The recovery mirage

Optimists across the nation are convinced the housing recovery has arrived. However, before applying their logic to California’s recovery, a quick comparison (reality check) is needed between national housing-related statistics and California specific numbers. We are more than just geographically removed.

Nationwide, the past few months have seen:

• rising housing starts (up 25% over last year);
• rising housing permits (up 45% over last year);
• rising home sales volume (up 12% over last year);
• rising auto sales (up 7% over last year); and
• the assurances of the third round of quantitative easing (QE3).

Together, these factors point to increased optimism from consumers and economists alike.

In California, recent data shows:

• rising housing starts(up 26% for SFRs and 18% for multi-family over last year);
• rising auto sales (up 16% over last year as of October 2012);
• rising sales volume (up 15% from last year as of October 2012); and
• rising jobs (up 2% over last year as of September 2012).

At first glance, this seems pretty good.  However, to get the bigger picture, a deeper analysis is needed.

California construction starts up very slightly

Housing starts are up in California… sort of.

SFRs are up 26% and apartment/condo starts are up 18% over one year ago, as of September 2012. While these starts show notable percentage increases, the actual number of starts is miniscule compared to healthy levels.

In the month of September 2012, 2,239 SFR starts occurred. In a healthy California economy, monthly SFR starts average around 9,000.

Further, the troughs of the past two real estate cycles (1993 and 1982) averaged around 5,000 starts. So while current starts are high compared to the past couple years, they’re still anemic.

End user demand is simply not high enough for builders to consider new housing starts a wise strategy. So, the question remains, when will end user demand meet housing market needs for growth?

Related article:

The rising trend in California construction starts

Auto sales are up

This is where California actually has the nation beat. Auto sales have generally increased in our state since December 2009. August through October 2012 experienced the first decreases in auto sales since 2009. However, these same months still had significantly higher auto sales than one year earlier.

Auto sales are an historical indicator of upcoming home sales volume. Approaching a recession, auto sales drop 12 months after home sales drops. In recovery mode (as we now are), auto sales rise first, followed by home sales. This correlation has to do with consumer confidence in the financial ability to handle future loan payments.

The current rise in auto sales indicates home sales volume will likely rise in the near future. How soon, you ask? It all depends on whether the drop seen over the past 3 months will be sustained, or if auto sales will soon rebound. January is always a good time to gauge the strength of a trend.

Related article:

On the highway to a real estate recovery

Sales volume on a bumpy plateau

As of October 2012, home sales volume is up 15% over a year earlier in California. Since 2009, sales volume has remained generally level, with monthly rises and falls. While September 2012 saw a yearly decrease, October 2012 saw a rise in recordings, part of that bumpy plateau we are on.

There has been talk that the recent drop in sales volume is due solely to low inventory. However, remember inventory affects prices, having little influence over sales volume.

However, sales volume will not pick up – regardless of inventory levels – until end user demand rises. And end user – occupying buyer – demand is directly stimulated by jobs.

Related article:

Home sales volume and price peaks

Jobs are lacking

Since 2010, the number of people employed in California has slowly increased. As of October 2012, 14,478,800 people were employed. In comparison, 15,348,200 people had jobs during the peak month of December 2007. The difference in jobs still lost: 869,400.

Even if we regain the nearly 1 million jobs needed to return to the peak employment number, we still need to factor in population increases. The working-age population has increased by about 140,000 annually since 2007. Therefore, we will need about 1.2 million more jobs in addition to the lost jobs before we can get “back to normal.”

In order to save for a down payment and qualify for financing, a buyer must have steady income. During the Millennium Boom just about anyone who walked into their local bank with a pulse could qualify.

In these more responsible times, only those truly financially qualified will succeed in becoming homebuyers. Thus, the housing market will just have to wait until employment increases before seeing a sustainable recovery.

Each month, California will need to add at least 350,000 jobs annually, and hold that level for 18-24 months before employment returns to pre-recession levels. We’re making progress at 296,100 more jobs year-over-year as of October 2012. first tuesday forecasts employment levels will likely return to December 2007 peak levels in 2016.

Related article:

Jobs move real estate

Fed action

The Fed’s goal in QE3 is to repair the economy through job creation. The hope is that lowering rates will entice investors into borrowing to expand business. Part of that expansion (fingers crossed) will involve hiring more employees.

The housing market also benefits. The Fed’s vehicle for reducing rates is mortgage-backed bonds. They have vowed to purchase billions in mortgage-backed bonds monthly through 2015. All this bond purchasing is designed to lower or sustain current interest rates.

Rates have already begun decreasing in the Western region of the U.S. The average 30-year mortgage rate was at a near-record low of 3.35% in the first week of November.

Lower interest rates help homebuyers qualify for more money with the same monthly payment. The ability to borrow more principal will eventually affect prices. Then buyers will be able to pay more for the same house. However, it will have no effect on sales volume. Without steady income and savings, potential homebuyers simply cannot qualify, low rates or not.

Related article:

Buyer purchasing power

Home prices slowly rise

There has been much talk of swiftly rising home prices these past months. As of October 2012, the median home price of all home sales rose 19% in California over last year, according to DataQuick. However, using the median price figure is misleading if you turn to it for changing prices.

What this percentage increase tells you is that high tier properties for the most wealthy were being sold at a faster clip than the low tier properties. Thus, that bugaboo mathematical abstraction setting the non-existent median price is phony, having nothing to do with price movement.

When individual home sale tiers are analyzed, the percentage rise is a much lower 1-6%, varying by price tier. The highest rise has occurred in low-tier homes, primarily due to speculator interference.

Related article:

California tiered home pricing

Are we there yet?

Not quite. There’s no mistaking it – we are on our way out of this bumpy plateau recovery, but we have yet to arrive in that promised land.

Increased speculator activity has distorted home sales volume and prices. They have caused an artificial price increase in mid-2012 which has yet to be cleared out. 2013 price adjustments will make up for this year’s speculator activity.

However, the real recovery will be heralded first by jobs, then a year or two later by increased end user (not speculator) demand. Rising demand will be seen in consistently rising sales volume, the true lagging indicator of an economic recovery.

Remember: real estate is local. National numbers cannot accurately predict California’s housing recovery. So stick with California data. Better yet, make your forecast using data from your region or county.

It’s good, even imperative to be optimistic, otherwise you do not move ahead. But realistic expectations are much more useful for brokers and their agents when optimistically planning for their future.