California is bubblicious.
Chibi at the aptly named blog-o-chibi is one of my most faithful commenters. Yesterday he directed me to his post on housing prices in the Bay Area in which he stares over the precipice and pulls back terrified.
I really wish I had complete data on this. But the drips and drabs that I do find in the press paint a terrifying picture of people using ARMs and other unconventional financing to leverage themselves pretty good to buy real estate that they really can't afford using optimistic projections of the future to bail them out (either increased income or appreciated asset, and probably both). . . .A while back Brad DeLong pondered whether there was a housing bubble in California (and elsewhere in the US), saying
When a high-level executive for a company that has reaped a massive windfall over the past few years goes on record saying there's a lack of rationality in the market, I really stand up and take note. Most of the folks in the industry have been quoted up to this point saying short supply, low interest rates, THERE IS NO BUBBLE. Um...
It's not that I'm sure we're not in a housing bubble. But I want to see the full argument. (Personally, I think we are in an interest rate bubble--and that high housing prices are (outside of New York, SF, and LA) probably a rational reaction to very low interest rates.)Yes, J. Bradford, there is a housing bubble, and nowhere more bubbly than California.
I already noted today that the "low interest rates" argument is mostly a fiction. Yes they're low, but not unusually so.
Moving on, take a peek at the most frothy housing markets in the US. According to the National Association of Realtors (here and here), from 2002:I to 2004:I, they are:
- West Palm Beach/Boca Raton/Delray Beach, FL - 59.1%
- Riverside/San Bernardino, CA - 57.2%
- Orange County, CA - 53.9%
- Sacramento, CA - 49.6%
- San Diego, CA - 48.4%
- Los Angeles area, CA - 46.3%
- Sarasota, FL - 43.1%
- Melbourne/Titusville/Palm Bay, FL - 42.9%
- Miami/Hileah, FL - 42.6%
- Providence, RI - 41.5%
- San Francisco Bay Area, CA - 23.8%
Place / City / '02:I-'03:I change / '03:I-'04:I change
- Riverside/San Bernardino, CA - 18.3% - 32.9%
- Orange County, CA - 20.2% - 28.1%
- Los Angeles area, CA - 16.3% - 25.8%
- San Diego, CA - 19.5% - 24.1%
- Sacramento, CA - 24.0% - 20.7%
- San Francisco Bay Area, CA - 5.5% - 17.3%
First, Californians are putting less money down to buy their rapidly more expensive houses. In the Bay Area, the loan-to-price ratio rose over 2003:I to 2004:I from 58.9% to 64.3%; in the Los Angeles area, 66.4% to 67.7%; and in San Diego, 60.7% to 66.5%. Only in Sacramento has the ratio come down, but that from a very high starting point: 70.3% to 66.4%.
Second, Californians are getting giddy over adjustable-rate mortgages (ARMs). In the Los Angeles Area, the percent of new mortgages with adjustable rather than fixed rates rose from 21% in 2003:I to 45% in 2004:I. In Sacramento there was a similar movement, from 20% to 47% over the same period. In the Bay Area the popularity of ARMs went from 36% to 56%, and in San Diego from 31% to a whopping 59%. Of the 32 largest housing markets in the US, only Chicago and Denver even come close to depending on ARMs as much as do the four markets in California, but price appreciation in these cities has been far less than in the Golden State.
The overall picture for California looks extremely bubbly: incredible rises in housing costs averaging over 20% per year; increasing use of debt rather than downpayments to pay for those houses; and a dramatic rise in the popularity of adjustable-rate mortgages, suggesting the most marginal home-buyers are coming to dominate the market and who will be the first to reap the whirlwind from the interest rate hikes begun last month. And on all these trends things are only getting worse, not better, except in Sacramento, the smallest of the four major markets defined by the Federal Housing Finance Board and nevertheless still quite bubbly itself.
Baltimore-Washington, New York City, Nevada and especially South Florida also are looking bubbly, but nowhere more so than California, only the largest population and economy in the country.