California Nightmare: Home Prices Drop 41% Year Over Year

Eleven straight months of price decline wipe outs



Economic followers are riveted to their TVs this week to see how the $700 Billion bailout plan is going to shake out. Meanwhile, the bad news in housing just keeps on a coming with Californian homeowners lynched on airhorn lanyards warning other bubble areas what is to come.

Here's yesterday's Bloomberg alert screaming some eye popping news about median prices in the Golden State. Because of the Bailout fixation, most economic followers didn't see this one fly below their radar:

Sept. 25 (Bloomberg) -- California home prices tumbled a record 41 percent in August from a year earlier as foreclosure sales pushed down values in the most populous U.S. state.

The median price of an existing, single-family detached home fell to $350,140, the lowest since March 2003, and will likely fall further, the Los Angeles-based California Association of Realtors said today in a report. Sales increased 56.7 percent from August 2007 and 1.8 percent from July.

``While sales appear to have turned the corner, the median will experience additional downward pressure as we move into the off-peak season in the coming months, and will continue to face pressure from distressed sales,'' Leslie Appleton-Young, vice president and chief economist of the association, said in a statement.

My note: Pity the new California homeowners of 2007 who bought the hype that the bottom was in a year ago. I've had stocks in my life go down 41% and didn't sell them because the company was still solid, dividends were still increasing, and other stocks in my portfolio were going up, giving me a gain for the whole port through diversification.

Unfortunately, if you bought a home in a fast depreciating market, you can't double down on your purchase, you can't sell your home a year later and expect to make any positive equity. In short, those who try to time the bottom in Real Estate are screwing themselves royally by not practicing the most important emotion a homebuyer can have: patience!

Nevertheless, there is a piece of gold in the info above: home sales increased year over year by 57% in California. The obvious reason sales are taking off is the majority of these sales are stressed properties such as foreclosures, short sales, bank REOs and homebuilders selling off inventory at fire sale prices.



Is it time to buy California Real Estate now?


What's the rush to try and snag a deal today? If you think $350,140 (the new median in California) is affordable housing with taxes, insurance, maintenance and other hidden costs added on, go ahead, knock yourself out. You'll wish you had waited longer.

It makes no sense to me to wade into the biggest purchase of my life in times like these where banks are failing, cash is king, and pressure increases to the downside on durable goods (autos, boats, homes, etc.) will continue to deflate perceived and real values of these assets.

And to top this, many people wanting to buy a home in California which is suddenly 41% cheaper than it was just one year ago have another problem which makes homeownership impossible: they no longer qualify for a loan because they don't have a healthy downpayment.

With banks failing left and right (JP Morgan bought out Washington Mutual this morning), what bank officers will hand out Ninja loans, no doc loans, interest only loans, etc., when the Feds are at their doors investigating loan fraud? The lending climate no longer blows favorably with tail winds for the first time homeowner trying to buy his first home.

Isn't that funny? A few years ago, anyone with a greed glands short circuiting their brain could buy a very overpriced home AND get a loan by just going to a mortgage chop shop and saying "I don't have a job, I don't have money in the bank, and I want to become a millionaire flipper like all those guys on the TV say I can be." No problem. You qualify for this $600,000 home built on a fault line or in a hurricane flood zone.

Jokes aside, with fewer qualified buyers, and more inventory coming on the market through credit seizures (think of the thousands of empty, unfinished condos and housing projects across America), foreclosures, and panicked sellers trying to escape their ball and chain, now is definitely not the time to buy a house in California.

To put it more succinctly: the Housing Bubble blew for almost 10 years in bubble areas across this country. California has only reported 11 months of falling median prices. It will take a much longer time to work out the excess. And what happens if a nation of negative savers are now forced to save for a downpayment? Think about it. Who is going to buy all these foreclosed properties if they cannot get a loan?

Lastly, please notice it's the California Realtors Association vice-president and chief economist who said above, "While sales appear to have turned the corner, the median will experience additional downward pressure as we move into the off-peak season in the coming months, and will continue to face pressure from distressed sales." (Note: my highlight)

As George Thurogood used to sing, "It wasn't me."



Speaking of foreclosures, check out California's


Are foreclosures slowing down in California as medians fall precipitously and sales begin to pick up?

According to the same Bloomberg story:

More than 101,000 California households received a default notice, were warned of a pending auction or foreclosed on last month, RealtyTrac Inc., a seller of default data, said on Sept. 12. That was a third of the nation's total and represented one in 130 homes in the state.

Prices fell in all 20 of the state's regions surveyed by the Realtors. Eight of the 10 metropolitan areas with the highest foreclosure rates are in California, led by Stockton in first place, according to RealtyTrac. Merced, Modesto, Vallejo-Fairfield and Riverside-San Bernardino ranked second through fifth. Bakersfield, Salinas-Monterey and Sacramento ranked eighth through tenth.

Homes priced under $500,000 made up 72 percent of August sales compared with 40 percent a year earlier, due to the increase in distressed sales, which include homes in foreclosure and so- called short sales where the purchase price is less than what's owed on the house, the Realtors said.

Save your money. Scrape together a 20% downpayment for a home or duplex. You'll have plenty of shots in the future to confidently wade in at much better prices.

Yeah, as prices drop, sales will pick up. So what? If you played follow the leader back in the Bubble Days, when everybody from your Taxi Driver to your Beautician was buying an overpriced home, you and they had your heads handed to you.

Don't be a panic buyer again.

Homes in California are still not affordable for the masses. Loans are harder than ever to get. And with the giant bailout looming across the land, we will probably experience what Japan has seen over the past 18 years . . . a slow prolonged recovery which will mean you'll have plenty of time to wisely consider all the giant fat pitches in Real Estate which will eventually come our way.

Patience.

Practice it.


Caveat Emptor,
Rock Trueblood