The Atlantic Home

Conor,

I am out in California, although in Orange County (ground zero for the sub prime industry) rather than Sacramento.

In terms of volume (number of houses sold) we may be near a bottom, although I am skeptical. The reason I am skeptical is that I think that we are no where near a bottom on price.

I think that there are three factors to look at in declaring a bottom for price (call it cdm's Corollary for the Housing Price Bottom, if you will):

1) The median home price for any designated neighborhood needs to be at 3 x median household income for the same neighborhood (this is a measure of basic affordability).

2) "Distressed" homes need to make up less than 10% of inventory (economists who studied the last big drop in California (mid 90's) seem to think that distressed inventory above ten percent is destabilizing to prices).

3) Unemployment needs to be below 7% (Unemployment has a destabilizing effect on both supply and demand). Why 7%? It is a number that just feels about right.

I do not think we will have a bottom until we see all three in concert.

Right now, I think that we are seeing a little bit of a false bottom, due in part to an anomaly in foreclosure numbers. Late last year, California had established a new waiting period that was intended to ensure that servicers took the time to contact borrowers that were in default. This led to a drastic drop in the number of NOD's (notice of defaults - the first step in foreclosure), and a corresponding drop in subsequent NTS and TS (Notice of Trustee Sale and Trustee Sale - the auction on the courthouse steps - respectively). However, NOD's have not only gone up as the servicers have processed through the new waiting period, they have set a new record! (http://www.dqnews.com/Articles/2009/News/California/CA-Foreclosures/RRFor090422.aspx)

My guess is that we will see in California and most other hard hit areas an over-correction down through and below the affordability factor that I stated, as the foreclosures and the unemployment issues will keep pushing prices lower. Of course, there are some smaller variables at play as well (baby boomers and their predicted future preference for smaller housing, interest rates, etc.), but I do not think these factors will be be determining like the other three will be.