Californians more likely to bite off more than they can chew

The University of the Pacific in Stockton has a great website, in which the Center produces quarterly economic forecasts of the United States, California and 11 Metropolitan areas from Sacramento to Fresno and San Francisco Bay Area. The Eberhardt School of Business is one of a handful of Business schools producing comprehensive quarterly forecasts of the U.S. economy. In addition, the quarterly metropolitan forecasts cover several regions in California's Central Valley not covered by other forecasts.

This week's Graph of the Week discusses two fundamental factors which determine a household's ability to own a house...

There are two fundamental factors which determine a household’s ability to own a house: the price of the house and income. The price of houses in California has always been among the highest in the nation. Data from the California Association of Realtors (CAR) shows that in 2006, the median price of a single family home in the state was over $556K - more than twice the national average of $221K.

In general, the difference between housing affordability index and home-ownership rate represents the gap between the number of households who can afford a house and the number who actually buy a house. The larger the gap suggests that relatively more households, knowingly or unknowingly, are willing to live beyond their normal means. The larger the gap also suggests the higher likelihood that more households are involved in riskier mortgage loans.

Such large gaps in California and San Joaquin County represent the occurrence of excessive demand for housing in the two regions, which tend to make housing highly over-priced. When the market cools down to get back to normal, more market correction is needed in the regions. This partly explains why in the summer 2007 the state of California and San Joaquin County are among those with the largest proportion of sub-prime mortgage loans and the highest number of foreclosures in the nation.

National: The Credit Window is Now Closed

"The credit window is now closed," writes strategist Barry Ritholtz in his blog, and the "multi-engine plane" that is the market has lost one of its sources of power ("liquidity - what is occurring today is a full blown repricing of the liquidity spigot slowly turning off").

As for the U.S. housing market, economist Mark Zandi expects a lot more pain, but not a recession. Here are some highlights of his forecast, based on a study using anonymous data collected by consumer credit agency Equifax:

1. Home prices will fall 10% from the peak nationally, more in the bubble regions in California, Florida, Nevada, Arizona and Washington, D.C.
2. Home sales could bottom later this year, home construction could bottom early next year, and house prices could bottom late next year. It'll be 2010 before the housing market could be termed "normal."
3. About 17% of total mortgage debt is at risk, totaling about $2.5 trillion in subprime, Alt-A and jumbo debt. About $1.4 trillion is at serious risk of default. Investors will lose about $113 billion as $460 billion worth of mortgages default.
4. About 20% of the subprime loans written in the last half of 2006 will fail, with the peak of the defaults not coming until 2011. A "significant number" of these borrowers never made a single payment.
5. More than 2.5 million first mortgages will default this year and next year. Subprime borrowers will experience significant financial distress.
6. The U.S. economy will grow less than 3% annualized through the middle of 2009. A healthy job market should prevent a recession, although the jobless rate will likely rise to 5% from 4.5% by the end of the year.
7. Consumer spending has already slowed and will slow further.

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