Three Crushing Trends

California shacking – three trends crushing the California housing market. Young workers moving back home, household incomes back to 1990s levels, and lack of an entry level market.

The recent data released by the Census does not bode well for the U.S. housing market but especially for the California housing market. We’ll go into the data later in this article but suffice it to say that household incomes continue to fall while poverty continues to increase. The data reflects the aggregate 2010 situation, a year when some were claiming that California was seeing an upsurge in the economy; therefore absurd home prices were justified. What we now realize is that it was nothing more than a gimmick induced spending spree brought on by the artificially low rates produced by the Federal Reserve and absurd tax cuts in the midst of massive budget deficits. All this action on the surface was to keep home prices inflated, at least that is how it was pitched to the public, yet in reality it is merely a ploy to keep troubled banks walking further down their zombie like path. Other data released shows that many younger workers, those 25 to 34 are moving back home and “doubling-up” instead of buying a starter home or even renting for that matter. The starter side of the market is practically fried.

California household incomes now back to 1990s levels

One of the most troubling data points released in the Census for 2010 is the crushing blow household income is taking:

Source: Sacramento Bee, Census

Median household income – the middle number in a list of incomes ranked from lowest to highest – in California fell from $57,061 to $54,459. Median household income has fallen 9 percent since 2006, before the economic downturn.

California household income dropped about twice as quickly last year as household income nationwide.”

This is data for 2010 so why would home prices go up when the median household income is actually going down? We also find out that household incomes in California are contracting at a higher pace than those on a nationwide level. The shadow inventory in California is enormous and now we have another piece to add. I’ve talked to contacts in the lending industry and they are stating that even with low rates, the bulk of traffic is coming from current owners refinancing. Those looking to buy simply do not have the household income or down payment for the best rates. Many older owners, the bulk still are delusional and want high prices. So most sales action occurs with those few REOs that hit the market and make more sense for tight budgets. Many are simply going for barebones FHA insured loans that require nothing more than a 3.5 percent down payment. These are all multi-year trends. However one national trend that is picking up steam is with households doubling-up:

Source: Census Before the recession officially began, you had 4.7 million adults between the ages of 25 to 34 living with their parents. In the spring of 2011 that figure shot up to 5.9 million. These are important years for household formation. Presumably these 1.2 million young adults are not saving money for a down payment. If they are, they are doing it through unconventional methods. This is a new trend in the U.S. housing market. The trend is abundantly clear and what it shows is that the weak economy is taking a larger toll on younger households. You have older more established households watching their faux-equity evaporate and stock portfolios incinerate and many are hunkering down in jobs and prolonging retirement. This keeps a lid on employment openings that would otherwise go to the 25 to 34 year old age group. However this also keeps a lid on the starter home market.

California home prices continue to make new price lows

While we have been following the data from multiple sources, the Census data simply reflects our deeper assumptions. There was no recovery in 2010 in California, to the contrary household incomes were tanking.

The summer bump was merely an adrenaline induced boost that evaporated just as quickly as it came on. The price information is rather clear:

What can we gather from all of this? The economy is incredibly weak and the best predictor of any sort of bottom is going to come from household income data and a boost in employment. This is why with record low mortgage rates July had one of its weakest months even with home prices down close to 40 percent statewide from their peak: Source:

DataQuick

When you have 23 percent of the workforce underemployed, budget deficits for years to come, cities still in bubbles, and household incomes contracting there is little fuel to boost prices upwards.