In the housing market, home sales are a leading indicator as to where prices will head. The priciest county in Southern California is Orange County and it has now faced the worst start of a year since the Great Recession ended. Sales are low. Extremely low. We have more people in the county since that time but this is a question of affordability. And it is no surprise that we’ve already seen the median price of a home in Orange County dip year-over-year for the first time since the housing bubble burst. Yet the economy is great right? Things are looking fantastic, right? We have multiple bubbles going on right now with student loans, auto debt, and with housing. While the NINJA loans are gone we are now seeing the housing ATM picking up and people pulling every single penny to overextend themselves into properties on “secure” 30-year fixed rate mortgages. Now what happens when the inevitable next recession hits? Just take a look at home sales in Orange County.

A poor start to the year

The Orange County housing market is off to a very slow start. In the last couple of years, we have seen people scrimping by to get in and of course the housing appreciation train has gone into a ridiculous clip. When a home in California is appreciating at the rate of the annual median household income of a U.S. family that is simply nuts and unsustainable. In other words, you can buy a crap shack in California and just by default it will “appreciate” by more than the gross household income of a U.S. family that is actually working in the economy. Of course people get delusional and forget about the past. Take a look at this telling chart:

Source: OC Register

“Yes, only other two years — mid-crash 2008 and 2009 — have been worse in at least 32 years.

So it should come as no surprise that Orange County’s median sales price for all residences was down 2.1% in a year to $710,000. Prices rose in only 36 of 83 Orange County ZIP codes.”

As a leading indicator, this home sales report is telling especially since the stock market is blistering hot and frothy and all the talk of being tough on China doesn’t really help Orange County since many investors from China purchase in the area.

This correction is bound to happen and Californians are one of the most cash strapped buyers in the nation. In Orange County with a median home costing $710,000 a nice chunk of net income is going to pay for that mortgage and all other associated expenses (e.g., taxes, insurance, maintenance, etc.). Then factor in costs like daycare when people grow their families and you realize people are one paycheck away from missing payments even with a healthy household income. The more troubling thing about the decline in home sales is that by all accounts, things look great in Orange County:

Looks like the last time we were in this range was in 2007 and 2008. And here is the thing, in Orange County many people are tied to the real estate industry for work: commercial builders, new home building is very high right now, leasing, financing, equity being tapped out of homes, people feeling wealthy buying expensive goods, and you get this entire eco-system that depends on housing going up. But as the narrative now changes, what do you say when year-over-year prices are going down and sales are near Great Recession levels. Buy now or be priced out forever? And these are the good times.

[stock chart]

The stock market is up 326 percent since it bottomed in 2009. That is a nice run. Yet somehow, housing can’t continue to go up even with all of this good news because it is inflated overall. Why? Because we are in a low interest rate trap. We are now addicted to this low rate environment. But we’ve maxed it out short of no-doc no-income verification loans entering the market or incomes shooting up dramatically. Housing sales are pointing to a market that now looks frothy.



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