38,975 new and resale homes closed escrow in California during June 2011, down 11% from one year ago when 43,964 sales closed escrow. Combined home sales rose 10% from their May 2011 numbers. Little overall change from 2010’s numbers is expected through the end of 2012.
Real estate owned (REO) resales accounted for roughly 40% of all sales in the first quarter of 2011— virtually unchanged from 40% one year earlier. This high proportion of REOs is expected to remain a constant for another three or four years as delinquencies are more efficiently foreclosed by servicers for big 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 22% of sales in the Bay Area, remaining almost unchanged from May, 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 17% of sales in SoCal, down less than 1% from one year earlier, and 35% of Bay Area sales, rising from May’s numbers back to 2010 levels. 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 height in the boom times of 2006 and 2007.
FHA-insured loans made up 31% of SoCal mortgages recorded, a drop from 34% in May and 38% one year earlier. This is the lowest percentage of FHA-insured loans since August 2008. FHA-insured loans made up 21% of Bay Area mortgages, a drop from 25% recorded one year earlier. first tuesday forecasts this percentage will continue to drop in the future, as 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 7%. ARM use in the Bay Area has increased even more dramatically in recent months, rising from 12% one year ago to a current 17%, the highest rate of ARM use since August 2008. This rise in ARM use is to be watched with concern, and will be cause for alarm if it continues, as an excessively high ratio of ARMs to FRMs in a low-interest rate market risks driving property prices to artificial (read: boom cycle) heights. [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 25% of Bay Area sales in May 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 sustainable recovery. This state of stasis will continue until California employment numbers and homebuyer confidence improve. Both employment and confidence are forecast to recover much of their lost momentum over the next two years. [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.]
In the absence of consistently strong new employment and homebuyer confidence, interest rates and low home prices are the sole drivers of real estate sales (with help from aggressive agents). Low rates and low prices are likely to spark a slight rise in sales volume later this year, but any significant increase in sales volume will lead to a corresponding rise in interest rates. [For more on the influence of rates on home sales, see the first tuesday Market Chart, Buyer Purchasing Power.]
For now, signs indicate that continued vacillation in both home sales volume and pricing will be the norm for at least two more years. 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.]
Even after 2013, 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 June Home Sales” from MDA Dataquick