Tuesday, August 26, 2008

A Subprime Saga: Merced, CA

An interesting / sad story in the NY Times over the weekend about Merced, CA and the devastation the housing bubble enacted on the town.

In the three years since housing peaked here, the median sales price has fallen by 50 percent. There are thousands of foreclosures on the market. The asking prices on those properties are so low that competitive bidding, a hallmark of the boom, is back.

But almost no homeowner can afford to sell. If you cannot go as low as “the foreclosure price” — the cost of a comparable bank-owned house — real estate agents say you might as well not even bother listing your home.

And so most people do not: three out of four existing-home sales in Merced County are now foreclosures, the highest percentage in the state, according to DataQuick Information Systems. The only group for whom selling makes sense, real estate agents here say, are the elderly entering assisted-living facilities, who often have decades of appreciation built into their home’s value.

The remarkable thing about Merced, CA (and a major problem with housing in general nationally), has been the stickiness of prices. Until there is a legit "floor" in home valuations, NOBODY can price those darn securities = uncertainty in the amount of capital needed in the banking system = dysfunctional credit markets = inability for legitimate buyers to get decent financing terms... phew.

In Merced, the average price of a home is still well north of pre-bubble levels, up ~5.4% on average annually since December 1998, well north of the 2.91% annualized return of the S&P (including dividends) over the past 10 years and a similar return as the Lehman Aggregate U.S. Bond Index over the same period.

If one of the worst hit housing markets in the U.S. has produced twice the return of the S&P 500 and a similar return as the investment grade bond market, who can possibly call this the bottom?

Apparently not even those who have recently purchased a home in Merced.
The market is “probably going to go lower,” says Ms. Johnson, who works at a local jewelry store. But time is on her side: She got a 30-year fixed-rate loan. The landscapers will be by shortly to breathe new life into her golden lawn.
Source: Zillow, NY Times