When I hear about arguments about the triumphant return of housing values I simply look at the above chart and realize that it is mathematically impossible. Since the government is now the lender of first, second, and last resort at least they are verifying income even with FHA insured loans. Yet the chart above showed how absurd lending standards got and were exploited especially here in California. This was the fuel that flamed the housing price bubble.
Yet the major source of housing appreciation in the state is now gone. The leverage to lift the world has been removed. With Alt-A and option ARM products buyers were able to get 10 and even 15 times leverage to purchase a home. Countless people making $50,000 a year went no doc and bought $500,000 homes. The $500,000 home in California was the median home back at the peak. Without this leverage, prices can only go up so high when they do start going up. Real incomes are unable to support current prices in many places. The $250,000 median price only reflects the large volume of sales in the lower end. Next year we will see more price reductions at the mid tier as prices reflect the current economy and lack of maximum leverage products. Current homeowners that more than likely won’t be able to support themselves in such high-end homes will then have to start looking at the likes of companies that exclaim “we buy houses in LA!” in order to sell their property and look to move somewhere more affordable.
Reasons #5 – Option ARM Recasts
option arm loans outstanding
The bulk of option ARMs have yet to hit recast dates. 60 percent of current outstanding option ARMs find their home in California. This is largely a one state problem. Florida, Nevada, and Arizona have the remaining large share of the loans but no state comes close to matching California. The problem with these loans are many are in the mid tier markets. The subprime debacle has already washed away much of the lower end of the market. Borrowers had less of a buffer in those areas.
Yet the option ARM does a good job hiding problems for a long time. The teaser payment can last for a few years and once that first recast hits, it is game over. Currently, 40 percent of all option ARMs are already 60 days late and we have yet to hit the major recast points. Once these homes start selling at lower prices comps will also take a hit.