Welcome to the Condotel California?
IMO however the biggest problems with the current housing situation are in the subprime mortgage market. First, the vast majority of sub borrowers are stupid. They aren't able to deal rationally with what's coming. They'll stop all other saving, investment, whatever and run up any consumer credit they have BEFORE they see a problem. By then it will far too late. A maxed out consumer that has been ignoring routine mantainence, scrimping on healthcare and insurance, has a now old car with still sizable balance and nearly maxed credit cards is going to miss their property tax payment or something and then just stop paying everything, thinking they are hoarding against the inevitable losing their "stuff" and starting out clean all over again. Like I said, stupid.
The real stupidity is the lenders. They have been counting neg-am balance accruals as current income and when late pays and those penalties start to pile up they'll call those current income as well. By the time they realize they have nowhere near the reserves against loses it'll be too late for them as well. Like the stupid borrower the banks will wish to prop up shareholder value until the elephant in the corner is too big. The write-downs and stock hits are going to be frightening.
For fun. People are telling us what pain is in the real estate world. After enough posts I'll start a retrospective of what Joy is.
Las Vegas pain; you keep your lawn green while others' are brown while your kid wears his sister's sneakers.
Los Angeles pain; Roy Lichenstien, "Oh my God, I forgot to accrue equity!"
Ventura pain; "So close to LA yet so far from its' troubles."
Santa Barbara pain; "But the other shack sold for more. My shack is nicer."
Cambria [and Wrightwood] pain; "Everyplace else should have crashed first."
San Diego pain; "Nice doesn't go down."
Boston pain; "Snow? Not at all, that is ambiance."
NYC pain; "As goes the financials so goes NYC."
SoCalMtgGuy, this is fun. I'm starting a thread just to collect these. Unless you object it is:
Measuring #2: Rents
Heck the bubble popping means rents will crater as well, right?
Don't be so quick. Rents are driven up by costs and down by competition. There are going to be a lot, lot more familes looking for rental housing, there isn't going to be another two sticks nailed together for more rental housing for a long, long time. The tax, energy and other components of providing rental housing are very very inflationary. There's going to be a lot of pressure on rent prices.
Interesting story. About 10 years ago the voters of San Bernardino approved a small parcel tax to fund libraries or law inforcement or something so I raised the rent an equivalent amount. My renter was dumbfounded, the tax was on property owners not renters she said. Some peoples iz so stupid.
Anyway, there's so much froth in the total housing market I wouldn't even try to guess what will go on with rents in the short term. Not just banks being reluctant landlords but boomer second homes becoming boomerang children's homes that won't relect market rents and the impending spate of divorces and houshold dissolution. there's also going to a rush of inexperienced landlords who won't correctly price their products. It's going to be amateur fire department hour as the neighborhood burns. That said, in the long term rents have to go up.
This is bad for inflation. The CPI includes 23% as owners equivalent rent. OER is a construct put together to undereport inflation. It assumes that even as you actually pay $3500 in PITI monthly you are only paying $2000, the amount the same property would rent on the open market. I fully expect the Fed to change the OER just in time to catch the slide in housing and thus continue to underreport inflation.
Measuring: TCO Housing
The measure of productivity is indeed tricky. Just like inflation is tricky. Even measuring bubbles is tricky. I'll concentrate on bubbles.
The big elephant in the corner: What about California has always made it more expensive to own a home? Ans: It isn't more expensive and more importantly hasn't always been as expensive as it appears today.
What are homeownership costs? And equally important, what are homeownership benefits? A fixed rate mortgage in CA is the ultimate in financial predictability. Your mortgage is the same and your property taxes are limited to 2% increases (maximum) annually. Contrast that last with FLA where people are experiencing doubling and tripling of property taxes. And insurance; forget the earthquake stuff, no one has earthquake insurance, it is designed to not be a good deal. So ex earthquakes CA is a good place to write a policy. No hurricanes, no ice storms, no frozen pipes bursting, floods and fires are predictable. Then there's ongoing costs. Roofs last 60 years, paint 15, driveways many many decades. And then there's no snow days and no shovelling and no winterizing. Those are all time and effort and money that doesn't happen here. Your car literally lasts as long as you want. A smaller home can really be a bigger living space when the utility of the outside is factored in. I grill on the patio year round. The alternative would be a $4000 indoor grill oven/stove taking up an extra 6 square feet of the floor plan. 2 Car garage rather than 3, as leaving an auto in the driveway doesn't kill resale value. Then there's utilities. Sure gas. water, electricity are getting steep on a unit basis and the idjits trying to grow Bermuda grass on Riverside are insane but my home has no central heating and no A/C at all. This has been a normal winter and the wall heater in one room has been turned on 3-4 times for a few hours for the entire house.
So, what does this all mean? It means that California can be a very cheap place to live. The perception comes from the rest of the nation hearing about $800k tract homes in Moreno Valley with $150 winter heating and $300 summer cooling and $200 water and $300 HOA and $750 taxes (all per month figures). The other 7/10ths of the iceberg are cool and safe under the water while those unusual examples above roast in the glare.
TCO is total cost of ownership. While not anything like all the price of California housing is justified, a lot more than other places does indeed have a basis in reality.
Raising the Dead
Thumbing through my copy of "The Necronomicon" (at midnight by the light of a black flame), it warns that the consequences of bringing the housing market back from the dead will be far more dangerous than letting it rot in the stygian depths to which it has fallen. The extent of those depths in the dark days ahead will not be known until the spectre of Cthulu awakens and (re)posses those things most dear to the doomed minions souls. Namely the holy speed boat, the most reverent Harley-Davidson, those objects of all desire the SUV, RV and ATV. Only then when all hope is lost and the scavengers are finished picking the bodies on the bloody battlefield clean of all that is valuable will the lamentations of the children, resigned to public schools and community college be heard. Only then as the wives cry out to the darkness, "Maui, Cancun wherefor art thou" will the true nature of the beast variously known to mere humans as the House ATM, the great equity withdrawl, the very HELOC himself so powerful that he is CAPITALIZED be revealed as a vampire sucking the lifeblood of guilty and innocent alike. Listen now, quiet, in the distance. The sound, the smell, the desperation. Those who thought an easy death, bankruptcy itself will be denied. No one gets off that easy. The laws of the gods of light and dark are no match for the US courts system. Ameriquest will eat their livers every dawn and peck out their eyes every sunset only to keep them barely alive to feed again on the morrow. And at night, where will they sleep? Not in their own beds, that's for sure.