Housing - How California Goes, So Goes the Nation (Part 1)

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This blog is based on the organizational principles found in my new book, "Millionaire Now! - A Financial Toolbox with Seven Steps to Wealth".

Posted on 10/09/2006 08:14 AM | Link | Post Comment

California is still reporting strong job gains, but the pace of growth is easing.

The California job market continued to expand slightly faster than the national rate, with year-over-year employment growth of 1.5 percent in second quarter 2006. Growth was widespread, with every sector except manufacturing and information adding jobs in the quarter chart 1.

Similar to many states in the West, California job growth has decelerated from the year-ago pace of 1.7 percent. Employment growth was highest in the Central Valley, but every metropolitan area in the state added jobs in the second quarter.

The cooling housing market has negatively affected the construction sector. While the construction sector was still adding jobs in the second quarter, the pace of growth was less than half that of a year ago. Particular weakness was evident in the residential building and specialty trades such as roofing and plumbing.

The California housing market continues to cool.

Weaker housing demand is depressing home sales, permit volumes, and price appreciation in California. Statewide sales and permit volumes declined by 25 percent and 21 percent, respectively, in second quarter 2006, while the annual rate of home price appreciation declined to its lowest level since 2004, chart 2.

Recent declines in permit and sales activity point to slower residential construction activity in the months ahead, with possible adverse implications for overall job growth and the demand for construction financing.

Mortgage past-due rates are rising from low levels, particularly in subprime portfolios.

The Mortgage Bankers Association reported that California’s past-due ratio on prime, adjustable rate mortgages (ARM) was 1.8 percent in the second quarter, up from 1.3 percent a year earlier but still less than the national average of 2.6 percent. In contrast, subprime adjustable rate mortgage (ARM) delinquencies increased to 8.2 percent from 5.8 percent a year earlier. Still, subprime ARM delinquencies in the state continued to trail the national average of more than 12 percent.

According to DataQuick, notices of default filed against California borrowers surged 67 percent during second quarter relative to year-ago levels, and the rate of increase accelerated from prior quarters (see Chart 3). The trend appears to reflect rising default activity among subprime borrowers in particular.

Among California-based commercial banks, exposures to 1-4 family mortgages remain modest, while the state’s thrift institutions show substantially higher mortgage holdings. While still-strong rates of home price appreciation helped keep residential mortgage delinquencies in check through second quarter 2006, an expected slowdown in home price growth going forward could translate into more credit problems for mortgage borrowers.

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