Happy 5th Birthday Housing Crash!

Though home prices didn’t start turning down until 2006, the housing market begin it’s downturn in the Fall of 2005. Back then, I never would have guessed that, after five years, we would still have so many foreclosures still ahead of us.

Changing Winds

In the Summer of 2005, the housing market frenzy was palpable. People were camping out for new home releases and nearly every home on the market was sold with multiple-offers. Everyone was trying to buy investment property: hair-dressers, cab-drivers, maids, even college kids. Both inside the real estate community and out on the streets, nobody doubted that home prices would keep rising. Everyone was making money.

I was selling real estate in Modesto, where home prices had doubled since 2002 and quadrupled since the mid 90s. My wife and I bought an older, modest, 3-bedroom there home at the end of 2003, for $271,000.

Modesto, today, is one of the housing bubble’s poster-children. But back then, outside money was flowing into the city. Bay Area commuters were buying $600,000 McMansions that would have cost seven-figures closer to the Bay. And investment money, both from the Bay Area and overseas, couldn’t buy Central Valley housing fast enough.  Developers were gobbling up farmland at $500,000-$600,000 an acre and cities were expanding as quickly as they could.

And, though nobody talked about it much, fraud was everywhere. It seemed like everyone used no-doc “liar” loans and straw-buyers were everywhere. Everyone, it seemed, used Countrywide, New Century, or WaMu.

Readers of this blog know that I’m a data geek; and I studied the bubble forming just as intensely as I’ve studied it’s bursting. Just before Labor Day in 2005, I watched a couple of $300,000 listings hit the market that should have sold immediately. They didn’t. I talked with a client of mine who had been looking in that price range and he said he wanted to “wait and see what happens.” Right then, I knew it was over.

The wind had begun to blow the other direction. Almost overnight, the housing bubble began to deflate.

Supply Overtaking Demand

Even though the market began to change in the Fall of 2005, home prices didn’t peak in most parts of California until the Spring of 2006. Price follows volume. It simply took 6-8 months of lower demand for the inventory balance to stabilize, then eventually swing to an oversupply and falling home prices.

The turning point seemed to come once a neighborhood passed about 3-months of inventory. That is, take the number of homes for sale, divided by the number actually sold (not pending) in the last 30 days.  Below 3-months, prices still rose. Above 3-months, they fell. Way above 3-months, they fell faster.

NOTE: Nationally, home prices are stable if there is a 4-5 month supply of homes. Here in California, prices fall sooner, probably because Sellers here expect to sell more quickly than in other places.

It’s Now or Never

Seeing the writing on the wall, my wife and I quickly put our home on the market, sold it for $385,000, and moved to Danville at the end of 2005, where we’ve been happily renting ever since. At the time, I figured that prices would fall nearly as quickly as they rose and that homes in both Danville and Modesto would fall by half or so within 3-4 years. I figured it would be painful, be we would all survive.

I was right about Modesto, but high-end communities like Danville rallied on for another year.

High, Sticky Prices

Danville, Alamo, and other high-end Bay Area communities held their home prices up all the way into 2007 before the declines began. Maybe the Kool-Aid was more potent, maybe maybe homeowners had higher credit card limits to mask their problems…certainly there is a lot more legitimate wealth here than in the Central Valley.

People here felt that this area was different: those other areas were subprime while we are Alt-A!

By 2008, high-end home prices were undeniably in decline, perhaps off 20% or more from the peak and falling. By contrast, Modesto, as well as all of the similar Bay Area towns like Antioch, Brentwood, and Concord, were down an incredible 60-70%.

Than, in the Fall of 2008, the Government began to intervene.

The first foreclosure moratorium happened in August of 2008 and carried through the Holidays. Through a combination of official and unofficial moratoria, and various “extend and pretend” policies, banks still aren’t foreclosing even today.

As a result, the lower-end communities have seen their housing supply fall back under 3-months and prices are up 20+% off of the lows. High-end communities like Danville, where the average price is probably down 30%-35% from the peak, have seen prices stay mostly flat for the last year.

Most of the high-end homes that would have been foreclosed and sold as REOs or listed as short sales are instead stuck in shadow inventory purgatory. Some are attempting modifications. Others are simply squatting and enjoying living here for free.

Demand is low, but supply is low as well. The high-end market is neither getting better or worse, just wasting time.

I don’t know where high-end prices will go. I can say that I saw a home near where I live that I liked very much: 2,400 on a big lot and in good condition. At the peak, it could have been $1.1M-$1.2M. Recently, it was listed for about $800,000. But, in 1998 (also in great condition), it sold for  $390,000.

Eye of The Storm

California’s Housing Market is enjoying the Eye of The Storm. We were battered from 2005-2009, but have enjoyed a Government-induced break for the last year.

Looking forward, we have massive storm clouds approaching. The shadow inventory is huge. Housing Supply is growing while Demand is falling. Unemployment is getting worse, not better. Social unrest is rising around the globe. Iran’s got nukes. And, the recession is already double-dipping, with potentially-negative GDP in Q3.

What’s more, NAR is about to release July existing home sales which should massively disappoint and push the national months-of-housing-supply well into the double digits. This should sharply darken social mood towards housing and homeownership going forward.

The Government will do everything it can to bask in the Eye a little longer – at least through the elections – but eventually it will start rain again.

How Far We’ve Come

The shadow inventory is now estimated to be around 7 million homes. But nobody can really say because, if home prices begin to spiral downwards again, the number cold balloon much higher. Home prices, and possibly our entire economy, will not hit bottom until we undo all of the real estate transactions that never should have happened.

So, after 5 years, how much progress have we made?

My best guess, to use a baseball analogy, is that we’re in the third inning. At this rate, it could be decades before this housing mess is behind us.