California led the U.S. into the worst housing recession since the 1930s. Now the most populous state may be the first to find the bottom.
In Stockton, the U.S. metro area with the highest foreclosure rate, home sales more than doubled in the second quarter after prices fell by an average 37 percent, said PMZ Real Estate Corp., the area's largest broker. Across the state, sales rose in April, May and June after 30 straight months of declines, the California Association of Realtors said. About 40 percent of those transactions were foreclosure sales, DataQuick Information Systems reported.
"California is having a wrenching decline in wealth, but this is a cathartic event that will lay the foundation for a recovery," said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pa., in an interview. "This signals the beginning of the end."
Almost $1.3 trillion of homeowner equity was lost in California since home prices peaked in December 2005, Zandi said. Discounts of as much as 50 percent will extend into 2010, helping clear a glut of foreclosures and leading to a more balanced housing market, according to Ryan Ratcliff, an economist at the Anderson Forecast at the University of California, Los Angeles, and Christopher Thornberg, principal of Beacon Economics LLC in Los Angeles.
"Half off in a decent neighborhood is close to the bottom," said Bill Gross, co-chief investment officer of Newport Beach-based Pacific Investment Management Co., manager of the world's biggest bond fund. Property markdowns of 30 percent to 40 percent give the market "price illumination if not sunshine," he said.
California led the U.S. in default notices and bank seizures for the 18th straight month in June and had seven of the 10 metro areas with the highest foreclosure rates, according to Irvine-based RealtyTrac Inc., which sells default data. That drove down prices and led to "discounted distressed sales," with two-thirds of transactions under $500,000, compared with 40 percent a year earlier, the California Association of Realtors said.
The amount of time it would take to deplete the supply of homes decreased to 7.7 months in June from 10.2 months a year earlier, and the median price fell 38 percent to $368,250, according to the Realtors.
"Things are beginning to happen," said Karl Case, professor of economics at Wellesley College in Wellesley, Mass., and co-creator of the S&P/Case-Shiller home-price index. "We're not going to get reestablished in a stable market unless that inventory gets cleared out."
California led the boom in the U.S. housing market, as prices in the state more than doubled from 2000 to 2005, fueled by historically low interest rates, according to the Chicago-based National Association of Realtors.
As values soared, California gave birth to the subprime mortgage industry that specialized in lending to borrowers with poor or limited credit, who often used them to buy homes they couldn't afford, said Stephen Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto.
Subprime products included "zero-percent" loans that needed no down payment, adjustable-rate mortgages, known as "exploding ARMs" because low interest rates rose after two or three years, and "Alt-A" or "no-doc" loans requiring no proof of income.
Defaults on subprime loans began to accelerate in 2006, helping to push California into the lead in foreclosures.
About 1 million U.S. homes will be in some stage of foreclosure by the end of the year, and properties seized by banks will eventually sell at an average discount of 30 percent to 33 percent, said Rick Sharga, executive vice president for marketing at RealtyTrac.
Bank-owned properties attract investors who can rent out the homes for 10 percent of the purchase price annually, said Sean O'Toole, founder of real estate auction Web site ForeclosureRadar in Discovery Bay. "Those deals are starting to pop up and putting a floor on the market," he said.
The housing bill signed by President George W. Bush July 30 is intended to stem foreclosures and includes a program backed by the Federal Housing Administration to insure as much as $300 billion in refinanced mortgages, including many subprime loans.
California may rebound more quickly from this decline than regions with fewer delinquencies and vacant homes, according to Zandi of Moody's Economy.com. The foreclosure process is "more efficient" than in states such as Florida where courts are involved, and Californians are typically "more optimistic" about housing after experiencing busts that were followed by property booms, Zandi said.
It may take until 2010 for foreclosure sales to work their way out of the system in areas where defaults have soared, said Thornberg of Beacon Economics.
"Those sales are going to have a very large impact on prices for the next year or so until those homes get absorbed by the market," he said. "Housing markets don't bounce, they splat. They hit bottom and they stay there."
That's good news for buyers like Peggy Thorpe. She outbid seven offers for a foreclosed house in Vallejo and still got a 34 percent discount. It was the sixth time since May she made an offer for a home in foreclosure.
"This time I jumped higher," said Thorpe, 43, who works at a vineyard in Napa and paid $190,500 for the three-bedroom home with a loan balance of $289,000. "There's an extreme bidding war right now."