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Never in the history of our modern economic system have we had coordinated housing bubbles rage across the world like some sort of financial plague. The proliferation of boiler plate media and the ubiquitous spreading of banking debt made the real estate religion spread quicker than any time in the past. The way real estate was being played up in the media was like some sort of spiritual revival. I remember a colleague showing me a clip of a real estate seminar in California at the peak of the bubble where people looked as if they were in some sort of glorified peyote induced trance. At the core of any mania is human psychology and herd behavior. People never want to believe that their special niche market is not in some sort of bubble. On January 15 we discussed the Canadian housing bubble and many people fell off their rockers as if this was some sort of spectacular revelation. Reading through the comments on the Canadian bubble post is very reminiscent of 2007 in California where the “not in my back yard” arguments dominated the discussion. The nature of this housing bubble is global and the collapse of markets across the globe will have wide ranging impacts that are yet to be felt.
The prospects of a housing recovery in 2012 seem unlikely as continued weak momentum carries over from the second half of 2011. Globally, housing bubbles are entering into peak mania phases as hot money seeks a safe harbor for the short-term. Back here in the United States, we can look at the cold hard reality that 2011 saw a record low number of single family completions. The positive news is that this aids in lowering the overall housing stock and provides a stronger buffer for shadow inventory that will leak out into the market over the next few years. A strong variable that is hard to factor in is this; we have 10,000 or so baby boomers that retire per day for the next 19 years and many will look to downsize. It should come as no surprise that the Case-Shiller prices are now at post-bubble lows. What does 2012 have in store for the housing market?
The median home price of a home in Southern California is down to $270,000. Would you like to know the last time we were at this level? You would have to go back to 2002 to find the first crack at the $270,000 mark. To sum it up we have now reached a nominal lost decade for Southern California. In reality the data highlights a much darker picture for the housing market here. You have two main groups buying up homes; first you have investors picking up low hanging fruit in locations like the Inland Empire for very low prices while first time buyers are hanging by a thread diving into the market with FHA insured loans. These are the two largest purchasing blocks in Southern California. Contrary to the rich foreigner myth or pent up demand meme, absentee buyers paid a median price of $200,000 for their purchases. Does this sound like they are eating up homes in Corona del Mar or San Marino in large numbers slowly purifying the market from shadow inventory? Let us dive into the figures.
In the last few years I’ve noticed that many of the cable finance and housing shows highlight families in Canada. Shows that talk about debt or home buyers are usually focused on families in Canada which is rather odd given that we are here in Southern California. Yet the funny thing about these shows is that they rarely identify that they are in Canada although I recognize locations like Vancouver. If one simply tuned into the show it would appear that a bubble was still going on in the states. This is probably the point. After all, the cable shows focused on flipping houses or making quick bucks on real estate started going off the air yet another bubble was still going on up north. Obviously these shows had an audience otherwise they would not be on the air. Now the focus is on the Canadian bubble and American audiences can swim in the nostalgic dreams of the glory days of domestic housing. Yet the shows rarely mention their location as if English-speaking families and cookie-cutter condos and homes are so easily interchangeable that they will fool an audience. Yet one thing the shows fail to acknowledge is that the Canadian housing bubble is even more pronounced than that in the United States.
Younger Americans, especially recent graduates are starting to question the limits of debt. Many are paying incredibly high prices for a college education and are living through a decade where most of the financial pain around the world was brought on by misuse of debt. Some of these younger Americans have seen their family’s household wealth plummet as they witnessed housing values crater while the debt secured to the following asset remained the same. The challenge being faced by many younger professionals is that there is very little in between in America in terms of good paying jobs. You either have a solid professional skill, this usually requires a college education, or will be left searching for low paying work in service sector jobs. First things first, many younger Americans are simply going to college and taking on incredible levels of debt. In California tuition prices are rising even though incomes have remained stagnant.
The core problem with the current housing market is that most of the current activity is being driven by distressed sales. When mortgage rates were lowered, instead of boosting new home buyer activity you really saw a large surge of refinancing activity from those who already own. Good news if you own a home but little use if you are trying to build up your income to purchase a home. The bulk of housing activity is being driven by three items; investors snatching up lower priced homes, refinancing activity, and FHA buyers purchasing lower priced homes. The overarching theme? The demand in the housing market is for cheaper real estate. So today, we are going to highlight three million dollar distressed properties here in Southern California. Since few bother to cover this niche, it is important to highlight that million dollar foreclosures are more common than most think.
The Los Angeles County median home price is down 6 percent year over year. This in itself fails to highlight the deeper changes occurring in the most populated county in California. If we look back at 2011 we see that it was a year of corrections for the mid-tier and upper-tier segments of the market. This trend is likely to continue with even the most prime locations in Corona del Mar and Beverly Hills showing that they have plenty of shadow inventory to work through in 2012. Los Angeles County is full of cities so the 6 percent drop only tells you very little. If we break out the top declining zip codes the picture is very different today from 2008 and 2009 when low hanging fruit was selling for massive price cuts. Today those price cuts are hitting fully in areas like Culver City, Burbank, and Pasadena which we predicted for a few years based on area household incomes. Let us look at the top 20 falling zip codes for 2011 in Los Angeles County.
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