Posted: 11 Mar 2011 02:30 AM PST
High house prices, high unemployment, and a state budget shortfall have contributed to out-migration to other states.
Irvine Home Address ... 12 VENEZIA AISLE Irvine, CA 92606
Are they? Are the people still coming? Will we form enough households to create the demand necessary to sustain current pricing given the problems in California?
Does today's topic seem familiar? If you were reading during the Christmas holidays, you may remember With people leaving Orange County, who will buy our overpriced homes?
Today we look at a different dataset showing the same basic pattern: people with a choice about where they live are choosing to live outside of California. Population is still growing because births exceed the outmigration, but newborns don't buy homes, and those who need work to buy homes are leaving the state due to our high unemployment and high cost of living.
Source: USA TODAY
California house prices went up so fast during the last 40 years at different times through a combination of wage growth and irrational exuberance. Even if every market were at rental parity and stayed there, many California markets would have outperformed the nation because wage growth outperformed the nation.
High wages coupled with robust employment growth drives a great deal of household formation and demand for housing. The California story for the last 40 years has been, off and on, boom and bust, with an undercurrent of strong wage growth. The wage growth is what makes the real estate engine purr. It corrects all mistakes. Overpaying is only a problem for those who can't wait for house prices to come back, right?
Without wage growth, homebuilding grinds to a halt, household formation slows, and home prices stagnate.
What is there to attract outsiders to California? Yes, the weather is great, but house prices are double or more the cost of other areas of the country, job prospects are bleak, and state government is dysfunctional.
So much for that above-average wage growth.
The FCBs will save us. Irvine will become a hub of savvy buyers who seek to outbid each other with cash for an Irvine tract home. Forget posh condos in Manhattan when you can invest in single-family detached homes in Irvine.
The problem with being one of the highest prices markets in the country is that every nearby market pulls you down by the substitution effect. The high prices in coastal California pushes growth inland as buyers substitute driving distance for cheaper housing. Cheaper substitutes in Riverside County limit price increases in Orange County.
Unfortunately, much of the housing demand of 2003-2006 was artificial demand. When lenders lowered standards to qualify more borrowers, those borrowers bought a house and stimulated a great deal of household formation. With access to cheap money gone, the demand that was pulled forward is now absent from the market.
For as bad as things look for California, this crisis too shall pass. The idea of a "new normal" is the cultural equivalent of the The Unceremonious Fall from Entitlement. Everyone has to adjust to a lifestyle within their means. The days of endless Ponzi borrowing are not coming back soon -- they may come back -- but not anytime soon.
We have done nothing of substance to prevent desire for mortgage equity withdrawal from Inflating another housing bubble. Most buyers of California real estate at least acknowledge it is a distinct possibility that the market may go insane, their home values could go orbital, and they may be offered free money to spend. I would argue that many buyers have this expectation.
If wage growth does not match its historic stellar performance, real estate appreciation will not either. An entire generation is overpaying in anticipation of appreciation that may not materialize.
Bringing cash to the closing?
The owner of today's featured property paid $579,000 on 5/5/2004. He used a $452,000 first mortgage, a $113,000 second mortgage, and a $19,000 down payment. On 6/8/2006 he refinanced with a $560,000 first mortgage which represents a $5,000 reduction in his mortgage balance. For his amazing mortgage management skills, I am giving him a B on the HELOC abuse grading system.
He is trying to get out for a price near his 2004 purchase price. Ordinarily, you would think that selling seven years after buying a property you would be able to sell it without losing money, but that is not the case for this property.
Do you see the face looking down on the kitchen nook table? I think it's frightened by the price.
Irvine Home Address ... 12 VENEZIA AISLE Irvine, CA 92606
Best located home in Corte Bella! Corner unit spaced away from surrounding buildings which gives this home much privacy. Excellent views of pool, fountains, and sculpture garden. Unobstructed northern and eastern exposure give this home unequaled brightness and privacy. Sound of waterfalls creates resort feel. 3 Bedrooms Up, den, office, gym or 4th bedroom downstairs. Many upgrades including maple hardwood floors, granite counter tops, plantation shutters, surround sound, cental vacum. Former model home with very high ceilings. Gated community with no Mello Roos. Black and white race deck checkered tiles in garage. Beautiful Italian design. Play ground, tennis courts, soccer field, baseball diamond, hockey court, basketball court all within a 1 minute walk. Unit will be available for viewing by appointment only, owner is agent.
Some British humor for you. It's painful to watch:
Thank you for reading the Irvine Housing Blog.
Astutely observing the housing market and combating California Kool-Aid since 2006.
Have a great weekend,
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