Whitney, I live in Southern California. Inland markets led the fall here and have been decimated back to rental parity, or better.  What are your ideas on why CA as a whole and/or LA/SD markets are slower on the descent to equilibrium?  Some ideas I've read (dubious or otherwise): owners in wealthier markets have greater resources (savings) with which to hold out for a rebound (i.e. refusal to capitulate); SD/LA relative to inland areas represent a greater concentration of prime borrowers who were targeted later in sort of a 2nd 'wave'(via ARMs, HELOCs, etc.) only after the subprimes had been exhausted (i.e. the prime reset/recast shocks only just now hitting); the "its different/more-desirable here" rationalizations (i.e. same arguments made during the boom).  My apologies if the question is too specific, regionally.

I also forgot to add that CA instituted a 'New Home/First Time Homebuyer' tax credit of 10k in 2009 and then extended it through 2010.  I do not know whether other state revenue boards are running similar schemes.


Buck,

I appreciate your comments and apologize for my belated response.  This week I was made a cog in the tightly orchestrated economic recovery.  Via the U.S. Census Bureau I have temporarily been reclassified as underemployed (part-time for economic reasons) from unemployed.  The puppeteers in D.C. have masterfully manipulated next month's employment figures to no productive end.  But it did make for a hectic week.

Some of the most interesting stuff happening in the housing market today is occurring at the state and local levels.  California is a fascinating case study as a state whose price trends are diverging from the rest of the nation.  And in my estimation, San Diego and Chicago are presently the most interesting individual cities in the country.  San Diego is the only Case-Shiller component to have not declined, on a month-to-month basis, since last summer.  Conversely Chicago has fallen by almost 10% during the same 6 month stretch. 




You have identified most of the factors contributing to California's recent uncorrelated housing price trends.  The state's incremental $10k incentive is the obvious explanation for the divergent behavior.  If the Housing Bubble illustrated anything it was how effective the Government may be at temporarily distorting home values.  

According to the WSJ there is an overlap between the Federal $8k program and the CA $10k one (resulting from delayed closings).  As such, buyers during March and April with closings in May and June may capture an $18k tax credit.  This alone is enough to explain March's price appreciation.  For a decade the CA market has been driven by access to ownership rather than price, value or affordability.  An $18k tax credit, which may be applied as a down payment, is irresistible to those focused on homeownership regardless of circumstances.

The state of California has decided to give up tax revenue now in an attempt to prop up housing values and hopefully preserve property taxes in the future.  In the near term CA housing will likely outperform the rest of the country as a result. 

The tactic is interesting and might almost make sense except that economic and market fundamentals will continue to force prices lower at the state level just as it has occurred on a national basis.  Providing buyers with subsidized access to homeownership does not make those houses affordable, sustain overvalued prices, resolve excess leverage, fix unemployment (13.0%), reduce inventories, rationalize foreclosure backlogs or stop ARMs from resetting.  It may take longer, but CA prices will decline to an undistorted equilibrium with post-bubble market forces.  (Record California Unemployment Claims)

California is Different Though

California, especially the southern region, participated in The Housing Bubble and recent stimulus driven appreciation to a much greater extent than the rest of the nation.  There are many reasons for this enthusiasm including the great weather, concentration of wealth, lucrative industries and densely concentrated population.

I believe that pervasively high prices, disconnected from traditional metrics of housing value, have leeched into the SoCal culture.  There is a reason that California was the Option-ARM capital of the country.  I recall that during the Housing Bubble only about 2% of the population of LA could actually afford to purchase the median home.  The emphasis then and now continues to be on mechanisms that allow access to homeownership, not genuine affordability.  Wacky mortgage products and Government subsidies allow such access to unaffordable properties and have been embraced by Californians.

Cultural idiosyncrasies that amplify Government efforts to prop up housing prices will not maintain elevated prices for long or beyond the duration of the subsidy. 

The Inland Empire

You note the rise and fall of the inland empire.  The reason why so many people were willing to move to these cow pastures transformed into tract housing was that prices were so high in Southern California cities.  It is possible that as prices have fallen in San Diego and LA that the exodus has or may reverse itself.  People moving back to "relatively cheaper" population centers could provide California with some price stability in its larger cities.  This is a zero sum game and would only slow price declines, but it theoretically could be contributing to recent stability in San Diego, San Francisco and Los Angeles.  

Welcome to The Jungle (Apologies to Guns and Roses and Upton Sinclair)

I have been trying for several months to come up with an explanation for why Chicago has been the worst performing Case-Shiller market since Sept. 2009.  I considered the harsh winter weather and its location in the Midwest but dismissed both as its results exceed similar markets including Detroit, Cleveland and Minneapolis. 
 
I have decided that the unusual decline is due to Chicago losing out on the 2016 Summer Olympics.  The decision was announced on October 2nd and prices have been plummeting since.  Given the extraordinary amount of capital invested in infrastructure and improvements in preparation for the Summer Games, I believe an Olympics-driven bubble had inflated or was propping up Chicago's housing prices.