Is CA ‘Echo Boom’ financing tax flight to Fort Alamo?

Feb. 8, 2013

By Wayne Lusvardi

By now most Californians have heard the radio ads by Texas Gov. Rick Perry urging businesses to move to Texas.  California Gov. Jerry Brown has inferred that the Texas governor is an annoying person.

But Brown may have more to worry about than jobs-poaching governors.  California currently is enjoying an “Echo Boom” in real estate, a boom following a crash. The money from the echo boom may be providing financial liquidity for small businesspersons, retirees and anyone with marketable properties in desirable locations finally to flee to Fort Alamo to escape the emerging flood of tax increases in California.

The Echo Boom selectively has exploded in Southern California.  So far this bubble mostly helps sellers, not buyers nor those property owners with upside down mortgages or property owners in loan default.  If the Mortgage Bubble of a decade ago was a buyer’s bubble, the Echo Boom is a seller’s bubble.

Market for “good” properties booming

Thus far, the Echo Boom is occurring on any “good properties.”  This means homes with little or no debt problems and vacant land in close-in locations with favorable near-term development potential.

What is inflating the boom is a confluence of factors:

* The federal government’s Zero Interest Rate Policy is producing low mortgage interest rates that are below the rate of money inflation (effectively free money).

* Government suppression of foreclosed and upside down homes from reaching the open market has created a very limited supply of homes on the open market.

* Asian buyers and investors are looking for tangible assets like real estate to buy rather than hold diluted Yuan (dollars).

* The supply of vacant or effectively vacant land for development has been limited resulting in less supply of new homes on the market.

* Entire subdivisions of homes are being taken off the sales market by large hedge funds buying up foreclosed homes for rental and eventually re-sale when the market recovers.

* A real estate salesperson in San Marino –- an upscale suburb of Los Angeles -– told this writer that prices are the highest in 20 years, even surpassing the recent past Mortgage Bubble.  Only 8 homes are listed for sale in San Marino and any home listed for sale typically gets ten or more offers.  She said that brokers no longer know what the market value of any home is because the prices get bid up so high.

And this boomlet is not just occurring in coastal cities with fewer foreclosures and no available land on which to build.  A broker in the city of Corona — in the foreclosure zone of the Inland Empire — says the government’s suppression of foreclosures has resulted in the same type of price bubble for sellers with homes that are not saddled with excessive debt.  He said those in foreclosure, or with upside down loans, are having their second mortgages forgiven and being given a new first loan with teaser interest rates.

The hook in these loan reductions is that the new loans require a balloon payment — a payoff of the entire first loan in 3 to 5 years — with a refinanced loan.  But the concentration of homes with upside down mortgages and defaulted loans in the Inland Empire is also driving buyers back to close in coastal locations.

In coastal Orange County, it is reported that 2,926 new home escrows were opened last year.  The Irvine Company reportedly sold 1,200 new homes last year.

The Manhattan Institute has documented a “Great California Exodus” to other states such as Texas, Nevada, Arizona, and Oregon.  Texas is the most popular state for California tax refugees.

California’s foreclosure policies backfiring

The policy of President Barack Obama, Brown and California Attorney General Kamala Harris of suppressing home foreclosures from reaching the open market seems to be having unintended consequences.  It has led to such a tight supply of homes and land that sellers are commanding prices that top those of the previous decade’s Mortgage Bubble.

Although we won’t know for sure until data is available later, it appears that the Echo Boom may be aiding middle-class tax flight from California.  IRS data migration numbers have been discontinued for the first time in 21 years.  Apparently, the Obama administration does not want to provide embarrassing data on where Californians are moving.

The San Antonio — Austin areas of Texas seem to be the most popular destination for tax flight, not only from California but every economically distressed Blue State in the United States.

U-Haul trailer rental data indicate that San Antonio, Tex. is the most popular destination city for Californians moving out of state.  San Antonio is the location of the famous Mission San Antonio —  “The Alamo” — which became a fortress for Texas soldiers in a war with Mexico in 1835.

San Antonio is now becoming a symbolic fortress for Californians in an interstate tax and business war.  Thus far, Texas appears to be winning most of the battles thanks to California’s politically motivated foreclosure policies unintentionally financing tax and business flight out of state.   No wonder Texans still shout: “remember the Alamo!”