By Peter Y. Hong - Los Angeles Times

June 5, 2009

Southern California property values have sunk below historic norms, various indexes show, but ongoing foreclosures and economic woes mean that the market bottom may not yet have been reached.

The forecasting firm IHS Global Insight reported this week that Los Angeles County home prices are now 6% undervalued. Its calculations are based on home prices, interest rates, area incomes, population density, and historic premiums and discounts in given markets.

By those measures, the firm said, Orange County is 11% undervalued and the Inland Empire is 16% undervalued. Even further below the historic norm are San Diego, at 21% undervalued, and San Francisco, which is 25% below normal, IHS said.

"If you get away from the coasts, houses are cheap," said Richard Green, director of USC's Lusk Center for Real Estate. Homes in many inland area are bargains relative to incomes and rents; some houses are selling for less than construction costs, Green said.

But problems beyond the housing market could thwart local real estate's recovery. California's inability to solve its budget woes is "so awful," Green said, "that it could create problems for business formation, which makes me really wonder about the prospects of job growth going forward."

California's unemployment rate was 11% in April, according to the California Employment Development Department, the fifth-highest rate in the nation.

IHS also qualified its findings, saying that "it is too early to call a bottoming," as "job losses continue, housing inventories remain elevated and consumers remain wary in light of economic uncertainty."

The IHS report came two weeks after a National Assn. of Home Builders index of purchasing ability hit the highest level in its 18-year history. The NAHB/Wells Fargo housing opportunity index showed that 73% of homes sold in the first quarter of this year were affordable to families earning the national median income of $64,000.

In Los Angeles County, 42% of homes sold in the first quarter were affordable to a median-income family, up from a recent low of 2% in the first quarter of 2006, the index showed. Orange County's home prices for the first quarter made 48% of homes sold affordable to a median-income family there, up from 3% in the fourth quarter of 2005.

The comparable first-quarter affordability index figure for the Inland Empire was 73%, up from 7% in mid-2006. San Diego County's index rose to 60% in the first quarter, compared with 4% in late 2005, and Ventura County's 61% affordability index was up from 8% in mid-2006.

The housing market still must clear a backlog of foreclosed homes and faces more than 100,000 potential foreclosures. In the first quarter, 135,431 mortgage defaults -- the first stage in the foreclosure process -- were recorded in California, MDA DataQuick said. Foreclosed properties are typically sold at deep discounts by lenders who need to get the properties off their books, dragging all prices down.

Low mortgage interest rates have also fueled many recent purchases. But the sub-5% loan rates so common in recent months may be history. The Mortgage Bankers Assn. reported that the average 30-year fixed-rate mortgage for the week ended May 29 was 5.25%, up from 4.81% the week before.

From what I see in the news, the California foreclosures situation is getting a lot worse.

More choices...

Option #2...

Option #3...

Option #4...

Option #5...

Time for a New Round of Stimulus

posted by Katrina vanden Heuvel - The Nation

"We might be witnessing the mother of all jobless recoveries."

That's how economist Bernard Baumohl described today's jobs report to the New York Times.

While there were "only" 345,000 jobs lost last month--as compared to 504,000 in April--the report doesn't account for the upcoming job losses as well as the ripple effect that will result from the GM bankruptcy. Nor does it reflect the severe budget shortfalls states continue to face. It did, however, reveal a continued collapse of wage growth, the highest unemployment rate in 25 years, and the loss of 156,000 manufacturing jobs.

Economic Policy Institute economist Heidi Shierholz writes today, "It is only in the midst of a historically steep recession that losing 345,000 jobs in a single month is actually taken as a good sign.... The US labor market is still hemorrhaging jobs. With the continued loss of jobs and hours along with the collapse of wage growth, it is time to start thinking very seriously about additional stimulus spending."

In fact, the Center for Economic and Policy Research (CEPR) is maintaining an "honor roll" of economists who have called for another stimulus "in an effort to promote forward thinking...and challenge those who have not yet faced up to the severity of the current recession."

"Many mainstream economists missed the housing bubble at the root of the current crisis and many have been slow to call for an additional recovery package," CEPR Visiting Scholar, Eileen Apellbaum, told me. "In the absence of a third economic stimulus, job loss is likely to exceed half a million jobs a month through the rest of this year and possibly longer. Pain for workers will continue to mount, and the budget problems of states will worsen.... A third stimulus is the best chance working families have for weathering this economic crisis."

Appelbaum's absolutely right about the fiscal outlook for states. The Center on Budget and Policy Priorities reports that "new mid-year FY2009 shortfalls of $60 billion have opened up in the budgets of at least forty-two states and the District of Columbia." (That doesn't include the initial $48 billion in shortfalls that these and other states faced when they originally adopted their budgets for the current fiscal year.) Also, forty-six states project deficits for the upcoming fiscal year--initial estimates project a $133 billion shortfall. Without additional help, we will see more layoffs, furloughs, and cuts in vital services that will only deepen economic hardship.

As economist and Nation contributor, Jamie Galbraith, wrote me in an e-mail: "This crisis is, above all, a crisis of unemployment, of foreclosures, and--as we see in California--of the essential services, including healthcare, that state and local governments provide. None of these will be remedied fast enough by the stimulus already in the pipeline. New, stronger, better targeted and faster-acting measures are needed, including general revenue sharing, a national infrastructure fund, a housing program and publicly-funded health care."

Meanwhile, the deficit hawks continue their damaging and alarmist talk of a federal debt that will soon be above 57 percent of GDP, or 82 percent of GDP by 2019. They overlook the fact that--as Mark Weisbrot, co-director of CEPR, writes--"the United States had a public debt of 109 percent of GDP in 1946, as it began the 'golden age' of its historically most rapid economic growth over the ensuing 27 years--growth that resulted in broadly shared prosperity, unlike that of the last three decades."

Just as we saw during the New Deal, there will be signs of recovery during which the deficit hawks will urge for spending cuts. In fact, after New Deal policies cut the unemployment rate from a peak of more than 25 percent to just over 10 percent in 1936, similar calls for fiscal restraint then led President Roosevelt to try to balance the budget. The result? The unemployment rate rose again in 1937 and 1938 and the country went back into a severe recession.

As economist and Nation contributor Dean Baker said to me, "The problem was not that Keynesianism failed, it was that it was not pursued with enough vigor."

It is indeed a time for vigor. In the absence of consumer spending and business investment, the government must step in and use these deficits in order to avert a depression. Our greatest deficit, after all, is our public investment deficit.

But another stimulus won't pass without serious work. The CEPR honor roll is one good effort to get economists involved. And progressive organizations are mobilizing the grassroots.

"Grassroots organizing is critical," Apellbaum said. "The disparities in the way Citigroup and GM were treated and in the amounts of money spent to bail each of them out makes clear what elite opinion thinks is important. Working people need to mobilize to get the help they--and the real economy--need."

Recent comments:

My brother said he wants to capitalize on the CA foreclosures situation.

I wonder what a CA foreclosure would cost me.

Can Entrepreneurs Save This Town?

By Amy S. Choi - BusinessWeek

On sunny afternoons, Lucy Whittle can be found tending to the lawn at the First Baptist Church in Los Banos, a small town of about 36,000 on the western edge of Merced County, in the heart of central California's San Joaquin Valley. Her husband, Melvin, is the pastor there, and she has a warm smile at the ready for church members and neighbors alike. But she'd rather be working.

Whittle is one of about 2,600 unemployed people in Los Banos. She hasn't worked since March 2008. Rather than look for yet another job, though, she has a different future mapped out—as a small business owner. Whittle is ready to launch a trucking company. But she and Melvin can barely make ends meet on his $32,000 salary, and she can't afford the $15,000 insurance policy necessary to get her truck on the road. "It's such a tiny amount of money," Whittle says. "But it may as well be $15 million right now."

Entrepreneurs, along with the rest of Merced County, are facing dire times. But not long ago, the area was booming. Developers added an estimated 60,000 housing units between 2002 and 2008, anticipating explosive growth from those commuting to jobs in the Bay Area and working at the new University of California campus, which opened in Merced in 2005. When the national housing market crashed, nearly all of Merced's new wealth was concentrated in those homes.

Home prices in Merced dove 42.3% in 2008 and continue to fall. The collapse coincided with a drought, forcing farmers to leave fields fallow and lay off employees. The dairy industry, another major employer, faced its own contraction because of a fall in milk prices and a drop in exports. Merced County now has a 22% unemployment rate. And despite a statewide moratorium on foreclosures—due to expire in June—it holds the dubious honor of having the nation's third-highest foreclosure rate.

Local authorities such as the Merced County Economic Development Corp. (MCEDCO) and the Los Banos Redevelopment Agency, along with the local Small Business Administration outpost, are counting on entrepreneurs to help create jobs and restore the region's economic health. "It'd be nice to get a big employer, but we believe it may be more effective to provide small businesses the resources to grow," says Scott Galbraith, chief executive of MCEDCO.

"The vast majority of the 5,000 businesses in the county are small companies. If we can get just half of them to hire one person, that's 2,500 jobs right off the bat, rather than working for 10 years to get a large employer into the region."

But those small companies can't grow—or hire—without help. Some agencies, such as the Los Banos Redevelopment Agency, which works in the western part of the county, provide microenterprise loans of up to $50,000 to help people start businesses, and they also try to help existing businesses find loans to spur growth. Merced College, meanwhile, has received a $68,000 planning grant to build a program for entrepreneurial studies, which it hopes to have up and running this fall. The college also wants to build a business incubator, but it's awaiting financing. The goal, says President Benjamin Duran, is to reach the hundreds of "grey economy" businesses, such as flea markets and home-based enterprises, and help them grow into companies that can create jobs.

These programs aim to support entrepreneurs, but what small business owners in Merced County need most is immediate financial relief. Without some aid, whether in the form of financing, refinancing, or debt assistance, it seems all but impossible that entrepreneurs, and would-be entrepreneurs such as Lucy Whittle, will be able to thrive, much less carry the rest of the economy on their shoulders.

Return to the BWSmallBiz June/July 2009 Table of Contents

Choi is a staff writer for BusinessWeek SmallBiz in New York.

I cannot believe the number of Los Angeles CA foreclosures out there right now.

Right now, the Sacramento CA foreclosures are almost as bad as in Los Angeles.