Looming Recession Update: California Housing Edition

Statewide foreclosures in California hit the 24,000 mark in the third quarter of 2007 for the first time ever. In fact, it beat the previous record by 39%. Nationally, there are almost 18 million vacant homes, and the homeownership rate, often touted by the Bush Administration as proof of economic success, fell for the fourth straight quarter. What's really concerning are the foreclosures in upper-income areas:

In four Newport Beach-area ZIP Codes, for example, there were 11 foreclosures in the third quarter, up from just three in the same period last year. There were seven foreclosures in Bel-Air, and none a year ago.

"It's definitely increasing," said Joyce Essex, a Coldwell Banker real estate agent based in Beverly Hills who specializes in selling foreclosed homes.

Essex said most of her properties were in the San Fernando Valley and South Los Angeles, but about 10% of her listings are now in a more affluent part of town.

"It's working its way to the Westside. The Westside is always last to get hit," Essex said of the foreclosure wave, based on her experience in the 1990s downturn.

The mortgage crisis is finally catching up to those who live hand-to-mouth on a higher level. The millions who used home equity loans to finance their lifestyle, pulling money out of their properties over and over again, now have no ability to continue the scheme. And this is just the beginning. Millions of variable-rate mortgages will reset to a higher rate, in some cases doubling the payment, in the next 2 years. That will mean more foreclosures, a sapping of housing wealth, and a real impact on state finances:

More than $23.6 billion in California housing wealth will evaporate if real estate prices continue to decline and foreclosures on subprime home loans soar, according to a new congressional report that indicates the fallout from the national mortgage crisis is worsening.

In addition, over the next two years, the state will lose nearly $111 million in tax revenue from the forecast repossession of 191,000 homes and the spillover effect on neighboring property values, said the study, released Thursday by the Senate Joint Economic Committee.

"State by state, the economic costs from the subprime debacle are shockingly high," committee Chairman Chuck Schumer, D-N.Y., said in a statement. "From New York to California, we are headed for billions in lost wealth, property values and tax revenues."

And that's actually a very optimistic scenario, plus it focuses only on tax revenues and not residual effects. In a country where two-thirds of all economic activity is consumer spending, housing jitters will redound through the entire economy, with families cutting spending because they can no longer rely on their houses for retirement security. And this isn't temporary.

"It took Southern California 10 years to recover (from the last housing downturn), and it took the Bay Area six or seven years," said Cynthia Kroll, senior regional economist at the Fisher Center for Real Estate and Urban Economics at UC Berkeley. "That's a very realistic expectation."

This was all very predictable. Everyone knew that subprime mortgages were a risky asset on which to rest the entire economy. But it was easy money, particularly for those financial institutions making cash in mortgage-backed securities, so they allowed it.

There is pending legislation in the House Financial Services Committee that would help protect consumers against predatory lending, and other bills would allow Fannie Mae to buy a bunch of mortgages and give homeowners a chance to stay in their homes. Hopefully, the market has gotten so bad that legislation like this will have a chance to pass. Otherwise, California and the nation will have a very tough road ahead, impacting the ability to improve people's lives in education, health care, and practically everything government does.