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Posted by: Prashant Gopal on August 01, 2008
It’s easy to call a bottom to the housing slump. The tough part is getting the timing right.
Treasury Secretary Henry Paulson has made many such predictions. “All the signs I look at” show “the housing market is at or near the bottom,” Paulson said in April 2007, a few months before the credit crunch hit.
Just last month Barron’s declared that “Real-Estate Rout May Be Short-Lived.” The evidence: home prices were moving closer to incomes in high-priced markets, existing homes sales had improved somewhat and inventories of unsold homes had dipped slightly. The critics responded swiftly: “During the Bull Market of the ’90s, I used to read Barron’s for their hard edged, skeptical look at many of the excesses on Wall Street, wrote Barry Ritholtz, of The Big Picture blog. “During the past 5 years or so, that skepticism seems to be fading… The latest evidence of this is the wrong headed cover story on Housing.”
Now, a Bloomberg article is suggesting that California might be the first state to hit bottom. The article points out that sales are rising across the state for three consecutive months starting in April. And four in 10 sales were sales of foreclosed homes.
“California is having a wrenching decline in wealth, but this is a cathartic event that will lay the foundation for a recovery,” said Mark Zandi, chief economist at Moody’s Economy.com told Bloomberg. “This signals the beginning of the end.”
I’m skeptical that California is out of the woods. It’s true that lower home prices have made some markets more attractive and more affordable for first-time buyers. But it will take some time for California to work through the overhang of unsold homes and sales of foreclosures have a way of pushing down prices, which, in turn, brings more foreclosures. And we shouldn’t forget California’s next potential crisis: option ARMs.
About half of option ARMs are concentrated in California and they’re expected to start resetting in high numbers next spring.
I’d love to hear what you think about this prediction. And do you have any predictions of your own?
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.