33,429 homes closed escrow in California during November 2013. This is down 8% from the prior month and down 11% from one year earlier when 37,481 sales took place.

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Home sales volume and price peaks

November’s 11% year-over-year decrease continues the downward trend experienced in home sales volume throughout most of this year. Increases in both home prices and mortgage interest rates have stifled any upward movement in sales volume this past summer and into fall.

The bumpy recovery pattern continues — but the ride is getting rougher, and the duration frustrating. Home sales volume did a dead cat bounce in 2009, fueled by end users clamoring after tax credits and speculator interference. Then, in 2010-2011, home sales volume fell back for lack of all types of buyers. It rose again in 2012, driven primarily by speculator interference. And now we see home sales trending downward again, as support from retreating speculators has been reduced. Further, sufficient end user demand is still lacking due to slow job creation and high mortgage rates.

As 2013 draws to an end, expect sales volume to continue to fall below 2012’s levels — a normal market response to the speculator-driven price bounce and unexpected jump in mortgage rates.

California’s real estate sales volume needs about 60,000 homes sold monthly to fully recover. That recovery is dependent on 18-24 months of annual California job growth exceeding 350,000-400,000 jobs. We are nowhere close at this point in the recovery, but likely will be around 2016.

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Jobs move real estate

Other key factors controlling California’s housing market sales volume follow.

Absentee homebuyers: to hold or to fold?

Absentee homebuyers (speculatorsbuy-to-let investors and renovation contractors) continue to decrease. Absentee homebuyers accounted for 26% of Southern California (SoCal) November sales volume, down from 27% in October and from 29% one year earlier. November 2013 represented the lowest share of absentee homebuyers in SoCal since November 2011, a sure sign speculators are beginning to exit the market.

Absentee homebuyers made up 20% of Bay Area homebuyers in November, down slightly from the prior month and down from 25% one year earlier.

Speculators chase upward price movement, but sales volume has been softening for 11 months, and prices are expected to slip as soon as December 2013. Thus, expect absentee buyers to comprise a smaller percentage of monthly sales throughout the fourth quarter of 2013 and into 2014.

Cash purchases (two-thirds of which are made by speculators) remained abnormally high in November, representing 27% of SoCal sales volume. However, cash sales decreased steadily this year, and are currently at their lowest volume since September 2010. In a normal market, cash purchases represent around 16% of all buyers, comprised mainly of end users.

The percentage of sales attributed to cash purchasers will trend downward well into 2014, as speculators abstain in reaction to slipping prices.

Bay Area cash sales were 22% of home sales in November 2013. This is down from 29% one year earlier.

Speculators remain motivated to buy only so long as they believe home prices will rise quickly. Expectations of a quick resale have faced the headwinds of falling sales volume since November 2012. The numbers indicate reality has begun to set in. Expect a speculator mass exodus when prices follow sales volume and mortgage rates, and take a sympathetic nosedive, likely to begin in December 2013.

The annual increases in the buyer purchasing power index (BPPI) came to an end in June 2013, dimming the prospects of flipping for a profit. Sellers ignore these trends at their peril.

When speculators realize they cannot make a short-term profit as soon as anticipated, most will quickly leave the market or resort to Plan B to hold for another five years. The inventory they dump (today’s growing shadow inventory) will need to be consumed primarily by end users and income property investors. However, there aren’t enough of these buyers ready and willing to sustain even the current low sales volume. Thus, expect prices to remain level to down through 2015.

At the moment, end user demand is half of what is needed for a normal 60,000 monthly sales volume.

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Press Release: Buyer purchasing power index still negative

Jumbo loans: room at the top

Jumbo loans (loans over $417,000) accounted for 28% of SoCal’s November 2013 sales. This is up from 26% in the prior month and 21% a year earlier. Jumbo loans were at their peak in mid-2007, when jumbo loans consisted of 37% of SoCal sales.

Jumbos financed a whopping 50% of Bay Area sales. This is up from 48% in the prior month and up from 40% a year earlier.

Jumbo use has risen statewide as sales of high-tier properties have accelerated — particularly in the pricey Bay Area with its greater concentration of new wealth — since 2009. Despite this increase, jumbo use remains far below its peak in 2006-2007 when buyer overreaching maxed out.

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Supersize my loan! Jumbo loan use is up

FHA-insured loans: a window is closing

Federal Housing Administration (FHA)-insured loans made up 20% of November SoCal mortgage recordings. This is up slightly from the prior month, and down from 25% one year earlier.

FHA-insured loans made up 10% of Bay Area mortgages in November. This is down slightly from the prior month and down from 15% one year earlier.

California’s appetite for FHA-insured loans is waning: FHA-insured loan use is around its lowest level since late 2008. first tuesday anticipates the share of FHA-insured loans will steadily drop, hitting a bottom of 4% of loan originations around 2018. High (and rising) FHA insurance premiums make conventional loans with private mortgage insurance (PMI) more appealing, as they ought to be.

The FHA has gradually tightened buyer standards to protect their mortgage insurance fund, with a limited exception for buyers who have very recent foreclosures or bankruptcies. Nonetheless, FHA-insured financing remains popular as a loan of last resort for determined first-time homebuyers with low savings and less than ideal credit scores or debt ratios.

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PMI cries tears of joy; FHA just cries

ARMs: holding lenders at bay

Adjustable rate mortgages (ARMs) made up 12% of all SoCal mortgages in November 2013, double the 6% share one year earlier. SoCal ARM use in November remained the highest since mid-2008, the heart of the recession. ARM use made up 13% of all SoCal sales in July 2008.

ARM use in the Bay Area was at 20% in November. This is down slightly from October, when ARM use was at its highest level since mid-2008, and up from 12% a year earlier. Cash transactions in the Bay Area are slipping, a warning that prices are being supported by ARMs. If this trend continues into 2014, the Bay Area will certainly be in a bubble and due for a crash-like adjustment in sales volume and prices.

ARM use will remain relatively low statewide until property prices rise more than 5% annually for at least two years. This probably will not happen with the current price trends. When it does, ARM use will increase as agents push homebuyers to overreach on amenity value, appraisers drift away from comparable pricing and, inevitably, lenders relax credit standards. This will not likely happen until the next big bubble, expected to occur around 2018-2020.

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The iron grip of ARMs on California real estate

Re: California November Home Sales from DataQuick