The California bubble, bigger than the other ones

Morning bloviation: Most reporting on the American economy is based on national statistics, giving the impression that all 300 million of us are in the same boat, rising or falling together at roughly the same time. Of course we all know that's not true -- there are big differences between regional economies. 

Which brings me to a story from the New York Times earlier this week on the effect of the weak housing market on car sales. Here's what grabbed me: "In hot markets like California, nearly 30 percent of all consumers tapped into the value of their homes to help finance their new cars, according to CNW Marketing Research."

Look at the chart put together by CNW measuring percentage of new-car purchases in 2007 that were made with home equity loans:

1) California  29.8%
2) Florida      19.7%
3) Illinois      14.7%

National average: 11.8%

Think about that for a second: Californians were nearly three times as likely as the rest of the country to use their homes as ATMs during the bubble (at least for buying autos). You know that stereotype of the equity-rich homeowner who borrows against his or her equity and splurges on a new car, a vacation, etc.? That stereotypical homeowner is a California homeowner. Why did Californians behave differently? Because theirs was a bigger housing bubble. They had more equity to borrow against. Their housing ATM had a higher withdrawal limit.

Does this mean that the fallout from the housing crash will be worse here? I'm guessing it does. The way I read the chart above is that California car dealers have just lost a lot more of their sales than car dealers in Chicago. Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: L.A. Times

Comments

[Brad]

Hmmm....I would think the Mercedes, BMW, etc. (all the yuppie "success" statements) dealers would see a much larger hit than due to this than, say, Kia.

The other dynamic is the price of gas. There will be new cars being bought/leased, but they'll be hybrids or econo-boxes and not Range Rovers. Which of course carry a smaller margin than SUV's, so this may very well affect CA dealers bottom lines.

[Tim K.]

Peter, I have a different take on this data. I would argue the key piece of data is the Californians are more likely to spend their HELOC on CARS because they are an essential part of having a job. Nearly every young person or immigrant whom is getting started with a new job has to commute to work, and they have always borrowed money to get their first car. I think the only difference is that recently, HELOC money has been the borrowing vehicle of choice (no pun intended).

I'm guessing that in other parts of the country, cars are not the critical must-have-to-survive item.

[Rich]

As I understand it, the portion of the refi used to buy the car isn't supposed to be deductible on Federal Taxes. How many people did so anyway, and how much did that cost the US government in revenue? I didn't see a way while doing my own 1040 for the IRS to know what the refi money was used for...

Ironically, interest on boats with cooking/bath facilities are deductible as second homes, though using refi money rather than a boat loan to buy one might negate that part of your deduction also...

[Laker]

Peter wrote: "...Why did Californians behave differently? Because theirs was a bigger housing bubble. They had more equity to borrow against. Their housing ATM had a higher withdrawal limit....."
EXACTLY.
Let me add that California's ATM had a banker fillup the machine with cash on a daily basis during 2001-2007. Then at some point in 2006-7 he got tired and eventually stopped refilling the machine. Now, the ATM cash machine is empty.
I know 3 people in my wide family that bought cars using HELOC/refinance.
Another important figure to understand here is that during 2001-2007, the california home owner basically had a 3rd income (assuming he/she are married) So the familiy was bringing three incomes, husband, wife and house. All spending, shopping, car buying was done based on 3 incomes. To understand this, take the median house in LA that was about $180,000-200,000 back in 2000. By 2006, it was $580,000. That translated into about increase of $66,000 a year. And that is even little higher than median income in LA. Now, take that income and remove it....what do you get?
BTW:. It is so true that this mess is pretty much confined to bubble markets like CA, NV, AZ, FL, etc. The rest of the states that did not bubble, are now paying the price and bailing out "people like us". It is kind of not fair...but that is the price of being united states.

[Susan]

Thanks for spotting this story Peter.

It is California that has also been generating all the recent news about tent cities and car park shelters for the homeless.

[fatkid]

While the statistic may be true, one should also keep in mind the style of car your average californian is driving, vs someone in Chicago. It's my understanding that two of the nations top performing (sales PSF, etc) Mercedes dealerships are in South OC, for example. It's not like the median incomes are that much higher here either.

Having lived on both coasts for a number of years, I've never seen so many people driving such expensive cars as in CA, or as obsessed about their cars as here. Feels like a culture thing.

What is also interesting is the drastic downturn in SoCal > Vegas trips. IIRC SoCal natives represent a pretty large portion of Vegas' out-of-state revenues, and traffic is down something like 30% from this area and with airfare what it is, Vegas is trying to make up the difference by lowering room rates, with little success. I wonder how much of the gambling racket was generated from LOLREFIs. Just another stat to track.

Net net, people simply live beyond their means.

[Tony]

I was at a lot getting my leased car serviced a few weeks ago and was stuck there for about 2 hours during the middle of the day. I didn't see one customer shopping for a car on the lot - not one. This was at a big Westside dealership, too.

I'm sure I will get chided by the morality police, but I can't wait for prices to fall and burn the banks, mortgage companies, and especially the buyers who could afford to put nothing down but had to have a house anyway. Their carelessness in their finances; their lack of morality, lack of honesty has impacted all of us who use financial stability, honesty and morality in guiding our financial decisions. I am stuck renting a place that is truly to small for me because they rabidly and carelessly drove up the prices of homes in my area. I don't care if it is bad karma, I am angry with the people that put us in this situation, and who have helped to weaken the country's financial system, which is most likely on the brink of collapse. When I read their sad stories of financial collapse, it brings a smile to my face - because when they got their house and their car they got a lot of things, but when they lose it all they are finally getting exactly what they deserved.

[pugtv]

ShockG,

Just curious, did you tap into your home?

Also, why are you unwilling to invest (and make tons of money) on the CME Los Angeles housing futures if you believe the market is not that bad? Back up your words with deeds. Or are you a doom and gloomer at heart? =)

[OC_Land]

I used my HELOC for the down payment on my car... and then I promptly paid off the balance. It was a "bridge loan" more than anything else. I suspect I am the exception though...

[Michael Snyder]

California has defined a large portion of America's "car culture" since the invention of the surfboard. Southern California has more walking, talking fashion statements per square mile anywhere this side of Paris. (France, not Hilton!) Put the two together, add a little cash & wall-la!
Speaking of bubbles, it's a great time to get a deal on a Hummer:-)

[mark g]

no surprise... this is a car + status culture out here and this supports that fact... not saying it's good or bad, but to each hi/her own...

[Mary Ellen]

Just another verification that the average California lives way way above their means - and now they are severely paying for it!
Yes California materialism is WORSE than anywhere else in the U.S.!

[Doug in Toronto]

I just wonder what percentage of these "ATM Loans" were used for vacations, cars, etc., and what percentage were used for home improvements, unexpected medical bills, college tuitions and the like. I have somewhat more sympathy for people who withdrew equity because they had a geniune need than I do for people who just wanted to see New Zealand or France, or upgrade to a more expensive model of BMW.

[giresu]

Fools die. It's a fact.

[tealeaf]

I'll stipulate to the redundancy factor:

This data underscores the notion that homeowners who bought prior to 2000 that abused bubble financing are just as at risk as the folks that bought during the run-up.

[Nelcisco]

Peter- my older left the southland about 30 yrs ago in, and sort of expanded his prospective on "real" life, meaning that as he moved around the country as a young man, he'd say to us get out of LA its a trap of image concious people.

growing up in L.A., I thought, we have it ALL, entertainment, sports etc. I left 6 yrs ago and saw California from the outside looking in, objectivley I noticed thru the media that California, particularly LA has a culture of exuberance much more than the rest of the country, thats because the entertainment industry is headquartered in Hollywood, the history of the Laker dynasty since Magic Johnson came to town from Lansing,Mi so we want to identify with that, we get caught up in the success around us even though many of us are not, so....to get what the rich has we loot the equity of our homes to get what the rich has.

When you're in your car driving on the 405 the person next you to doesn't know whether you make 40k a yr or 40k a week. But boy, at least we look it like and thats part of the LA thing.

So while the rest of the county is building true security and driving Hondas we are now losing our homes and sleeping in our wheel spinning Escalades. NOT ALL OF US, but you get the gist.

Which is why I stand by what I said yesterday about LA not being third world ECONOMY, great opportunity to be successful, but we need to be responsible and change our mindset about whats impotant to us or we will fall and it will carry over to other areas other than housing.

Remmber, MONEY DOES'T COME WITH INSTRUCTIONS!!!!!

[Matthew]

Wow - sounds like I should be able to pick up a used car as well as a house much cheaper. Doesn't sounds like a bad deal to those of us who didn't over extend ourselves...

Anyone looking to unload a nice SUV at firesale prices?

[TakeFive]

People didn't take money out to BUY a vehicle - they took money out to make a down payment on a vehicle. Resale market for SUV has tanked, so now they're upside down on the house AND the Hummer.

And then there's the folks who rolled over an old car loan into a new vehicle (Car worth less than you owe? No Problem!).I know someone who's paying $900 a month for a Tahoe because of this kind of financing.

Was at the Ford dealer the other day. Saw a spotless '06 Expedition on the lot for $18,300. Didn't these things sell for about $40K new?

[KateNonymous]

I'm still amazed at how many people think that everything is an ATM. As far as I'm concerned, there are very few reasons to take money out of your house--if you're putting it back into the house through well-thought-out improvements or repairs, for example, or severe financial hardship. A new car isn't either of those things. If you have to take money out of your house to buy a car, you can't afford to buy that car. But then you probably couldn't afford the house, either.

More and more, I think we need to have some sort of "Life Skills" class for high school students. There wasn't a lot of that when I was in school, and today there's even less. Mr. Nonymous works with college students and has had to teach several of them how to write a check. An awful lot of kids aren't likely to be learning this stuff at home, given the kinds of financial decisions we're seeing from adults.

[Joe B.]

In the words of the Governator, "Well, duh..."

[puckhead]

Maybe I’m missing something, but is it that big of a deal to tap into a HELOC to buy a car? I mean, everyone finances a car purchase. How many of you bloggers go into a car dealership and write a check for $30K to buy a new car? Whether you do it by a loan from the dealer/bank or a HELOC, what’s the difference? The rates from HELOC’s were really low and you can deduct the interest. People always assume the worse, that the people who tapped into their HELOC’s were buying above their means. How do you know they were not buying Accords or Camrys?

[Jackie Romulo]

@Tim K. - I agree, cars are more of a necessity here in California than in other areas where public transportation may be an option, but the difference here is that people are taking from their HELOC and buying LUXURY cars, cars that they couldn't afford otherwise.

I say if you are going to use your HELOC for a new car, get something mileage efficient and cost-effective, like a Honda Accord or a Toyota Camry instead of that S-Class Mercedes Benz. And people with 2-3 kids who use that as justification to buy SUVs ... well i think they are better off with a Sienna than a Tahoe.

But that's just me.

[Jim]

If you're so image conscious and don't have the guts and courage to live within your means I have a hard time feeling any sympathy for you. Few of the people driving these expensive cars can truly afford them, and now they're finding that out. Queue the violins to play for them, cuz I aint.

I rent a very modest apartment and drive a car that I paid off 5 years ago, neither of them are gonna get me laid. Living BELOW my means has allowed me to save for a down payment during the time that I knew things were ridiculously over-inflated. With all that I'm still crossing my fingers that things continue to drop so I can afford in a nice location.

[Uncle Billy Climbs Mont Pelerin]

OMG

MLTPB is now a day trader (note tongue in cheek) and Michael Snyder is selling Hummers.

When are they going to start auctioning off huge quantities of cars? Port people... are they stacking up like mad over there?

Other note -- what happened to the two posts purportedly from Laura Richardson's assistant's mom, "dfree." Is it gone or did I just lose it? I can't find it when using the search tool at the top of the page either, using language specific to the posts, and searching only the blogs. Did it turn out to be bogus?

[Teresa]

-----I'm guessing that in other parts of the country, cars are not the critical must-have-to-survive item.-------

Incorrect. Cars ARE a critical must-have-to-survive item in almost all of the US, the notable exception being New York City.

I'm not against people using HELOC's to buy cars--I think a traditional car loan is one of the worst kinds of debts one can take on--but I suspect these people weren't buying cars they "needed," but cars they WANTED. As someone else pointed out, I doubt that Kia dealers are being hit as hard by the real estate fallout than are Mercedes dealers.

In addition, how many families of four insisted that they "needed" a monster SUV that seats eight? And why did all these people have to buy brand-new cars?

A new car is a horrible thing to purchase; it depreciates exponentially the moment it is driven off the lot. It's a lot better to do what I did a few months ago, purchase a relatively young (two- to three-year-old) used car with low miles. My 2005 model cost about half of what I would have paid for a 2008, it's in great shape and it's still under warranty for the next seven years.