The California Real Estate Bubble

(Peter Schiff On Cavuto On Business April 2, 2008) 

 

Global Economist Peter Schiff Discusses How Far California Home Prices
Will Drop From Peak Prices Seen During 2004-2006

    We are currently in the midst of what will easily become a 50% or more decline in property values as prices revert back to the traditional multiple of three to four times the buyers annual household income. The out of control real estate bubble that was fueled by record low interest rates and loans that encouraged buying with no down payment, stated incomes and short term teaser rates that included pre-payment penalties has done its damage. The recent credit crunch has caused for the no down and stated income parts of the equation to virtually disappear overnight meaning that any new purchases require a down payment and most likely a fully documented income. As a result, very few people can qualify to purchase or refinance under the current circumstances which is resulting in an explosion of unsold inventory. Most buyers that purchased between 2004-2006 in California paid outrageously high prices and were directed into loans with temporary teaser rates that are now in the process of resetting causing payment shock of 30% or more every 6 months. Most of these individuals cannot afford their increased payment and they are unable to refinance due to their negative equity position or due to the newly tightened lending standards so they are being forced into selling to avoid default. Unfortunately, most borrowers that either purchased or refinanced during the 2004-2006 real estate mania are finding that their property value has gone below what they currently owe in mortgages forcing them to either walk away from their home and allowing the bank to foreclose, asking the lender to participate in a Short Sale or the buyer must pay down enough of the balance owed in order to refinance into an 80% LTV 30 year fixed mortgage.

 

    Many of these homes are now on the Multiple Listing Service as Short Sales until they are sold. If they are not sold as a Short Sale and do not get reinstated once in default the properties will ultimately go through the Trustees Sale process. During the Trustee Sale the property is sold on the courthouse steps to highest bidder unless the highest bid does not meet the lenders minimum requirement for sale. If the property does not get sold at the Auction it reverts back to the lender and becomes a bank-owned property that the lender places on the market at a price often much lower than the neighboring properties which causes excessive inventory as well as a downward pressure on prices. 

 

    This is causing the inventory throughout California to explode as those who can qualify with full documentation loans do not want to buy homes while prices decline in the midst of overwhelming negative media attention while those First Time Buyers who need to buy because their family has outgrown their apartment or rental home does not have the income, down payment or credit score to purchase a home in California. The excess inventory and lack of demand is causing a serious decline in real estate prices, and it seems as though we may continue to see a serious decline until we reach the affordability point where the typical buyer can purchase a house based on traditional lending standards which include  full documentation of income.