By Mike Colpitts
The boom bust cycle of California real estate holds historic lessons that every where else in the U.S. can learn from as the nation sustains the housing crisis driven by the sharpest foreclosure epidemic on record.
California has seen home values drop an average of 43.7% since the housing crisis started in 2006, according to CoreLogic, which provides real estate data for the financial industry and home builders. The downturn in the Golden State’s economy, however, still persists with record long unemployment topping 20% in the state’s hardest hit regions.
Fewer employers are hiring workers back, despite an array of industries that seem to be improving. But the reason so many public companies with stocks listed on Wall Street have reported higher profit margins has been corporate lay-offs and budgetary cut-backs.
Six years after the U.S. housing market showed the initial signs of slowing from its free mortgage driven frenzy, only dozens of markets are showing improvement, and most of them had little or less of an impact from the bubble driven days triggered by exotic Wall Street instruments.
California’s economy alone would rank as the ninth strongest economy in the world, making it a state that has little comparable with any other U.S. state. However, the boom and bust cycle that California has experienced in housing is similar to that of many other states.
The Savings & Loan Crisis in the late 1980s produced a horrible real estate crash that cost tax payers billions of dollars. But a larger portion of its losses were confined to commercial real estate holdings, damaging the housing market less than the current crisis.
California homes, condos and townhouses that were caught up in the crisis were eventually sold-off by the Resolution Trust Corp. (RTC) started by the White House and home prices tumbled. It took more than a decade for prices to recover, but changes in mortgage lending directed by Congress and the abolishment of Glass-Steagall legislation adopted in the years following the Great Depression set the stage for the next major drop in home values during the Great Recession.
Banks and many mortgage lenders that weren’t forced to follow strict laws opened a series of other changes that would change the Golden State’s financial future, shift growth patterns, open inland areas of the state to new home construction that seemed endless and drive the entire real estate industry into a fast paced frenzy of buying and selling and flipping property.
People who had never even bought a home before called themselves investors, and suddenly hit pay dirt, netting high profits quickly reselling homes. The #1 lesson that California real estate may hold for the rest of the nation is that the “end buyer” or owner occupant is the only solid purchaser of a home.
All others, whether they are single professional veteran real estate investors, Real Estate Investment Trusts (REITs) or first time investor buyers are mere speculators hoping to cash in for a profit. Housing had never seen such an explosion of investors until the early 2000s in California, where flipping homes became commonplace to make a profit. Other places followed California’s lead and the bubble grew as greed worked its own time-table.
All asset classes, stocks, bonds, homes, commercial real estate, art and even tulips have been targets of financial investments and over time each seems to have their day. Investing in any asset takes the right timing to make a profit, and the time it takes for California housing to recover in this cycle is likely to be longer than any other, if it ever does.