41,280 homes were sold in August 2012, up 4.5% from July 2012, and up 9% from one year earlier. This August increase in home sales marks the first improvement after two months of declines, and is a marked improvement from the flat sales volume experienced this time last summer.
Here are some other key factors controlling California’s housing market:
Absentee homebuyers: to hold or to fold?
Absentee homebuyers (a group generally composed of speculators, buy-to-let investors and renovation contractors) accounted for 27% of Southern California (SoCal) August sales, remaining level with July 2012, and near the record high of 30% set in February 2012. Absentee buyers made up 23% of Bay Area homebuyers in August 2012, slightly higher than July 2012 and up from 21% one year earlier.
Sales of single family residences (SFRs) to owner-occupant homebuyers, the core demographic for a sustainable recovery, remained low.
first tuesday forecasts that sales volume and prices will not rise beyond the rate of inflation until 2016. As absentee buyers of the speculator/flipping variety realize this, many will fold and leave the market. The inventory they leave behind will be consumed primarily by the low-level demand of occupying homebuyers.
Jumbo loans: room at the top
Jumbo loans (loans over the old conforming limit of $417,000) accounted for 20% of August 2012 sales in SoCal, marginally higher than the prior month and up from 17% one year earlier. Jumbos made up 39% of Bay Area sales, slightly higher than last month and up from 33% a year earlier. Jumbo use has risen statewide since 2009, and continues to rise as high-end property is becoming right-priced, but it remains far below its market share height in the boom times of 2006 and 2007.
FHA Loans: phase out has begun
Federal Housing Administration (FHA)-insured loans made up 27% of SoCal mortgage recordings, down slightly from last month, and down from 32% one year earlier, reaching the lowest level since late 2008. FHA-insured loans made up 16% of Bay Area mortgages, level with July 2012 and down from 22% in August 2011. Use of FHA-insured loans in the Bay Area was at its lowest level since August of 2008, when 15% of mortgage loans were FHA-insured.
first tuesday anticipates that the percentage of FHA-insured loans will steadily drop through this recovery, with a bottom in the 2018 period. The combined annual rate of interest and private mortgage insurance (PMI) for conventional financing is currently lower than the combined rate on FHA-insured loans with equivalent down payments, making FHA loans less appealing than conventional loans with private PMI options. Nonetheless, FHA-insured financing remains the surest way to get a loan for borrowers with low savings and low credit, the fall-out from foreclosures pasts.
ARMs: holding lenders at bay
Adjustable rate mortgages (ARMs) made up 5.8% of all SoCal mortgages, down slightly from 6.2% in July and down from 8.5% a year ago, a good thing for market stability. ARM use in the Bay Area was at 12.8% in August, down from 13.5% the prior month and 16% one year earlier. ARM use tends to remain relatively low until prices rise and, with the advice of agents, push homebuyers to overreach on amenity value.
Cash purchases: look Mom, no lender!
Cash purchases represented 32% of SoCal sales, down slightly from July and up from 29% one year earlier. 28% of Bay Area sales were cash purchases in August 2012, up from 27.6% in July and up from 26.5% in August 2011.
The continuing high volume of cash purchasers this year means that speculators remain confident of quick upward price movement, and thus their ability to turn a profit on the resale of a property within two or three years. Time will tell whether these highly optimistic expectations are to be justified. A bit of luck and market volatility would help their cause, for they can do nothing but wait.
first tuesday insight
Over the last two years, home prices have risen and fallen from quarter to quarter in a “bumpy plateau” recovery. Home sales volume has done the same, showing only the faintest upward trend from time to time, then falling back toward the “equilibrium price.”
We forecast the decline in sales volume seen in the past two months will continue for several months, well into 2013, cancelling out most of the gains made during the first months of 2012. The real estate and jobs market still have a great deal of recuperation to do before breaking the stagnant pattern of the current ongoing bumpy plateau.
Until approximately 2016, home sales volume will continue to rise slowly and unsteadily, while pricing will most likely remain flat, save for the annual rate of inflation. Home sales volume is unlikely to show any sustained improvement until California experiences 18 continuous months of major increases in employment (25,000-30,000 new jobs per month on average) — support that has just begun, if it holds until January 2013.
In 2011, an average 13,000 new jobs were created monthly. Employment numbers through July 2012 have shown an average of 14,457 jobs gained each month of this year. Had it not been for the extreme job loss suffered in January of 2012, this low average would be higher.
More significantly, as of July 2012 there were 362,200 Californians with jobs above one year ago. If this year-over-year increase can be kept above 350,000 through the beginning of 2013, the outlook for a solid, upward-bound recovery beginning before 2014 is good.
Once the Fed increases interest rates from their current zero-bound trap, likely in 2015 once the third round of quantitative easing (QE3) ends, expect sales volume to drop back to the lowest levels of this Lesser Depression.
A total of 413,479 homes were sold statewide in 2011, a drop of 2% from 421,634 in 2010. Although up in the first half of 2012, mainly due to speculator intervention, first tuesday anticipates a further drop to 407,000 annual home sales in 2012 before yearly sales volume begins to fully bottom in early 2013. Speculator activity is irrational and thus hugely variable, and is likely to pull sales volume downward significantly by year’s end.
If the historical trends at the end of the Great Depression from the 1940s through the booming 1950s are any guide to this Lesser Depression (and thus far they have proven highly relevant), real estate prices are not likely to rise faster than the rate of inflation reported in the Consumer Price Index (CPI). Expect annual price increases to be modest, even after 2015.
Re: California August Home Sales from DataQuick