Looks like the coming Crash of the housing market in California is running ahead of the schedule. The market will Crash under the weight of the mounting inventory that is increasing at a very rapid rate, as we shall see below.

City of Fanta Barbie

A long-time friend from City of Fanta Barbie, aka Santa Barbara, called a few days ago and said that he called because talking to me will make him feel better! I mean how many people would call the Prophet of Doom and Gloom to feel better? Anyway, he got an offer for his home that has been on the market for more than six months that is 19% below the original listing price and he accepted the offer. What did the trick was the second price reduction very recently. His home was not over-priced when it was listed based on the prices that prevailed in the summer of 2005. Had it been listed at the original price in June of 2005 it would have been sold at the asking price or higher some time during the summer.

The housing market in City of Santa Barbara was beyond bubble in the summer of 2005; it was absurd. People thought that no price is too high for such a perfect place to live. After all, the city had a controlled growth policy in place and the limited supply could drive the prices to sky-is-the-limit. I don’t track the inventory for the city on a regular basis but I did notice lot more homes on the market than few months ago.

Santa Clara County

Larry Ellison of Oracle, the richest man in the area, has set the example for the rest in Silly.con Valley to follow for those who have a need to sell their home. He has lowered the asking price for a home he has had on the market by 36%! The house is still on the market. Even in an area flush with Fraud Money, things are getting tougher. Looks like all the Google millionaires have bought their homes and the pace of Scam Market riches is slowing. Its effect would be felt at all levels and in surrounding areas.

As of yesterday evening, there were 3015 SFHs on the market (active Listings not counting Pending Sales) and only 594 with Sales Pending, giving Listings to Pending Ratio (LPR) of 5.08. The ratio above 5 is a sign of a dead market. Since 4/16/06 there are 749 additional Listings, while the Sales Pending number is down from 623 to 594. At these rates we should have a year’s worth of inventory on the market during the late summer.

Santa Cruz County

There were 989 SFHs on the market and only 165 Sales Pending, giving an LPR of 5.99.

A son of my friends has had a home on the market for some four months. He has lowered the price twice. Six weeks ago, where the original listing price was 787K, there were 312 homes listed below his asking price. Then he lowered the price to 762K and soon after that there were 342 homes listed below his new asking price. Recently, he has lowered the price to 750K and as of yesterday there are 380 homes listed below his price. Do you see what I see? He is falling behind the curve. His agent is clueless about what is happening. Not only more new listings are coming on the market but others are lowering the price too. And those who are slow to act might remain behind the curve for a long time. This is the problem that is now common to all area that I follow and hear from others.

Tehachapi Area

There are 439 homes on the market and only 72 Sales Pending, giving an LPR of 5.63. A year ago the LPR was only 1.10-1.20. What a difference a year makes! The supply-demand equation has changed by a factor of 5 in just one year.

Things in Tehachapi area for those who must sell a home will get very ugly real fast. I expect the listings to reach 1,000 next year. Here is why. I spent Saturday and Sunday of the last weekend, the Memorial Day long weekend, looking at homes in several areas with a friend. I was struck by the new homes, in various stages of competition, everywhere. In most areas, what one would notice are homes built at various times, new homes, and empty lots. In every boom, some of the empty lots get built. But, the supply of land to build homes is more or less unlimited. And yet the home prices doubled during the 27-month period of Apr’03-Jul’05, driven primarily by speculation. In every boom, the outskirts of L.A. got over-built and a bust followed in many of them. This time, we reached the extremes of this phenomenon that has repeated almost every decade. So much for people learning from the past.

There is one area named Stallion Springs, a green valley at the foot of a big mountain. It is a nice area with rural feeling. I noticed lots of new homes and lots of empty lots for more future new homes. We saw a “sale by owner” Open House sign. I went in and met the builder-contractor owner. He is a practical man and he moved his family to the area to build homes, one or two at a time, and sell them. The home he was selling was just about finished and listed for 550K. Right across from that home was another home being built by someone lese, fully framed but not completed, that is also expected to list for 550K. I asked him who would buy these homes. The standard answer, “People from L.A. Area, Bakersfield, Lancaster, and even San Francisco Area.” Bakersfield and Lancaster are only an hour away but are much hotter. Not only Stallion Springs, a residential area, is far enough away from the city for some, but how many people like to commute an hour for work with the high gas prices these days? BTW, the high gas prices are already factoring into people’s decision as to where to live. We met a retired couple who are selling a home that they bought brand new just two years ago because of high gas prices (their children live 1.0-1.5 hours commute away and they plan to move closer to them to save on gas money).

An Example of a Realty Nightmare?

My son called to relate something. He stopped by an acquaintance’s home to pick up something. The home is on the market because her employer is transferring her out of the state. The home has been on the market for more than two months and no offers. She has some urgency to sell, so she was thinking about lowering the asking price. But, her realtor doesn’t want her to lower the price because it will affect the prices in the whole neighborhood! As it turns out the employer of the seller might buy the home if she can’t sell, at “the market price,” but what if that were not the case? The poor woman might be stuck with a bad situation once she leaves.

Out Migration of Jobs and People Will Have a Huge Impact on the Future Home Prices

More and more employers are either moving out of the state or relocating substantial part of their operations to lower cost and lower regulation states. Some people are moving out on their own as a result of high home prices.

It is sad that people are being forced to relocate from this “wonderful state to God-awful places like Texas and Carolinas.” Once a month we blessed Californians should observe a 2-nanoseconds of silence for every unfortunate Californian who has to leave because of the job or other economic reasons.

These nanoseconds could add up to a whole millisecond. A millisecond, for those who don’t know, is the historical time horizon of a bubblehead in Silly.con Valley.

Jas