39,507 homes were sold in July 2012, down 3.7% from June, yet up 14% from one year earlier. This is the second consecutive month of declining home sales, however sales volume is higher than it was last summer, which was mostly low and flat.

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) July sales, remaining level with June 2012, near the record high of 30% set in February 2012. Absentee buyers made up 23% of Bay Area homebuyers in July, remaining level with June 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

Jumbo loans (loans over the old conforming limit of $417,000) accounted for 20% of July 2012 sales in SoCal, remaining level with the prior month and up from 18% one year earlier. Jumbos made up 39% of Bay Area sales, up from 38% last month and 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

Federal Housing Administration (FHA)-insured loans made up 27% of SoCal mortgage recordings, down from 28% last month, and 31% one year earlier, reaching the lowest level since late 2008. FHA-insured loans made up 16% of Bay Area mortgages, up less than one percentage point from June 2012 and down significantly from 22% in July 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.

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Adjustable rate mortgages (ARMs) made up 6.2% of all SoCal mortgages, down slightly from 6.7% in June and down from 8.9% a year ago, a good thing for market stability. ARM use in the Bay Area was at 13.3% in July, down from 14.2% the prior month and 14.4% 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

Cash purchases represented 31% of SoCal sales, down from 32% in June and up from 29% one year earlier. 27% of Bay Area sales were cash purchases in July 2012, level with June and up from 26% in July 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 22 months, home prices have risen and fallen from quarter to quarter, or more, 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.”

Related article:

The equilibrium trendline: the mean-price anchor

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 for mid-2012 have shown an average of 16,742 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. first tuesday currently forecasts a continuing low rate of approximately 20,000 new jobs gained monthly for the remainder of the year. This rate may well do much better, as California may defy the odds.

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In the absence of strong job increases in excess of 350,000 annually through the end of 2012, first tuesday expects home prices to remain low through the end of 2014. Once the Fed increases interest rates from their current zero-bound trap, probably in 2015, 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 July Home Sales from DataQuick