39,051 homes sold in California during April 2013. This is up 2% from one year earlier. April’s increase goes against the trend of decreasing home sales volume experienced since December 2012.
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 buyer types. It rose again in 2012, driven by speculator interference. And now we see it drifting downward again for lack of end-user demand.
By the end of 2013, sales volume most likely will be significantly below last year’s numbers — a normal market adjustment to the speculator-driven price bounce we experienced during 2012. 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.
Jobs move real estate
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 30% of Southern California (SoCal) April sales volume, up from 28% one year earlier. Absentee homebuyers made up 24% of Bay Area homebuyers in April, slightly higher than 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 April, 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 28% of home sales in April 2013. This is down slightly from 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 quickly 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.
Buyer purchasing power index falls slightly, remains high
Jumbo loans: room at the top
Jumbo loans (loans over $417,000) in SoCal accounted for 26% of April 2013 sales. This is up from 18% one year earlier and accounts for the highest share of the market since 2007.
Jumbos made up 48% of Bay Area sales. This is up from 43% last month and up from 36% a year earlier.
Jumbo use has risen statewide as sales of high-tier properties have accelerated — particularly in the pricey Bay Area — since 2009. As prices fall back later this year, jumbos levels will also decline.
FHA Loans: a window period is closing
Federal Housing Administration (FHA)-insured loans made up 22% of SoCal mortgage recordings. This is down from 23% last month, and 31% one year earlier.
FHA-insured loans made up 11% of Bay Area mortgages in April. This is down from 12% in the prior month and 18% 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 7.9% of all SoCal mortgages. This is up from 7.4% in the prior month and 7% one year ago.
ARM use in the Bay Area was at 14% in April. This is up from 13% in the prior month and down from 15% 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 April Home Sales from DataQuick