California home prices continue on a downward and inevitable trend lower reflecting an underlying weak economy brought on by lower paying jobs and gobs of debt that cling to the state like an albatross. We are seeing promising early reports regarding nationwide job hiring but little of that is being reflected in California. Even as the job report comes out we are realizing that we are entering an era of low wage capitalism. The new added jobs don’t come from the six-figure real estate agent and mortgage broker crowd but come in lower paying employment sectors. Because of this and other reasons it is likely that California home prices will not see any significant gains for the rest of the decade. Focusing on a market bottom clouds the more important fact that is rarely highlighted in the media and that is the fact that housing has collapsed because of massive leverage that masked weak income gains for over a decade. The housing crisis is largely a crisis of the middle class loss of income in the United States. Now that the toxic mortgages have shut down the leverage game we are left dealing with real income figures and the steady decline of home values is merely an adjustment to this new economic climate.

Follow the real estate agents

Source: DRE

I casually track the number of licensees in California that hold either a broker or real estate agent designation. From 1995 to 2002 the state had roughly 300,000 agents and brokers at any given point. At the peak in 2008 nearly 550,000 Californians had either a broker or agent license. This was an increase of 83 percent from 2002 to 2008. During this same time the population increased by 5 percent. This was the modern day California gold rush. The above chart shows what we all know and why all of us knew at least one family member that suddenly was a “real estate professional.” Many agents and brokers have dropped out of the field and are letting their licenses expire. If the market was so healthy, don’t you think these numbers would be going up as people enter the field?

I tend to believe that there are many fewer people that have their active license but have completely left the field. For mortgage brokers, especially with only government backed loans in many cases there are slim pickings and the days of large option ARM commissions are more of a dream. These were good paying jobs that only existed because of the housing bubble similar to tulip dealers hundreds of years ago. According to many agents it is always a good time to buy or sell a home (otherwise they don’t get paid). Yet many are leaving the field and this is largely due to the continually weak California housing market.

Shadow inventory delaying tactics

I love this chart because it really highlights the insanity of the market. Today it takes an average of 285 days for a home in California to foreclose! Last year it was 235 days. Foreclosure is a typically straight forward process. You miss three payments, you get a notice of default filed. After that the auction date and process to bank owned should be rather quick. In a healthy market this would typically happen in a steady stream. Why? Because people actually had large down payments and homes had equity. A bank would be glad to take the home back since they would then be able to sell it back on market. The owner in many cases had the option of selling because of equity. The incentives pushed the process to be quicker. Today with falling home prices and the incredible shadow inventory in California banks are dragging this process out as long as possible. We’ve recently seen indications that banks are now moving on releasing some of the shadow inventory to market so it’ll be interesting to see how this plays out in 2011. Yet I have a hard time understanding how any of the above indicators are somehow good for home values? The one important metric of household income is going sideways or down depending on what county we look at.

Real unemployment and underemployment

Source: Gallup

Gallup tracks the underemployment rate which is a better indicator of the health of the U.S. economy. The most recent data shows that 19.9 percent of Americans are underemployed. If we look at the recent job additions these are coming from lower paying sectors and keep in mind that if you land a job at the 99 Cent Store for 15 hours a week you are now considered employed in the headline BLS figures even if you want a full-time gig. How does this warrant sky high California home prices? The only way California home prices remain inflated at today’s levels is if we have another bubble similar to the technology or real estate boom and hundreds of thousands of high paying jobs are created. So far there is no indication of that so I’m not sure why some people think prices will be going up anytime soon.

Although the unemployment rate seems to be edging lower nationwide California is going in the opposite direction:



I think some people must think high unemployment and low wages are somehow good for housing prices. The large amount of shadow inventory and currently falling prices are an indication that they are not.

Top holders of U.S. debt





Source: Zero Hedge

The Federal Reserve is now the single biggest U.S. debt holder thanks to their absurd quantitative easing and mortgage buyback programs which basically did a clandestine banking bailout at the expense of the U.S. taxpayer. Those that point at the low cost of the bailout usually look at only TARP or some smoke and mirrors program when the true cost is hidden through artificially low rates, banking bailouts, and the fact that the Fed now owns the most debt as a single entity, even surpassing Mainland China. Of course the quality of life of most Americans will diminish because of this because it devalues the worth of your money. Keeping mortgage rates artificially low inflates housing values which actually hurts most Americans. This is money that can be used to pay for increasing college costs, energy bills, or rising medical care. High home values are only a way the Fed is trying to bailout the banking industry through more subtle ways. Look at the above chart and you realize we are merely going into debt to sustain the appearance of recovery.

By definition that which is unsustainable will eventually collapse or reverse course. Home prices need to reflect the household incomes of those in the immediate area. This applies for California just like it does in Canada or Australia. California faces severe price corrections ahead unless a giant new segment of the economy rises from the ashes and begins hiring people in droves and pays them excellent wages. Until we see that prices will keep moving lower.

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