Home Prices Down 26% in CA; Really, It’s a Good Thing!

L.A. Land : Los Angeles Times : California freefall: Home prices down 26% in February: “In the San Fernando Valley, losing a home to foreclosure is now almost as common for families as buying a home.” That is a shocking statement. However, the drop in home prices is a good thing.

The California real estate market was going up too fast to support home ownership for the average person. At the peak, homes in the Fresno area were averaging around $290,000 and incomes were around $45,000/year. There is no way someone making $45,000 a year can pay a $290,000 mortgage. Now, that same house is selling for $140,000-175,000. It might be possible for someone making $45,000 to pay a $140,000-175,000 mortgage, or at least it is in the realm of possibility. My thought is that the prices will stabilize around that level and then will begin their gradual drift upward, probably no more than 2-3% a year. That will allow for a healthy economic situation where the housing market opens up for a lot of people.

The other side of the coin, however, is that a lot (and I mean a lot) of people bought or refinanced their houses to the max within the last 5 years. Consequently, there are a lot of people out there who owe $300,000 on a house that is now worth about $200,000. And it won’t be worth $300,000 for ten years or more. So, what are those people going to do? Some of them might have taken out unsecured loans in that amount and have the income to pay the loans. But many of them are not going to have the income to swing the payments on those loans for the long haul. I predict that many of them are going to walk away from their homes, unless the mortgage companies agree to write down the loan amount. I think we will see a steady stream of these folks for the next 5 or 6 years, many of whom will need to file bankruptcy if they can’t get a mortgage modification.

For consumers caught in this trap, the only good thing is that everyone’s credit will be in the tank, so if banks want to lend, they will have to lower their standards in the future and it will be easier for these people to purchase a house in the future (at the new lower values).