California Inventory Jumps from 3.8 Months to 5.8 Months in January – Total California Housing Inventory 154,000 Homes. How Many Homes are in Mortgage Limbo and Don’t Show up in These Stats? If we take Distress Data About 793,000 Homes.
Rarely do we ever see an actual total inventory report for California because this would require a count of each county in the entire state. I try to track all this data in a spreadsheet since obviously the most important item we have in measuring California real estate is the actual quantity of homes we have for sale on the market. Last month, the amount of unsold inventory jumped from 3.8 to 5.8 months in January. Part of this was because of the seasonal dip in home sales for December but also the elevated amount of homes for sale on the market. Keep in mind that in the past the unsold inventory number would usually track down in the month as well as people would hold off on selling their homes. Yet in this climate where a large number of home sales are distress properties, they are not pulled back during this typical seasonal fluctuation.
California still has many deep issues including a large amount of troubled loans in option ARMs and other mortgage products that have extremely high default rats. Let us first look at the latest snapshot from the California Association of Realtors:
Aside from the seasonal fluctuation, the seasonal home sale rate has fallen by 10 percent from this time last year. This can be from an exhaustion of home purchases and all the additional government programs set in place to spur home buying. The median home price has been pushed up from this point last year but has fallen from last month. The amount of unsold inventory did move up again last month. Let us first crunch that number since this is such an important point in determining how many homes are for sale in California:
Source: MLS
In total, California has over 154,000 homes listed on the MLS. Yet this number in itself doesn’t tell us the actual amount of inventory on the market. We then need to look at the number of homes sold statewide last month:
January 2010 CA Home Sales: 27,858
After getting this number we merely divide by the amount of total inventory:
154,717 / 27,858 = 5.5 months
This number is fairly close to the 5.8 months reported by the CAR. In a healthy housing market anything below 6 months of inventory is a good number. Yet this market is anything but healthy. In fact, we really need to get a better understanding of the market regarding negative home equity but also, how many homes are in distress that aren’t listed on the MLS.
A study from Arizona State University examines negative equity from MSAs (metropolitan statistical areas) and finds that the bulk of them are here in California:
Source: ASU
Now this chart is crucial in determining the path ahead because it gives us a sense of how many more distressed properties we can expect in the year to come. If we look at Merced California, 85 percent of mortgage holders are underwater. Couple this with an unemployment rate of 17 percent and you can understand why some areas are going to see low home prices for a long period ahead. And the study from ASU and other institutions shows that negative equity is the number one factor in predicting future foreclosure. This makes sense. If you are in trouble and have equity, all you need to do is sell. But when you are in a position where you owe more than your home is worth, selling isn’t an option unless the bank approves a short sale and this seems to be a new path ahead. How big of an impact this will have is yet to be seen.
So how many homes are in distress in California? This is hard to say. Yet even if we take nationwide statistics and apply them to the state, we know that the number of homes in trouble is extremely large:
“(Calculted Risk / MBA) The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the fourth quarter was 4.58 percent, an increase of 11 basis points from the third quarter of 2009 and 128 basis points from one year ago. The combined percentage of loans in foreclosure or at least one payment past due was 15.02 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.”
Now this is nationwide data. So let us apply this number to the amount of California mortgages (the distress rate in California is much higher because of loans like option ARMs):
California
Housing Units with a mortgage: 5,290,276
MBA Nationwide data on 1 payment behind and foreclosure (15%)
Total potential pool of current distress California homes: 793,541
Now take that above number and compare it to the 154,000 homes currently listed on the MLS. In other words, the potential for distress inventory hitting the market for years to come is enormous. It already appears that banks won’t flood the market but with this amount of people 1 payment behind or in foreclosure, California housing will be depressed for years to come.
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Big Loans Facing Big Problems – California Prime Jumbo Loan Defaults Rise to 11.3 Percent Putting $167 Billion in Loans in Distress. California Holds 44 Percent of Prime Jumbo Loans and 50 Percent of Option ARMs.
Most Americans will never deal with a jumbo mortgage. With the nationwide median home price of $173,000 a mortgage of $729,750 seems like an absurdity to most people. But in states where housing prices were climbing by leaps and bounds big mortgages were big business. The prime jumbo residential mortgage backed security market is currently at $381 billion. This is an area that is largely ignored in most housing talk because it impacts such a select few. To put this in perspective the option ARM pool of mortgage backed securities outstanding is up to $189 billion. With option ARMs we find that half of the loans find their home in California. With prime jumbo loans the same pattern holds with 44 percent of the entire pool in California.
Let us look at a few other states as well:
Source: Fitch Ratings
California by far holds the largest amount of jumbo loans. Jumbo loans are risk and many times, lenders would require two appraisals before making the loan. That was the case before the bubble but with that cast aside performance has faltered. Jumbo loans are performing poorly with 11.3 percent now registering as being delinquent in California. The only other state to have a worse performing track record is Florida where prime jumbo loans are in distress at a rate of 16.6 percent. Now many might be asking why are these loans labeled as “prime” if such a large number of the pool is now performing badly? The issue is the loan itself. Many of these loans do not fall under conforming standards and carry higher interest rates but also, carry much larger balances. In markets like Florida and California where prices have collapsed, many people now find themselves in negative equity positions and it might be that many borrowers are choosing to strategically default on these loans. Or what is more likely are unable to service the actual mortgage.
It is a horrible track record that for 32 months jumbo loans delinquencies have been surging. Fitch Ratings looked at prime jumbo residential mortgage-backed securities (RMBS) and found that for the entire pool of $381 billion 9.6 percent of loans were seriously delinquent. To qualify for serious delinquency means being past due by 60+ days.
The jumbo mortgage market was once a good way to find financing but now with government loans making up the bulk of purchase money, jumbo loans are largely sidelined:
“(MDA DataQuick) The percentage of Southland homes sold above $500,000 last month rose to 20.2 percent of all sales, up from 16.5 percent a year earlier and the highest since it was 23.6 percent in August 2008. On average since 2000, $500,000-plus sales have made up 36.5 percent of total sales. Right before the credit crunch hit in August 2007, making larger “jumbo” mortgages more expensive and harder to obtain, $500,000-plus sales made up about 52 percent of Southland transactions.
More sales in once-dormant high-end communities helps explain last month’s year-over-year gain in the median sale price – the point where half of the homes sold for more, half for less.”
This trend has also played out in Northern California:
“Home loans for more than $417,000, the old “jumbo” limit, used to account for more than 60 percent of the Bay Area’s purchase financing. Last month it was 29.8 percent. That percentage rose from 17.1 in January 2009 to 28.7 last June. It has since remained at roughly 30 percent.”
Jumbo loans carry higher interest rates and ask for larger down payments. In a market like California where consumers are financially strained these loans are becoming a smaller part of the market. In fact, this is another reason why the million dollar plus market has seen a steady decline since 2005.
Million Dollar Home Sales (CA):
2005: 54,000
2009: 18,621
I put in a quote for a few jumbo 30 year loans in California and found the rate to be between 5.8 percent and 6.5 percent. Compare this to loans under $417,000 with rates of 4.8 to 5.4 percent. Now the rate itself is marginally different but the down payment requirement is the bigger deal. Keep in mind that FHA insured loans will allow you to purchase a home with 3.5 percent down up to a maximum loan cap of $729,750. Anything above that and you are looking at 20 percent down or 10 percent down with a handful of lenders.
The jumbo market is going to experience more pain in the upcoming year. California and Florida are already showing the deep issues in this market. Keep in mind when jumbo loans go bad that their losses will be larger because they are also larger in balance size. A home that sold with a $4 million mortgage that is now worth $2 million is the equivalent of 20 houses that foreclose and each cost the banks $100,000. This is another aspect of the mortgage market that got out of hand during the housing boom.
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