Home sales volume in May 2012 was at the highest level since state and federal stimulus actions were taken in June of 2010, and up 18% from one year earlier. 41,790 new and resale home transactions closed escrow in California in May 2012, up 9% from April 2012, when 38,241 homes were sold. This marks four continuous months of increases in home sales volume.
Here are some other key factors controlling California’s housing market:
Absentee homebuyers (a group generally composed of speculators, buy-to-let investors and renovation contractors) accounted for 27% of Southern California (SoCal) May sales, down from 28% in April 2012, but still near the record high of 30% set in February 2012. Absentee buyers made up 25% of Bay Area homebuyers in May, up from 24% last month and 21% 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 buyers realize this, absentee homebuyers will leave the market, leaving inventories behind to be consumed by occupying homebuyers.
Jumbo loans (loans over the old conforming limit of $417,000) accounted for 19% of May 2012 sales in SoCal, up from 18% the prior month and 17% one year earlier. Jumbos made up 37% of Bay Area sales, up from 36% last month and 33% a year earlier. Jumbo use has risen since 2009, especially in the Bay Area, but remains far below its market share height in the boom times of 2006 and 2007.
FHA-insured loans made up 29% of SoCal mortgage recordings, even with last month at the lowest level since late 2008, and down from 34% one year earlier. FHA-insured loans made up 17% of Bay Area mortgages, down from 18% in April 2012 and 21% in May 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.
Even more important, the FHA’s recent increases in mortgage insurance premium (MIP) rates will accelerate the use (and strengthen the financing) of PMI-insured loans over FHA-insured loans, although the FHA remains the surest way to get a loan for borrowers with low savings and low credit.
Adjustable rate mortgages (ARMs) made up 7% of all SoCal mortgages, level with April and down from 9% a year ago, a favorable trend. ARM use in the Bay Area was at 14%, down from 15% the prior month and 16% one year earlier. ARM use tends to remain relatively low until rising prices push homebuyers to overreach on amenity value by resorting to risky ARMs. We predict ARM use to peak within ten years — far faster than in the decades following their introduction in 1982.
Cash purchases represented 31% of SoCal sales, near the record 32% set last month and up from 29% one year earlier. 28% of Bay Area sales were cash purchases in May 2012, near the record level of 32% set in February and up from 27% in May 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 20 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.
The equilibrium trendline: the mean-price anchor
We forecast that this month’s jump in sales volume will soon be partially or entirely cancelled out by coming months of disappointing home sales.
Until approximately 2016, home sales volume will continue to rise slowly and unsteadily, while pricing remains flat but 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. Newly released employment numbers for May 2012 show only slight signs of improvement, with an average of only 7,740 jobs gained each month of this year (note that this low number is attributable largely to the extreme job loss suffered in January of 2012). first tuesday forecasts a continuing low rate of approximately 15,000 new jobs gained monthly for the remainder of the year.
In the absence of job increases or a confidence uptick, low interest rates and home prices remain the sole drivers of real estate sales volume . first tuesday anticipated a slight rise in sales volume in the first half of 2012, which has occurred, sparked by the temporary confluence of low mortgage rates and low prices, but we expect 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, 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 skew the current sales volume rate downward significantly by year’s end.
Expect annual price increases to be modest, even after 2015. If the historical trends at the end of the Great Depression in the 1940s and throughout 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). This is rational price activity. Real estate is, after all, nothing more than land, labor and materials. Bubble pricing is the result of restrictive zoning policies which limit builders throughout the state, increasing demand beyond reason.
Re: “California May Home Sales” from DataQuick