If there was ever a sign that the housing market was nowhere near a bottom, this has got to be it. We aren't talking about Detroit or Cleveland here. This is San Diego. We aren't talking about some slumlord's shack. These are new homes.
Am I pointing this out because it is a great deal? Not even close. This is a clear sign that home prices will fall much further.
Allow me to explain.
No matter how bad you've heard the housing market is, the truth is much worse.
For example, you've probably heard that housing prices are falling. But did you know that those home prices are not adjusted for rising inflation?
“Although only one-third of CBSAs [core-based statistical areas] are depreciating on a nominal basis, on an inflation adjusted basis, 90 percent of CBSAs are experiencing real price declines. Only 10 percent of CBSAs are experiencing real inflation-adjusted price increases.”
If you are in the bubble regions things can be downright scary.
One area—to give the real stark picture--is Stockton, Calif. Right now, they are saying that in Stockton, 3 out of 4 homes are either in foreclosure or going to begin foreclosure. And if you look at the data that we have in this report, two years ago—in the first quarter of 2006—homes there were overvalued by about 71 percent. And now, in this quarter, they are at 4.3 percent. And two years ago, the home prices were about $360,000, and now they are about $230,000—a significant difference.
So then the question is why is the real estate situation so bad, especially in California?
To answer that, I would like to direct you to my newest favorite source of information about the real estate market - Mr. Mortgage.
In a nutshell and simplistically speaking if 10k people get a ‘great buy’ on REO, 100k home owners could have the value of their homes fall by 30-50% overnight. Of those 100k, 35% get thrown into a negative equity position, 35% of those experience loan default and 75% of those (9,200) go back the bank as REO. The banks sell at a 30-50% discount and the process repeats. Again, no inventory has moved. Values just continue to fall. It is a vicious cycle.
He isn't just pulling numbers out of the air. His example is based on real world percentages.
By his calculation there are 4.25 YEARS of housing inventory waiting to be sold in California.
In a normally functioning market, a drop in price increases consumption of that product. But in a post-bubble world a drop in price causes speculators to sell, not buy. Meanwhile, normal buyers have long since been priced out of the market.
New Bank REO as a percentage of Total Sales has been steadily climbing since 2006 and even reached 101.45% in Jan 2008 before backing off to 71.67% in April 2008.
Backing out Foreclosure Resale’s from Total Sales in April 2008, leaves you with 19,406 Organic Sales, which is the below the lowest number since DataQuick began keeping records in 1988.
New Bank REO as a percentage of Total Organic Sales was 115% in the month of April 2008 showing infinite inventory.
When you realize that foreclosures are adding as much or more to the market than actual home sales, it makes perfect sense to have a 2-for-1 sale on homes.
The Wall Street Journal backed up Mr. Mortgage's numbers last night.
“Lenders and investors in mortgages owned about 660,000 foreclosed homes in April, up from 493,000 in January and 231,000 in January 2007, according to First American CoreLogic, a research firm based in Santa Ana, Calif., that collects data from lenders and county clerks. The April total works out to about one in seven previously occupied homes available for sale nationwide.”
When something this big is getting this ugly so long after the bubble popped, then you need to get out of the way because implosions this large tend to suck in innocent victims.