Thursday, January 29, 2009

California Munis are "Whispering" Buy

Now for what seems like my weekly California update:

Housing continues to deteriorate (per Bloomberg):

California home prices plunged 42 percent in December from a year earlier as the U.S. housing slump deepened and foreclosures hit record levels.

The median price for a single-family home in the most populous U.S. state dropped to $281,100 from $480,820 a year earlier, the Los Angeles-based California Association of Realtors said today in a statement.
The price decline is in part due to foreclosures:
Foreclosed properties tend to sell at a discount of 25 percent or more, and California home sales rose 85 percent in response to last month's drop in prices, the Realtors association said.
Assuming every sale was a foreclosure (and sold at a 25% discount), this indicates the average non-foreclosed price was $374,800 or a 22% drop. Knowing that "only" ~50% of sales were foreclosures, that means most sales were at the "lower-end" of the price spectrum.

As the housing market goes, so goes California Munis:

Municipal General Obligation "GO" bonds (i.e. bonds backed by the taxing authority of states) have historical traded at yields less than Treasuries (due to the high-quality nature and tax benefits of Muni bonds). Rather than track California GO bonds to Treasuries, below is the ratio of California GO bonds to the Muni GO bond index.



This past week hasn't been kind. The ratio of California Muni bonds to those in the index is almost 1.4x (and this chart is for bonds with just five years to maturity). If / when state funding troubles are addressed with Federal money, I expect this ratio to come back down. For investors dieing to make a "whopping" non-taxable 2.9% return (hey... much better than Treasuries!), I'll call this a "whispering" rather than "screaming" buy.

Speaking of that 2.9%... for all the trouble California is facing, the financing cost for the state is still down a full percent since the turmoil began.