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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