On Friday the California Employment Development Department released preliminary figures on California unemployment. As it turns out, the unemployment problem ran deeper in 2009 than many had initially thought.  The current unemployment rate is 12.5 percent which means the underemployment rate for the state is probably closer to 23 percent.  Mix that in with Alt-A and option ARM loans floating out in the market and you can understand why there are still problems in the California housing market.  The unemployment report is in sharp contrast to what is going on in Wall Street.  The stock market rallied even though we have yet to add one net job since the recession started.

The California budget is mired with systemic problems and many state and local government are going to be battling with cuts over the next couple of years even if the economy starts recovering.  If we actually look at unadjusted unemployment figures, the unemployment rate for Los Angeles County and California is a stunning 13.2 percent:

Source:  EDD

Very few of us have ever seen an unemployment rate this high for the region.  And we are starting to see some aggressive price cutting from banks in some select mid-tier markets to reflect this lower wage economy.  It is hard to tell what is going on internally on the balance sheet of many banks but it isn’t good.

Today we’ll look at what I would consider a mid-tier city in Los Angeles County that is starting to see some aggressive price cuts.  Today we salute you La Mirada with our Real Homes of Genius Award.

Half Off From 2006

La Mirada like many cities in Los Angeles County saw a massive jump in housing prices.  When prices were out of reach in other locations La Mirada was considered a good middle class place to buy a modest home.  This seemed to be enough to justify massive increases in prices.  The median price peak was reached late in the spring of 2007:

June 2007:           $555,000 (median La Mirada home price)

In that month, 40 homes were sold in the city.  Today the stats look a bit different:

January 2010:     $380,000 (median La Mirada home price)

In January 25 homes sold.  Now, much of this of course has to do with it being winter but a 31 percent price cut in less than three years is significant.  Yet prices are still too high given the household demographics.  We’ll get into that in a minute.  First let us examine the home above in better detail.

The above home is a 4 bedrooms and 1 bath home.  It is listed at 1,312 square feet and was built in 1953.  When I go into the history of California housing this was one of those massive building boom times.  This home was purchased near the peak back in 2006.  This home was financed with toxic mortgages up to the very common 100 percent mark:

Let us run the numbers.  The home was purchased for $514,000 with an 80/20 setup:

1^st mortgage:     $411,200 (80%)

2^nd mortgage:    $102,800 (20%)

Now I know some of you are stunned about this but this was very common in California.  In fact, those toxic option ARMs were being handed out like Pez candy.  The notice of default was filed back in December of 2008, then in March of 2009 the NTS was filed.  It took another nine months from that point for this home to go into bank owned status.  The home hit the MLS on 1/19/2010.

But here is where I’m noticing some reality based pricing.  Back even a few months ago, you would see bank owned homes hit the market at outrageous prices and banks simply sat back and did nothing.  On some areas and some homes, pricing seems to be aggressive on the downside.  Take a look at this place:

Price Reduced: 03/03/10 — $284,900 to $259,900

A 50 percent haircut from the 2006 peak price.  Before you jump up and down this is exactly what we’ve been talking about.  It seems like in some markets banks are being more realistic with their pricing.  And they should be.  Take a look at the household demographics for the city:

So let us run the FHA insured loan numbers here since at the current price, it clearly meets the criteria (4 out of 10 homes sold in SoCal were FHA backed last month).

3.5% down payment:     $9,096

The median household family bringing $61,000 is taking home roughly $3,900 net per month.  So roughly 43 percent of net pay is going to the home payment.  Does this make sense?  It would seem a bit high but it is certainly more in line than other areas and certainly far from the bubble peak.  And this is now the next phase and I expect to see more of this going forward.  We went from areas in the Inland Empire seeing big haircuts, to lower priced L.A. County areas, and now we are seeing certain mid-tier cities cut prices aggressively.  In my book, a 50 percent cut is significant.

Should you rush out and buy a home?  No.  If the numbers work and you find a home you like, go for it.  Yet the reality is, if L.A. County has a headline unemployment rate of 13.2 percent then the unemployment and underemployment rate is closer to 24 percent.  In other words, 1 out of 4 people in L.A. County are either out of work or working part-time for economic reasons.  Does that really sound like a healthy market?  Frankly, many people are focusing on their career and employment and are putting aside the Wall Street and real estate industry obsession with housing as the center of the universe.  Without solid employment, home prices will still go lower.  And keep in mind the current household income figures are based on 2008 Census figures and we won’t have more up to date data until September of 2010.  In other words, the income data is much worse than it appears.

And about that shadow inventory?  Let us take a quick look.  The MLS currently lists the following for La Mirada:

Non-distress:     45

Short Sales:        28

Foreclosures:     13

And this is what is lurking on the bank balance sheet:

Pre-foreclosure (NOD):                 124

Scheduled for Auction:                  188

Bank Owned:                                     39

Some had a question about double counting but these are all unique properties, nothing is double counted in the above data except for the 13 MLS foreclosures from the 39 bank owned properties.  86 properties on the MLS and 351 properties in distress.  This above home is one of those “trickle” down homes that is supposedly going to make the market better because we won’t see a flood.   A 50 percent price cut sure doesn’t seem like prices are going to boom as some in the housing industry would like you to believe and even with a drip strategy for the shadow inventory, prices will still come down to reflect economic reality.  And why would it matter how properties are released onto the market?  The distress is as plain as day.  Just look at the above stats.  People with a NOD, auction scheduled, and losing their homes are not in a stellar financial position.  People now have to go with government backed mortgages and even though these are easy to get, they are based on verifying income.  And with 13.2 percent of L.A. unemployed that is proving to be a challenge in itself.

Today we salute you La Mirada with our Real Homes of Genius Award.

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