The foreclosure crisis if you want to frame it differently in your mind is really a crisis of overpriced housing. The only reason we have such a large number of foreclosures flooding bank balance sheets is because the market cannot support the inflated prices that banks would like to get on foreclosed properties. It is a crisis of delusion. Foreclosure isn’t a new thing. In the past, a bank would be quick to take a home back because it was likely that they would find a willing buyer in the market at a reasonable price to mitigate a loss. It was part of the calculus of banking. However today you have banks holding onto a flood of shadow inventory while trying to gimmick the system to bolster prices. Yet even a historically low mortgage rate cannot entice buyers who are broke or unwilling to go into massive debt. Today we are going to examine 13 of the most overpriced zip codes in Los Angeles County. Some might be surprised by which zip codes pop up.

Notice of defaults and foreclosures

Before we examine the zip codes we should look at how the foreclosure pipeline built up in California:

Source: DataQuick

This is an important chart to understand. At any given point in history you will always have a number of households who are unable to pay their mortgage because of a job loss, divorce, or other financial reasons. Yet this segment of the housing market was so small, that notice of defaults didn’t always make their way through the entire process. Why? Because in a more stable market if you had problems paying your mortgage, it is likely you have 6 to 10 percent equity to sell your home and cover your costs. In essence you can sell and break even or even pocket a bit of money. So it was unusual aside from pocket regional bubbles for banks to deal with a flood of foreclosures and if they did take a home back, the losses wouldn’t be financially catastrophic. The current issue we face today is the massive amount of toxic low down to no money down mortgages that are massively underwater. Even “safe” loans like FHA insured loans are now massively underwater because people bought while home prices were still falling. There is no market to sell a home that is 20, 30, or even 40 percent underwater.

Crunch the numbers for 2006 for example at the height of the bubble. In Q2 of 2006 there were 20,752 notice of defaults filed yet only 1,936 trustee deeds recorded. If you want to conceptualize this into a ratio, in Q2 of 2006 trustee deeds were slightly over 9 percent of the notice of defaults filed in the quarter. But look at the current data:

Q2 of 2010

Notice of defaults: 70,051 Trustee deeds recorded: 47,669

Now what you have is an elevated amount of notice of defaults plus a large number of homes being taken back. As things stand, this number is now up to 67 percent if we use the previous ratio. But keep in mind this is merely one way of looking at this. Simply looking at the raw numbers NODs are 3.5 times higher today than they were in Q2 of 2006 and trustee deeds recorded are 24 times higher. That is the heart of the problem. Also keep in mind that this foreclosure pipeline is artificially low given that many banks have put on acme style brakes even before they file the NOD thus artificially keeping the pool lower. Like the disclaimer on your car mirror, things are worse than they appear. The housing market is in a mess because prices are still too high. Unfortunately for California this is the reality and either income needs to jump up or prices need to come down. The math is rather straight forward and the Federal Reserve would like to believe that simply having a low interest rate is the solution to the entire crisis. But would you buy a BMW for $60,000 just because the interest rate was 0 percent? Many have done this but this isn’t exactly a prudent way to live and this crisis is a symptom of this massive debt behavior and financing the present with maximum leverage on future income.

Some argue that housing in California has always been expensive. First, this is not true. Maybe in their short memory this is the case but looking at historical data doesn’t show this. Also, have they not paid attention to the state budget and the fact that 23 percent of Californians are either unemployed or underemployed? In fact, California up until the 1970s was relatively affordable. I pulled data from the 1940s to 2010:

In 1960 dividing the median California home price by the median household income gave us a number of 2.73. In 1970, this number was down to 2.48 so it actually got cheaper relative to income over an entire decade. Home prices went up but so did incomes. Interestingly enough if we merely go by decade cutoffs, 1990 turned out to be a high peak when the number hit 5.87 for California. Today that figure is at 4.33 and nationwide over the long-run the figure has been closer to 3. In other words 1960 and 1970 reflected a more sensible price of housing for California.

Some only think in short-term horizons so they tend to only look back to 2000 and start there. Keep in mind that in the 1970s the consumer debt bubble took off. Can it be that this has been a bubble in the making for multiple decades? It sure seems that way. We will reach a point in the next few years where statewide we will experience a nominal lost decade for California housing prices (this is already the case on a real inflation adjusted basis).

Every other area is in a bubble except my neighborhood

I love the anecdotal argument that many communities will never adjust because everyone makes $250,000 a year and everyone has a foreign automobile. Unfortunately the data doesn’t support this argument. You will always have hyper-elite neighborhoods like Bel-Air or La Jolla but Pasadena and Culver City although nice, do not fall in this category. Income tax data does not justify the giant leap in prices and many of these communities are very much in bubbles today. To appease those that only look to the early 2000s as the start of all things related to California housing, let us carefully parse 13 zip codes that are clearly in housing bubbles:

The winner of the most overpriced zip code in Los Angeles County at least for September of 2010 is Encino (91436). Those that argue no correction is happening simply aren’t paying attention. Encino had a median home price of $1.28 million as of December 2009. The last figure for September of 2010 shows that the median price is now down to $926,000. In less than one year prices have fallen by $361,000 (a drop of 28 percent). How can someone argue the correction isn’t hitting in these markets? But even with irrefutable data, the median home price of Encino back in January of 2001 was $405,000. So prices today are still double what they were nine years ago. Are prices cheap in Encino? The number of sales in September (10) is a big decline from those fence sitters that jumped in December of 2009 at $1.28 million and bought 18 homes in this zip code. But this is only one of the many areas facing this kind of correction.

Take a look at San Marino (91108). In January of 2001 the median price was $610,000. Today the median price is up to $1.79 million! Prices have nearly tripled in this zip code. Or take a look at Culver City (90232) which had a median home price of $317,000 back in 2001. In December 2009 that price was still up at $769,000 but last month it dropped to $665,000. I think a $100,000 cut in less than one year is significant. Look at Arcadia that has seen prices fall by $132,000 in less than one year yet is still double the price of what it was in 2001. Think the correction is done just because people have leased foreign vehicles in their driveways? The tax and income data tells us many people are living on fumes powered by debt, not real wealth.

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information.