28,719 home sales closed escrow in February 2013. This is roughly level with the prior month, but down 3% from one year earlier.
The bumpy recovery pattern continues as home sales rise and fall from month to month. However, the overall trend now tilts downwards. Year over year volume will drop further, likely through the end of 2013. These market adjustments are due to this past year’s speculator-driven sales volume bounce.
California’s real estate recovery will gain sustainable momentum, moving out of our past five years of bumpy plateau sales lethargy, after 18-24 months of annual job growth of over 350,000 jobs. This recovery condition will manifest around 2016. Progress is being made on the jobs front, but California’s January 2013 employment data, due March 22, will give us a better vantage point.
Jobs move real estate
Other key factors controlling California’s housing market follow.
Absentee homebuyers: to hold or to fold?
Absentee homebuyers (speculators, buy-to-let investors and renovation contractors) accounted for a record 31% of Southern California (SoCal) February sales, up from 30% in January. Absentee homebuyers made up yet another record high of 28% of Bay Area homebuyers in January, up from 26% one year earlier.
Cash purchases (mostly speculators) remained abnormally high in February, representing 36% of SoCal sales. This is up from 34% one year earlier. The percentage of cash purchasers in a normal market is around 16%.
A record 32% of Bay Area sales were cash purchases in February 2013. This is up from 28% in the prior month and 31.5% one year earlier.
Speculators will remain motivated to buy only so long as they believe home prices will rise quickly. Time will tell whether these highly optimistic expectations are justified. The likelihood dims each month as low interest rates and positive indications from the buyer purchasing power index (BPI) will soon come to an end mid-year 2013. Sellers ignore these forward trends at their peril.
When speculators realize they cannot make as quick or juicy a profit as anticipated, they will fast leave the market. The inventory they leave behind as they all exit at about the same time will be consumed primarily by occupying homebuyers. However, at the moment, occupying homebuyers are comparatively short on demand.
Jumbo loans: room at the top
Jumbo loans (loans over the old conforming limit of $417,000) accounted for 21% of February 2013 sales in SoCal. This is up from 19% in the prior month and up significantly from 14% one year earlier.
Jumbos made up 38% of Bay Area sales. This is up from 36% last month and up from 27% a year earlier.
Jumbo use has risen statewide — particularly in the pricey Bay Area — since 2009. Use continues to rise as high-end property sellers finally abandon their sticky price delusions. Despite this increase, jumbo use and related sales remain far below their peaks in the 2006-2007 boom.
FHA Loans: phase out has begun
Federal Housing Administration (FHA)-insured loans made up 25% of SoCal mortgage recordings. This is level with last month, and down from 31% one year earlier.
FHA-insured loans made up 15% of Bay Area mortgages in February. This is level with January and down from 23% 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 through this recovery and hit a bottom around 2018. High (and rising) FHA insurance premiums make conventional loans with private mortgage insurance (PMI) more appealing.
FHA buyer standards have also become stricter in this recovery. Nonetheless, FHA-insured financing remains popular among determined first-time homebuyers with low savings and low credit scores.
FHA loans cost more
ARMs: holding lenders at bay
Adjustable rate mortgages (ARMs) made up 6% of all SoCal mortgages. This is level with the prior month and down slightly from one year ago, a positive condition for buyers.
ARM use in the Bay Area was at 11% in February. This is up slightly from the prior month and down from 12% one year earlier.
ARM use will remain relatively low until property prices rise beyond 5% annually over a two-year period. Then ARMs will increase as agents push homebuyers to overreach on amenity value.
The number of SoCal homes that were sold previously over the last six months, or flipped, increased to 7% in February. This is up slightly from January and up from 4% one year ago.
While the flipper presence remains high today, they will soon drop out of the market as home prices begin to lag towards the end of 2013.
Re: California January Home Sales from DataQuick