As I’ve noted in earlier posts, the government is doing exactly the wrong thing in connection with the housing bubble’s collapse. Instead of letting foreclosures proceed – which would speedily bring the market down to its natural floor – the administration is intent on propping up prices by keeping people in homes they can’t afford at any price. Trying to maintain prices – and spending enormous quantities of the taxpayers’ cash to do it - merely postpones the inevitable and delays economic recovery.
About sixty percent of foreclosures are found in just four states: California, Arizona, Nevada and Florida. And the very worst of the collapse is California’s because of the ruinous state of the economy there. For the last two decades, California has lived on bubbles: first it was the tech bubble of the 1990s and when it collapsed the real estate bubble took its place. Hundreds of thousands of people ‘bought up’ into expensive properties dizzily appreciating because of ARMs, wads of low interest cash and speculative frenzy.
But has the market found a bottom yet? Not according to Dr. Housing Bubble, who lives, eats and breathes California real estate and crunches the numbers relentlessly. He’s been proclaiming the bad news that the ‘experts’ are only now publicly admitting. His message: you ain’t seen nothing yet.
There is a wonderful smell of delusion in the air. As the state marches on to economic Armageddon, there is now a large portion of bottom callers jumping into the market. Many investors are now buying up homes in the Inland Empire and other depressed areas for 50, 60, and sometimes 70 percent off peak prices. A mentor once told me, “at times, things are cheap for a reason.” At the low end, we may be seeing signs of a bottom. But one thing people forget is that this does not necessitate that prices will bounce up. Since we have emulated Japan in everything concerning fiscal and monetary policy, we may have a stagnant decade of real estate ahead of us. So for those buying homes for $100,000 and collecting $800 in rent, you are a long way from cash flowing like a mogul. Yet those making the argument that the mid to upper range won’t fall simply do not back up their arguments with any good data. I have for over a year explicitly shown how the Alt-A and Option ARM collapse will depress California housing for many more years and now this is being picked up by the mainstream media.
As the good doctor observes, ‘the ultimate sign of housing distress is a foreclosure’ and that nationally we’ve seen nearly 1.6 million foreclosures in the first five months alone with notices of default accelerating. And in California, incomes can’t support mortgages even at reduced prices:
Now a new argument that I am seeing is that since the actual recast time line pushes things well into 2012, that this unfolding will somehow be methodical and efficient. Really? These people have not been to the Inland Empire or to any current auctions. It is anything but. Some places are selling for whatever they can fetch. First the argument was, “housing will go down but not in California.” Next it was, “housing will go down but not in mid to upper range areas.” Now the argument is, “housing will not go down in prime areas.” The bottom line which people fail over and over to examine is local area incomes do not support prices even today. Period. It wasn’t incomes that supported these home valuations but Chucky Cheese mortgages that allowed fantasies to play out in a debt playground.
Read it all. The Day of Reckoning in California is still in the future, and it doesn’t bode well for the rest of the economy.
