Wednesday, November 18, 2009

The Good News: LA Times, "Housing Market Shows Signs of New Life"; The Bad News: Dr. Housing Bubble: "Option ARMs...The $189 Billion Recast Problem"

socal median home price Nov 2009The Southern California housing market shows signs of resilience -- green shoots that are turning into sprouts, that seem to be leading to a full-blown recovery. First, let's point out the very good news.

  • In October, the median home price in the five county Southern California area rose to $280,000, up 1.8% from September -- but off 44.6% from the July 2007 peak of $505,000
  • The number of sales in October 2009 in Los Angeles County was 7,409, up 8.6% from October 2008.
  • In October, the median sale price in Los Angeles County was $325,000, down 8.5% from a year earlier
But, there are also some fundamental problems with this housing market.
  • Mortgage delinquencies are still rising. Nearly 10.2% of home loans in California are 60 or more days past due, up from 9.7% in the 2nd quarter.
  • Nearly one in five homes in the Los Angeles area is "underwater", where the value of the house is less than the loan(s) on the property

Another problem which has been explored in the Dr. Housing Bubble Blog is that California -- and especially Los Angeles County -- is the epicenter of "Option ARM" loans, which became popular during the bubble days. Option ARMs allow the borrower to pay less than the interest due for a given period, so that they "negatively amortize" -- and the loan principal actually increases as time goes along.

58% of these 900,000 loans nationwide are in California! 78% of these loans are underwater. 37% of these loans are 90+ days delinquent. And over 200,000 of these option ARM loans are in the LA Metro Area. Now-defunct WaMu (currently part of Chase) was the king of option ARMs -- and many of these loans are on high-end properties.

So, as the subprime crisis subsides on the low-end, we now face an option ARM crisis on the high-end. Many of these homeowners have no refinance options, and may do strategic walk-aways. So, how do we assess the Los Angeles housing market? "It's complicated."

Read the Los Angeles Times article, "Housing Market Shows New Signs of Life"
Read the Dr. Housing Bubble Article on Option ARMs