Latest prediction: California's housing market will hit bottom first

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?

Reader Comments

Jim D

August 1, 2008 02:27 PM

3x income.

100x rent.

THAT is the bottom - and we're less than half way to getting there in California.

It's been the bottom in other housing crashes, and there's been no plausible reason advanced why it won't be in this one.

ballbuster

August 2, 2008 05:17 AM

The evil California landscamers are at it again. This time they are trying to persuade people to start buying real estate because they claim the market has hit "bottom." What has hit "bottom" is their ethics. For the evil California real estate flippers, the only true god is the almighty green-back. California is the home of wicked real estate scam groups whose fellowship includes the real estate agent, appraiser, lender/brokers. These con-men are in deep financial trouble and they are trying to unload their pink elephant real estates on the unwary. The severity of the liquidity crisis is just beginning to hit home. Witness the failure of BearnStearn, IndyMac, and recent FDIC take-over of eight regional banks, not to mentioned the battered conditions of Citigroup, Merrill-Lynch, UBS, CreditSuisse, Lehman, Washington Mutual, Wachovia, Ambac, MBI, Countrywide, BoA, CarlyGroup, SCA, etc, etc, etc. Witness the massive construction unemployment in California. That's not to mention the massive layoff of auto workers. The bottom won't be reach until more of these firms hit rock bottom and imto bankruptcy. With the help of Madison Avenue, the California landscamers are masquerading sales propaganda as news. These con-artists have their ying-yan in the vise grip and they are trying everything in the book including declaring that the real estate bust is over and happy times are here again. That fact is that Calfornia real estate sales has all but stalled and the state is $15bil in red because its budget depended on projected real estate sales that never materialized. The California's budget and its landscamers are bleeding to death and Arnold is forced to pay all state employees minimum wages under emergency power. Checking the MLS, luxury homes sales in Newport Beach, and Beverly Hills are basically going nowhere for the past 1.5 years. Judgment days is here: The speculators are themselves ripe for the picking. Now they have become desperate people. Don't listen to these con-artist. Don't be a fool. Don't buy into a trap. The truth is that the California real estate bust, liquidity crises, and high crude prices are already driving the US and California economy into a depression. Before any recovery will take place, all the toxic ARMs made during the real estate feeding "frenzy" will have to run through its course. That will take about 2-3 years. After that time, the "frenzy" price will have been reduced by at least 50% to prices that reflect the purchasing power of the average homebuyer.

George

August 2, 2008 11:11 AM

Likewise, the effect of option Arm reset cannot be ignored. I think that areas that are driven by speculation (eg. Sacramento) will hit bottom first and will begin to stay flat or see appreciation sooner (again driven by investors)...while in other higher priced areas, you may see continued correction. We have begun to see higher priced area with more foreclosure activity and a lower listing price, such as Arcadia, Redondo Beach, and San Marino. I am a renter and I plan to stay on the sideline until this whole thing blows over before I begin shopping for our dream home.

Sally in Chicago

August 5, 2008 09:45 AM

Not in California, I live in Chicago. The most recent condos to come on the market are now "rentals" because the developers cannot sell out the total building. So you see a mix of owners and renters in a multi-unit building. Developers are holding on hoping for the sales market to pick up, but the problem is -- more and more people are losing their jobs. If you don't have a job and there are no (high paying) jobs available, how you going to buy a house? Not everybody can be an entrepreneur!
Plus wages are stagnant.
Even the Donald is having problems with his $mil condo-hotel.
I don't see anything on the horizon here in Chicago or elsewhere showing an upward tick in the housing market. All this is tied into wage earnings, which stated before are flat and people having their hours cut and being laid off.

Dan

August 5, 2008 01:13 PM

Being in the real estate industry in Arizona for the past 17 years, you get used to what is happening now in California, will get to Arizona soon. I see some isolated areas in Arizona becoming "steady", but it appears we are in this for at least another 18 months. The "correction" of sales prices continues to decline in most AZ markets, although some only slightly.

Artemis in CA

August 5, 2008 07:24 PM

It's not over yet here, nor anywhere else in the US. Time will tell what happens when the ARMs click over. Hopefully most people are working on avoiding losing their homes NOW. I do think CA will have some fallout from it -- we'll have to wait and see just how much. I work(ed) in homebuilding and know there are a lot of buyers who took any kind of loan to get in on the land rush. When the tech crash hit, people moved their $ to land, as its values in CA have always grown faster than most of the US. THe new world order of 'how to get retirement $ fast'.

Our flawed capitalist economic structure is beginning to buckle at the knees. You can't allow businesses to become huge, live and die by the stockholders and the next merger (and requisite downsize of employees), cut wages and benefits, and have land values grow in far greater leaps than working stiffs can reasonably afford. I think the US is in for a long economic lull until we figure out how to achieve fiscal balance and release the middle class from the vice big biz has squeezed us into.

CA was first in the toilet (behind Vegas) and will linger longer due to the fact that land values here will NEVER decrease to the point that jumbo loans are no longer needed here. Salaries are down, jobs are being lost, and people are going to have to be more fiscally conservative to survive going forward. That said, location, location, and opportunity have always driven land values, and will continue to. Will be interesting to see where this goes. I don't think the economists will be able to predict the future of the US anymore.

Ming

August 8, 2008 03:06 PM

I am a renter, so I hope (wish?) the house price will drop. But when you make the prediction, do you factor in the rising rent and the huge amount of potential California home buyer?


I live in EL Cerrito, bay area, CA, where the school district is not good, but a two bed room apartment for rent listed at $1600 is out in one second. The high rent will chase people out to buy.

I have so many friends and met many people, with $100,000 cash in bank for down pay, $150,000/year household income, now renting, but waiting for a chance to jump in house market.

I don't have any quantitative data to support my view, but if you can, just refute, I will be extreme glad to find I am wrong.

Alex

August 16, 2008 12:01 PM

100,000 people come into california each month (illegal legal or otherwise)Note that Califonia statistics include area which are in outlying areas suhc as riverside and lancaster which are part of LA county, the larghest county in square miles in the country. But these areas have nothing to do with metropolitan LA.. I live in a great neighborhood in Studio City and prices for good properties have NOT come down this summer. All the REO crap , homes with poor locations or floorplans are sold at the cheap and should be....but the great areas in LA have not come down this summer nand have actually incread inprioce year over year from 2007.Sorry to all you bitter naysayers but the Good areas in Califonia have bottomed....

Jean

August 19, 2008 03:36 PM

We are all talking about the high foreclosure problem and blaming the brokers, realtors and banks. Think about it, not only these things come into play but the energy companies are ripping us off with their high energy bills. They know not only people need a place to live but they need gas to get to and forth and lights and gas to keep cool and warm. Let's not only look at the housing problem but the energy problem also. The energy companies do not want us to save energy, they say they are rewarding us for this, but instead punishing us for using methods to save energy. Question have you read your gas and electric meter lately? Warning!! You should and you will know why real soon. You will note that your meters are not being read and the energy companies are estimating your energy cost by your usage the year before. So, we just pay the bill trusting them that they are doing the right thing, just like you trusted the loan officers,realtors,brokers,etc.thinking they were doing the right things for you when you purchased your homes. So, who can you trust? No one but, GOD!! We will go through these crisis until we as a nation turn back to God.

Suzie

August 29, 2008 01:48 PM

Our own greed has put us in this position in the first place. Yes, there are loan sharks and loan companies out there that will do whatever it takes to get you into a big nice house for the money you make, but honestly, do people need that? People are getting in $400,000 homes, but make $70,000 a year - do the math - YOU WON'T BE ABLE TO AFFORD THE PAYMENT. We as a nation have to have everything and have "The American Dream," yet there are so many that just plain can't afford it and yet are still living the lifestyle. It amazes me that despite the housing crisis and gas being almost $4 a gallon that I still see people driving huge trucks and SUV's (with one or two people inside) and still purchasing the new furniture to put in their big house. People are living outside of their means. Until we get a grip and quit spending money we don't have, we aren't going to get out of this slump.

Kyle

September 24, 2008 12:25 AM

70000 a year? If that is net and you put 20% down then you would only have a 320000 loan. Roughly 2500 a month with insurance and taxes. That leaves 3500 a month. I dont know what you spend your money on but 3500 is enough for bills, food, entertainment and have a little to put in bank. You point is right but I think the numbers are a little off. Maybe 50000 a year would have been more right on.

p.m.

November 5, 2008 02:37 AM

Kyle, How old are you? You are obviously ignorant to debt to income ratios. It takes at least 100k of income to afford a 400k mortgage, even with 20% down, and that is probably even pushing it unless you live very frugally. I sure hope you don't own any real estate. Our country is in this crisis because of the way you are thinking.

Erick Leyva

January 14, 2009 03:11 AM

I think that all of you are right to some extend, yes Ca has the most forclosures on the market but remember, who does not want to get a good deal on a good house. La desgracia de unos es la oportunidad de otros all of these houses are going to be sold to people that can afford them remember that lots of new people are coming into ca because of the weather and now because of the ship homes. If you really worry about the time that is going to take for the economy to get better more jobs and so on well until we star thinking positively about it, thats how long its going take.

Peter F

March 19, 2009 02:16 PM

Has everybody gone f'ing crazy! Yes, god will save us. That's right everybody pray to god close your eyes and then when nothing happens and you are still broke because the greedy investors took all your money it will be all their fault. Your inability to act because you were too blind, too stupid, or too busy waiting for god has nothing to do with it. Has CA hit bottom. No probably not. But if you can buy a $250k condo at 5% interest for a payment including taxes, hoa and insurace of less than $1800 a month that you can rent out for almost $2k why would you not do this!? Not to mention if you live there the government will give you $8000 for buying in 2009 and you get to write off most the expenses. Not only could you save over what you are paying in rent you could get $20000 back when you file your taxes. Oh and if you are whining about the investors and how we are not at bottom and the greedy investors are trying to trick you I have to ask are you not the greedy one who must buy at the very bottom!? Real Estate is a long term investment for the average person and unless it is your Business buy a house long term save over renting right now and stop being greedy waiting to buy at the very bottom. If it is cheaper to buy than rent why would you ever rent? Oh and to those of you who are shaking in your boots afraid and waiting for god to save you I suggest you open your eyes and see that god saves those who save themselves. Have you heard the story about the deeply religious man that while trying to escape the flood ends up on the last bit of dry land as it slowly floods. Someone comes by in a dingy and offers to rescue him as the waters rise. He says: "No thanks, god will save me." A few minutes later as the water rises to his knees and he climbs a tree to stay above it a man appears across the water and says he has rope and can throw it out to him." Again the man says, "No, god will save me." Then a few minutes later as the waters are rising and he is at the top of the tree water to his chest a helicopter approaches and a paramedic screams down: "Sir we are coming down to help you." Again the man says: "No, god will save me." and waves off the rescuer. A few minutes later he takes his last gasp of air and drowns as the waters rises even more. When he gets to heaven he looks up at good and asks: "God I have been your loyal servant and thought you would always protect me, but you let me drown!" God looks at the man and says: "Why are you here? I sent you a boat, a man on shore with a rope and a rescue helicopter!" God gave you the gift of life! Don't squander it waiting for him to live it for you too!

Ticketgirl

April 16, 2009 02:32 PM

Amen to that Suzie.

"People are living outside of their means"

Yup. They should have their homes forclosed, give them a wake up call.

j.leval

May 23, 2009 12:40 AM

so okay, the next question is... are we there yet?

Not everyone in Ca. is a "landscammer". Some of us are natives, who've actually lived in the same town for their whole lives, the same house for the last 20 years, who are now (or should I say for the last 6 years) battling catastrophic illness' with both wage earners chronically ill. We need to sell our home. We can't afford to live here anymore. Even if we could, we aren't well enough to take care of our home any longer. We've had our home on the market for the last 3 years, taken off only on the ocasion when one or the other of us has needed surgery. We took it off the market in Sep. 08 with it listed at 930,000. We came back on this spring at 720,000.

Our fear is that bottom will hit, we'll sell, the market will go up and we won't be able to buy a smaller home that's comperable to what we have here.

We're not greedy. We just don't want to loose everything we worked so hard for just because we got sick! We already lost a business due to illness.

So where do we stand in this housing market now??? Have we hit bottom yet?It would be just our luck to accept an offer and then find out we could have made just enough more to get us into a retirement community nearby(not because we're old; I'm 57 and my wife just turned 50, but was disabled on the job 6 years ago and no longer drives. The retirement community has busses that come thru hourly so she could go into town on days I'm sick, and clubs she could join and participate in so that she's not so isolated). We need every penny we can get out of our home as it's ALL we have left, after all of the medical expenses we've had.

Does any one have any statistics that might help us decide whether to try and ride this out or not?

jonLev

May 25, 2009 10:30 AM

Is there some reason why my comment wasn't posted?

LarMac

July 6, 2009 01:18 AM

I maybe stupid but I just gathered every penny I had (retirement included) and put over 50% down on a house this month (July 2009). We were renting for $2,200 a month on a very small income (I support a family of five). I just lowered my monthly payment over $500. a month. My kids are in better schools, better neighborhood, doubled the space in the home, and feel good I have my money in something that is working for me... (not like the f-ing market that I lost half my money in). Even if the price goes down we have a home. The tough thing is I own my own business, and work has been slow. If I can make it through the next year... we will be far better off then I was a month ago.

LarMac

July 6, 2009 01:18 AM

I maybe stupid but I just gathered every penny I had (retirement included) and put over 50% down on a house this month (July 2009). We were renting for $2,200 a month on a very small income (I support a family of five). I just lowered my monthly payment over $500. a month. My kids are in better schools, better neighborhood, doubled the space in the home, and feel good I have my money in something that is working for me... (not like the f-ing market that I lost half my money in). Even if the price goes down we have a home. The tough thing is I own my own business, and work has been slow. If I can make it through the next year... we will be far better off then I was a month ago.

armando

July 7, 2009 05:21 PM

If you can afford a home and your credit is good, then buy. Just make sure you can afford the home down the road. Be honest on your app and dont inflate your income earnings. If your looking for a home, not an investment you cant go wrong. Homes are cheaper than ever.

Mossfish

February 6, 2010 09:07 AM

Obviously August 2008 was not the bottom in Southern California and unemployment continues to rise here in LA and south to the border, so much that even illegals have slowed their attempts to come here. My neighborhood is one of the best in San Diego county and the public schools can't be beaten by any private schools in CA. In 2005 a house sold for $995,000, right before the big drop. Houses that rented for $2500, had mortgages of $6000! That house just resold for $425,000 last summer. Mortgages are getting close to aligning to rents, but the rents are down to $2200. These are 4 bedroom, 2-3 bath single family houses with horse trails and open space. The sharks continue to push higher prices. The only way they are getting anything is by selling to the rich Mexican families trying to escape the violence in Tiajuana. Two Mexican fathers on my street have been gunned down in front of their families and two have been kidnapped. Around the corner the police busted a slave/sex ring in a house that had sold 6 months ago. It's not the straight up middle class that can afford to live here even now. Many empty houses are poping up still despite the media's attempt to say the crash is over and housing prices have bottomed. Arnold, the govenator, put a cap on how many houses could be sold at a time in an area so the banks are still looking for ways to move inventory without violating the regulations imposed to continue to artificially support the bubble. I know I've been buying and selling or advising real estate for over 30 years and the nature fluxuation of prices is still being manipulated. I'd like to ask the blogger above where in 2008/2009 did you find a condo renting for 2k the cost 1.8 k in mortgage? That's a sales pitch! The real cost of the area referred to in his comment put any validity to his words out the window. Even unemployment numbers are being Manipulated! If you don't find a job you are dumped from the unemployment list. CA is close to 25% real unemployment and rising fast. Even UPS is laying off 33% of their drivers this month.

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About

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.

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