The Housing Bubble

Reports from California show the precarious nature of that states’ housing bubble. “It’s unclear what lies ahead for housing, which is a state of flux. Residential permits statewide were down 2.7 percent last year. In San Diego County, permit activity dropped 12.2 percent. Among the bigger cities in the county, San Diego and Oceanside were off more than 6 percent. Chula Vista was down 51.1 percent.”

“University of San Diego economist Alan Gin predicted that fewer homes permitted in the state means that the 6.8 percent increase in California construction jobs last year will not be equaled. ‘That’s a worry,’ he said. ‘Construction has been a big job producer. We added 7,200 (San Diego construction) jobs in 2004 and probably over 5,000 in 2005.’ A bigger jobs hit is probably among real estate agents, mortgage brokers and other workers in housing services, he said: ‘I think there will be a shakeout in that industry.’”

“UCSD economist Ross Starr said the wild card in the local housing market is the financial health of recent home buyers who took out adjustable-rate mortgages with monthly payments set to rise substantially. ‘The question is will there be some panic selling by buyers who bought during 2002-2003 and can’t afford to hold on,’ Starr said. ‘The answer is nobody really knows the answer to that question.’”

“The December median home sales price in the Coachella Valley was $390,000, down slightly from the record $400,000 posted in November. Experts say the valley is in no immediate danger of dealing with a foreclosure crisis, as local prices continue to appreciate even as unsold resale inventory rises.”

“Buyers have relied increasingly on nontraditional loans to be able to buy into the local market amid plunging affordability. The loans have helped many, including investors like Danielle Galland of Desert Hot Springs. She bought a home in that city recently with an interest-only loan with payments scheduled to jump in two years. ‘The payments are scheduled to go up in two years, but I plan to sell before then,’ she said.”

“One red flag is that the valley’s notices of default, sent by lending institutions when payments are overdue, totaled 816 in 2005. That was up 29 percent from the 632 notices seen in 2004, and reversed a three-year trend of declines.”

“Longtime valley banker William Powers said while his bank does not offer them, many valley buyers have been able to save on their monthly payments initially by opting for non-traditional loan packages. The upside is that it allowed many more people to purchase homes than would otherwise have been possible. The downside is that when their introductory rates convert to adjustable, some will find that they really weren’t able to afford their properties long term.”

“The reason: They’ve already spent their monthly-payment savings on other items, like cars, big-screen TVs and upscale furnishings. If those owners find themselves with default or foreclosure notices, and home values aren’t rising as they are today, some may unload their homes at a loss or below-market value to pay off their loans. That could put a drag on the selling prices of non-distressed homes in the same neighborhoods.”

“‘As a homeowner, that wouldn’t make me very happy,’ Powers said.”

“As an indicator of what could be at stake nationally, there is currently between $1.5 trillion and $2 trillion tied up in what are known as interest-only loans. Currently, interest-only loans are more popular in the inland Riverside-San Bernardino metro area, which includes the valley, than in California and the nation. 39.3 percent of all inland home loans were interest-only in 2005, up from just 3.7 percent in 2000.”

“The California percentage was 34.3 (up from 1.4 percent). The national percentage was 24 percent (up from 1.1 percent). According to recent figures from the California Association of Realtors, only 10 percent of valley households can afford to purchase the median-priced valley home based on working income.”

“‘Our house is almost paid off, and we’re on a fixed-rate loan. We want to sell the house eventually and retire, but where? Not in California,’ said Colleen Bliss, (a) Calimesa resident visiting Palm Springs.”