billddrummer

California Housing Recovery? Not So Fast

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

California Housing Recovery? Not So Fast

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