Well, I wish I could say that I was right that prices were going to decline. The fact is they have not. The reason is that the banks have been very successful at keeping their toxic assets off the market, which I did not think that they would be able to do. So the shadow inventory is growing and will continue to grow for the next couple of years until either something pops or they bleed off their accumulated defaults over the course of the next ten years or so. Will they be able to do that? I don’t see how, but they’ve made a fool out of me so far.
Having successfully held inventory at artificially low levels for months, they have released a larger number of properties for sale, there are 41% more properties for sale in May than there were in February of 2010, just in time for the Summer selling season. But even this massive increase is only a drop in the bucket. Nationwide 7% of all homes are in mortgage default; in California, 20% of all home owners are 30 or more days late on their mortgage payments, 6.98% are over 90 days late but not yet in the foreclosure process; 10% o California homes are already are already formally in the foreclosure process.
These are grim numbers. They are not going to get better any time soon. 
All this means that mortgage defaults will increase over time at a much faster pace than the banks are taking them back and doling them out to the market.
Despite all the hoopla over declining unemployment numbers, the decline is so minuscule, and so tenuous that it does not look reliable to me. I remain a pessimist. 32 States have quietly borrowed over $37,800,000,000 from the Federal Government to cover extended unemployment benefits, California alone got $6,900,000,000 of that. Does that make you feel optimistic? “Do you feel lucky, punk? Well do ya?”
Of course that money came directly from Taxpayers-R-Us. Except that the money isn’t really there which means that it was borrowed in our name. Which means that we’ll have to pay it back with interest over time; it gives our grand kids something to look forward to.
But of course the only place the money gets borrowed is by the Federal Reserve, which is neither Federal, nor a bank nor has any reserves. Recent Fed auctions have been somewhat disappointing, seems not so many people want to lend money to Uncle Sam based on the full faith and credit of the US Government. Consequently the Fed has been buying it’s own bonds. This works because they can print their own money (don’t try this at home, folks).
Of course when the Fed prints money backed by nothing but hot air the value of money falls. Then the value of money falls it takes more money to buy things: inflation. Inflation makes us all poorer because out money buys less. Inflation hasn’t been a big problem for a while, although it has been eating steadily at us at about 2%-4% per year, year over year for a long time.
When inflation goes up sharply, then the Fed has to cut interest rates to slow the inflation rate down. Once interest rates are raised then it gets harder to borrow money, especially for big ticket items like houses. When borrowing becomes costlier fewer people will be able to do it. Which means that fewer people are going to be able to buy a home under those circumstances. Which will mean that sellers will either have to hang on to their properties or lower their prices until buyers can afford them.
So, to answer the question: Whither the California Housing Market? As long as supply is held in check and interest rates are held at artificially low levels, the housing market will prosper. Once either or both of those circumstances changes, as it will, then the housing market will surely slow. I am still bearish on housing in California. We are currently in a sort of Indian Summer which of it’s nature cannot last.
There is a correlative question to the former: should I buy now or not? There are good arguments either way. In the overall I’d say for now, buy. Why? Because although you’ll be paying higher prices in the short term, even when prices fall they will be driven up again by inflation. Further, you’ll be borrowing at ridiculously low interest rates and paying it back in inflated dollars.
