Wednesday, July 06, 2005

California market safe until 2006?

Union Bank of California
said in a report today that there's no housing bubble in the Golden State, and that the market is so strong that it can coast for another year, according to a story today on the Reuters wire. In that story, Union Bank of California economist Keitaro Matsuda said:
"California is not where the big correction is likely to occur. How do I know that? Well, all recent housing crashes happened when a large number of jobs disappeared in local markets"

The story talks about an increase of jobs in California, but doesn't mention that most of those jobs offer low wages. Likewise, it doesn't get into the affordability issue. Few are asking the common sense question of where buyers are coming up with all this money? (They're borrowing beyond their means) Where's the massive growth in six-figure income jobs in Southern California? (It doesn't exist) Likewise, few are addressing the potential impact that flippers could have on the market. Consider this story from the LA Times on Sunday that said 25 percent of the homes sold in Bakersfield are being bought by investors looking to flip them for a profit. Granted, Bakersfield is still affordable by Los Angeles standards, with homes in the $220,000 range. But it may be a good bellweather for what's going on here as well. As mentioned in a prior post, a market that has 25 percent of its inventory tied up by investors could be heading for a fall:

… Buyers are not just retirees and young families priced out of the coastal housing market. About one of every four is a speculator, quick to flip properties for a profit, according to property appraiser Gary Crabtree, who regularly surveys the market. About half of the investors are from outside the Bakersfield area, he said.

"My flip of the week," said Crabtree, "is a house that closed escrow for $431,500 in April, was put back on the market, had three bidders, and is now in escrow again for $675,000."

A sign of how quickly the market is moving, Crabtree said, is that the average sales price of a single-family home in Bakersfield was $275,237 in May, and the average list price of 910 homes on the market last week was $387,911.

A San Francisco finance research firm, Loan Performance, recently ranked Bakersfield ninth in the nation for investor loans, which made up nearly 19% of all mortgages in the city in the first four months of this year.

I am no housing expert, but I have to wonder how likely it is that a person with a vested interest in something is going to be kindhearted enough to warn me off when the warning signs of a downturn appear. Immunity? Maybe they're right. We'll come back to this in 12 months, if not sooner.