41,027 homes were sold in June 2012, down just 1.8% from May and up 5.3% from one year earlier. This is the first month of declining home sales since January of this year, but time will tell whether this is a reversal or merely a pause in an upward trend.

Here are some other key factors controlling California’s housing market:

Absentee homebuyers

Absentee homebuyers (a group generally composed of speculators, buy-to-let investors and renovation contractors) accounted for 27% of Southern California (SoCal) June sales, down from 28% in May 2012, but still near the record high of 30% set in February 2012. Absentee buyers made up 23% of Bay Area homebuyers in June, down very slightly from 24% in May and up from 20% one year earlier. Sales of single family residences (SFRs) to owner-occupant homebuyers, the core demographic for a sustainable recovery, remain low.

first tuesday forecasts that sales volume and prices will not rise significantly for four to five years. As absentee buyers realize this, many will leave the market, and the remaining inventory will be consumed by occupying homebuyers.

Jumbo loans

Jumbo loans (loans over the old conforming limit of $417,000) accounted for 20% of June 2012 sales in SoCal, up from 19% the prior month and 18% one year earlier. Jumbos made up 38% of Bay Area sales, up from 37% last month and 35% a year earlier. Jumbo use has risen statewide since 2009, and continues to rise, but it remains far below its market share height in the boom times of 2006 and 2007.

FHA Loans

FHA-insured loans made up 28% of SoCal mortgage recordings, down from 29% last month, and 31% one year earlier, reaching the lowest level since late 2008. FHA-insured loans made up 17% of Bay Area mortgages, down less than one percentage point from May 2012 and down significantly from 21% in June 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 as we move through the this year and next. 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 private PMI options. Nonetheless, the FHA remains the surest way to get a loan for borrowers with low savings and low credit.

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Adjustable rate mortgages (ARMs) made up 6.7% of all SoCal mortgages, virtually level with 6.6% in May and down from 8.8% a year ago. ARM use in the Bay Area was at 14%, down from 14.1% the prior month and 16.8% one year earlier. ARM use tends to remain relatively low until rising prices push homebuyers to overreach on amenity value. We predict ARM use will peak within ten years — far faster than in the decades following their introduction in 1982.

Cash Purchases

Cash purchases represented 31.6% of SoCal sales, near the record 33.7% set in February and up from 28.6% one year earlier. 27.5% of Bay Area sales were cash purchases in June 2012, down from 28.3% in May and up from 26% in June 2011. The continuing high volume of cash purchasers 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 justified.

first tuesday take

Over the last 21 months, 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 to the “equilibrium price”, rising only at the rate of consumer inflation.

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We forecast that this month’s slight decline in sales volume will continue in upcoming months, cancelling out most of the gains made since the start of 2012. The real estate market still has a great deal of work to do before it can break 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 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 yet to begin.

In 2011, an average 13,000 new jobs were created monthly. Employment numbers for Mid-2012 have shown an average of 19,533 jobs gained each month of this year so far. Note that this low would be higher still, were it not for the extreme job loss suffered in January of 2012. first tuesday currently forecasts a continuing low rate of approximately 15,000 new jobs gained monthly for the remainder of the year.

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In the absence of job increases or a confidence uptick, 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 in 2015 or so, 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-year, 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, but likely to push 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 June Home Sales” from DataQuick