37,734 new and resale home transactions closed escrow in California during August 2011, a sharp (and likely brief) jump from one year ago when 34,239 sales closed escrow. For home sales volume, August is the first month in 2011 to surpass the corresponding month in 2010. While a 9% rise above July 2011 home sales volume, August’s numbers remain below those of June 2011. Thus, this increase does not suggest a sustained rise in home sales.
The recovery’s overall bumpy plateau trend continues to reflect a leveling in home sales in 2011, following a decline that set in after mid-2010. Annual home sales volume is expected to remain at or below 2010’s numbers through the end of 2012.
Real estate owned (REO) resales made up roughly 36% of all sales in the second quarter of 2011— down significantly from 46% one year earlier when sales volume bit higher. However, this still-high proportion of REOs is expected to remain a constant for three or four years to come. In 2012, delinquencies are expected to be more efficiently foreclosed by servicers under contracts with big mortgage banks. [For our most current data on REOs statewide, see the first tuesday Market Chart, REO Resales.]
Absentee homebuyers (a group generally composed of speculators and investors) accounted for 25% of Southern California (SoCal) sales and 21% of sales in the Bay Area, basically unchanged from July, and near the historic records of 26% and 23%, respectively, set in February 2011.
“Jumbo loans” (loans over the old conforming limit of $417,000) accounted for 17% of sales in SoCal, weakening from 18% one year earlier, and 33% of Bay Area sales, a slip from 35% one year earlier. 2010 saw a sharp rise over 2009 in the use of Jumbo loans, likely attributable to an increase in foreclosures among high-tier properties and the Federal Housing Administration’s (FHA’s) increase of their loan insurance ceiling to $724,000. Jumbo use remains far below its market share height in the boom times of 2006 and 2007.
FHA-insured loans made up 32% of SoCal mortgages recorded, level with July 2011 but down from 35% one year earlier. FHA-insured loans made up 22% of Bay Area mortgages, also level with July 2011 and down from 23% recorded one year earlier.
first tuesday forecasts this percentage for FHA-insured loans will continue to drop in the future, as buyer’s agents become aware that other government agencies and private mortgage insurers now guarantee almost all types of highly-leveraged conventional loans, including loans with low down payments and down payments from unconventional sources (such as gifts). Importantly, the combined rate of interest and private mortgage insurance (PMI) is currently lower than the combined rate of FHA-insured loans, making the FHA loan less appealing. [For a comparative cost analysis of FHA and PMI loans, see the first tuesday Market Chart, FHA, PMI, or neither?]
Adjustable rate mortgages (ARMs) made up 9% of all SoCal mortgages, relatively unchanged from last month, but up significantly from last year’s level of 6%. ARM use in the Bay Area has increased even more dramatically in recent months, rising from 9% one year ago to a current 16%. This rise in ARM use is to be watched with concern, and will be cause for alarm if it continues.
An excessively high ratio of ARMs to fixed rate mortgages (FRMs) risks driving property prices to artificial (read: boom-cycle) heights, especially in the low-interest rate market we have today and will have for the foreseeable future (6-18 months.) The boom mentality euphoria present in Silicon Valley may be the cause of the Bay Area rush-to-ARMS. [For more information on ARMs in the real estate market, see the first tuesday Market Chart, The iron grip of ARMs in California real estate.]
Cash purchases represented 29% of Southern California and 28% of Bay Area sales in August 2011. Although these numbers are down slightly from February 2011’s record highs of 32% and 31%, respectively, they remain abnormally high in both regions, indicating speculators are still at work.
The ongoing spike in cash purchases indicates that speculators are still optimistic about a potential recovery in real estate sales volume and pricing. Both have slipped since late 2010; not a good sign for speculators, who require very high profits to be successful.
first tuesday take: Over the last 12 months, home prices have risen and fallen from quarter to quarter, but show no sign of any sustained increase in sales volume, much less prices. To the contrary, the present trend in both sales volume and pricing has declined slowly since mid-2010, and is likely to remain low until both employment and homebuyer confidence improve significantly. [For more on homebuyer confidence, see the first tuesday Market Chart, Trends in homebuyer expectations; for more on California employment, see the first tuesday Market Chart, Jobs move real estate.]
For now, signs indicate that continued vacillation in both home sales volume and pricing on the washboard plateau of a real estate recovery will be the norm for at least two more years, and will probably continue through 2015. Home pricing especially is unlikely to show any noticeable improvement until California experiences 18 continuous months of major monthly increases in employment numbers — support that has yet to begin. [For more on current home pricing, see the first tuesday Market Chart, California tiered home pricing.]
In the absence of increased jobs and confidence numbers, low interest rates and home prices remain the sole drivers of real estate sales (with help from well-informed agents). The dynamite combination of low mortgage rates and low home prices is certain to spark a slight rise in sales volume going into 2012, but no more than that.
Be warned: any significant increase in sales volume will lead to a corresponding rise in interest rates and put an end to that run within 12 to 18 months (as occurred in 1984 and 1994). Only statewide employment gains of 400,000 plus annually, as took place in the late 1990s and early 2000s, can sustain a full recovery for California’s real estate markets. Unfortunately, homebuyers will likely need to wait until 2015 before such employment levels arrive. [For more on the influence of rates on home sales, see the first tuesday Market Chart, Buyer Purchasing Power.]
Even after 2015, expect annual price increases to be modest. If the historical trends at the end of the Great Depression in the 1940s are any guide (and they should be) real estate prices are not likely to rise at or faster than the rate of inflation reported in the Consumer Price Index (CPI). Remember, although the 2008 recession ended in mid-2009, an ongoing financial crisis remains, superimposed on the economic recovery. [For the most current CPI in Los Angeles, San Francisco and San Diego, see the first tuesday Market Charts feature, Current market rates.]
For more extensive history and analysis of monthly and annual home sales in California, see the first tuesday Market Chart, Home Sales Volume and Price Peaks.
Re: “California August Home Sales” from MDA Dataquick
