Déjà vu yet again for Southern California housing prices. Remember all the hype about home prices going up in early 2010? Well Southern California has entered another month where the year-over-year median price has declined. In other words you didn’t miss out by jumping head first into the empty pool of housing industry mantras. This should come as no surprise given the pervasive unemployment in the region and the fact that many of the new jobs that people took on are in lower paying employment sectors. No more moonlighting as a mortgage broker or real estate agent and pulling in six figures. In other words keeping prices inflated with lower wages doesn’t seem to be in the cards. Another stunning fact is that 30 percent of all home sales last month were for all cash and the median price paid for these homes was $190,000. The investor class is thinking they can turn a profit making these into rentals. I wonder if they are factoring in vacancy rates, fixing places up after tenets rip up items like the carpet, or the fact that California is not very favorable for landlords. Either way, I think many investors are being lured by the siren call of low prices without doing a deep analysis. The below chart tells us where things are heading in California home prices:

Southern California median home price

Another key point in the data that was released was the fact that home sales in January were the slowest on record going back to March of 2008. This was in fact a very weak report. We find that many Southern California home buyers are price conscious (now that they have to document income) when it comes to the monthly payment. Let us spend some time on the above chart since it is important to understand. The Southern California median price is now down on a year-over-year basis. We already knew this was going to happen simply because the economy is in bad shape and the massive amount of shadow inventory. Once the inventory hit the market prices would move lower. The trend started happening after the summer of 2010 and now prices are back to levels last seen in 2002. With little hope of major price moves up in 2011 we will have a nominal lost decade. We may even breach the lows reached in 2008 in terms of median price given that investors are jumping in for low hanging fruit.

Los Angeles County took a big hit last month. The median price dropped from $330,000 to $300,000! A 9 percent hit in one month! In September of 2010 the median LA home was going for $340,000 so we are now down over 10 percent in a matter of four months. Until the shadow inventory becomes a tiny portion of the overall housing market jumping into the market at these prices is a speculative bet.

It is also the case that foreclosure re-sales are going back up as expected:

This is an interesting trend but falls in line with our last report that banks are now moving on shadow inventory at a brisker pace. 37 percent of all homes sold were foreclosure re-sales in January. This is up from 33 percent from the June 2010 low when all the stalling gimmicks were in full effect. Expect this trend to continue up especially if investors are looking to pick up cheap places to rent or flip. Many are buying out in the Inland Empire but many forget to ask whether these communities are sustainable especially if oil remains at a permanently high plateau. A large number commute into the basin and incomes are much lower in these areas. From investors that I have talked to renter turnover in these areas are high. So those using optimistic full occupancy metrics are using a lower price to base potentially optimistic models. Look at Nevada and Arizona for examples of desert regions with cheap new housing developments. Sure your mortgage is $700 but what about your $300 energy bill and $500 of fuel for your car to get around?

Late night infomercials are a good indicator of where not to invest. Last night I happened to catch a glimpse of someone trying to teach people how to buy foreclosures in California and “become financially independent in 3 months.” This kind of get rich psychology hits at the primordial part of our brain that likes to believe in fantasy and is devoid of rational logic. Even though we like to think of ourselves as far above snake oil tactics most of us have a hard time avoiding the herd and diving into another gimmick. The shadow inventory and the above charts have a hard time competing with people and their instinctual drive for finding a big harvest with little work. These are not deals because these areas especially where homes are selling for $190,000 all are built in a model where energy is cheap and abundant. I don’t need to tell you that model is now no longer viable. Growing global markets are competing for the same resources so this isn’t some kind of temporary spike.

You also have many younger households that are holding off on having children and aren’t drawn to the allure of the suburbs. This may or may not be part of your situation but younger couples of today have different tastes from those of past generations. The housing bubble was largely a baby boomer phenomenon. We have a new dynamic where young working professionals are coming out with student loan debt that previous generations never had to contend with. Many young professionals have a mortgage before they even buy a house because of the burden of student loan debt. The generations of working at a blue collar job and affording a home in a good part of town seem long gone. In order to compete, many are finding it harder to avoid debt. Yet debt is now harder to access because the economy is over leveraged already. In other words, it is hard to see how interest rates don’t rise in the next few years. It is also hard to keep this model going because it is unsustainable. To iron out these dislocations, either incomes need to go up (no evidence of this with a 23 percent unemployment and underemployment rate in the state) or home prices need to go down (this is actually happening).

California currently has 162,000 homes for sale. Add in homes in the foreclosure process and the number jumps up to 446,000. This is not a normal market. Investors seem to be hungry for low priced homes and banks seem to be letting go of some of their shadow inventory. What does this mean? Lower prices for 2011.