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Dr. Housing Bubble Blog on Emerging Economic Trends

02 Jun

The Dr. give the latest blow by blow on what is really moving and not moving in the economic world of consumers in California -

Today there is more debt than equity in the real estate market…

3 emerging economic trends – Buy for less at the Beverly Connection? Consumer prices going up in nearly every category year over year. Home-debtor epiphany.

from Dr. Housing Bubble Blog by drhousingbubble

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The economic crisis is changing the way people confront reality.  Some are taking the new era of finance in stride while others try to cling to better days filled with easy flowing debt.  Those days are long gone at least when it comes to the typical American consumer.  Banks are betting taxpayer money on the stock market and doing extremely well with all the enormous volatility.  It would seem that banks have decided to forget about all the toxic residential mortgages on their balance sheet and took a giant broom to sweep under the rug trillions of dollars in commercial real estate.  On the flip side you have many homeowners unable or unwilling to pay their mortgage but enjoying the new short-term freedom of having no housing payment.  It feels as if someone had pushed the big red reset button on common financial prudence.

I’ve noticed a few trends here in Southern California emerging from this crisis.  The public seems oblivious for the most part that the state is facing a multi-billion dollar deficit.  Most have a sense that the economy isn’t healthy yet many are trying to spend with substitutes trying to keep the pretense going.

Buy clothes for less in a million dollar zip code

I don’t have an enormous wardrobe but do like buying good quality items that I can wear for a long time.  Why buy a cheap $5 shirt every month when you can get a good one to last you a year for $40?  A store that has good quality discount clothes is Ross.  I expect to find this store in most middle-class neighborhoods.  Having a Ross at the Beverly Connection threw me off but more so all the traffic.  Keep in mind this zip code has a median home price of over $1 million.  The motto of Ross is “Dress for Less” and apparently this store was filled with foot traffic.

The California housing market might be in the toilet but there is no reason to dress like crap because of it, no matter where you live.  I find trends like this fascinating.  This Memorial Day weekend turned out to be a bust for the box office with movies having their worst holiday performance since 1994.  Yet Netflix is pulling in solid revenues as a cheap economic substitute.  Instead of buying that Calvin Klein for retail, why not get it at a discount?  Instead of watching a $15 movie, why not pay $9 a month and watch all the movies you want at home?  People are clearly voting with their wallets for cheaper alternatives.

Consumer prices still going up

Notice how the cost of fuel at the gas pump is still over $3 here in California?  Energy costs increased over 18 percent on a year over year basis as of the end of April.  Virtually every category except apparel (hello Ross) and shelter (hello California housing bust) have actually increased on a year over year basis.  This is why most working to middle class Americans feel the pinch on a daily basis.  Many fill up their cars on a weekly basis while paying electricity and gas bills each month.  This is felt on a continual basis.  We all eat on a daily basis and food costs have also gone up.  Rents at least in California have fallen over this time.  It is an interesting dynamic that the biggest ticket item in homes has fallen yet every other category seems to be increasing.  Since owner’s equivalent of rent is a large item on the CPI this has kept the overall rate of inflation low over the past year.

The massive amounts of toxic mortgages in the state has clearly impacted home prices.  Home buyers are no longer capable of pushing home prices higher with exotic loans.  Since consumers are clearly pulling back it should be no surprise that the biggest purchase most will ever make is being more modest as well.

What do you call a homeowner with no equity?  A renter with an albatross

Source:  oftwominds

It is a stunning fact that today there is more mortgage debt than actual equity in residential real estate.  In fact, we didn’t cross this point until 2006.  For over 50 years this had never happened.  American homeowners actually had more equity than debt.  Even during the massive housing bubble from 2000 to 2007 the mortgage equity withdrawal machine allowed Americans to tap into their homes and treat them as some sort of makeshift ATM.  The above chart clearly shows this trend.

Here is some interesting data on California:

Owner-occupied:                             6.9 million

Homes with a mortgage:              5.2 million

Underwater homes:                       1.768 (million) – 34% negative equity

Renter-occupied:                             5.2 million

California is a big renter state.  What many are finding out is that owning a home with no equity is worse than renting.  34% of California mortgage holders are in this position.  I actually see this position below renting because you have little power of mobility.  You can’t sell unless you come with money to the table or strategically default.  If you rent, you stay for your lease and then move.  Many are waking up to the mobility provided by leasing.  People forget that California has a large renting population (43%).  This is based on 2008 Census data and I can imagine this only increased when data is released for 2009 in September.

Some areas like Stockton California have negative equity rates of 65%!  Negative equity is the number one reason in predicting future foreclosure and it should be obvious why.  If you had equity, you would simply sell the home.  Clearly that is an option many have now lost in this current crisis.

Part of what made housing such a viable option in the past is the desire to grow equity in the home.  This was achieved through paying down the principal on the loan.  With option ARMs and interest only loans this was an afterthought.  Paying down principal was secondary to appreciation and delusional appreciation pipedreams.  Instead of earning equity through saving and actually paying down the principal the new equation bet on pure appreciation.  This was purely speculation and if this were in some high flying stock sector we could sit back and discuss the giant mania with little repercussion to the real economy.  Instead, we turned the number one asset for Americans, the home into one giant money piñata and beat every nickel of equity out of it.  And we wonder why people living in million dollar homes now need to buy discounted clothes?

 

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