Economists miss on California housing forecast

I'd like to explain why economists are wrong to pronounce a bottom in housing.

Their approach is reasonable.  They measure the price/income ratio of California houses.  In essence, they measure whether house prices are affordable to the average family in an area.  They look at house prices, and they look at household income.  In past real estate cycles, where sales were proportionately affected across all price ranges,  this method worked.  Now, it does not.  I'll explain.

The analysis begins with California house prices:  

Then, it looks at California household income, and the price/income ratio:  

The chart shows the California median house price/median income grew from its historical ratio of 6, to a ratio of 10 during the bubble years, and is again a ratio of 6.  The conclusion:  the market is healthy.

That analysis would work, except for one problem:  the median price reflects the mix of homes sold, not the prices of homes!  Keep an eye on the changing buyer pool, or the market share of price ranges sold!!

In San Diego, homes under $400k were 1/3 of sales in 2007, and are 2/3 of sales in 2011.   As the cheaper homes make up more of the sales, naturally the median declines.  

The falling median is a result of a sick market.  If we lose even more of the mid-tier and high-tier buyers, the median will fall even further!

We are losing these higher-priced buyers because of the broken chain in housing.  The chain is supposed to start with a homeowner with equity in her first home, moving up.  That buyer is gone.  Without equity move-up buyers, how will the rest of the market regain any market share?

Bob Casagrand and I look inside the numbers to get the real story.  Look for Bob's interview soon in a local newspaper, where he explains how banks are managing foreclosing to prevent further price drops.