In the past five years, Californian's took out mortgages far exceeding their ability to service the debt. Now residents are suffering massive wage cuts and job losses.....many simply can't afford to make their mortgage payments and foreclosures are exploding.
The problem is simply not just home buyers who purchased homes, but the thousands who borrowed against their existing homes to sustain a "California" lifestyle:
The latest argument comes from Michael LaCour-Little, a finance professor at Cal State Fullerton. He is lead author of a new study, which found that during the housing boom some long-time owners borrowed against all their property's equity gain, or paper profits. They treated their houses like cash machines.
People who owe their bank as much or more than their home is worth are most vulnerable to foreclosure. When they suffer a job loss or other drop in income, they can't sell, because the sale price won't cover the debt.
It's long been assumed that home buyers who purchased at housing's peak with little money down are among the most likely to face foreclosure. They owed more than their property was worth once prices tanked.
But the study concludes 'cashing-out' is about as predictive of foreclosure for the same reason: negative equity.
Think of the countless number of elderly, small business owners, and others that survived over the past few years simply from extracting millions of dollars from perceived home equity......and now that the supplemental income has evaporated.....few can sustain their lifestyle and the equity is gone.
Many families are in financial distress and that distress is driving DOWN home values. Pricing projections are constantly being revised lower. Most recently, Fitch is calling for an ADDITIONAL 30% decline in California.
The projected losses also reflect an assumption that from the first quarter of 2009, home prices will fall an additional 12.5% nationally and 36% in California, with home prices not exhibiting stability until the second half of 2010.
With countless numbers unable to make their payments.....California is struggling with the torrent of foreclosures flooding its court system every month.....a court system already stretched due to budget constraints. Things have gotten so bad that lawmakers are suggesting a moratorium on foreclosures....
California is imposing a 90-day moratorium on housing foreclosures under a new law that takes effect Monday.
The law is expected to make lenders try harder to keep borrowers in their homes. Loan companies must prove they tried to modify the delinquent loans before they can begin foreclosing.
But supporters acknowledge the California Foreclosure Prevention Act won't stop thousands of foreclosures from eventually happening. There have been more than 365,000 foreclosures in California since early 2007, with many more already scheduled.
However, the moratorium will accomplish little other than delay a growing problem of affordability....evidenced by the most recent federal moratorium's failure to slow the rising the tide once lifted.
Foreclosures occur as a result of insufficient income and savings to service debt and other obligations. Without good jobs, savings or easy access to the home equity machine......many more in CA face eviction. In addition, the state faces the loss of billions in property tax revenues at a time when it's $24 Billion in the hole.
If wages continue to evaporate and jobs sliced like limbs on a sepsis patient....pretty soon there won't be much left to cut in California. Few will be able to afford much of anything.
Due to budget constraints, California faces the biggest cycle of wage cuts and job losses in its history. Especially vulnerable are high paid government and health care workers(and those that support government)....the cuts could easily affect millions of residents.
As many know, to destroy home values, it doesn't take every house on a street to be in foreclosure to impact all homes.....just a few distressed homes in the same area can drop values dramatically.
The most extreme case right now is in Michigan where home median home prices in a number of municipalities have dropped below $10,000.....simply due to the fact that there are no jobs and/or very low incomes......
It has become so bad in some areas that the government is now leveling ENTIRE sections of towns to save money!!!!!
Dozens of US cities may have entire neighbourhoods bulldozed as part of drastic "shrink to survive" proposals being considered by the Obama administration to tackle economic decline.
California will be no different, although not likely to reach Michigan extremes for a variety of reasons, if you think that CA home prices have come close to reaching a bottom......you may want to sit back, have a drink, and watch the spectacle. Fitch is only predicting an ADDITIONAL 30% decline, I am predicting at least 50% MORE.
If we continue down this path of government spending money it just doesn't have, few will consider supporting our uncontrollable welfare payments and interest rates will likely climb into double digits in very short order destroying affordability. Conversely, if we lower government spending to income, California could loose or cut wages on hundreds of thousands of jobs imposing MASSIVE pressure on an already stressed state.
The above exemplifies why we, as a nation, are stuck between a rock and a hard place!!!!!
Economists used to laugh when I predicted homes values would drop 50-70% a few years ago. We are already there in a number of areas across America. The problem is the problem is a BIG problem....and not very funny, especially for those getting evicted from their homes and families destroyed.
Now the distressed home issue has morphed into a state concern. Tax revenues are evaporating and the burden of taxation is being focused on fewer and fewer. If this process continues, soon there will be few left in California to support state services. I am already aware of a number of wealthier Californian's who have migrated from the state due to fear of draconian taxes. For confirmation, just give the Austin, Texas MVA a call and see how many of the new license applicants are from CA!!!!!
Without tax revenues, California's economy faces serious hurdles maintaining the states standard of living. Right now tax revenues are imploding. If the situation is not reversed soon, many of you may be surprised how many may leave California. And if you are surprised by the migration out of the state, you will really be SHOCKED how low home prices can go in a state with negative population growth.
For those of you who think Great Depression pricing is the bottom, you may want to talk to residents in Detroit. What receives little commentary is that in the 1930s, property taxes and insurance payments were insignificant. Ask yourself, how much more of a home could be purchased today if you didn't pay taxes and insurance on your house and deduct it from its current value.
Soon you will begin to understand that massive structural change is ahead. Alstry is confident of this and very confident of a very bright future. However, the change will be very convulsive to many existing paradigms and few are prepared.
Are you ready to leave the matrix??????
Let's hope our government officials don't take us on a path of WAR to distract us from the symptoms of change.