34,695 new and resale homes closed escrow in California during July 2011, slightly lower than one year ago when 35,202 sales closed escrow. No month in 2011 has yet equaled its corresponding month in 2010. July 2011 numbers reflect a continuing gradual decline, which began mid-2010. Combined home sales also fell 11% from their June 2011 numbers, a normal June to July event. 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. However, this still-high proportion of REOs is expected to remain a constant for another three or four years. In that time, 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 24% of Southern California (SoCal) sales and 21% of sales in the Bay Area, basically unchanged from June, 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 18% of sales in SoCal, nearly identical to one year earlier, and 33% of Bay Area sales, a slip from 36% 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 Administrations  (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, a rise from 31% in June but down from 35% one year earlier. FHA-insured loans made up 22% of Bay Area mortgages, a drop from 23% recorded one year earlier.

first tuesday forecasts this percentage 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 conventional loans, including loans with lower down payments and down payments from unconventional sources (such as gifts). 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.

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 12% one year ago to a current 14%. 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), especiallyin a low-interest rate market, risks driving property prices to artificial (read: boom cycle) heights. The boom mentality 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.]

Editor’s note — Wall Street investors have also begun to purchase Jumbo ARMs in the Bay Area for resale in the mortgage backed bonds (MBB) market. The MBB market for jumbos has been dormant for three years. This small opening will make it easier for sellers of high-tier property in the Bay Area to get a higher price.

Cash purchases represented 28% of Southern California and 26% of Bay Area sales in July 2011. Although these numbers are down slightly from February 2011’s record high, they remain abnormally high in both districts, 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 recovery. The present trend in both sales volume and pricing has declined slowly since mid-2010, and is likely to continue to drop until both employment and homebuyer confidence start to improve. [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 without 18 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 those factors, low interest rates and home prices will be the sole drivers of real estate sales (with help from aggressive agents). Low rates and low prices are certain to spark a slight, and temporary, rise in sales volume going into 2012. 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 a year or two. Only real employment, such as will begin to arrive by 2015, can produce a stable recovery. [For more on the influence of rates on home sales, see the first tuesday Market Chart, Buyer Purchasing Power.]

Even after 2015, expect price increases to be modest. If the historical trends at the end of the Great Depression in the 1940s are any guide, prices are not likely to rise at a rate faster than the rate of inflation indicated in the Consumer Price Index (CPI). [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 July Home Sales” from MDA Dataquick