The Housing Bubble Has Burst in California

The Housing Bubble Has Burst in California
By Joe DiPaola

Trying to sell your California home in the Summer of 2006? Actually, you are about a year too late. The following are my doom-n-gloom impressions of the California Home Resale Market, and the California economic outlook for the Summer and the rest of 2006.

Loss of Confidence in the Housing Market by Buyers:

Buyers have lost confidence in the housing market. Buyers seem unwilling to purchase, apparently because they do not believe that their savings/investment is protected. A $50,000-100,000 down payment on a $500,000 home can easily be wiped out a year from now by a rapidly declining market. So, a Buyer is only entering the market if the Seller has heavily discounted the price---enough to effectively insure against that kind of loss. Price, in my opinion, is the only thing driving the sale of a house in California today.

Increasing Panic By Sellers:

Yes, panic. Sellers are beginning to panic. They were used to seeing homes sold in 5-10 days. Now, even with signifiicant price reductions on their part, their homes are sometimes sitting unsold for 60 days or more.

Inventory is Building:

Inventory is building. In MLS regions where I do most of my selling, the ratio of homes coming on the market to homes being sold is 2.5:1 or 3:1, and growing.

Bottom-Feeder Buyers are Prowling:

From my own experience, I see "bottom-feeder buyers" on the increase---Buyers who mass-produce drastically low-ball offers to try to steal houses from Sellers. It only takes one distressed Seller out of 20-30 mass-produced offers for them to make a profit. And, if even one Seller accepts their offer, then it establishes a new comparable in that neighborhood, putting even more downward pressure on prices for everyone else trying to sell in that area.


There is Nothing Coming on the Near-Term Horizon To Improve the Situation

If anything, it is my opinion that conditions will worsen for Sellers. There is no bottom, or even temporary floor--in sight. The off-season is ahead. Demand continues to fall, while supply continues to increase. Interest rates continue to rise (although rates are, in my opinion, only a small part of the problem). Buyer and Investor confidence in the market continue to erode. Sellers are getting more desperate. The price reductions are getting bigger, and coming with greater frequency.

My California Home Sales Forecast

My California forecast for the rest of 2006 is for a much slower California economy, led by a rapidly declining housing market, and a declining stock market.

I am predicting a substantial decline in average resale home prices, and a substantial increase in time on the market.

It's hard to predict exact timing and duration, but I predict that the declines will generally occur in waves. For example, I see:
In Northern California:
- Sacramento and San Joaquin Counties declining rapidly
- Other Northern California Counties following suit
- San Francisco, San Mateo, Santa Clara declining more slowly
In Southern California:
-Riverside, San Bernadino, Orange and San Diego Counties declining rapidly
- Other Southern California Counties following suit
- Los Angeles County declining more slowly

I am also greatly concerned about the amount of "creative" home financing which has occurred wholesale over the past few years. A significant number of Sellers marginally qualified as Buyers themselves, have no equity in their homes, and/or have mortgage payments that are becoming increasingly difficult to make. The default/foreclosure rates could balloon---in direct proportion to the fall in housing prices.





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