California Housing Recovery? Not So Fast

Recently, there have been early indicators that California's housing industry was improving. Foreclosures were causing a pick-up in home sales there. There was speculation that as Florida and California led the way in to the housing slump, those states would lead the way out. Hovnanian Enterprises is among the first to report Q4 results.

Mortgage insurance firm PMI Group (PMI) indicated on its November Q3 earnings call that:

While there was an increase in defaults in loans, we did see positive loss development trends that partially counteracted the increase in NODs [Notice of Default]. These included stabilization of the claim rate for the delinquent loans we received in 2007 - what we called the 2007 report year - stabilization of the average claim sizes, and stabilization of NODs reported from California and Florida.

I talked about the stabilization of the number of NODs actually coming from California and Florida, and we did see that stabilization in the third quarter. Obviously, we'll need to see what happens in the fourth, but that was an encouraging sign and trend that we saw in the third quarter.

Modular housing company Champion Enterprises (CHB), however, noted around the same time on its Q308 call:

The decline in margins, compared to the second quarter, was partially the result of fewer Canadian sales but also impacted by both increased raw material cost and difficult competitive pressures in the US as well as further significant declines in California, Arizona and Florida.

The jury's still out on which way things will go, but Hovnanian Enterprises' (HOV) FQ408 conference call doesn't augur well:

A: In general the margins in Florida and California have been particularly lousy.

Q: I guess if you could sum it up, that’s just gotten that much worse then the last few months? Is that a fair statement?

A: I think that may be fair.

Comments

[Tim Plaehn:]

There is a big difference between the existing housing market and new housing. Homebuilders will not be building homes until the overall pricing moves to the positive. It is foolish to start building new homes that will sell for less money in 6 months. New starts and permits will continue to fall until the existing housing market turns positive for a while.

I saw that builders took out a total of only 180 permits in Las Vegas for November. Builders there have been managing to sell 1,000 new homes a month even the tough 2008 environment. Homebuilders are close to an almost complete cessation of new home building. The smart ones are hoarding cash and either writing down or selling their real estate. Those that keep building are just throwing their cash in a hole.

2008 Dec 22 07:08 AM

[Scott Sambucci:]

I would agree Tim's comment that there are differences between the new and existing home markets. I only specialize in the existing home markets, but there are some interesting price trends that we're seeing. For example, check out this chart of existing home prices in Sacramento by 25% divisions - top, two middle, and bottom market segments:
tinyurl.com/7l3vbn

There is definitely a rate of decline in home prices at the lower ends of the market. The question is - are these reflective of a turnaround, or just that prices have fallen so far that there is an asymptotic effect at some perceived price floors? Either way, prices are starting to show signs of leveling in Sacramento. If California was first in the glut, it could be first out and maybe this is the beginning of the beginning....

2008 Dec 22 08:41 AM

[Moon Kil Woong:]

Anyone selling their house in California can tell you that the prognostications of a recovery by the brokers is pure hyperbole. With California instituting government cuts and the tech sector finally getting slammed by the recession (tis a lagging down indicator) even the Northern California Bay Area and San Francisco won't be immune to the weak real estate market in 2009.

The good news for California is that the tech sector and export market tends to be a leading indicator out of a downturn. So brighter days are in the cards eventually.

For the forseeable future, I would not plan on making a killing in the real estate market. Rather I'd suggest for people to look at a home for what it should be seen as: a place to live.

2008 Dec 22 02:00 PM

[RAL:]

There's a big difference in PMI Group's announcement that there is a stabilization in claim rates for delinquent loans and NODs for Q308 vs. the CA housing market truly bottoming out and turning around. Albeit it's a good sign - if it can hold - but before making any judgments it's probably best to see what the Q4 results bring. Odds are the financial/economic rollercoaster that has been Oct-Dec of '08 probably will not help those statistics.

Check out Fortune magazine's article today (12/22/08) regarding their picks for the worst 10 real estate markets in the nation for 2009. Eight of the 10 worst markets they've called are in the Sunshine state, with projected valuation losses of 22-25% for next year and additional 2-5% losses for 2010. Yikes! If you've been a good soldier and have hung tough for now with a loan that's upside down and underwater, that bit of news might be enough to unleash a slew of 'jingle mail'.

money.cnn.com/gallerie...

Sounds like there's still quite a bit more pain to go before Arnold & Co. see any relief on the real estate side of things. And with ground zero for much of the country's ALT-A and Option-ARM mortgages originating in CA and ready to start re-setting this year, the possibility for things to get really ugly is high.

2008 Dec 22 08:23 PM

[SA Editor J...:]

Hi RAL,
I agree that it would be best to wait for Q4 results to determine the trend. October-November's events in the stock market cannot have done good for real estate anywhere, whatever trends were emerging before that.
Having said that, you might want to look at John Mauldin's Frontline Weekly newsletter. One interesting point he makes is about the new wave of defaults we've been expecting in the wake of re-setting ARM loans. Mauldin says that-- at least in the near term-- those loan rates will reset lower. Most are linked to LIBOR or treasuries, and those rates are down considerably from 2006.
Worth a read: www.frontlinethoughts....
All the best,
Judy

2008 Dec 23 12:53 AM

[billddrummer:]

Hi Judy,

Your point about ARM loans resetting at current rates is an excellent one. If you recall, I was predicting another wave of foreclosures as Alt-A and ARM loans reached their maximum caps, and rate resets would balloon the payments.

With rates 150-200 basis points lower than just a few months ago, there's hope that mortgages resetting will have lower payments than anticipated. But I still believe that there will be additional foreclosures as loans reach their deferred interest caps. Teaser rates on these loans were 1%-1.5%, but the vast majority were written at a spread over either LIBOR or the TCM index. There's no way mortgage rates will fall to the point that the newly reset payments will be as low as the teaser rates, because of the spread.

So in a typical example, where a $175,000 30-year mortgage was written with a 1.25% teaser rate, the initial payment is $583.19. If the mortgage caps at 115% and resets at 3.45% over the current TCM index, the new payment on $201,750 becomes $1,011.08 (functions of the higher balance and shorter term). And the new rate is low, at 3.95%. If the homeowner doesn't have an extra $428/month in his budget, watch out.

This discrepancy gets even worse with higher loan balances.

I believe the biggest risks will be in high-cost areas, like coastal CA, WA state, DC, NY and Boston. Areas with moderate home prices should be spared.

ATB,

Bill

2008 Dec 23 12:34 PM

[billddrummer:]

Hi Judy,

According to the CA Association of Realtors, home sales are up 80+% over last year, but prices are down 40+%:

sacramento.bizjournals...

The article also mentions that the average marketing time has dropped under 45 days, from 61, and inventory is down to a 6.9 month supply.

That's statewide, apparently, but it bodes well for reaching the vaunted 'housing bottom.' Distressed sales are still dominating the market, with over 45% either sales out of foreclosure or short sales.

As I posted months ago, these are the kinds of statistcs that suggest the end of the crash is near in CA. What's happened now, in my opinion, is that the contagion has spread to other areas that heretofore hadn't experienced a significant bubble, like TX, WA, and most of the Southeast (save FL).

If CA stabilizes and rates remain low next year (as the Fed implied), the housing market may begin to recover in the 3rd quarter of 2009.

I'm publishing that as my uneducated prediction.

ATB,

Bill

2008 Dec 23 06:59 PM

[Mad Hedge F...:]

I'll believe it when I see it. I ran into governor Arnold Schwarzenegger at San Francisco’s Mark Hopkins yesterday, much to the distress of his posse of ex Marine bodyguards. He was there to take credit for hammering together a compromise solution to his state’s $42 billion budget fiasco in front of 400 admiring members of the Commonwealth Club of California. After heavies physically dragged hecklers out of the ballroom, the retired Terminator confessed that enduring the tedious, and often contentious negotiations was worse than watching his first movie, “Hercules in New York.” The shortfall was so gigantic, that even firing all 200,000 state workers would not have filled the gap. Well funded special interests from both the right and the left make it impossible to get anything done in Sacramento. Unrestrained gerrymandering means that extremists are rewarded at the polls, and moderates punished. Of course, the budget compromise still requires an amendment to the state constitution which must be approved by voters on May 19, not exactly a sure thing. I have never been a big fan of the “governator,” but a lot of what he said made sense.

Mar 23 06:38 PM

[TrembleTheD...:]

California's going to need a lot more than a housing recovery before the summer's out:

seekingalpha.com/user/...

Jun 11 05:04 PM