They write that their findings “challenge the notion that foreclosures are simply the result of people purchasing properties they could not afford”.

However, the data appears to indicate that the household sector took on too much mortgage debt. United States data shows that the ratio of mortgage debt to income climbed from about 55 percent at the end of 2000 to 88 percent in early 2009. While it is subsiding, it is still too high, the early 2010 level was 84 percent. If such data were available for California, it would likely show a more dramatic change from 2000 to 2009, given California’s worse housing market conditions.

The report’s findings do not disprove that some of the households who took on the task of paying a mortgage should not have because of a lack of requisite savings and income. If there was a large share of households who were renters that moved into ownership housing, then I would expect the average home size would be modest.

What do we do now that they are there? We have three options: use government funds to give those households the money they need to stay in those homes, require the mortgage companies to forgive substantial portions of principle, or encourage those households to move back into rental housing. The policy debate should focus on the merits and demerits of these three choices.

This is bearish news for the United States economy, but I bring something more important to your attention. From the chart below, you can see that in the year 2000 the United States typically experienced housing starts at the one and a half million home annual rate. This was pre-bubble, the bubble-rate during 2005 and 2006 was about 2 million starts. At least as important, the United States economy has been mired in the low housing start level of 500 to 600 thousand since November of 2008 with no sign of breaking out of this regime.

Our United States GDP forecast for each of the remaining quarters in 2010 is approximately 100 basis points below the consensus forecast. This measure of economic activity is partly why our forecast is bearish, other reasons include weakness in the Household sector’s balance sheet, and on-going problems in banking. I ask this question for my competitors, the other forecasters who in the aggregate are the consensus, how could real GDP growth be three percent when housing starts remain this low?

Yes!  In order for California’s devastated housing market to recover home sales must increase.  The excess inventory of homes needs to be reduced before prices can stabilize.  June marks the 15^th consecutive month home sales have increased in California.  This is certainly welcome news.

CAR’s unsold inventory index fell to 4.1 months in June.  This represents a 46.1 percent decline from a year earlier.  More importantly, this is a significant decline from the January 2008 peak of 16.6 months.

While home owners do not like to hear about falling home prices, the reported 26.4 percent decline in home prices is somewhat misleading.  The composition of home sales has changed dramatically.  Distressed properties, foreclosures and short sales, now account for a significant proportion of all homes sold.  As these properties are sold at a discount they tend to reduce median home prices.

This implies that traditional, non-distressed homes have not lost as much value.  To be sure, home values in California have declined.  However, it is likely that the values of non-distressed homes have not declined as much as the reported decline in median home prices.