In past AppraisalPort newsletters, I have referenced information from the Real Estate Research Council of Southern California. The council is a longstanding nonprofit organization consisting of members who share an interest in real estate information (lenders, appraisers, brokers, reporters, public utilities, and others). Since the 1960s, the council has been collecting extensive information that is compiled into a quarterly report about the market in the seven major Southern California counties. Often the information reflects trends nationwide.
The last quarterly meeting featured a great presentation by Leslie Appleton-Young, Chief Economist for the California Association of Realtors. Most of the numbers I reference below are from California, but the overall trends apply to the country as a whole. Leslie also covered aspects of the current lending environment and the shadow inventory that apply to the entire country.
Leslie began the presentation with good news: The total dollar volume of real estate sales for the state finally turned around and started back up in 2012 with an increase of 16.6% over 2011. The forecast is that the dollar volume will experience another increase of 7% in 2013. She identified 2011 as the bottom of the market where total dollar volume of home sales is used as a measurement.
Next, Leslie took a look at distressed sales as a share of the market. She shared more good news here because the percentage of foreclosure sales (REOs) has been dropping. REOs fell from 28% of the market in October 2011 to only 11.8% just a year later in October 2012. Short sales, on the other hand, have remained fairly steady, representing 24.4% of the market in October 2012. In that same month, full equity sales represented the largest segment of the market, totaling 63.4% vs. only 49% in October 2011. It would appear that the market is getting stronger. Equity sales are increasing rapidly while REOs are falling. Many people still seem to be using the short sale as a means to get out of an upside-down property and avoid foreclosure, but on better terms than in earlier years.
The next part of the presentation covered a topic of concern to everyone: prices. I was amazed to see how fast and hard the fall in prices had been for existing detached homes in California. The peak was in May 2007 with a median price of $595,530. In those days it was not easy to buy a house in California. No wonder people went for loans they couldn’t afford. Leslie believes we hit what we hope is the bottom of the trough barely a year and a half later with a median price of $245,230 in February 2009. However, there is also some good news concerning prices. They have been steadily increasing (with some ups and downs in various months) since that time. The biggest and most stable increase occurred in 2012 and prices are currently almost 39% above the trough with the October 2012 median price reaching $341,370.
Based on the above numbers, housing in California is still much more affordable than in the past. That fact, combined with an improving economy, is finally having a positive effect on housing sales. Leslie further explained that the unsold inventory indexes have dropped by more than half in most parts of the state in the past year. This is even holding true for all the different price ranges, and we are looking at numbers in the 2-5 month range compared to numbers exceeding 16 months, such as when we were drowning in inventory back in 2008. At this point, California actually has an extremely low level of active listings. Short Sales and REOs are in the shortest supply now. This low level of listings is what is finally putting some real sustainable upward pressure on housing prices. If your state isn’t as fortunate yet, it too may begin to turn around soon; many times California indicates where the rest of the country is heading.
The next section of Leslie’s presentation examined the current national lending environment. Of course the best news in lending is the incredibly low interest rates. However, the trick is getting one of those low interest mortgages. The number of new mortgages financed reached a 16-year low in 2011 (the numbers weren’t in for 2012 yet). Fannie Mae and Freddie Mac are still far and away the main source in the secondary market and all the lenders have to play by those rules if they want to sell their loans. Considering what we went through in the crisis, some tougher standards were in order. The worry is that Fannie and Freddie will make things too difficult for new buyers to enter the market and absorb the inventory. We just have to wait and see what 2013 brings on this issue.
What about all the shadow inventory that many think will be released and flood the market with unsold homes? Leslie first explained that everyone defines the shadow inventory differently. Do they include properties that are bank owned, in foreclosure, not making payments, underwater, or some combination of the above? So there’s no true gauge indicating what should be included in the count. She says it is an “urban myth” that there will be a flood of foreclosures after the election. That seems to be holding true, at least for now.
That isn’t to say that the shadow inventory issue should be ignored. There are still a lot of homeowners that are in some kind of trouble and those houses could eventually find their way back into the market as distressed properties. Looking again at California statistics, Leslie pointed out that 29% of borrowers are still underwater and that 15.6% of mortgages are over 125% loan-to-value (LTV). The U.S. as a whole is in a bit better shape with less than 10% of the mortgages having an LTV of 125% or more. If we had to deal with all these homes hitting the market at once it would be a problem, but the good news is that “Notices of Default” and the actual foreclosure rate in California has been trending downward since 2010. Short sales are absorbing much of the excess inventory and the banks that own large numbers of properties are still operating with some level of caution as they sell them off.
Leslie finished her presentation with some forecasts for the real estate market. She thinks there is a pent-up housing demand looming based on some market factors in California. The population has continued to increase while the actual number of households has been dramatically decreasing since 2009. This has created the largest spread between population and the number of households that has existed in quite some time. The cost factors have also shifted. On average, it now costs $390 per month less to own and pay a mortgage when compared to renting. Leslie predicts that these factors, and some of the dynamics mentioned above, such as continued low interest rates, will push the total number of single family re-sales in California to 530,000 in 2013 compared to 498,000 in 2011 with an accompanying increase in prices. If your state hasn’t yet started to feel the recovery, it is on its way.
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