Just under 29,500 homes closed escrow in California during November 2014. This is down 20% from October 2014 and down 12% from a year earlier.
This November’s home sales volume marks the slowest November since 2007. However, there were fewer business days in November than normal, which may account for some of the drop in sales volume. Still, California home sales volume has been locked in a downward trend experienced since the second half of 2013. This slip is mostly due to the steep increase in home prices occurring in 2012 through Q3 2014, when prices peaked.
2014 is on track to end with approximately 400,000 home sales. This is well below the peak year of 2005 when 753,876 sales closed escrow. Prior to the Millennium Boom, 550,000-600,000 homes closed escrow annually.
first tuesday forecasts a weaker home sales volume for December 2014, continuing into the first half of 2015. This resembles the 2010-2011 experience in home sales volume after the 2009 tax stimulus. 2012-2013 received a similar “stimulus” from speculators who temporarily propped up sales volume and prices. Now, as speculators continue to exit the market, sales volume will continue to decrease, followed by the continued decline of prices from Q3 2013 into mid-2016. End users of property have been pushed out of the market by reduced purchasing power, due to the jump in prices and the mid-2013 rise in mortgage rates which persists today.
The bumpy recovery continues, and it’s still a rough ride. California’s housing market 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. The good news is that a full jobs recovery (pre-population gain) finally arrived in Q3 2014. This is critical since homebuyers need income (and savings) to qualify for a mortgage.
Other key factors controlling California’s home sales volume follow.
Absentee homebuyers: to hold or to fold?
Absentee homebuyers (speculators, buy-to-let investors and renovation contractors) still make up a significant portion of the resale market, though they are leaving quickly. Absentee homebuyers accounted for 24% of Southern California (SoCal) November sales volume, up slightly from the prior month. November’s absentee homebuyer share is down from 27% one year earlier.
Absentee homebuyers made up 19% of Bay Area homebuyers in November, the lowest level since September 2010, and down from 20% a year earlier.
Speculators chase upward price movement, but home prices have topped out and are beginning to slip. Thus, real estate speculation and absentee buyers are expected to continue their exodus from the market throughout this year and into 2015.
Cash purchases (two-thirds of which are made by speculators) represented 24% of SoCal sales volume in November, up slightly from October which was the lowest share of cash purchases in nearly five years. This follows a steady descent from 28% a year ago. In a normal market, cash purchases represent around 17% of all buyers, comprised mainly of cash-flush end users.
Bay Area cash sales were 19% of home sales in November 2014, the lowest since 2008 and down from 22% a year earlier.
Speculators remain motivated to buy only so long as they believe home prices will rise quickly. When speculators realize they cannot make a short-term profit as anticipated, they will either quickly leave the market or resort to Plan B to hold for another five years. The inventory they dump and return to the market (today’s shadow inventory) will need to be consumed primarily by end users and income property investors who will hold the property for a considerable length of time. However, there aren’t enough of these buyers ready and willing to sustain even the current low sales volume. Thus, expect home prices to decrease in Q4 2014 and continue downward in 2015. As a matter of financial gravity, the more exaggerated the rise in home prices beyond the rate of consumer inflation, the more pronounced the corresponding fall.
Jumbo loans: room at the top
Jumbo loans (loans over $417,000) accounted for 31% of SoCal’s November 2014 sales, down from 32% in the prior month and up from 28% a year earlier.
Jumbos financed an astounding 57% of Bay Area sales, up from 56% in the prior month and 50% a year earlier.
Jumbo use has risen statewide as sales of high-tier properties accelerated — particularly in the pricey Bay Area with its greater concentration of new wealth. Despite this increase, jumbo use remains below its 2006-2007 peak, when buyer overreaching maxed out.
ARMs: holding lenders at bay
Adjustable rate mortgages (ARMs) made up 12% of all SoCal mortgages in November 2014. November’s ARM share was up slightly from the prior month and up from 11% a year earlier. While ARM use is over what it was up until mid-2013, it’s still well below the Millennium Boom peak of 78% experienced in mid-2005. ARM use bottomed at 2% of all SoCal sales in April 2009.
ARM use in the Bay Area was 23% in November. This is up slightly from the prior month and up from the 20% share a year earlier.
ARM use will remain relatively low statewide until property prices rise more than 5% annually for at least two years. This probably will not happen with today’s price trends. But when it does happen later on this decade, ARM use will increase as agents push homebuyers to overreach on amenity value, appraisers drift away from comparable pricing and, inevitably, lenders relax credit standards. This is unlikely until the next big bubble, expected to occur around 2019-2020.
Re: California November Home Sales from DataQuick