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Is another California housing bubble possible?

drhousingbubble's picture





 

California home prices experienced a big surge in 2012. This might fly in the face of stagnant household incomes but the incredible push for lower interest rates and reliance on low down payment FHA insured loans has brought many people off the fence. In Southern California home sales are up by 14 percent over the last year and the median price is now up by 16 percent. The median price is largely being pushed by the mix of home sales. Distressed properties are making up a smaller pool of sales. With low inventory, you have regular home buyers competing also with house flippers, big Wall Street buyers, and foreign money with limited supply on the market. The result has been to push home prices much higher making it more difficult for middle class families to afford a home. As we approach the end of 2012, let us look at the data for Southern California.

Southern California home sales and prices

The trend for higher sales and higher prices continued throughout the year:

sales socal

Of the above home sales, 33 percent were all cash buyers. Cash buyers paid a median $263,000 for purchased homes, and this is up a stunning 27 percent from last year showing the massive pressure being brought on by low inventory. Of course all cash buyers are largely investors and they are consuming a third of the market.

Next you have about 16 percent of homes being purchased with FHA insured loans. This is down from 21 percent last year and about a third from two years ago. FHA loans are now becoming much more expensive products to take on with higher insurance premiums courtesy of massive defaults in the overall portfolio.

Jumbo loans are now back in fashion. 21 percent of sales last month were financed by these kind of loans (above $417,000). Short sales made up about 25 percent of the market. Activity is picking up but what you see is that investors are paying much less for the properties they buy while those looking for move in ready homes are leveraging up, many with jumbo loans or low down payment products.

What is a more telling sign is the amount of the monthly nut for home buyers with a mortgage:

mortgage payment

While home values are moving up largely because of low interest rates, low inventory, and investors you can see that those financing homes with mortgages still cannot afford higher payments. The amount people are taking on via mortgage payments is still close to half of what it was during the peak. This is a better metric of what local households can truly afford based on their actual income.

Another bubble brewing?

It is hard to believe how quickly prices are rising but when you look below the surface, you realize that this rush is coming via cheap money and hot money from other sources. Many investors looking to buy homes to rent out are now turning away from places like the Inland Empire because the yields are no longer attractive. Flipping can only go on as long as easy financing is in play. Foreign money will only continue so long as our economic growth is in play. The Fed keeping interest rates low has given the market a major boost but how will life be after the boost?

The animal spirits did come out in 2012 at least for housing. Yet the economy is still weak and the young home buyer section of our economy is still in economic shambles. Unlike previous generations this group now approaches the home buying market with over $1 trillion in student loan debt. Many are unable to finance a home in high priced states like California. The figures of the last decade certainly show a large migration out of the state by the middle class.

It seems like the economic split in California is only growing deeper. California is very much a boom and bust state. A large portion of revenues come from higher income tax payers, many who depend on the whims of the economy:

who-pays-income-tax-california

With higher taxes coming online and a recent bull stock market, can this continue? Many pay very little to no taxes and as we mentioned, the state is nearly half and half between renters and home owners. A more stable tax basis comes from property taxes and we are already seeing talks about Prop 13. If you take a look at Texas with incredibly high property taxes and strict laws on funky mortgages, they rode out the housing boom and bust with little issues. California going into another boom is easily understood when you compare taxes for example.

Say a home in California sells for $500,000. The taxes paid depending on the county will be about $5,000 to $6,000 per year. In Texas you are looking at annual taxes of roughly $15,000. This keeps a lid on massive price movement because those paying $500,000 can actually afford the larger monthly nut. California’s current rise is a matter of artificially low rates and investment buying. There are also stricter rules on tapping out home equity but it is interesting as a comparison.

The quick counter is that we have coastal regions and many prime locations. Of course. But what about the Inland Empire that is now seeing major price hikes? What is going on there? So something else is happening and it is certainly not coming from higher household incomes.

Is another bubble in California possible? Absolutely. Prices are rising disconnected from household incomes. The only way we keep moving at the current pace is if all of the above groups continue to purchase: investors, flippers, foreign money, FHA loans, low Fed rates. Missing from the equation is household income growth but then again, this is repeating the history of the first bubble run.

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Sun, 12/30/2012 - 00:57 | Link to Comment garypaul
garypaul's picture

This if off-topic, but one thing on my mind is the comparison of house taxes between Texas and California. It seems to me that the entire world is moving towards higher house taxes and it's just a matter of time before everyone gets closer to Texas rates. 

Sat, 12/29/2012 - 23:58 | Link to Comment apberusdisvet
apberusdisvet's picture

It used to be when parents died, the children inherited the house, usually free and clear.  Like winning a small lottery.  Nowadays, not even the grandchildren can afford to pay for the upkeep and taxes on grandmas's house.  For this reason, housing will be a trap for at least 3 decades, if not forever.

Sat, 12/29/2012 - 23:32 | Link to Comment swmnguy
swmnguy's picture

I bought my house from a flipper in 2009.  He bought it from the bank in 2008.  The previous owner was in the process of losing the house to foreclosure when he was murdered.  It was a total fluke; he walked into a pawnshop while it was being robbed and got shot to death.  Every month I get notices from GMAC addressed to the dead guy.  Apparently he had a $265,000 first mortgage and a $49,000 second mortgage.  I'm not sure what happened with the first, but GMAC still has the second as an active, money-good asset on the books, and they're looking to collect.  I send them a printout of the newspaper story of his murder every so often when I think of it.  This particular loan is an extreme example, but I wonder how many billions of dollars of completely "ain't gonna get paid" mortgages are out there on the books at 100% face value.  I suppose there are $85 billion a month fewer as we go along, thanks to Benny and the InkJets, but that's not enough for the bankster/looters?  They have to crank out fresh worthless mortgages?

Einstein was wrong, saying the universe and human stupidity were the only things infinite, and he wasn't sure about the universe.  He meant "bankster greed."

Sun, 12/30/2012 - 09:17 | Link to Comment caShOnlY
caShOnlY's picture

This particular loan is an extreme example, but I wonder how many billions of dollars of completely "ain't gonna get paid" mortgages are out there on the books at 100% face value.

One way or another they are going to be paid.  The banks, through the FED, will make sure of it.  Our higher price on food since 2008 is one example.  The enormous Govt deficit is another.   Instead of banks collapsing it will be a Nation.

Sun, 12/30/2012 - 01:53 | Link to Comment uncle_vito
uncle_vito's picture

You check your house for liens before you bought?   Have title insurance?

Sun, 12/30/2012 - 12:07 | Link to Comment swmnguy
swmnguy's picture

"uncle_vito": You bet your bippy.  I was offered two kinds of title insurance; one cheaper that didn't cover against fishy stuff and one a lot more expensive that did.  I went with the much more expensive version, full title search, the whole nine yards.

An excellent observation.

Sat, 12/29/2012 - 23:26 | Link to Comment One World Mafia
One World Mafia's picture

Property taxes where I am are high and prices steadier like in TX.  Don't know about TX but the backlog of foreclosed homes here yet to reach market keeps piling higher.

Sat, 12/29/2012 - 22:47 | Link to Comment justsayin2u
justsayin2u's picture

Print print print - more subprime - more 750000$ hud loans.  Progress baby.

Sat, 12/29/2012 - 21:51 | Link to Comment SanOvaBeach
SanOvaBeach's picture

i just love it.  here in ob, the twentysomethings r buying houses,  wow, got the obligation of a big fucking morgage.  they actually think their winners.  spent all these years digging myself out while these stupid fucks r digging themselves in!  good luck....after all....your too kool 4 words...............

Sat, 12/29/2012 - 21:58 | Link to Comment GrinandBearit
GrinandBearit's picture

The goverment keeps offering the cheese, and the rats are going to eat it.  Even if the the cheese has rat poison in it the rats don't care.

There's one born every minute and the supply is endless, especially in So Cali.

Sat, 12/29/2012 - 22:02 | Link to Comment willwork4food
willwork4food's picture

If your statement about foreign Chinese purchasing homes is real, then it might not be such a bad idea. Even those evicted have to live somewhere.

Sat, 12/29/2012 - 21:45 | Link to Comment GrinandBearit
GrinandBearit's picture

I used to live in So Cal and I still visit frequently.  I can tell you that flippers are out in force again.  They are puting in 20-30K in fix-ups and upgrades and walking away with six figure profits.  They are selling mostly to foreign investors (mainly Chinese).  These naive buyers have very short memories.

 

Sat, 12/29/2012 - 21:48 | Link to Comment GrinandBearit
GrinandBearit's picture

Also, there is someone I know who is living in a $1.5 million dollar home and hasn't made a mortgage payment in 3 years.

We know how this is going to all end...

Badly.

 

Sat, 12/29/2012 - 21:57 | Link to Comment SanOvaBeach
SanOvaBeach's picture

more pwr 2 em!  fuck the banks,,,,,,,,,got them out of my life pronto...............what a strange concept.......2 actually own your house........how fucking unamerican,,,,,burma shave

Sat, 12/29/2012 - 21:28 | Link to Comment willwork4food
willwork4food's picture

There's alot of young people buying these days and why not? Would you rather spend a little less on renting an apartment and putting up with your upstairs neighbor's screaming orgasm in the middle of the night?

Sat, 12/29/2012 - 21:24 | Link to Comment Never One Roach
Never One Roach's picture

They will find a way around Prop 13 and those houses will be taxed at the market rate (somewhere around 1-2% of the real appraised value) as California attempts to keep from defaulting on its muni bonds..

I agree with Binko above. As long as they give houses away for free (or near free) with zero down and near zero-down loans, the defaults will keep coming. These zero down neighborhoods are basically 'free' public housing projects and many will degenerate into slums. It's happened time and time again. I feel sorry for the poor saps who actually pony up 20-50% for their house in a zero down neighborhood. They will be trapped in the hood with too much equity in the house to move...whereas all the other deadbeats who put zero down can 'walk away."

 

Sat, 12/29/2012 - 21:46 | Link to Comment Eireann go Brach
Eireann go Brach's picture

B of A has $64 billion mortgages over x6 months delinquent, I am sure the others are no better off! So banks not releasing any inventory coupled with Fed induced rates is driving prices up!

If rates increase by just 1% a buyer loses 10% in purchasing power, so the Fed is driving everyone down bubble lane again! People don't change, the same sheep will be slaughtered again!

Sun, 12/30/2012 - 09:18 | Link to Comment caShOnlY
caShOnlY's picture

B of A has $64 billion mortgages over x6 months delinquent, I am sure the others are no better off!

.... "unlimited and open ended".  (for a reason)

 

Sat, 12/29/2012 - 22:11 | Link to Comment SanOvaBeach
SanOvaBeach's picture

it's bubble time, you stupid sheeple out there!  i'll never forget the union carbide boob bitch, at this yuppie party, said back in the 80's  "made $15,000 and our escrow has not even closed yet".  her bimbo live-in bozo looking on in appreciation.  don't yea just love it!

Sat, 12/29/2012 - 20:49 | Link to Comment I am Jobe
I am Jobe's picture

Yippie. Sheeples still beleive in a happy ending. Inbred fucks

Sat, 12/29/2012 - 20:32 | Link to Comment Binko
Binko's picture

Why not? As long as they are giving houses away for free then prices will rise. There is almost an infinite demand for houses that have a high price when the buyer actually doesn't have to pay that price.

My nephew humps boxes at a Fed Ex warehouse in No California. He also spent 5 years in the Air Force humping boxes at military warehouses. Recently he used a NO down payment VA loan to "buy" a house for himself. Somehow he even got out of covering closing costs and his total, out-of-pocket expenses for "buying" a house was about $800.

He didn't care what the "price" was because he wasn't paying it. So, sure, prices can rise again, as long as artificially low interest rates and special government programs ensure that people can "buy" without actually having to spend much of anything.

Of course he's a young, single, unattached and simple sort of guy. He can just walk away anytime if an opportunity arises. Or he could live there without even paying his tiny mortgage for a couple of years before they boot him out. So this is just more of the same old stupidity. Nobody learned anything from the last housing bubble and they won't learn anything from the next.

Sat, 12/29/2012 - 21:00 | Link to Comment JuicedGamma
JuicedGamma's picture

Wanted young unattached female for box humper, former Air Force box humper, honorable discharge (yeah that's what they call it).  New house 100% LTV.  Single, unattached, tiny.  Great prospect going forwards!

Your nephew sounds like a find.

 

Sat, 12/29/2012 - 22:29 | Link to Comment SanOvaBeach
SanOvaBeach's picture

i'm a really hot blonde w/ a beautiful shaved pussy.  i'm trained in multiple sexual tech's and like to give a man his freedom.  i'm very athletic and have (5) advanced degrees,  i also speak (22) twenty-two languages including russian and polish.  I was part of the asset-grab in Russia in the 90's so I'm rich, also. Would like 2 meet u!  Lv your #............................

 

 

 

 

 

 

 

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Sun, 12/30/2012 - 09:37 | Link to Comment economics9698
economics9698's picture

That shaved pussy is a deal breaker lady.

Sat, 12/29/2012 - 21:03 | Link to Comment Enslavethechild...
EnslavethechildrenforBen's picture

The Bankers have the printing press. They can print all the money they want, price is not an issue.

 May as well refer to California as Bankerfornia.

Sun, 12/30/2012 - 09:35 | Link to Comment economics9698
economics9698's picture

The Mexicans will come in, buy, take out a second mortgage, and leave. Same shit they did in 2005. Presto second housing boom.

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