factor to look at is how much are families committing to their monthly mortgage payment?  With Alt-A and option ARM products families were able to stretch their budget.  Since the bulk of loans are now backed by the government lenders are now at the very least verifying income.  Let us look at the monthly mortgage payment over this time:

Source:  DataQuick

The above tells you a lot.  While the median home price in Southern California is down by 46 percent from the peak the typical monthly mortgage payment is down 52 percent from the peak.  People are committing to half the monthly payment amount and this has more to do with the health of the economy.  I know many would love to have a $1,170 monthly mortgage for a place in Southern California.  This is already happening in many areas but not in higher priced regions like Culver City or other parts of the Westside.

It helps to look at a handful of examples to highlight what is really happening.  Let us look at pre-bubble prices in areas that have corrected versus areas that still seem elevated:

Source:  DataQuick

Now this data tells us a lot because over the past decade incomes went stagnant.  The overall inflation rate for California was 25.6 percent:

So if wages don’t explain this rise in prices and inflation isn’t the reason, can it be that some areas are still in mini bubbles?  This is very likely.  And this doesn’t apply to the entire state of California.  Some areas have corrected fiercely and prices seem to be more in line with inflation and wage increases:

You’ll also notice the difference in overall sale numbers.  What on the surface may seem like an enormous crash actually looks like a correction to the inflation adjusted mean.  I find it fascinating to see many communities heading back to the 25 to 30 percent inflation rate of California and are somehow finding a bottom in this range.  But many areas are still over priced and this will need to adjust either with higher incomes coming from better job growth or further price corrections.  Part of what is forgotten when examining the shadow inventory is the fact that these are properties in heavy distress.  The L.A. Times ran a piece confirming what we have been talking about for over a year:

“(LA Times) It’s been 16 months since Eugene and Patricia Harrison last paid the mortgage on their Perris home. Eleven months since the notice got slapped on their front door, warning that it would be sold at auction.

A terse letter from a lawyer came eight months ago, telling them that their lender now owned the house. Three months later, the bank told them to pay up or get out by the end of the week.

Throughout the country, people continue to default on their home loans — but lenders have backed off on forced evictions, allowing many to remain in their homes, essentially rent-free.

Several factors are driving the trend, industry experts say, including government pressure on banks to modify loans and keep people in their homes.”

Now this wouldn’t be such a big deal if it were a handful of mortgages.  But just look at this mind blowing chart:

Source:  LA Times

Mortgages that are 90 days late and a foreclosure hasn’t been filed are up to a record shattering 5.1 percent.  Now think about that.  How is this a sign that things are good?  So we’ve reached a point where simply staying put in your home, rent-free is a strategy being used by banks to deal with the foreclosure crisis.  The big losers are the prudent in this country.  How many Americans are paying their mortgages diligently, probably needing to take a second job if there is one to be had, just to make sure they pay their bills?  Wall Street has the luxury of making disastrous mistakes and yet they are bailed out to the tune of trillions of dollars and offer billion dollar bonuses.  Those that over extended are then put in a lottery essentially where some can stay rent free for one and even two years before an eviction depending on when banks get to it.  Others are kicked out quickly.  Some are put into HAMP.  The big issue?  No clear uniformity to what is going on.  What is wrong with renting?  Half of those living in giant Los Angeles County rent.  There is this stigma attached to renting a home and massive subsidies for homeownership.  This carefully orchestrated play is now being held up even though tens of thousands now are living rent free in over leveraged homes.  Housing seemed to work well when it was a boring, track inflation play that if you were lucky after 30 years, you had a place over your head and no mortgage.  Since when did it become a rule that every 5 to 7 years you had to “trade up” a “starter home” just so you can progress forward?  This twisted logic seemed to make sense because how else were most families going to save $100,000 to $200,000 just for a down payment on a 1,000 square foot home in a decent area?  Of course that broken trend is now unraveling.

So putting this altogether, why would anyone want to buy in this current climate?  Transparency is really not to be found.  What real reform have we gotten after these two agonizing years?  Is this reason in itself to buy?  The headline data seems to tell us things have stalled but if we look at a deeper analysis, foreclosure filings, those 90 days late and with no foreclosure pending, bankruptcies, and other in the trenches data we realize that the market really isn’t healthy.  We have yet to add one net job since the recession started.  How are home prices going to go up?  So let us assume the next big play is to simply turn ourselves into Japan and go for our second lost decade by putting banks into a permanent zombie position and ignoring problems.  Pretending someone in a home that isn’t paying their mortgage is somehow good is probably a clear example of turning our housing market into a zombie market.  Yet how is this good for prices?  The same arguments were made in Japan and prices went nowhere for over 20 years!

It is interesting that the flurry of buyers jumping into the market have tapered off in the last few months.  There was a period of two months where the tax credit and uptick in sales seemed to move a large number of people off the fence.  There was a good amount of e-mail during this time.  This has now waned significantly.  But guess what?  Prices are still near the trough.  Why?  Because incomes are stagnant.  Maximum leverage mortgages are gone.  Unless you plan on staying put for 30 years and can cover your mortgage comfortably, that future buyer is only going to be able to afford what their household income can stretch with a government backed loan.  And looking at that typical monthly mortgage payment for Southern California it isn’t jumping up quickly.  In other words, know the metrics of where you’re buying before jumping in.

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