We’ve enjoyed a one year respite in the housing crash.  Yet housing in many parts of the country is overpriced relative to local area incomes.  I want to examine 10 charts that give substantive evidence that we are merely in the eye of the housing correction hurricane.

Chart #1 – Unemployment rate and labor force participation

It is often touted how great it is that the unemployment rate is falling.  First, a large part of that has to do with massive government hiring.  Next, a large part of the rate appearing better has to do with people simply dropping out of the labor force.  The headline unemployment rate is 9.5 percent but if we count those unemployed and underemployed the rate spikes over 16 percent.  Not only do we have an elevated unemployment situation, we have 40 percent of our country working in low paying service sector work.  This doesn’t provide a solid foundation for growing housing prices let alone a bustling economy.  Keep in mind we need to add 150,000 jobs a month simply to keep up with population growth.  Our economy faces challenges that rival those of the Great Depression.  If the unemployment rate were dropping because of adding a good portion of non-government jobs then that would call for a champagne celebration.  Yet calling it great news by massaging numbers is simply an exercise in self-delusion.

Chart #2 – Pending home sales

Given the weak employment situation, it should be no surprise that simultaneously the amount of pending home sales has collapsed to record levels.  The jump you see above from 2008 to 2009 came from gigantic forms of government stimulus.  The Federal Reserve purchased $1.25 trillion in mortgage backed securities.  Why?  No other investor in their sane mind would buy this.  The Fed has also kept interest rates dangerously low trying to encourage additional borrowing.  Alan Greenspan instead of confronting the real structural problems that came after the tech bust decided to take the easy road out and created a credit bubble and brought on a plastic recovery.  We now know none of it was real in sense of it being sustainable.  The above collapse shows the sugar high running out from the Fed and also the very expensive tax credits.

Chart #3 – Construction spending

As home sales jumped on a sugar high from government intervention, construction spending did jump up in the residential sector.  How long will this last now that the government is pulling back?  And in the more sensitive commercial real estate market, growth has contracted.  This is a better reflection of actual demand because who is going to build a strip mall during a time that consumers are embracing austerity?  The residential sector did go up but again, this was merely based on massive government intervention that has no guarantee going forward.  All we did was pull demand forward for one year and operated on tax credit fumes.

Chart #4 – Hires and separations

As expected hires have increased in the first half but this is largely due to government temporary hiring.  But look at the separation line above.  People are hanging on with their clenched hands to their jobs (jobs that are largely paying less).  Do you think these people are looking to buy a massive ticket item like a home moving forward?  The above chart does a good job reflecting the psyche of workers.  Confident workers are willing to leave a job to find a position that better matches their wants in a healthy economy.  What the above shows is that people are holding on tight to their positions even if they are not ideal and fund their needs.  It is all about needs today.  With 5 unemployed workers competing for each single job opening you can tell why the above pattern is holding.

Chart #5 – Export prices

During the Great Depression import and export prices collapsed.  During this globally difficult time we faced massive deflation.  Last week we saw that the CPI went negative.  The market is so tight right now that there is little pricing power for producers.  Ben Bernanke gave a speech a few years ago where he outlined every way we can avoid deflation.  He hasn’t been shy about keeping rates low and also offering quantitative easing.  But this has only helped the banks and that is ultimately who the Fed works for.  Americans as a whole did not benefit from this easy money.  In fact, say you buy a home today with a low down payment FHA insured loan, are you confident that you will have the money to pay off that debt for 30 years?  If anything, the decline in export prices shows that people are not confident about the future and are more concerned about the present.  They are competing on a price level and that is why even with home sales, the large push has come from lower priced foreclosed properties.  As time goes on we are looking more and more like Japan.

Chart #6 – Employment changes in big counties

Even though the stock market rallied in the last year employment has gotten worse.  The stock market is largely an indicator of the casino that we now call Wall Street and really doesn’t reflect reality for most Americans.  Look at the above chart.  While the stock market was raging in 2009 many large counties saw employment contract severely.  This was across the spectrum.  You have your typical Southwest locations but also Texas.  Recent articles have talked about how immune Texas is from the contraction.  Just because you don’t have a housing bubble doesn’t mean you don’t have people that used the same credit cards and auto loans to purchase other items.  We’re all in this together and Wall Street banks are the biggest winners with the stock market rally.  How anyone can look at the above chart and say things are economically good is beyond reason.

Chart #7 – Commercial real estate

Commercial real estate (CRE) prices are down 40 percent from their peak from only a few years ago.  There is no pricing power in this market.  CRE has collapsed and is also guilty of large amounts of toxic high flying mortgages.  This market isn’t going to collapse it HAS collapsed.  The only reasons we don’t see the ramifications of this more visibly is because banks are using extend and pretend tactics while siphoning off money from taxpayers.  The CRE market is enormous coming in with $3 trillion in loans outstanding.  Many of these bad loans are sinking smaller regional banks (we are reminded on bank failure Fridays).  The big banks have these as well but they have a money sucking hose to the taxpayer wallet via the Federal Reserve and every loss they face is already buffered by the majority of Americans.  More and more the public is waking up and public sentiment is furious.  At a certain point, there will be massive calls for action.  You think the public is looking to bailout the CRE market?  There is no political will for helping this bubble market.  In the end, reality will come to the surface.

Chart #8 – U.S. home prices

The only reason that you see home prices increasing above from 2009 to 2010 is because of the government.  From the previous charts, you can see that prices did not go up because of income and wages growing.  This is merely a tiny reflection of easy money coming from the government.  But even with that, you can see that prices are way down from the peak.  The median home price is still down by over 23 percent from the peak.  Why would prices go up if incomes are not?  There is little reason to believe we’ll see any jump here.

And this chart is very important.  I hear people talk about the 1970s and how inflation eventually brought the price of everything up including wages.  Well there is absolutely no pricing power for wages in our current market because we have largely outsourced our manufacturing base.  Working at McDonalds isn’t going to buy you a $175,000 median priced home.  Has anyone looked at what people earn in China?  The real estate cheerleaders make little attempt to connect macro level economic movements with what is going on with housing prices.  The Fed is vigorously trying to inject inflation into the market.  But most of the money is going to the banks!  It isn’t making its way back into the real economy.  What sectors are we seeing wage inflation in?  Without that, good luck seeing higher home prices.

Chart #9 – Total U.S. debt

We have more total outstanding debt as a percentage of our GDP than we did during World War II.  Think about that incredible fact for a moment.  In addition, during the early 1940s we had massive pent up demand and wages because of the deep problems of the Great Depression.  Is a war going to boost our economy?  If you haven’t noticed we are actively in two wars at the moment.  Plus, modern warfare doesn’t require troops that resemble the Battle of Philippi.  It puts things into a precarious state because anyone that is honest realizes we will never pay our debts back.  Why would a global investor put money into a company it knows will never pay it back in full?  Yet we insist on more spending without actually getting money into the economy.  If we really want to stimulate the economy take all the money given to the banks and build infrastructure.  At least it’ll leave something for the country instead of filling up the funds in some investment banker’s offshore account.

Chart #10 – Consumer sentiment

You might have noticed that the casino had a bad end of the week.  Apparently the public realizes how bad things are out in the real world.  Most people (as measured by ratings) don’t watch CNBC and are glued to their ticker tape counting their stock market wealth.  Why?  Because most of it is concentrated in the hands of the top 1 percent but more importantly, most pay their monthly bills and commitments through their job.  The vast majority of Americans simply want a job that allows them to cover the needs of their family.  They don’t care that someone shorted a stock and made a billion dollars.  The demands of their daily life are so removed from that nonsense.  That is why the above surveys are still near their lows.  People are simply not confident with a bad economy.  Outside of Wall Street, Americans are still having a tough time.

In a way, it is something of a coincidence that the big movie out is Inception.  I love the tagline:

“In a world where technology exists to enter the human mind through dream invasion, a single idea within one’s mind can be the most dangerous weapon or the most valuable asset.”

Apparently some people were dreaming when they thought their most valuable asset was their home.

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I normally listen to a few financial shows on my iPod but for the last month, took a hiatus from some of the financial media.  As I put on my earphones and listened to shows from early to mid-June, I realize how utterly wrong “analyst” are in predicting trends.  In fact, one show was aired when the DOW was up over 10,500 and they were talking how at the end of the month, only a few days away, we would end at 11,000.  We ended the month at 9,774.  Many in the financial mainstream press are like the shamans trying to heal illness with ritualistic dances.  In this case, the dance involves singing the praises of housing and the inevitable bull market run that is around the corner.

The first chart, shows the collapse in new home sales:

Chart 1 – New Home Sales

Why should we be concerned with the above?  New homes usually sell for a higher price but also create demand for jobs in construction.  With the market falling due to lack of demand (aka people dealing with a poor economy) there is little need for new home construction.  Much of the demand was pulled forward with every imaginable gimmick that the government could muster.  The U.S. Treasury and Federal Reserve have conjured up magical ways to get people to buy but there is only so much that can be done in the longer term.  The drop in new home sales shows us that the second half is going to be a major challenge especially for housing.  Keep in mind that spring and summer are the high selling seasons.  We have roughly two months for spectacular results before entering the weaker fall and winter.

When I talk with colleagues about a double dip we usually have to reflect on where things improved.  Sure, the 401k looks better than early 2009 but most don’t understand why.  They just assume that since the government juiced up Wall Street that somehow this will take care of itself.  Of course, much of the aid has been shifted to crony bankers who use the housing industry as a buffer for their own personal enrichment and at the detriment of society.  New home sales tanking is simply reality coming to a massively subsidized market.

Chart 2 – Employment by Sector

Government has been the big sector out there hiring.  Much of the growth in the last few months has come from temporary hiring by the Census.  As this retreats the private sector will need to pick up the slack but it doesn’t look like it can do it.  Some economist point to 1990 and 2000 with similar trends but 2010 is nothing close to those decades.  During those times, we weren’t dealing with an epic global housing bubble.  We also didn’t have a stock market reacting like the market during the Great Depression.  Right now the government is the housing market, employment market, and best friend to Wall Street.

The ADP report this week showed tepid hiring in the private sector.  This Friday we are expecting a job loss figure but the real data will be on how many jobs are added (or lost) from the private sector.  The trend of artificial stimulus is simply unsustainable.

Chart 3 – Deficit

It cost money to do all that we are doing.  The above chart looks like the balance sheet of many households.  A household with a budget like the above will be at risk of foreclosure and bankruptcy.  Yet for our government, we are supposed to believe that this is somehow good.  In May, we collected $146 billion in receipts.  At the same time we spent $282 billion.  For the current fiscal year we have a $935 billion deficit.  What are we spending this money on?

It would be one thing if we were spending these hundreds of billions in actually creating jobs and industry to put people back to work.  At least that I can stomach.  But we are using money for delusional tax breaks so people can buy homes they can’t afford and using the Federal Reserve as the Fort Knox of buying up mortgage backed securities.  There is something disturbing about the massive wealth transfer that is occurring in our country.  If the funds were actually going to putting people back to work it would be more palatable for the public but when all of it is going to backstop this real life Wall Street monopoly game, people start realizing something is seriously off.

If someone is going to argue about deficit spending they should at least argue that there can be no deficit spending without actually reforming the financial system first.  Otherwise, you simply spend more with the bulk going to financial firms and the tiny bit of crumbs that fall off the plate go to the economy.  It is taxpayer money that is keeping the system afloat yet they are being helped the least.

Chart 4 – Existing Home Sales

Existing home sales are a large reason why new home sales have collapsed.  Why pay that much more when there are tens of thousands of foreclosures to be had at much lower prices?  But even here, we are seeing demand wane as the tax credit euphoria begins to wear off.  This shows us that nationwide housing is in for a challenging second half.  Sure, the government can talk about extending tax credits and other gimmicks but part of the surge was the notion that “this was it” and people had to buy now to take advantage of these offers.  If we are going to have tax credits into perpetuity the market will simply adjust.  If people start seeing that home prices can move sideways and even fall going forward, why would they jump in?

You also need good income with a steady job to buy a home.  Those hundreds of thousands of Census jobs are merely temporary.  They won’t buy homes.  Who will?  Clearly the answer is not many once the air is let out of the balloon.  Going forward we need to have the economy and jobs stabilize before seeing any housing recovery.

Chart 5 – Home Prices

Home prices have moved sideways even with all the government intervention.  With some of this starting to wear off, we are likely to see two scenarios in the second half. The first one is a continuation of the sideways trend.  In other words, prices don’t move up or down.  The more likely case is prices move lower to reflect the demand pulled forward.  Should interest rates rise, this would be another reason to push prices lower.  Of course rates won’t go down because of the Fed but market forces can change dynamics quickly as we have seen in Ireland, Greece, and now Spain.  Certain areas of California are still clearly in housing bubbles.

There is much to be cautious about in the second half.  As I finished listening to the financial Podcasts from a few days ago, it is obvious that the so-called experts have no idea where we are heading.  They merely react to the day to day movements in the market and don’t take a larger macro approach.  The above data combined with massive amounts of shadow inventory and weak hiring tells us the economy needs to brace itself during the second half.  Can’t call it a double dip if most Americans are still in the trench.      

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People look at the jump in home sales last year for California and attribute this to a recovery:

Without a doubt, we are no longer scraping the bottom that we faced back in 2007.  Yet this in no way reflects a healthy market.  For 2007 and 2008 nearly half of all California home sales were foreclosure resales.  Even today, 40 percent of all California homes sold in the last month were foreclosure resales.  This is not the makeup of a healthy market.  The jump in sales came because of a few artificial stimulants:

-HAMP and banks holding off inventory

-$8,000 government tax credit

-Federal Reserve keeping mortgage rates low by buying up $1.25 trillion in mortgage backed securities

-Crash in home prices

And home prices are still at the bottom on aggregate:

So why hasn’t the massive jump in sales caused prices to rise accordingly?  Because lower prices are the direct reason for more sales (plus the large amount of foreclosure resales).  Yet many of the temporary gimmicks have seen their day.  For example, inventory is now making its way onto the MLS at a steady pace:

Inventory keeps moving up from the bottom although we know that banks have enormous amounts of mortgages that are problematic.  One third of California mortgages are underwater.  That gives us approximately 1.7 million homes that are underwater in California.  Foreclosure resales are not a healthy part of the market.  Just look at this chart:

We have no historical comparison for this.  Foreclosures are always part of any housing market but they are usually a tiny number of homes.  Even today after trillions in banking bailouts we are still seeing record amounts of foreclosures.  Nationwide the number is still elevated:

We are heading for 3.5 to 4 million foreclosure filings this year and this is all occurring with every imaginable government program as well.  Why hasn’t it worked?  Because the economy is still in the dumps for most Americans.  What use is it having a low interest rate if you lost a job or had your wages cut back?  A principal reduction does little if you have no work.  I’ve been arguing for a few years that the bailouts were focusing on the wrong issue first.  Instead of focusing on banks and Wall Street, we should have focused on solidifying the employment market for most Americans.  The two are absolutely interlinked.  In California, the last ten years have been all about real estate.

The Governor’s budget always optimistic in projections, has double-digit unemployment until the end of 2011:

How does this bode well for housing?  People keep wondering why home prices are stagnant or falling in many areas.  This is occurring because home prices can only sustain what local incomes can support.  That was the flaw of the housing bubble in the first place.  The large mortgages allowed one giant game of musical chairs where home prices simply kept going up but in reality, incomes had no way of supporting growing home prices.  Even today in many cities in California you have mini housing bubbles.  People buy with the same expectations they had during the decade long bubble.  That has worked in the last year but with every government support measure in place.  As I talk with people today I would summarize the situation as cautious.  The vast majority of Americans don’t follow the housing market that closely.  Even those in the housing industry trying to pump up prices have hard times justifying prices.  “Prices will go up because real estate always goes up.”  I’m not sure if they’re trying to convince me or each other.

Deep budget cuts ripple through an economy.  The pain will come months after the cuts take place.  You start seeing a class division in California take place.  The housing markets that have taken the worst hits have been in lower to middle class areas.  These areas have seen local governments decimated.  So wealthier areas get smaller and more selective since there are fewer places to hide.  But to think that people can go into a tiny niche and forget the rest of the state is the same logic of what occurs in places like Brazil where the wealthy focus on their own well being while the rest of society is left to fight for scraps.  Yet is this what we want?  America is built on a foundation of a solid middle class and that has been eroding for years.  Growth came after World War II from the ability for average families to purchase a home that was affordable with a 30 year fixed mortgage and our ability to produce goods for the world and ourselves.

In the last decade, California has witnessed what happens when you give Wall Street free access to impose its will on the market.  Wall Street devised the most obnoxious toxic mortgage waste and had an army of mortgage brokers and agents doing their dirty work for years.  These people convinced themselves that they were doing “the right thing” because after all, it was the borrower who signed the mortgage.  I’m sure the giant commissions helped.  Would they be doing this “right thing” if they got $8 an hour for helping homeowners purchase a home?  Of course not.  Yet many of these people now realize how expendable they are to Wall Street.  Investment banks are back to betting on the next hot thing with bailout money and churning out giant profits creating bubbles in other sectors.

“It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”

I find it appropriate to quote Upton Sinclair who had a run with California politics before and during the Great Depression.  We have to create an economy that depends on building and producing things.  Right now what we have is an economy that allows Wall Street to siphon off true value and funnels it to a very few at the top (even if it requires bailouts).  Then you have a crony government sector that basically does Wall Street’s bidding when it comes to writing laws.  Is it any wonder that many Americans in recent polls are now favoring a system that goes beyond two parties?

I doubt we’ll see any stability in California housing for years.  In some markets, purchasing a home is putting a bet on the housing bubble returning.  Other markets have prices getting closer to more reasonable fundamentals.  But until we start seeing solid employment growth for one year, then all of the supposed gains are merely an illusion.

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Let us first examine the employment situation in the state:

Source:  BLS; Yellow modified U6

I’ve been putting together this chart for a few years now.  The red line is the official BLS headline unemployment rate for California.  But with such a large number of Americans working part-time but looking for full-time work, I’ve also added a line that reflects the underemployment rate.  This data was created from averaging out the difference over the years between U3 and U6 for the state.  The ratio is fairly accurate.  In fact, let us look at the official 2009 average for California:

The average U6 rate for the state in 2009 was 21.1 percent.  But keep in mind and look at the above chart.  The headline rate (U3) has been going up all through 2009 and now in 2010 we’ve had a rate of 12.5, 12.5, and 12.6 percent.  In other words, the average is now much higher.  And we actually see this in the current part-time rate:

Source:  OC Register

In the last year we’ve increased the part-time for economic reasons number by 456,000.  It is difficult to envision any housing stability without the employment situation improving.  How are people going to afford any sort of mortgage payment if they have no job or are working part-time with lower wages?  At the moment, we have seen a movement in home sale activity but much of this seems to come from a couple of unsustainable groups:

-a.  Investors

-b.  First time buyers using the tax credits (federal currently, state next month)

-c.  Low mortgage rate push

-d.  Pent up demand

All four groups are currently dominating the market.  In most healthy markets sales come from people selling homes to move up/out and first time buyers.  We are missing a large healthy group of home sales that come from the move up market.  After all, what are you going to move up from when one-third of California mortgage holders are underwater?

What is even more challenging for the current economy is we are reaching the end of the line for many.  In the next few weeks we are going to see roughly 100,000 people lose their unemployment insurance:

“(LA Times) Despite hints of an economic turnaround, some of the 2.3 million unemployed in the state found March the toughest month yet. That’s because tens of thousands have been out of work so long that their unemployment checks will be cut off within the next few weeks. They’re not helped by the $18-billion measure signed Thursday by President Obama that extends jobless benefits for many Americans through June 2.”

Many of these people are part of the 2.3 million unemployed:

Source:  EDD

The recession has been so long and deep, that even 99 weeks of unemployment insurance with combined extensions is not enough for thousands of California residents.  A current extension signed by the President will not help this group.  And with budget battles looming for cities and the state, it will be a struggle of priorities.  Why choose to give a $200 million home buyer tax credit when our employment situation resembles the above is beyond me.  It is a purely political move because economically it makes absolutely no sense.

And Southern California is in really tough shape.  Many of those investors have been buying out in the Inland Empire:

Source:  OC Register

The Inland Empire is made up of Riverside and San Bernardino Counties with headline unemployment rates of approximately 15 percent which means their underemployment rate is 25 percent or higher.  I’ve been following this market closely and have seen an explosion of rentals hitting the market.  Yet the economy is so tough here, that many rentals seem to languish or if they do get rented, investors are finding a hard time collecting rent.  This might be because the underemployment rate is 25 percent!  It should be obvious to most that we can have no housing recovery without fixing the current employment situation in the state.

And here in Southern California, we are seeing some shadow inventory move from the dark hidden corners of a bank balance sheet to the MLS:

So what we see is a decrease in shadow inventory and a bump in actual MLS data.  This trend has been going on for a few months now.  Yet the properties making their way look to be hand selected.  For example, banks seem to want to move shadow inventory in the Inland Empire fast and at lower prices.  In other areas, not so much (i.e., Beverly Hills, Culver City, etc).  It would appear that banks are already giving up on certain areas and crossing their fingers that in other markets, things will recover quick enough and then they can unload properties at face value.

The California budget battle is going to give us two choices.  One includes raising taxes to generate more revenues.  The other will include cuts which means additional job losses.  These are not good choices but this is what we have ahead of us in 2010.

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Here is how that projection looked in the budget proposal:

“(News Chief) Scarcely three weeks ago, Gov. Arnold Schwarzenegger unveiled his final budget, predicated on the outlandish notion that the federal government would cough up almost $7 billion more to cover California’s budget deficits.

Schwarzenegger and legislative leaders then jetted off to Washington to lobby for a federal bailout, but received – at best – a cool reception even from the state’s congressional delegation, much less other federales.

This week, President Barack Obama unveiled his own budget and it contains, at most, less than a quarter of what Schwarzenegger wants – such as no more than a token payment to the state to cover imprisoning illegal-immigrant felons.”

Hey, they had to ask given the crony system is handing out bailouts like candy in D.C.  However without a Wall Street address that request was denied.  If we want to know why California is in such a budgetary mess we have to look at their delusional revenue projections made at the peak of the bubble.  Let us go through five major reasons why California will have no real estate recovery in 2010:

Reason #1 – Revenues Projections Off

As the blue line above highlights we sort of missed the perpetual revenue machine by believing in the fairy godmother of real estate.  These projections were as delusional as those made with housing prices backed by Alt-A and option ARM toxic mortgage sludge.  Now last year the state went through some major cuts and furloughed thousands of state workers.  Now you would think that people would equate less money with less discretionary spending but somehow people think that less money equals more money for home buying.  Right now a large part of California is fighting to stay afloat.  The tunnel vision focus on real estate has ignored the real crisis at hand.  The nation has followed in the same path putting housing before jobs.  Now with a $19.9 billion budget short fall we are assured another budget circus in the next few months especially in a year when we will be electing a new governor that isn’t Kindergarten Cop.  In Arnold’s defense (just a little) look at who he has to work with in Sacramento.

Reason #2 – Employment

It should be obvious that without jobs or companies hiring that there will be little resources to buy a home.  A home purchase is the biggest financial commitment most Americans will take in their lives.  So why would people be making this commitment when unemployment in California is at the highest since the Great Depression?  The underemployment rate is up to 22 percent and this is why the real economy is still faltering.  Aside from wacky headline numbers, the real economy is fumbling left and right.  Just take a look at those collecting unemployment insurance in California:

Now if the employment situation was getting any better why would we still be losing jobs and paying out more and more in unemployment insurance?  It is hard to fake the above data because these are people that are filing every two weeks trying to get a paycheck.  And it is hard to imagine someone running out of unemployment insurance with nearly 99 weeks of unemployment available but thousands are now confronting that reality with benefits running out.  But that is the face of the new recession.  Yet people still think that it is a good time to buy?

Reason #3 – Taxes

The state draws most of its revenue from personal income taxes.  Personal income tax is such a volatile source of taxes.  When things are good things look flush but when things go bad, people won’t be paying taxes on jobs they don’t have.  It is a deep problem in how California raises funds.  The next biggest revenue source comes from sales taxes which also fluctuate wildly with economic cycles.  These are actually poor sources for stable revenue.  Local property taxes are actually more stable sources of funding (i.e., Texas).  However you do have exceptions like New Jersey that have high property taxes and other high taxes.  But look how they are fairing in this recession.  The bottom line is revenues have dried up in this cycle.

And we saw what happened in the last go around for the budget circus.  We had cuts and higher taxes.  Here in Los Angeles County we are now paying 9.75 percent in sales taxes.  People here have also seen their checks shrink with state withholding increases.  So expect to see more of this in the upcoming cycle.  More money to plug the gap and less money to blow on overpriced housing.

Reason #4 – Glut of Housing

Contrary to what the real estate industry wants you to believe, the market is flooded with distress properties.  Just because banks are holding onto these properties doesn’t mean things are suddenly fine.  The government is trying to buy more and more time.  In a twist of real estate irony, tax delinquencies have actually fallen because banks are paying the taxes on shadow inventory:

“(NC Times) Property tax delinquency rates are down in both San Diego and Riverside counties, because banks are paying back taxes on foreclosures, officials said.

As the economy began to sour in 2007 and unemployment rose, the percentage of property tax delinquents in both counties jumped. But the past two years have seen a steady increase in the percentage of people who were paying on time —- mostly, tax officials said, because financial institutions have been taking over foreclosed properties and getting the taxes caught up.

In San Diego County, the percentage of properties with owners who were delinquent on property taxes for the December 2009 installment fell to 6.8 percent, or 66,448 properties, that owed a total of $133 million. The delinquency percentage was down from 7.7 percent in 2007, and 8.7 percent in 2006, the peak for the decade, said San Diego County Treasurer-Tax Collector Dan McAllister.”

But this is money coming out of the too big to fail banks (aka the taxpayer funded banks).  So by default, we as taxpayers are paying the delinquent taxes on empty homes that banks refuse to put on the market.  The massive foreclosures and missed payments are simply a reflection of the horrible economy.  Yet everyone should buy a home today because of low interest rates according to the housing industry.

Reason #5 – Gambler’s Fallacy

California suffers from a massive case of the gambler’s fallacy.  Just think of a roulette table and the electronic scorecard above the wheel.  There are times when you will see a number repeat multiple times (i.e,. the number 3 hits five times in a row).  Yet technically if the game isn’t rigged, every number on the table has equal odds of popping up.  But people suddenly think that because 3 came up that somehow the gambling gods will give them better luck on this number.  It is a part of human nature and casinos exploit this weakness.

But California housing carries some of this logic.  I can’t tell you how many times I have heard, “prices have come down so far that once they go back to appreciating I’ll be up big!”  Or another good one is, “California housing will always go up in the long-run so buying right now makes sense.”  This is like ignoring the statistics on the roulette table.  Robert Shiller with over 130 years of data found that housing prices track inflation over the long run.  As I pointed out in a recent article, California home prices in many counties are still way overpriced above rates of inflation.

Buying a home today is a big gamble but that didn’t seem to stop many California buyers from getting in over their heads before and I’m sure it won’t stop many from doing it again.  Banks and realtors are more than happy to indulge in your speculation.

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