The Most Expensive County in California Examined – How San Francisco County Became the Most Over Priced Real Estate in California. 26% of Those Who Own Their San Francisco Home Would not be Able to Afford Their own Place if they Bought Today.
Only two counties in California have the honor of having a median price of over $600,000. Sure, we have areas like Beverly Hills with a median price of millions of dollars but this is still part of Los Angeles County. But to have a county like San Francisco with a current median price of $627,500 even after all the California housing turmoil boggles the mind. It is hard to grasp because the county income dynamics do not support that price level. Not even close. It’s as if the correction in the state was passed over in San Francisco. But make no mistake, this county has always been expensive. Even in 2000 the median price in the county was up to $477,000 mostly because of the tech bubble secondary push.
Let us look at the current data and try to figure out what is going on:
The latest data shows San Francisco still holding at a very high median price. But San Francisco County only accounts for 6% of all Bay Area home sales. It should be obvious that price is one of those reasons keeping people from buying in the city. Yet the reasons don’t seem so obvious when we dig deeper into the data:
The median household income for San Francisco County is $73,000. So with a current median price of $627,500 we are looking at a household income to home price ratio of over 8. This is enormous since even looking at historical data a ratio of 3 to 4 seems to be more standard. Looking at this data tells us that SF County is definitely still in a housing bubble. As other areas have corrected, this area is still being propped up and it is certainly not because of higher than expected incomes. In fact, if we look at distress inventory for SF we find that many households are now unable to pay their mortgages:
Distress inventory trumps the actual MLS data viewable to the public. This is very common throughout many counties in California. But you would logically think that the most expensive county would have people that are able to pay their mortgages at a higher percentage than other areas. That is not the case if we are to look at the above.
San Francisco is an interesting case study. The county is made up of 359,000 households. But when we look at the housing dynamics we can see why the median income is much lower:
Housing occupied units: 323,000
Owner-occupied: 127,000
Renter-occupied: 195,000 (60%)
60% of those living in San Francisco County rent. The obvious reason is that many people don’t have the income to support those current prices. There is no way a $73,000 income can buy a $625,000 home. So let us look at the above income chart again. In order to “afford” a $625,000 a household income will need at least an income of $200,000. Of those living in San Francisco only 14% make that amount. Yet 40% occupy their home (i.e., own their place). So we have a 26% gap of those living in their home that if they were to buy today, would not be able to do so. We see this when homes were purchased in California:
And for San Francisco, about 40% bought before 2000. It is interesting to see these numbers because it shows us that many counties in California are still in bubbles. Given the distress inventory, we would expect more correcting in these areas. In fact, you’ll notice that the Bay Area is up 20% for the year in price while San Francisco County is down 2%. This is a long way from making sense but it is heading in the right direction.
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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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