Southern California Real Estate Bubble Crash Blog

This post is being put out for those readers who are seeing the unfolding of 2009 and wonder if we are at a housing bottom. Indeed, volumes have increased dramatically, and one can hardly turn on the tv, radio, or internet without being barraged with news that the housing market has hit bottom and is quickly recovering. I understand why one would be confused. After all, the housing market has improved, and the global stock market is deeply in rally territory after hitting rock bottom in March. However, this is time time when one has to ask themselves why they were waiting to buy a house in the first place. Was it because it was too expensive? Was it because you were worried about prices slipping more? Or, was it just because you wanted to catch the bottom and look like a genius in 10 more years? Well, if any of these motivations, you’ll have different answers of when to buy.

If you waited to buy a house because it was too expensive, ask yourself, is it too expensive now?  This is the easiest concern to get over.  In the throes of the housing bubble, you would have been told by your agent that you should just lower your expectations.  Buy a smaller place.  Buy a place further out.  Buy a place you don’t want, but can afford.  I’ll dispel any myths, there is no such thing as a crystal ball.  Just as I tell you that scamsters like Gary Watts didn’t know was going to happen, we also only operated on verifiable information.  All information is telling us that while a bit of affordability has returned, the underlying problems with the housing market still exist.  Let’s outline those quickly:

1.  Housing exceeds healthy income limits for much of Southern California (inland areas are back to a healthy level, so this really only refers to coastal areas, and some pockets throughout.

2.  Interest rates are low, masking the affordability problems mentioned above.  Rates are low because the Federal Reserve is intentionally targeting mortgage rates by purchasing up to 50% of all issued mortgage paper.  This is only intended to be temporary, and at some point, not only will this be removed, the current leverage must be unwound.  It is likely that interest rates will proceed higher.  While noone can know for sure when this will be done, it is likely to have an impact in the 2nd half of 2010 and into 2011.

3.  Unemployment in Southern California is increasing.  This is a known fact, and is expected to peak sometime in 2010 if things immediately improve.  However, it is expected that the decline will be less than steep, and high unemployment could persist for up to 5  more years after the recession ends.  Add in that California has become a very difficult place for many businesses to continue due to high taxes and infrastructure problems, and many companies are looking at alternatives if they upstaff.  Only lower wages will attract them back.  Lower wages do not increase home prices.

4.  The option-arm Tsunami has not come yet.  With an expected default rate that is much higher than subprime, and a concentration in coastal California, much of pain that inland areas sufferend is expected to occur in the more expensive areas.  If this materializes, buyers today are “catching the falling knife”.  The option arm recasts are expected to peak starting this quarter and cresting late 2010 and not declining until 2011 or 2012.

5.  The move-up market is dead.  The most starkly different part of this bust versus prior busts is that many, many people over-leveraged their houses even more than their increase in value.  Indeed, so many people are underwater at prices that locals can afford that it’s impossible for the majority of home buyers to move up at all.  This is one of the reasons that the low end is the most active areas.  Higher areas are simply over-priced for locals who fear for their jobs and have suffered a calamitous stock market setback.

6.  The banking system is unhealthy.  Leverage, and indeed money supply is decreasing.  This is the backside of a debt-fueled overcapacity bubble.  First, it was businesses that were overleveraged.  Then it was households.  Soon, it will be government, and there won’t be enough income to support the levels of debt and still account for imperfections in the system.  Someday, we’ll worry about

So, if you’re still interested in buying after knowing all of that, don’t say nobody warned you.  I understand, sometimes the social peer pressures push us to do irrational things.  Just look back at the bubble.  And, with the seemingly invincible Federal Government pulling out all stops to stimulate housing sales and ownership, it might seem that you just want to throw in the towel and give it up.  I know, I’ve wondered if it’s worth the wait.  I won’t think bad of anybody who buys now.

However, if you’re waiting for prices to come down more, I believe they will, but don’t fool yourself, no one will intentionally catch the bottom.  I don’t believe we’ll see the bottom until noone cares anymore, that’s how bubbles work historically.  We are, however, still pulling demand from the future.  We’ll overshoot by that much, at some point.  It can be fast and painful, or it can be slow and painful.  Either way, we haven’t had pain in the coastal areas yet.

Besides, if you’re wanting people to think you’re a genius, you might be surprised to find that no one likes the smartest guy in the room.  I know a lot of Goldman Sachs employees are finding that out.