Posted on 25 May 2010.
Wish he can do both New York and Florida…would be interesting!
How many real estate agents and brokers does it take to sell a California home? 2 ¼ if we look at current inventory levels and the amount of Californians with a real estate or broker’s license. One of the early observations of the housing bubble was how much money was being spent in the economy because of high wage California housing bubble jobs. Toxic loan after toxic loan provided wonderful commission checks but also provided the state with a nice chunk of tax revenue. Year after year this went on. Our fate has been intertwined with real estate and since real estate has busted so has ourstate economy. I remember a few colleagues that were pulling in high six-figure incomes as mortgage brokers and real estate agents and were spending every dime as quickly as it came in. Many have downsized drastically and don’t have a penny to their name. Ironically many of these people drank their own Kool-Aid and bought million dollar homes with the same mortgage sewage they were passing onto their clients. A few are now in bankruptcy and many have lost or will lose their homes.
California is likely to face a lost decade in housing. Do I mean from 2000 to 2010? In some areas we have already reached a lost decade. Yet many areas will face their lost decade from 2010 to 2020. Here are 5 reasons why California real estate will have a decade of slow or no growth ahead:
Reason #1 – High paying finance and real estate jobs are gone
I went ahead and compiled 14 years of license and broker data for California above. From 1996 to 2002 we averaged approximately 300,000 active licensees in the state. This was before the bubble ramped up. We reached a peak in 2008 of 549,000 active licensees. Today that number is down to 493,000 and is continuing to fall as many simply let their license expire. Even with recent sales increases we are still close to half the volume of the bubble years. Plus, home prices are half of what their peak values were. So even basic math will tell you that at the very least, half of income in this industry is gone (for example the 5 to 6 percent agent cut is based on the sale price). Then on the lending side you have 96.5% of loans being government backed and these don’t provide the nice kickbacks that the option ARMs did for example. In other words, high income no GED required jobs are now gone. Even those with industry specific degrees and training are finding it hard to get good jobs in today’s economy.
And many other jobs tied to the FIRE side of California employment and construction took big hits:
These were good paying jobs that are now gone. Many of these jobs depended on the perpetual growth of the housing bubble. But even as we will see with inventory levels, do we still have a bubble in this industry?
Reason #2 – Too little inventory and sales for the amount of workers
I went ahead and took a major snapshot of how much MLS inventory is currently listed for public view in California. Although inventory is spiking, you start seeing issues that are plaguing the industry:
Since February of this year California has added 64,500 homes to the MLS, an increase of 41 percent. This is a massive jump. Part of this jump aligns perfectly with the failure of HAMP and more banks pushing inventory onto the market.
But let us use that current inventory number and run a quick analysis:
493,576 real estate agents and brokers / 219,217 homes on the CA MLS = 2 ¼ agents and brokers for each home
I find the above fascinating. We have close to 500,000 licensed agents and brokers for 219,000 homes on the market. And you wonder why we have a problem? This is like going to a used car lot with 20 cars and finding 50 sales representatives. However like many things in life, I believe that the Pareto principle applies here as well. That is, 80 percent of sales is likely to come from 20 percent of those with active licenses.
Although the shadow inventory is much larger than the 219,000 homes on the MLS, agents and brokers only make money when they sell. And banks don’t seem in a big hurry to move the entire inventory out at once. In other words, we have years of junk built up in the pipeline with wages slashed.
Reason #3 – California budget and revenues shattered
If you want to see a problem in the making look at this:
The state for the fiscal year of 2007-08 collected over $101 billion. How do things look today?
For the fiscal year that is coming to an end, we are projected to bring in $81 billion. We are short by $20 billion and this includes every kind of tax increase you can imagine. This does little considering half of the state revenues come from personal income taxes and many of those high paying bubble jobs (see above) are now gone. Yet the state kept spending more and more assuming that a Ponzi like income stream was going to come in forever. That is not the case as we are now painfully finding out so we must adjust.
The Legislative Analyst Office (LAO) is projecting problems well into 2015. Another issue that the state will have to contend with is high pension costs of soon to retire baby boomers. Recently CalPERs announced that the state will need to pitch in $700 million to cover its poor bets. They are pulling back for the moment:
“(LA Times) Facing political fire, the state’s largest public pension fund Wednesday retreated for a month from a plan to approve a $700-million increase in taxpayer contributions it gets from the state and about 1,000 school districts.
State Treasurer Bill Lockyer, a member of the California Public Employees’ Retirement System board, said the fund needs to assess the consequences of the huge hike on California at a time when the state faces an estimated $19-billion budget deficit.”
You can rest assured that there will be some serious battles on this front for years to come.
Reason #4 – Shadow inventory
The Wall Street Journal put together data regarding shadow inventory that we already knew about. California ranks near the top of shady banks and home squatters that are simply staying put and not paying their mortgage:
This is just nuts. In California 7 percent of loans that are 90 days overdue are not in foreclosure! What is even more stunning is the nationwide amount of people living in homes with no payment and foreclosure for 2 years! This is a slap in the face of every prudent middle class American. And the idea of poor homeowners is nonsense here in California. You have folks living in prime locations not paying their mortgage who can easily afford a nice rental. But they’ll sit it out while banks sit back and suck on thetaxpayer gravy train. This data merely confirms what we already know. The state is plagued with delinquent loans. In fact, 15 percent of all California loans are 30+ days late or worse.
Reason #5 – Consumer psychology and jobs
The mantra that real estate prices never fall is completely shattered for an entire generation of Americans. Those who lived through the Great Depression are largely absent from our current economy and can’t share their wisdom. And given the preference of Americans to watch Dancing with the Stars instead of reading some history, many have forgotten that real estate can crash and crash hard. But if history is any guide, we will have a generation of Americans who are more cautious and thus will put a lid on any mega jumps in appreciation for the next decade.
On Friday the California unemployment rate came out and we are still at a record high of 12.6 percent. Adjusted for the underemployment rate we are closer to 23 percent. Even the running average at the BLS shows us over 21 percent:
Keep in mind this is a one year rolling average so this will only move higher as we have been at peak levels for many months. This also goes back to my earlier reasons for a lost decade in home prices. Those high paying jobs are gone. You can only purchase a home by what your income can support. A large number of those depended on toxic mortgagesthat were easy to churn on a short notice. After all, giving NINJA loans with no verification allowed seedy mortgage brokers to turn out loan after loan. Now even with lax lending inFHA insured loans, at least they have to verify income. As it turns out, there simply isn’t that many that can qualify in California.
I see a sideways moving decade for California real estate. And for the next one or two years prices will start trending lower again as the Alt-A and option ARM waves hit and the gimmick parade starts running out. You can only keep a lid on corruption for so long. The “once in a century” problems now seem to be hitting every month. A near 1,000 point drop in the Dow, the trillion dollar Euro bailout, and other mega events will come quicker as a reckoning day will hit. All it takes is a failed Treasury auction and you can kiss cheap mortgage rates goodbye.