California and Florida Housing Outlook: More Hope for Recovery in 2010

The California and Florida housing markets are as different as black and white.

That’s the view of real estate consultant John Burns, who notes that California housing markets have “less than 10 months supply” of homes for sale, while Florida is “still hugely oversupplied, with most markets currently maintaining more than 16 months of supply.”

Despite the improvement in the California market, Burns believes that it is too soon to call “the bottom” for California housing, due to the state’s fiscal problems, prospects for higher unemployment and taxes, and future impact of foreclosures on home prices.

As I’ve noted before (see Greed, Fear, and Loathing or Foreclosure Zombies) the foreclosure moratoria (that expired in March 2009) produced a false sense of well being. The moratoria temporarily halted foreclosure sales – which normally produce foreclosure discounts of roughly 30%.

This temporary halt can be most easily seen by comparing a) the 90-day delinquency trends with b) the pace of foreclosures in:

• California - The most populous state, with roughly 12% of the population and 30% of US housing market value; and
• Florida - The 4^th most populous state, with roughly 6% of population and 7% of US housing market value.

Figure 1: California 90-Day Delinquencies and Foreclosures [MBA]

Figure 2: Florida 90-Day Delinquencies and Foreclosures [MBA]

The dislocation between delinquency and foreclosure began in 2008 and continued until 2009 Q1, and can be clearly seen in the above two charts. As the foreclosure production lines begin to roll, the pace of foreclosures will more than double … or triple.

The home price model developed in Greed, Fear, and Loathing provides another way to visualize the continued decline in home prices as foreclosures resume.

Regional versions of these models relate home prices to unemployment and foreclosures. Below are two charts, for CA and FL, depicting what could easily be rosy scenarios for unemployment and foreclosures in each state.

Figure 3: California Unemployment and Foreclosures

Figure 4: Florida Unemployment and Foreclosures

I’ve taken a wild guess at predicting unemployment and foreclosures in each state for the rest of 2009. I’m guessing that unemployment continues to worsen, and that foreclosures begin their relentless post-moratoria upward march.

Note: Last week’s spike in mortgage rates – if not reversed – will make things even tougher for the housing market (see Figure 5, below).

Figure 5: Fannie 30 Year Current Coupon, 2009

Let’s see what this might mean for home prices for the rest of 2009.

I’ll begin by aggregating the Radarlogic/RPX home price series for the MSA’s in CA and FL (using the market value MSA’s weights used in the RPX Composite) to produce indices for each state that reflect prices of homes financed by both conforming and nonconforming mortgages.

Then, I’ll relate home prices to factors similar to those described in Greed, Fear, and Loathing, using the CA and FL forecasts discussed above.

What do you get?

As indicated by the graphs below, perhaps you get something that’s not completely inconsistent with the views of more widely followed real estate consultants.

Figure 6: California Home Prices, Actual and Forecast


Figure 7: Florida Home Prices, Actual and Forecast

1. Continued declines in CA and FL home prices for the rest of 2009;
2. Moderation in declines – home prices continue to fall in each state, but at a pace that eventually moderates; and
3. The California housing market is more robust (i.e., it declines at a slower pace) than the Florida housing market.

I doubt that the above will be right. But if it is, I’ll be sure to dress up in my best formal wear to celebrate the New Year in which a real housing recovery might begin... Happy 2010.

Comments

[demichae:]

If I read the last California chart, it would appear you are predicting a 20% decline in California later this year. I think that's pretty accurate. Many, many homes are underwater by $100,000 to $300,000 dollars. The failure of cramdown legislation in Congress just ended any hope, in the short term, for most of these homeowners, and many will walk. (Realtors in California are predicting a Tsunami of foreclosures). I think that Congress will have to do something in terms of principal reduction, but it will take about 6 - 8 more months of foreclosures for them to actually enact anything. I predict a bottom, at 10-20% of current prices, in late 2009; after that, it's risky to wait, since Congress will have to put some real solutions in place to stem the tide.

Jun 01 06:28 AM

[dirtyharry:]

The problem with a 2010 timeline is that we are going to see a huge ramp up in Option ARM loan resets. For those that haven't see the graphical representation, please see here:

optionarmageddon.ml-im...

We are in the "trough" between to massive waves of mortgage resets. One thing not commonly discussed about the upcoming implosion is the internal break-down of which states will be most affected. It turns out, five states make up 75% of all Option ARMs ever written. They are: CA, FL, NV, AZ, and VA. It should come as no surprise that these were all "bubble states". The Option ARMs were used to help make overpriced homes affordable to buyers that never would have qualified under traditional underwriting guidelines.

A whopping 19% of ALL Option ARMs were writtin in CA - just about 1 out of 5. This means CA will be hit with resets disproportionally when compared to many other parts of the country. As much as I'd like to see my home market recover, I'm a realist. We have a three year, bumpy road ahead of us. Factoring in the lower inventories we're currently experiencing, I believe that under the best circumstances we can hope for a market that drops no more than 10% from here and then flattens until the rest of the excess inventory is sold off. However, the fundamentals suggest it will be worse: Another 20%+ down from here. Only time will tell, but I certainly wouldn't advise any friend or family member that "now is the time to buy in CA." By the numbers, I suspect the best time to buy in CA will be the winter of 2011, rolling into the early months of 2012.

Jun 01 09:11 AM

[Trane250:]

I just read about a new twist on the "great California real estate game" where everybody gets rich by selling each other houses at hugely inflated prices with no money down using other peoples money. It's called "buy and bail." You buy another house at a huge discount using a government mortgage program and then you bail out of your old house, you know the one that you bought a few years ago with a no down payment "pick-a-pay" mortgage and didn't pay any of the principal and very little of the interest.

Jun 01 09:35 AM

[panocha man:]

if the lenders froze the payments on all Option Arm loans that are current with no further resets that would stop many foreclosures, definitely no resets at the 5 year reset that reamortizes the remaining balances,

Jun 01 10:07 AM

[Mad Hedge F...:]

but its only hope. That great sucking sound you hear is the air going out of the housing recovery- punctured by the collapse of the bond market and the spike in interest rates. Interest rates on 30 year fixed rate mortgages gapped up from 5.03% to 5.29% in just one day, up from the 4.50% low two months ago. This underlines what a difficult position the government is now in. While all the stimulus spending is great, the need for epic financing is triggering a collapse of the dollar and the bond market. The resulting soaring interest rates are bound to snuff out any recovery. Obama is truly caught between the Scylla and the Charybdis.

Jun 01 10:32 AM

[Mr Gadget:]

There's no way I can forsee a recovery until the banks put up ALL the forclosed homes on the market. Here in Vegas there is still a heavy precentage of "unreported" units.

Jun 01 11:42 AM

[ain't no fo...:]

As someone who played by the rules, I find that egregious.

You bought it with those terms, now live with it.

On Jun 01 10:07 AM panocha man wrote:

> if the lenders froze the payments on all Option Arm loans that are
> current with no further resets that would stop many foreclosures,
> definitely no resets at the 5 year reset that reamortizes the remaining
> balances,

Jun 01 12:15 PM

[cadoggy:]

I'm also someone who played by the rules and now I'm getting screwed for it. All the bank and government plans out there are targeted at people on the edge of foreclosure: aka, people who should not have owned in the first place.

My home is worth 55% of what I paid for it and not a single homeowner relief plan would give me $1.00.

Jun 01 01:31 PM

[demichae:]

That was popular in early 2008, but the banks quickly put an end to it. Now it's just rent and bail.


On Jun 01 09:35 AM Trane250 wrote:

> I just read about a new twist on the "great California real estate
> game" where everybody gets rich by selling each other houses at hugely
> inflated prices with no money down using other peoples money. It's
> called "buy and bail." You buy another house at a huge discount using
> a government mortgage program and then you bail out of your old house,
> you know the one that you bought a few years ago with a no down payment
> "pick-a-pay" mortgage and didn't pay any of the principal and very
> little of the interest.

Jun 01 01:44 PM

[OptimizedPrime:]

What a bullshit misleading headline. How do I know? Because the word "recovery" can have two different meanings. Many people think that means, "recovery" to the prices we saw back in 2007. That will NEVER EVER happen for AS LONG AS WE ALL LIVE.

If you mean "recovery" in the sense that owners finally figure out that they MUST SELL NOW AT 1997 (or below*) PRICES and sales volumes finally return to a sustainable, balanced level then maybe we might see THAT in 2010.

But anything that gives homeowners "hope" that they might be rich again (or simply not screwed) because everything will be "back" by 2010 is misleading, irresponsible, and will delay our actual recovery.

* The high-end of the market will probably take a LOT LONGER to recover in sales volume and prices will drop even more since this segment of the market is driven by "flippers" that cash in the equity of their previous house to make a down payment on the more expensive one. The equity that drove this activity has evaporated in the last 24 months and it will take DECADES to return even partially.


OP

Jun 01 02:01 PM

[Ira Artman:]

Thank you all ffor comments.

If you'd like to see what I proposed for the title of the above, please see my Instablog version, available here:

seekingalpha.com/insta...

Jun 01 02:42 PM

[henarl:]

Foreclosures will continue to fall behind deliquencies. Early on, a delinquency would be likely to lead to a foreclosure but now lenders have a much larger inventory of real estate owned, which they are having a hard time selling, and are faced with the choice of taking back a home and leaving it vacant or adjusting the mortgage and allowing the owner to stay in the home with reduced payments. An occupied house will not lose value as rapidly as a vacant house which is subject to vandalism, and even a vastly reduced mortgage payment is better than none. Look for more delinquency and less foreclosures.

Jun 01 02:54 PM

[mallarde:]

I agree with OptimizedPrime. all this talk about the housing market "recovering" sounds to me like saying that the government is hoping that the bubble will start up again. Like if they pump some dollars into the housing market, they can trigger another frenzy that creates wealth for citizens.

What is that saying? Bread and circus?

Let the housing market return to what it was rather than a vehicle for speculation and wealth creation. That way, normal people will not have to spend 50% of their income on housing.

Jun 01 05:01 PM

[Fighting Yoda:]

MBA (Mortgage Banker Association) survey is indicating otherwise:
Delinquencies and Foreclosures Continue to Climb in Latest MBA National Delinquency Survey May 28, 2009

"The seasonally adjusted rate is the highest in the MBA’s records going back to 1972 and the unadjusted rate is the highest recorded in the first quarter of any year back to 1972."

“What has not changed, however, is the oversized impact of California, Florida, Arizona and Nevada in driving up the national numbers. Those states continue to account for about 46 percent of the foreclosure starts in the country, and represented 56 percent of the increase in foreclosure starts, including half of the increase in prime fixed-rate foreclosure starts.

“It is difficult to overstate the severe impact home price declines have had on mortgage performance in those four states. 10.6 percent of the mortgages in Florida are now somewhere in the process of foreclosure. In Nevada it is 7.8 percent, Arizona 5.6 percent and California 5.2 percent. "

MBA is suggesting worse of subprime is likely over, now we are going to start the foreclosure on Alt-A and prime loans - a much larger market.
"Prime fixed-rate loans now represent the largest share of new foreclosures. In addition, almost half of the overall increase in foreclosure starts we saw in the first quarter was due to the increase in prime fixed-rate loans."

Jun 01 10:18 PM

[FloridaBoy2:]

I live in Ft. Myers, Florida and played by the rules. This area is foreclosure ground zero. Florida is no stranger to real estate busts.
Property is selling, but at greatly reduced prices. There are a lot of people that want to retire here and they will absorb the excess inventory. There will be no return to the silly values of the past.

On a macro basis housing may have bottomed. It may have bottomed here too because the contraction has squeezed out those that could not hang on and the people that should have been given a mortgage left when the construction jobs dried up. I can say with certainty that many of the sub-primers were lied to by realtors and mortgage brokers. You would not believe what they were told.

The overall recovery of the economy is on track but California and Florida will slow things down...for a while.

Jun 02 07:07 PM