Is California Reaching the Bottom?

Following is a somewhat optimistic viewpoint on California that we thought we would share with you...

California's Discount Foreclosure Sales Point to Housing Bottom

July 31 (Bloomberg) -- California led the U.S. into the worst housing recession since the 1930s. Now the most populous state may be the first to find the bottom.

In Stockton, the U.S. metro area with the highest foreclosure rate, home sales more than doubled in the second quarter after prices fell by an average 37 percent, said PMZ Real Estate Corp., the area's largest broker. Across the state, sales rose for three consecutive months starting in April after 30 straight months of declines, the California Association of Realtors said. About 40 percent of those transactions were foreclosure sales, DataQuick Information Systems reported.

``California is having a wrenching decline in wealth, but this is a cathartic event that will lay the foundation for a recovery,'' said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, in an interview. ``This signals the beginning of the end.''

Almost $1.3 trillion of homeowner equity was lost in California since home prices peaked in December 2005, Zandi said. Discounts of as much as 50 percent will extend into 2010, helping clear a glut of foreclosures and leading to a more balanced housing market, said Ryan Ratcliff, an economist at the Anderson Forecast at the University of California in Los Angeles, and Christopher Thornberg, principal of Beacon Economics LLC in Los Angeles.

``Half off in a decent neighborhood is close to the bottom,'' said Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., manager of the world's biggest bond fund. Property markdowns of 30 percent to 40 percent give the market ``price illumination if not sunshine,'' he said.

`Beginning to Happen'

California led the U.S. in default notices and bank seizures for the 18th straight month in June and had seven of the 10 metro areas with the highest foreclosure rates, according to Irvine, California-based RealtyTrac Inc., which sells default data. That drove down prices and led to ``discounted distressed sales,'' with two-thirds of transactions under $500,000, compared with 40 percent a year earlier, the California Association of Realtors said.

The amount of time it would take to deplete the supply of homes decreased to 7.7 months from 10.2 months a year earlier, and the median price fell 38 percent to $368,250 last month, according to the Realtors.

``Things are beginning to happen,'' said Karl Case, professor of economics at Wellesley College in Wellesley, Massachusetts, and co-creator of the S&P/Case-Shiller home-price index. ``We're not going to get reestablished in a stable market unless that inventory gets cleared out.''

Birth of Subprime

California led the boom in the U.S. housing market, as prices in the state more than doubled from 2000 to 2005, fueled by historically low interest rates, according to the Chicago-based National Association of Realtors.

As values soared, California gave birth to the subprime mortgage industry that specialized in lending to borrowers with poor or limited credit, who often used them to buy homes they couldn't afford, said Stephen Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto.

`Seen the Light'

Discounts will be higher in areas such as Stockton, about 80 miles east of San Francisco in California's agricultural Central Valley, and Riverside, 50 miles east of Los Angeles, that experienced above-average levels of new construction at the peak of the housing boom and where lenders made a disproportionate number of subprime loans, Sharga said.

PMZ, the Stockton-based brokerage, closed 1,707 home transactions in the second quarter, about 80 percent of them foreclosure sales, said Michael Zagaris, the company's president. Foreclosed homes are now getting multiple bids and the supply of homes for sale in San Joaquin and Stanislaus counties shrank to 4.9 months in June from 18.2 months a year earlier, he said.

``We've found the bottom,'' Zagaris said. ``The financial institutions have seen the light and are allowing the market to find its own level.''

Past Busts

Previous California housing busts had roots in local economic woes and U.S. monetary policy. The state lost 350,000 jobs in the early 1990s, about two-thirds in the aerospace industry, according to the Cato Institute and Los Angeles County Economic Development Corp. Home prices tumbled 12 percent. In the early 1980s, existing-home sales dropped 61 percent amid interest rates of more than 14 percent and a national recession, the state Realtors said.

California may rebound more quickly from this decline than regions with fewer delinquencies and vacant homes, according to Zandi of Moody's Economy.com. The foreclosure process is ``more efficient'' than in states such as Florida where courts are involved, and Californians are typically ``more optimistic'' about housing after experiencing busts that were followed by property booms, Zandi said.

``They know it's going to be a good investment five or 10 years down the road,'' Zandi said. ``The fundamentals are good: supply constrained markets with lots of population growth, a solid and diversified economy and important global links'' in Los Angeles and San Francisco, he said.

`Bidding War'

It may take until 2010 for foreclosure sales to work their way out of the system in areas where defaults have soared, said Thornberg of Beacon Economics.

``Those sales are going to have a very large impact on prices for the next year or so until those homes get absorbed by the market,'' he said. ``Housing markets don't bounce, they splat. They hit bottom and they stay there.''

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Your CWC Financial Loan Team
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