by Calculated Risk on 4/02/2007 10:44:00 AM

This is a key issue. According to the UCLA Anderson Forecast, Orange County, California (where I live) will avoid the worst of the housing bust. The logic goes something like this: Since there are very few first time buyers in O.C., there are very few subprime loans. Therefore there will be fewer homes in foreclosure, and less pressure on housing prices.

I disagree somewhat with this view. The areas with a high percentage of both housing related employment and subprime loans will most likely get hit the hardest (like California's Inland Empire). However areas like Orange County will not escape the carnage. In O.C., a large percentage of buyers used affordability products (like option ARMs) to purchase or refinance their homes. Many of these buyers will also get in trouble as housing prices stagnate and fall - it will just take a little longer than with the subprime borrowers.

Also, housing is a series of small chain reactions.

Click on graph for larger image.

Not all chain reactions start with a first time buyer using a subprime loan, but the loss of a large number of subprime buyers will impact an entire chain.

And it doesn't matter if the subprime buyer is in Orange County. The loss of a subprime buyer in Riverside means a moveup buyer can't purchase a home somewhere in Orange County.

Here is the story ...

From the O.C. Register: O.C.'s housing market to be spared worst of subprime fallout

The troubles in the subprime mortgage industry could bring stagnation to California's housing market, but Orange County should be spared the worst fallout, according to a UCLA economist.

In a report to be released today, Ryan Ratcliff, an economist with the UCLA Anderson Forecast, points out that markets with a higher proportion of first-time buyers and new homes – such as the Inland Empire and Ventura County – are seeing a bigger surge in defaults, or borrowers who fall 90 or more days behind on their mortgage payments, than areas like Orange County.
...
Orange County is "not a first-time buyer market or a market with a lot of new building," Ratcliff said in an interview. For those reasons, the recent rise in defaults is of a lesser magnitude here.
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"Since the subprime market was almost the only thing keeping sales volume buoyant in the last years of the boom, the drying up of subprime credit suggests that home sales in California will be stagnant for some time to come," he writes.