No bubble, No correction in California

The Union Bank of California (once again consider the source as a major market investor) claims that the average California home owner will not feel the effects of the correction. One of the things I love is that the guy notes he owns a home he could barely afford 8 years ago. He then slides into how the national market alway rises and over time housing prices will rise in the US.

"Worried about the possibility of higher mortgage rates? Then re-read the section about what happened in 1982. With double-digit mortgage rates, home prices still rose 3% nationwide and were flat in California."

I cannot believe this guy is an economist. Flat home prices mean a fall in value to due to inflation. So houses did lose value.The funny thing about this press release is that it almost reads like a "Don't Panic Release." It has nice charts to show how things have happened in the past and everything is gonna be fine. What the article seems to gloss over is that the types of financial instruments used in the current housing boom. The current boom is sustained by loosing standards on credit, 100% financing and the highly flexible 5 and 3 year ARMS. During previous housing corrections, most owners didn't become upside down on their homes as they were required to have a 5% or 10% downpayment. This provided some cushion to sudden drop in prices. With current financial practices this will prove difficult. Since many homes have been bought on speculation and with the hope that they will rise in value. Another thing completely glossed over by the article is that while jobs are growing faster in California, wages are not keeping pace with rising home prices. While new jobs are being created these are not jobs which will result in home ownership. The new Starbucks barista is not gonna buy a home in California.

The article is right that most home owners will be unaffected by the deflation of the California market. Those that bought their homes with traditional 30 fixed or that haven't bought a house they could afford. I think it funny that he bought his home during the correction in California when prices were really low. Of course a down turn in the California market isn't going to affect you, you paid next to nothing for your home. It's going to impact those on the margins or have just purchased.