SOURCE: U.S. CENSUS BUREAU

The divide between California’s large coastal metro areas and smaller inland areas is also apparent in local permit data. Table 3 shows how permits in smaller inland cities like Bakersfield, Modesto, and Redding are far below what they averaged before the housing and financial crises. Permits in Los Angeles, San Francisco, and San Diego have recovered to 73 percent, 80 percent, and 67 percent respectively of their pre-recession averages, all above the statewide average of 46 percent. Permits in San Jose, mentioned previously for its low unemployment, wage growth, and house price growth, average 621 permits per month compared to a pre-recession average of 435 each month. Permits in Bakersfield, Modesto, and Redding are 36 percent, 7 percent, and 18 percent of their pre-recession average and have not all gained ground in the past year.

TABLE 3. MONTHLY HOUSING PERMITS BY METRO AREA

(NOT SEASONALLY ADJUSTED)

	PRE-RECESSION AVERAGE	2013 AVERAGE	2012 AVG AS % OF PRE-RECESSION AVG	Y-o-Y % CHANGE
BAKERSFIELD-DELANO	506	183	36%	157%
CHICO	112	47	42%	88%
EL CENTRO	104	21	20%	90%
FRESNO	409	197	48%	72%
HANFORD-CORCORAN	54	18	33%	-6%
LOS ANGELES-LONG BEACH-SANTA ANA	2693	1955	73%	94%
MADERA-CHOWCHILLA	101	15	15%	127%
MERCED	190	11	6%	73%
MODESTO	248	18	7%	-47%
NAPA	41	21	52%	-63%
OXNARD-THOUSAND OAKS-VENTURA	232	63	27%	84%
REDDING	84	15	18%	-60%
RIVERSIDE-SAN BERNARDINO-ONTARIO	3355	749	22%	15%
SACRAMENTO–ARDEN-ARCADE–ROSEVILLE	1325	393	30%	45%
SALINAS	79	26	33%	300%
SAN DIEGO-CARLSBAD-SAN MARCOS	978	656	67%	-45%
SAN FRANCISCO-OAKLAND-FREMONT	1118	891	80%	11%
SAN JOSE-SUNNYVALE-SANTA CLARA	435	621	143%	43%
SAN LUIS OBISPO-PASO ROBLES	132	46	35%	-14%
SANTA BARBARA-SANTA MARIA-GOLETA	76	26	34%	200%
SANTA CRUZ-WATSONVILLE	45	17	38%	100%
SANTA ROSA-PETALUMA	141	42	30%	-66%
STOCKTON	394	107	27%	-17%
VALLEJO-FAIRFIELD	150	78	52%	10%
VISALIA-PORTERVILLE	243	64	26%	26%
YUBA CITY	167	18	11%	650%

SOURCE: U.S. CENSUS BUREAU

Another way to the measure the recovery is to track construction employment levels. Construction employment statewide is about two-thirds of what it was at the peak of the housing bubble. That represents 329,000 fewer people employed by the construction industry than at the peak of the market. While construction employment has risen since last year, only 17 percent of construction jobs lost in the recession have been recovered so far. Housing markets will truly recover not only prices increase but home construction also picks up. Only then can housing more fully contribute to the state’s overall economic growth.

Foreclosures & Mitigation Efforts

California, once plagued by one of the highest rates of foreclosure in the country, has had the number of foreclosures fall significantly. Real estate firm DataQuick reported that foreclosure notices of default fell from 49,026 in the third quarter of 2012 to 20,314 in the third quarter of 2013, a 59 percent decline.[3] Additionally, the supply of distressed homes has fallen from 8.1 months a year ago to 4.1 months in August 2013 according to CoreLogic.[4]

While some of that decline can be attributed to the strengthening job market, the California Homeowner’s Bill of Rights (HBR) almost certainly also played a role. California’s HBR, which became law in January 2013, included measures to restrict dual tracking of foreclosures, guarantee a single point of contact, and fine lenders for unverified documents among other measures to address concerns that arose during the housing crisis.[5] HBR has led to fewer completed foreclosures, an increase in the length it takes to complete a foreclosure, a decline in the inventory of distressed homes, and more quickly increasing prices (See Table 3). While it seems beneficial on the surface to have prices increase more quickly and foreclosures starts fall, the legislation is also preventing some housing markets in California from sustainably recovering. Changing the foreclosure process added uncertainty in the market and slowed down the recovery. Mere delays in inevitable foreclosures prevent distressed properties from being purchased quickly, burdening surrounding neighborhoods, and draws out the recovery process. Additionally, obstructing the foreclosure pipeline has led to decreased inventory for prospective homebuyers at a time when homebuilding is still struggling to regain footing, pushing up house prices more quickly.[6]

TABLE 4. FORECLOSURE PROCESS INDICATORS

	90+ DAYS DELINQUENT	FORECLOSURE INVENTORY	COMPLETED FORECLOSURES THIS YEAR	FORECLOSURE TIMELINE	MONTH’S SUPPLY OF DISTRESSED HOMES	LOAN-TO-VALUE RATIO
CALIFORNIA	3.3%	1.0%	59,535	435 DAYS	4.1	57.6%
U.S.	5.3%	2.4%	658,463	551 DAYS	4.7	67.5%

SOURCE: CORELOGIC; REALTYTRAC

On average, house prices increased statewide in 2012 by 0.8 percent monthly, but quickened to 1.9 percent on average in 2013. Rapidly increasing prices without greater homebuilding and the prompt clearing of foreclosures jeopardizes California’s housing recovery and may lead to decreased affordability in many markets. Many have speculated that judicial foreclosures will rise in the coming months due to some of the provisions in California’s HBR. Previous AAF research has shown that judicial foreclosures states have had slower housing recoveries.[7]

California’s HBR is not the only measure that, while well intentioned, has had consequences other than those intended. Shown in Figure 7, a slew of government initiatives and programs were created as a response to the housing crisis with a portion of funding coming from the Troubled Asset Relief Program (TARP), and the remainder coming from the Government-Sponsored Enterprises (GSEs, or Fannie Mae and Freddie Mac). Repeated changes were made to several programs due to criticisms of the their weaknesses and inability to assist more borrowers.

Through September 2013, at least 1.2 million borrowers in California have benefited from some federally funded foreclosure mitigation program.[8][9][10][11][12][13] These programs were designed to help borrowers in a variety of ways such as encouraging refinancing, modifying loans, putting in place forbearance or repayment plans, and incentivizing foreclosure alternatives like shorts sales. For example, 397,000 borrowers in California have received HARP (Home Affordable Refinance Program) refinances, an increase of 110 percent over last year, following changes to the program to reach borrowers with higher loan-to-value (LTV) ratios (See Figure 8). Other programs such as the Keep Your Home California (KYHC) programs, funded through the Hardest Hit Fund (HHF) as part of TARP, have only begun to help more borrowers; KYHC helped 150 percent more borrowers than this time last year. Still, overall KYHC has helped only 26,000 borrowers compared to all GSE programs (not just HARP), which have helped about 778,000 borrowers in California.

SOURCE: FHFA

Though many borrowers in California received assistance through federal housing programs to mitigate foreclosures, the programs by large have fallen far short of the estimated number of borrowers they were expected to help and have actually at time been counterproductive. Borrowers that receive loan modifications and then re-default have lengthened the time it takes for the housing recovery as a whole to take hold. While it may be a worthy goal to assist borrowers in keeping their homes, loan modifications are only successful when they bring mortgage payments to an affordable and sustainable level in the long term. Reports on the re-default rates of loans modified by the GSEs and other government programs suggest that many programs have failed on that front.[14]

Additionally, local communities like Richmond, California are continuing to consider schemes, including  eminent domain, to seize underwater mortgages. That proposal will likely face significant legal challenges if implemented and could potentially drive away investors. Now more than seven years after prices starting falling, greater stabilization and improvement will come better with growth in jobs and incomes and not measures that may further delay recovery.

Conclusion

Economic data suggests that housing markets in California have improved greatly in the past year, especially when it comes to house prices and jobs. Yet a very clear divide exists between coastal cities like San Jose and smaller inland cities like Redding and Fresno. The reality is that there is no single national housing market or even 50 state markets. Local communities have charted very different courses through the housing crisis and are recovering at different paces. While challenges in San Francisco surround housing affordability and low inventory, cities across the Central Valley face more fundamental economic problems. Public policy, on the federal and state levels, has in many ways prevented local communities from recovering more quickly and continues to do so. Recent changes in California law have also slowed down foreclosures, likely to the detriment of the overall recovery. As house prices continue to rise, it will be important to observe how foreclosures held up by new laws affect markets and whether homebuilding picks up and can more significantly contribute to the state’s overall economic growth.