Los Angeles County has 2,205 Homes that are valued at $1 Million or More in Shadow Inventory. MLS Only Lists 32 Foreclosures with a Price Tag of $1 Million or Higher.
Million dollar home sales in the state continue to fall. In 2009 California saw 18,621 homes sell with a price tag of over $1 million. That is a far cry from 2005 when over 54,000 homes sold with a price of $1 million or more. But one thing that is rarely mentioned is this massive decline is due to the elimination of toxic maximum leverage mortgage products like option ARMs. The option ARM was billed as a mortgage that was for “higher income” borrowers that had erratic income and simply wanted the flexibility of stretching their dollar. Well apparently that hasn’t turned out well. I decided to run a report on Los Angeles County to get a sense of how healthy the million dollar market is. It is anything but healthy and this market has a large number of homes in what is now dubbed shadow inventory.
First, let us look at the MLS data:
Source: MLS
For Los Angeles County 3,349 homes are listed with a price of $1 million or more. Now for a county with 24,000 homes listed on the MLS, this is a large number. But again refer to the above data. Million dollar home sales are lagging. Why? Because the pool of million dollar buyers goes away when you require a down payment and actual income verification. Do we have wealthy families in the county? Absolutely! But the products that stretched the dollar to unprecedented proportions are gone. So this is what happened to sales statewide:
So the trend is definitely heading lower. As many of you know option ARMs and Alt-A loans are largely absent from the market (option ARMs are now banned in California). So if these home sales jump it will have to do with actual income verification and funding through jumbo loans. The million dollar market is interesting. Roughly 24 percent pay cash. That isn’t going to change. Yet that other 76 percent that actually have to get a loan is the game changer. And make no mistake, there is a large amount of distress in this market:
And here is where we see the massive discrepancy. 2,205 homes with estimated values of $1 million or more are in some stage of foreclosure; either bank owned, with a notice of default filed, or scheduled for auction. Yet the MLS only lists 32 homes with a $1 million price or higher as foreclosures! Banks don’t want to move on these places because if you think it is bad trying to move a $250,000 home in a tough market, try moving a $2 million or $5 million home. Ask Nicholas Cage if it is easy to sell a million dollar home in Southern California in this market.
And he isn’t alone:
“(WSJ) Big borrowers are more likely to default than ordinary people, according to data from First American CoreLogic. Its loan database, reflecting more than 80% of the overall home-loan market, includes 1,700 loans with balances of $4 million or more. About 14.8% of those loans were 90 days or more overdue at the end of January, compared with 8.7% for all home loans tracked by First American. Sam Khater, a senior economist at First American, said the bigger borrowers may be more prone to stop making payments when they have lost all their home equity.
Mr. Fuscone, Merrill Lynch’s one-time head of Latin America, put his mansion up for sale in November, asking $13.9 million. But he couldn’t find a buyer.”
Then you add into the mix L.A. County getting closer to bankruptcy and it is hard to see a market developing for these million dollar homes. Banks are going to have some major losses coming up. They can ignore and wait around but this won’t end pretty. Want to see an example?
This is for a 3 bedrooms and 3 baths home in Beverly Hills that Zillow estimates to be valued at $1.1 million even though it has $5.2 million in loans. Do the math and you will quickly find out that banks are simply deluding themselves at the moment with what they have on their balance sheet.
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Hourly Wages Down for the Month – Are Lower Paying Jobs with no Benefits the new Trend for Americans? 22 More Months like March and We’ll be Back to December of 2007.
For 26 long and arduous months the U.S. economy has been cutting jobs and setting up a situation where Americans had less and less money. This is problematic for an economy where such a large part of GDP growth comes from consumption. Yet on Friday we were notified that 162,000 jobs were added in the month of March. This was a welcome respite after the longest consecutive job loss timeframe since the Great Depression. But was the actual number something really to jump for joy or should we be more cautious with the data?
Although the 162,000 added jobs is welcome, we have lost 8 million jobs since the recession started in December of 2007:
People may forget how bad this recession really was. To put it in perspective let us look at the carnage done in the worst months:
Job Losses
November 2008: 728,000
December 2008: 673,000
January 2009: 779,000
February 2009: 726,000
March 2009: 753,000
In these five months alone, nearly 3.7 million Americans lost their jobs. We need over 22 months like this one just to get back to December of 2007 levels. The normal rate of growth for our economy factoring population growth is 150,000 jobs per month so the figure today has merely put us at this level. But where are the jobs coming from?
Retail trade added a good number of employees but this is a low paying sector and usually work is temporary and transitory. Temporary help services which added 40,000 jobs falls in this similar category. Education and health services added a sizeable number of jobs but with health care as most of us can attest, is usually a draw of funds from most Americans so simply adding more jobs here is deceptive. Why is it good that insurers can raise their premiums 39 percent in one year just because they can? This is another sector adding jobs. And finally the government added a good portion of jobs and a large part has come from Census hiring:
We’ll take added jobs anytime over losing jobs yet to say we are now on solid ground isn’t exactly correct. The housing market is still in tatters and this is where most Americans keep their wealth. The fact of the matter is, many Americans that are returning back to work from unemployment are not seeing the wages they once saw. This is even reflected in the hourly earnings:
This dipped over the past month and probably has to do with the makeup of what jobs were added. If you are asking why it remained relatively high during the bust this stems from the fact that those that don’t earn are simply not calculated. The underemployment rate is still up at 16.9 percent which is abnormally high.
The trend we should be looking for is to see whether we start seeing good paying jobs coming back into the market. Companies still remain tenuous in terms of hiring long-term employees on the whole. This hasn’t changed. We’ll need a good number of months before we can make this assessment. And the fact remains that even with the job losses being patched up, Americans are still massively in debt:
Although household debt has contracted for the first time in record keeping history dating back to the 1950s, there is still a tremendous amount of debt outstanding. Currently American households carry nearly as much household debt as the U.S. annual GDP. This is enormous and the overall job trend is going to have to improve much more if we plan on making any significant dent to this massive number.
Jobs are the number one issue in regards to restarting the economy. The obsessive focus on housing and banking has distracted us from the most important engine of the economy. It is unfortunate that it took us over two years of unprecedented hemorrhaging to get that at a government and Wall Street level but most Americans already get that. They’ve been out in the brutal job market. Those with jobs have seen little to no wage growth and cost of items going up while those out of work have seen the toughest job market in a generation. Is this the new normal? Are lower paying jobs with little to no benefits the new trend?
If we look at the jobs added in the last month, the bulk do not pay benefits and in many cases are transitory. The long security of employment is nowhere to be found even in a report that added 162,000 jobs.
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The Bulk of Californians Bought or Refinanced During the Peak – 4.6 Million Moved into a New Housing Unit from 2005 to 2008. 1.7 Million Additional Homes priced under $249,000.
I think looking deep into the housing data of California helps illuminate the story of the housing bubble, but also the drawn out aftermath. Of the 12 million occupied units in California, over 4.6 million people entered their new housing unit between 2005 and 2008. This occurred during the peak time. So to really get a sense of how many people over paid, we should look at the sales count from these years but also look at other data points to get a sense of where things are heading based on price and trends. The most recent data shows us that one third of California homeowners with a mortgage are underwater. This probably has to do with the big movement into these units at inflated prices:
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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