March 2013 home sales volume was 37,764. This is on a par with one year earlier. Of particular note is the sales volume trend over the past four months. The trend has turned dramatically downward with the slowdown in sales momentum.
The bumpy recovery pattern continues. Home sales volume rose in 2009, fueled by end users clamoring after tax credits. Then, in 2010-2011, home sales volume fell back for lack of all types of buyers. It rose again in 2012, driven by speculator interference. And now we see it drifting downward again for lack of end-user demand.
By mid-2013, sales volume most likely will be significantly below last year’s numbers — a normal market adjustment to the speculator-driven price bounce we just experienced. The next downturn will follow an increase in mortgage rates, forecasted to occur in 2015.
California’s real estate sales volume needs about 60,000 homes sold monthly to fully recover. That recovery is dependent on 18-24 months of annual California job growth exceeding 350,000-400,000 jobs. We are nowhere close at this point in the recovery, but likely will be around 2016.
Other key factors controlling California’s housing market sales volume follow.
Absentee homebuyers: to hold or to fold?
Absentee homebuyers (speculators, buy-to-let investors and renovation contractors) accounted for 31% of Southern California (SoCal) March sales volume, up from 28% one year earlier. Absentee homebuyers made up 27% of Bay Area homebuyers in March, up from 24% one year earlier. Speculators chase upward price movement, but sales volume is now softening and prices will slip in response. Thus, the percentage of absentee buyers making up monthly sales will continue to rise until prices start to slip, likely by the third quarter this year.
Cash purchases (60-66% speculators) remained abnormally high in March, representing 34% of SoCal sales volume. This is down slightly from the record high set in February of 37% and up from 32% one year earlier.
The percentage of cash purchasers in a normal market is around 16%, comprised mainly of end-user buyers. By fall 2013, cash purchasers as a percentage of total sales volume will drop as speculators react to slipping prices.
Bay Area cash sales were 31% of home sales in March 2013. This is down slightly from 32% in February 2013 and up from 29% one year earlier.
Speculators will remain motivated to buy only so long as they believe home prices will rise quickly. These current high expectations for a quick resale are facing the headwind of falling sales volume, to be followed by downward price movement within 12 months.
Also, the likelihood of a flip in the near future dims each month as annual increases in the buyer purchasing power index (BPI) come to an end by midyear. Sellers ignore these forward trends at their peril.
When short-term speculators realize they cannot make as quick a profit as anticipated, they will fast leave the market. The inventory they leave behind (today’s shadow inventory) will be consumed primarily by end users and income property investors.
At the moment, demand from end users represents only half the number needed for a normal 60,000 monthly sales volume. End users currently have difficulty financing home purchases due to overpricing and lender down payment and debt-to-income ratio requirements.
Jumbo loans: room at the top
Jumbo loans (loans over $417,000) in SoCal accounted for 24% of March 2013 sales. This is up from 21% in the prior month and 16% one year earlier.
Jumbos made up 40% of Bay Area sales. This is up from 37% last month and up from 31% a year earlier.
Jumbo use has risen statewide as sales of high-tier properties have accelerated — particularly in the pricey Bay Area — since 2009. Despite this increase, jumbo use remains far below its peak in 2006-2007.
FHA Loans: a window period is closing
Federal Housing Administration (FHA)-insured loans made up 23% of SoCal mortgage recordings. This is down from 25% last month, and 30% one year earlier.
FHA-insured loans made up 12% of Bay Area mortgages in March. This is down from 15% in the prior month and 21% one year earlier.
FHA-insured loan use across California is at its lowest level since late 2008. first tuesday anticipates the percentage of FHA-insured loans will steadily drop, hitting a bottom of 4% of loan originations around 2018. High (and rising) FHA insurance premiums make conventional loans with private mortgage insurance (PMI) more appealing, as they ought to be.
FHA buyer standards have also been tightened at this point in the recovery. Nonetheless, FHA-insured financing remains popular among determined first-time homebuyers with low savings and low credit scores.
FHA, PMI, or neither?
ARMs: holding lenders at bay
Adjustable rate mortgages (ARMs) made up 7.5% of all SoCal mortgages. This is up from 5.5% in the prior month and 6% one year ago.
ARM use in the Bay Area was at 13% in March. This is up from 11% in the prior month and 12% one year earlier. This movement is insignificant and of no present concern.
ARM use will remain relatively low until property prices rise more than 5% annually over a two-year period. This is not likely to happen in the current price bounce. When it does, ARM use will increase as agents push homebuyers to overreach on amenity value, appraisers drift away from comparable pricing and lenders relax credit standards.
Re: California March Home Sales from DataQuick