Explaining Southern California's economy

DoubleLine Capital's Jeff Gundlach says housing recovery has a ways to go (Chart)

DoubleLine Capital's CEO, Jeff Gundlach, doesn't see a robust housing recovery in 2013, the "Year of the Snake."

DoubleLine Capital's Jeff Gundlach presented his 2013 market outlook on Tuesday. DoubleLine, based in Los Angeles, is a fast-growing financial start-up. It has amassed more than $50 billion in assets under management (AUM) since CEO Gundlach left rival TCW — also L.A. based — in 2009, under controversial and eventually litigious circumstances. 

With Newport Beach based PIMCO, DoubleLine and TCW form what I call a Southern California "bond triangle" — together the trio manages more than $2 trillion, dealing mostly with fixed-income investments (although PIMCO and DoubleLine have been edging toward equities as a greater portion of their portfolios).

Add in Pasadena-based WAMCO, with $450 billion under management, and you have a constellation of bond funds with portfolios that surpass the annual economic output of the entire state of California, which is about $2 trillion.

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California catches up with Congress on short sale mortgage debt relief

A short sale home in the Spring Valley a

MARK RALSTON/AFP/Getty Images

Homeowners who do short sales won't owe federal taxes on the forgiven portion of the debt. California may soon follow suit.

Homeowners who do short sales — selling their homes for less than they owe to the bank — got a break when a deal was made in Washington on the fiscal cliff. They won’t owe taxes on the difference between the sale price and the loan debt because the Mortgage Forgiveness Debt Relief Act was extended.

Now California may do the same.

Last December, State Senator Ron Calderon introduced a bill — SB 30 — that would extend mortgage debt forgiveness for Californians on their state taxes. If it passes, it will join the federal tax relief that was already extended by Congress.

The California Association of Realtors (CAR) has put its weight behind passage of Calderon’s bill. The trade group sees the bill as critical to the “continued recovery of California’s housing market.” A shortage of homes for sale in the state is driving up prices.

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Are homebuyers too optimistic about rising prices?

Homes

KPCC

Buyers are looking to buy housing again. And according to the California Association of Realtors, they expect prices to rise.

It looks like the pendulum has swung back to the optimistic side for California home buyers. The California Association of Realtors released a study Tuesday showing that buyers are increasingly confident prices will go up in the future.

Which raises an obvious question: Are buyers in the state being too optimistic about rising prices, after being excessively pessimistic about prices falling in the aftermath of the housing bust? When the pendulum swings back, it often swings too far.

About 25 percent of the 800 home buyers surveyed by the trade organization think prices will be higher next year. That’s more than a threefold increase over what buyers said in 2009, in the depths of the housing crisis.

But that pales by comparison with the five-year and 10-year outlook. For those periods, home buyers expect 41 and 73 percent price increases, respectively. Clearly, there's a high probability that prices will be higher a decade from now than they are today. There's a little thing called inflation, after all, which typically runs at about 2-3 percent per year and, absent big upticks in home prices, provides the steady, reliable asset appreciation that homeowners buying for the long term are looking for. They don't call real estate a hedge against inflation for nothing. 

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California foreclosures and short sales are a smaller part of October market

Reed Saxon

A foreclosure sign in Pasadena. Foreclosures and short sales are a smaller part of the market in October, according to the California Association of Realtors.

California’s real estate market has been anything but healthy since the housing bubble burst. But there are now signs that the patient is on the mend. And really, what a difference a year makes! Last October, so-called “distressed sales” made up half of all monthly transactions in California real estate.

In this case, "distressed" means foreclosures and short sales. Short sales in particular have become popular. That's when the lender accepts less for the house that what the borrower owes.

A year later, the numbers have been reversed. The California Association of Realtors now reports that in October, distressed sales fell to just over a third of the market. Los Angeles County mirrored this statewide trend.

One reason why distressed sales are falling is that there simply aren’t as many of them on the market. There was only a 2-month supply of foreclosures in September and a 3-month supply for short sales. Those inventories could rise as banks put more foreclosures in the market and borrowers who remain underwater on their mortgages, just not as much as a year ago, decide to go for a short sale. 

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Housing crunch in SoCal could take a while to normalize

Justin Sullivan/Getty Images

A sign is seen outside of a KB Home sales center in Richmond, California. It could take a while before business is back to normal.

Monthly real estate data has been pointing in one clear direction for the past few months: a lack of supply is driving up prices. 

At this point, everyone from the California Association of Realtors to the National Association of Realtors to economists and firms that track the Southern California real estate market agree: We don’t have enough houses!

But wait — idn’t we just go through a massive housing bust? Yes, but now demand is surging, driven by low prices and low interest rates. Meanwhile, homebuilders are building again, but at about half the rate they did in the early 2000s.

The California Association of Realtors says there’s barely a three-month supply of homes to sell in the state. Twice that would be normal.  But rationalizing the market could take time, with analysts predicting it could take anywhere from a few quarters to a year before the homebuilding business is solid again for firms like L.A.-based KB Home.

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