Dr Housing Bubble 08/06/09

Rich Dad, Underwater Dad: 21 Million Homeowners with Negative Equity or No Equity in Their Homes. 33 Percent of California Mortgages Underwater.

The latest Case-Shiller Index data had its first nationwide price bump up in nearly three years. I am astounded (but not shocked) by what this has done to the psychology of many. The most recent post highlighting the REO shadow inventory and how banks are keeping homes off the public view instead of convincing people that housing has a tumultuous path ahead, the post actually reinforced a group of people that now think the worst is over. Keep in mind the Case-Shiller data set for the LA/OC region is still declining. Yet people are extrapolating nationwide data and transferring it over to the dismal state of California. It may very well be the case that nationwide prices have hit a bottom but not for the mid and upper tier of California homes. Price corrections are virtually assured with the coming onslaught of Alt-A toxic dubious mortgages coming in full force in 2010.

The argument keeps shifting so let me be extremely clear. Some keep thinking that there will be some generalized and clean decline when the Alt-A loans implode. They keep obsessing over tiny details in the market and say, “I thought the implosion was going to happen now! Forget this, I’m jumping in.” Many people are simply impatient and choose to ignore certain facts at their own convenience. The same kind of reasoning occurred in 2006. Even almighty Ben Bernanke shrugged off the housing problems and didn’t see a recession being set off by the housing bubble. Housing in California will be in trouble for years to come. The distress market data tells us that. Yet if you use the median price as your indicator, you will be completely off. In fact, I wouldn’t be surprised to see the median price increase as the mid and upper tier markets implode…simultaneously.

How can this be? Simply put, for the past year the bulk of the sales have occurred in the lower priced cities. Of course, the median price is principally concerned with volume and the volume has been with the low hanging fruit. Many in the mid to upper tier did not sell and still had prices at delusional levels so the volume at the mid to upper tier simply did not make a dent in the overall data. But now, we are seeing sales in these areas with more modest price cuts. Ironically, with more volume in these areas and the lower end working through its funk, prices may increase in terms of the median price. Let me give you a really simple example. Take a home in Pasadena. The hypothetical home might have sold for $700,000 during the peak but now will fetch $500,000. The homeowner bought for $300,000 so they still stand to profit. Life occurs (i.e., new job, divorce, etc) and they need to sell. The home moves for $500,000. Do this many times over and you can understand why you are seeing the median price in Southern California increase:

http://www.doctorhousingbubble.com/rich-dad-underwater-dad-21-million-homeowners-with-negative-equity-or-no-equity-in-their-homes-33-percent-of-california-mortgages-underwater/