Source:  Census

Now we only have data running up until the end of 2008 but we already know where the trend has been heading.  As you can see from the above chart, the bulk of movement happened from 2005 to 2008 during the peak of the bubble.  It is safe to say that in many areas, 2004 was also a year with inflated prices.  So this can be extended further out.  It is also the case that some harder hit areas like the Central Valley are seeing home prices going back to 1990 levels.  You can only be underwater if you have a mortgage so let us look at more data breaking out ownership status in the state:

The owner occupied rate fell throughout 2009 with the massive number of foreclosures continuing.  Let us look at annual resales:

Between 2004 and 2008 2.4 million resales occurred in California.  It is hard to get an exact estimate here because we had many homes that sold multiple times during this timeframe.  But one thing is certain, many people locked in bubble prices for their home purchase.   Now the current Seasonal Annual Sales Rate (SAAR) is running much higher thanks to lower prices:

Yet that still leaves millions of mortgage holders under water.  One argument I have seen being made is that many bought before the bubble hit and never moved out.  The argument goes, that these people are not underwater simply because they didn’t sell and supposedly have a low mortgage balance.  But as we know, there was an enormous amount of cash out refinancing and home equity loans that actually put people into the underwater category and these don’t register as home sales:

Source:  Calculated Risk

Now this has added hundreds of thousands more into the underwater category.  In 2008, a year when prices were already correcting for California the median price was $467,000.  Since that time, the median price has fallen to $249,000.  If we look at the chart, when 2009 Census data is released this will mean over 1.7 million units (at least) were kicked from the higher priced sectors into the lower range:

Now this above shift is important in understanding why sales have increased.  It has been driven by lower and lower prices.  And the California economy was booming during the bubble and many that bought, even prior to these inflated years, used the inflated prices to cash out.  The chart above clearly demonstrates the massive amount from the home ATM.  Yet that door has now closed.

I think what we will now see is a reality check with actual incomes.  We also tend to forget that the economy wasn’t all that good during the boom times at least when it came to wages for working Californians.  The only reason they were able to push prices so high was because of the criminally lax lending practices available.  Consider this for California:

2000 monthly average unemployment rate:        4.95%

2008 monthly average unemployment rate:        7.22%

2009 monthly average unemployment rate:        11.425%

The latest measure has the unemployment rate at 12.5%.  So the economy is even in worse shape and we will see this drag home prices lower.  The toxic mortgages like option ARMs are banned from the system.  I think some hold this notion that we will somehow go back to “normal” times but mistake normal with a bubble.  Those days are over.  With the FHA and Fannie and Freddie hurting there will be more stringent requirements since banks are only making government backed loans.  They are at the mercy of the government and they should be, this is taxpayer money.  Do we want to go stated income and no money down again?  That has led to a financially disastrous place.

When we look at charts like the above, it is hard to see why prices will be moving up anytime soon.  There is an enormous amount of overpriced housing in the market.  The economy is stagnant and wages have fallen so this will end up reflecting in the price of homes.  A large part of recent purchases have come from investors.  Yet this has pushed rents lower.  Some think they will be flipping that home in a few years for a tidy profit.  If mortgage rates hit their 40 year historical average of 9%, I wouldn’t bet on it:

With the Fed coming to the end on the $1.25 trillion mortgage backed security quantitative easing program, rates have only one way to go.  And with massive deficits, it is hard to see how mortgage rates don’t go up especially with so many loans going bad (even just for the risk premium).  It is likely we will never see mortgage rates this low again in our lifetimes.  But this is not reason enough to buy an overpriced property like some would like you to believe. This is the same kind of allure used by those 0 percent credit card offers.  How well did that turn out?

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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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