How irrational were California real estate prices?
November 17, 2008 5 Comments
How irrational were California real estate prices? This irrational – the Pasadena shack in the picture sold for $522,000 in August, 2006. The local government was happy to play along with the fantasy since it meant more property tax money for them:
That’s one of Doctor Housing Bubble’s Real Homes of Genius. If you want to know how much trouble California is in read his article, 10 Reasons Why California is Years Away from a Housing Bottom.
We are going to find out how pervasive and extensive this fraud network is. To paraphrase Warren Buffet, the tide is going out and we are going to see who is swimming naked. Most of these loans fall under the Alt-A category and many lenders are deluded thinking these are much better than subprime loans. They are not. How many of these loans are out in California?
Total Alt-A loans as of June 2008: 688,975
Average Balance as of June 2008: $419,790 [* See note – LLJ]
Number with a prepayment penalty: 302,909
Number with a second lien at origination: 206,216 (these are most likely worth zero)
Number with interest only payment: 252,329
Number with negative amortization: 198,385
Percent with at least one late payment in last 12 months: 27%
Percent ARM loans: 70%
*Source: New York Fed
Think about those numbers for a second. This one point is enough to quell any bottom talk. Take a look at WaMu’s Option ARM portfolio, half of which is in California and you’ll realize that we haven’t even seen the start of this mess:
The world is in for a rough ride. The country is in for a rough ride. California is in for something even worse. Go read the Doctor.
* That $419,790 average is slightly higher than Fannie Mae’s 2008 limit of $417,000 for conforming single-family first mortgages.