California Housing Market at the Bottom?!

GREAT article on the affordability of housing right now. Lower prices are making owning the same cost as renting…

California housing market hints at bottom to slump

By Jim ChristieFri Aug 1, 4:32 PM ET

A bottom in the battered U.S. housing market may emerge first in California, one of the states hardest hit by foreclosures and where home prices are dropping to a point where the cost of a mortgage and taxes equals rent.

"The key is to try is to get some stability in the price of homes, which appears to be happening in California," veteran banking analyst Charles Peabody of Portales Partners told Reuters by phone on Friday.

And as goes California, the most populous state, so goes the rest of the United States, according to Peabody.

He sees the tumble in California home prices nearing its end and suspects home prices elsewhere likewise will stabilize.

"Since California constitutes 25 percent of the housing stock in the U.S., any stabilization can have a profound impact on national averages," Peabody said in a recent report.

The fall in home prices in California, fueled dramatically this year by the firesale of foreclosed homes, combined with reasonably low mortgage interest rates is making homeownership more affordable again.

As a result, home sales are picking up and are foreshadowing a stabilization in home prices in California before the end of this year, Peabody said.

"By extension, a stabilization in home prices is required before any sustainable rally in financials can be expected," he added. "It is our belief that we are moving in that direction."

Reasons to believe in California home prices will firm may be found in the California Association of Realtors data, Peabody said.

Notably, buyers are responding to sharply lower home prices. The realtors' group reports the state's June home sales rose 17.5 percent from a year earlier while its median home price plunged 37.7 percent. June also marked the third consecutive month of increases of home sales from year-earlier levels in the state.

Additionally, the backlog of homes for sale in California has steadily decreased this year, falling to 7.7 months of supply in June from 16.8 months in January, and the days a home for sale stayed on the market fell to 49.1 in June from 71.6 in January.

In many parts of California, buying a house, especially at auction, makes more financial sense than paying rent.

Peabody noted that in Lompoc, California, home prices are "depressed," with the local median price was down 39.7 percent in June from a year earlier, and a buyer may be able to get a house that would have cost $500,000 during the hey-dey of the housing boom earlier in the decade at auction now for $250,000.

The annual "carrying costs," or monthly mortgage payments and property taxes, for a home in Lompoc, now equates to about 25 percent of the $80,000 gross income of a two-income earning blue-collar household.

More important, that $20,000 in annual carrying costs now are in line with rents in Lompoc, where monthly rents run $1,500 to $2,000, Peabody said.

"At last, the carrying cost of purchasing a home equals rental rates, a condition that should lead to more stable home pricing going forward," he said.

But Peabody said he is uncertain whether stable home prices will stick. For now he sees "a bottom, but not the bottom" for housing and financials, adding that, "We think a temporary bottom in housing is at hand."

(Reporting by Jim Christie;)