California Housing Woes Accelerate in March

I regularly check on the state of affairs in California's Housing market for a basic reason: the US consumer economy will go where the Californian consumer takes it. Californians are/were the dominant consumer force in the US, and they bankrolled this spending with the housing boom.

Plus I live here and I would like to buy a house.

http://www.dqnews.com/Charts/Monthly-Charts/CA-City-Charts/ZIPCAR.aspx

Today we have the March sales figures. It’s very hard to extrapolate much about price trends because sales volume is so low. Menlo Park had only 5 home sales and the median price fell 50% since last year. It’s probably not safe to apply that to all of Menlo Park going forward.

Where we do have volume, the trends are falling prices in the blue collar towns (San Bruno, Daly City, South San Francisco) and stable prices in wealthier towns (San Francisco, San Mateo, Mountain View).

The crumbling price effect is getting closer and closer to prime Bay Area territory. These aren’t towns on the margins where it’s an hour to drive to San Francisco. Daly City is less than 10 miles away.

Also, Silicon Valley areas are showing similar signs of stratification. San Jose & Santa Clara are very down while wealthier areas like Cupertino, Mountain View, & Sunnyvale are doing very well: up 15%+. Again, looking only at the towns with high sales volumes.

It’s becoming like an oasis where towns like Palo Alto and Cupertino anchor thrive but the next-door neighbors are crashing. I think that will remain the case for at least a year, but then major wealthy areas like Palo Alto will come down as well. Why? It’s not a coincidence that higher foreclosure rates, falling prices, and big housing developments are all in the same cities. Palo Alto did not have big blocks of homes thrown up the way Santa Clara and San Jose did.

For example, this is the Santa Clara Notice of defaults:
Q1 2007 1,056
Q4 2007 2,162
Q1 2008 3,074

It took almost a year for the NODs to grow by ~1,000 homes. It took 3 months for them to grow another 1,000.

Those trends are similar across California: up 39% from Q1 2007 to Q42007 and then up 141% from Q4 2007 to Q1 2008. Almost 114K homes in the last quarter began the NOD process. The NOD is the last step before foreclosure and it is an indicator of what to expect. Critically, the rate of conversion from NOD to actual foreclosure has shot up from ~50% to ~70% in 1 year. Which is easy to understand if housing prices dropped 20% in 1 year.

Consider the tax revenue implications. Out of 35 counties, only 1 had positive increase in sales prices: San Francisco with 0.67% change in the median price. Most of the others had at least a 20% drop. California depends on property taxes and that base will shrink, especially as current homeowners ask for re-appraisals to lower tax exposure.

Consider the consumer spending implications. Lower home prices reduce everyone’s home equity, which in turn spurs banks to cut back home equity lines. No more borrowing against the house for home improvements, new cars, etc. I don’t see much impact on consumer spending by those under foreclosure – they have been stretched tight for a while already.

For the State and the individual, borrowing is no longer the route to living a lifestyle. The return to affordability will be refreshing but will also crush everyone in the consumer world. Do-it-yourself courses will probably come back into fashion (Learning Annex courses on gardening, clothes-making and so forth).

A decline in prices will lead to a decline in prices.