Foreclosures: A Good Thing for CA Economy?
Foreclosures: A Good Thing for CA Economy?
The reality is, California has the most crowded housing situation in the nation. There simply are not enough homes in the state’s housing stock for all its inhabitants. So something has to give. At least part of the solution in times like this is foreclosures. They help, according to Dr. Christopher Thornberg.
Speaking to members of the Real Estate Research Council of Southern California (RERCSC) last week, Thornberg, a principal of Los Angeles-based Beacon Economics, noted the inventory of foreclosed homes around the state is mounting; approximately two-thirds of them being bank-owned properties (REOs).
“It turns out we had a real estate bubble,” Thornberg said. “We had a 140 percent run-up in nine years; 10 times the long-run average.”
Citing the Case-Shiller Price Index for the Los Angeles metro area as an example, Thornberg explained that in 1999 the median price of an existing home was $199,000, which required 35.2 percent of the average homeowner’s income to afford the costs involved. In 2006, on the other hand, the average home had a median price of $577,000, which cost the average homeowner 70.7 percent of his or her income.
“Prices had to fall 40 percent to get back to a level of affordability,” he said. “Prices are still going to fall, probably another 20 percent and then they’re going to rise. Low home prices are good in the long run.”
While he does not believe that the wave of foreclosures taking place can truly be stopped by any government policy, Thornberg has noticed at least a slowdown in the volume of Notices of Default being recorded.
The three reasons he sees for such a slowdown are:
1. The banks can’t handle the workload
2. The banks are holding back because they want to wait and see what the Obama bailout package is going to do, and they’re looking for a payoff
3. Why have a foreclosed house that gets destroyed and then is left vacant?
Overall, Thornberg believes California’s housing crisis is close to the bottom, but there is still a huge mess to clean up. Fire sales will create opportunities, with the end of the year being a good time to buy a home.
“Wait for it!,” he said.
To see Thornberg’s entire slide presentation to the RERCSC, click here.