INVENTORY SLIDES, GEN X AND Y, WANT TO BUY, AND THE SMALL INVESTOR

Los Angeles inventory is down 37.1% and Orange County is about there too.  The city taking national honors for the biggest slide is our own San Diego with 40.7% (according to the national KCM Blog.)  Generation X and Y, in a recent survey, were asked, "what is a fundamental indicator of success?"  A whopping 75% said it was owning a nice home and only 12% said an extravagant vacation.  Home ownership is in America's DNA.  Should the small investor attempt to buy a single-family property as a rental.  Only a discussion with your financial planner can tell you what's right for you, but here are some thoughts... 1) Nationally, rental leasing volumes were up every month for 2 years.  2) Supply of available rentals is down 11% in the same period.  3) Rent growth is expected to increase at a very strong clip in 2013.  

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HOMES SELLING AT A BRISK PACE, INVENTORY IS LOW AND SO ARE INTEREST RATES AND FORECLOSURES

The last time homes sold at today’s pace, it was 2009 and there was a very good reason--the tax credit.  So, for homes to be outselling that pace, there must be some pretty good reasons now...and there are.  Interest rates, for one thing, are screaming low, “in the high 3%’s low.”  Lots of investors have bought up the true foreclosed messes out there, have rehabbed them, and are now “flipping” them, meaning the investor is putting them right back up for sale.  These properties generally have a lower price point and demand for them is great.  Next up we have the fact that housing affordability ratios are at their highest level since the early 1990’s.  In fact, homes last month moved in California at the fastest pace and had the biggest year-over-year gain since 2009, according to the California Association of Realtors.  Another fact: homes sold at an annual rate of 572,260 up 21% from the previous year.  The statewide median home price for single-family resale was $312,110, up 6.6% in a year.  And although the median price for a single-family in Orange County fell 1.2% from  ($538,340), the overall median price for all properties, condos, new homes, and single-family, had risen in Orange County by 1.8% from last year.  More on the numbers later, but for now, let’s concentrate on yet another factor -- inventory.  Or better put, lack of inventory.  May of 2011 saw inventory of 5.7 months, almost normal.  By May of  2012, inventory is at 3.5 months and this month was less than 2 months in many Orange County cities.  Any time you have this level of scarcity, demand exceeding supply; homes will sell briskly, lowering the days on market by as much as 30% to 40%.  The next logical question is: If there really is such low inventory, why aren’t prices being driven up?  The answers make some logical sense.  First of all, in certain areas, prices are climbing faster.  There are multiple offers on many properties, and bidding wars are not unheard of right now.  So there are pockets of higher appreciation.  What keeps a bit of a lid on it are two factors: 1) Appraisals.  Many appraisers are hesitant to buy into any hype created by multiple offers, and the entire appraisal system has been re-hardwired to prevent a run up in prices.  Secondly, and this column has written about this before, wages.  Real estate prices ran up so fast and for so long at the beginning of 2000 and on to 2006, that wages were left way behind.  When you take away the “funny money” loans and qualify people for loans the old fashioned way, with the prerequisite that they be able to repay it, wages must be able to withstand market appreciation.  So Cal, along with the rest of the country, is a far cry from this yet.  Realistically, maybe 5-10 years away.

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WHAT WERE THE ACTUAL NUMBERS?

For the last complete month available, the total number of sales was 3,351.  That number includes single-family, condos, and new homes.  The median price was $453,000 and that was up 1.8%.  The increase of sales over the previous month was 13.7%.  The median price for single-family came in higher at $515,000.  That was an increase of 2% from last year.  Condos rose over 10.4% in median price from a year ago with $295,000.  Even new homes saw an increase in value of 4.5% with a median price of $617,750.  All categories saw double-digit increases in volume except new home sales which declined 22.56% from a year ago.  Notice of Default, which had been steadily declining, actually rose in last month to 1005, about a 10% increase.  Notices of Trustee Sale also rose slightly after plummeting in the early summer months by almost 50%.  The tally for those was 1,443.  There were 394 properties that actually went to Trustee Sale; of those, 205 were purchased by private investors, look for those properties to be rehabbed and flipped as stated above.  The other 189 properties went back to the banks, and their fates will be similar, eventually making it to the market place.  Given the current market climate, they will be quickly absorbed.

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U.S. ECONOMY LIMPS ALONG, FORGIVENESS OF DEBT TAX RELIEF LIKELY TO BE EXTENDED

The results of economic growth for this third quarter are obviously not yet available, and the second quarter results were not stellar.  Growth of 1.5%, although in the right direction, was not enough to seriously curb unemployment and start a serious job burst for most of the country.  California is better off than most of the country, and ironically, it may be our wonderful mild weather that continues to set us apart as the rest of the country struggled with floods, tornadoes, drought, and record setting heat.  Companies that left for easier environmental standards, or tax breaks, may think seriously about returning as their productivity and profits see some challenges as a result of Mother Nature.  Hmm... something to ponder.  As of now the forgiveness of debt for the 1099 income resulting from short sales has made it into Obama’s 2013 budget, to be extended to include 2013.  Although foreclosures are at a 5 year low, it is appropriate to extend this relief.  After all, foreclosures are at a low precisely because the lenders are optioning to do short sales instead.

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HIGHEST PRICED HOME

Ever wonder what properties the other 1/4 of 1/4 of the 1% buy?  (Let’s face it; it’s not the other half...) The highest priced home in California was in Los Angeles for $125 MILLION! Here are the others: 2) Santa Barbara - $79 million  3) Bradbury - $78 million 4) Laguna Beach  $65 million. Wow!

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WHAT WILL NEXT 5 YEARS BRING TO HOUSING PRICES?

Does this sound like a loaded question?  There may be as many answers to that question as there are people in the USA, but it seemed like a good lead off question for this month's report.  In fact, the opinion reflected in the following numbers are reported by "Pulsenomics", a group of 100 economists, investment strategists, and housing market analysts.  After their conference they reported housing prices to start upward in 2013.  Here is the 5 year projection:  (A) 2012 - (-).4%  (B) 2013 - (+)1.3 %  (C) 2014 - (+)2.6%  (D) 2015 - (+)3.2%  (E) 2016 - (+)3.5%.   The average pre-bubble (1987-1999) annual appreciation was 3.6%.  How can Pulsenomics make such a prediction when the housing market still seems in such dire trouble?  There are several factors to consider.  Firstly, the plummet of "shadow inventory."  It is at its lowest number since 2008.  In fact, according to Mark Fleming, the chief economist for CoreLogic, "Since peaking at 2.1 million units in January of 2010, the shadow inventory has fallen by 28%.  The decline in the shadow inventory is a positive development because it removes some of the downward pressure on house prices.  This is one of the reasons why some markets that were formerly identified as deeply distressed, like Arizona, California and Nevada, are now experiencing price increases."  Prices in southern California certainly have not skyrocketed, nor does any Realtor or economist wish them to do so.  A lesson, hopefully, has been learned regarding ascending markets that rise on false theories or practices.  However, there are slight bumps upward in certain areas only.  Literally, a price may rise for a certain neighborhood, based on competing properties, or simply more buyers for that area than sellers.  But you will note that overall, prices remain flat for 2012, even slightly down.  Those are national numbers and obviously California is on different footing, particularly southern California, which has been projected to recover more quickly than northern California, and the rest of the country. 

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IF INVENTORY IS SO LOW, WHY AREN'T PRICES RISING NOW?

This is a good question.  Isn't housing economics simply the law of supply and demand?  And if it is, with inventory so low, (and inventory is low, with the possibility that pending sales will rise above available homes for sale, a true market anomaly), why aren't prices rising more quickly right now?  The answer to these questions may not be obvious, but there are some reasonable answers.  First of all we are in a counter-intuitive market.  So what would seem to be an obvious outcome is not, and in fact, the opposite occurs.  In this case, prices are still going down, despite some listings that sell over list price, in some price ranges or neighborhoods.  Remember that the list price was aggressively LOW, not HIGH, to begin with.  And although historically low interest rates, (seriously 3-4%??), are driving the demand which is rapidly lowering available inventory, there is a key factor which is keeping a lid on housing prices--- WAGES.  In fact, this column will report it first, that as long as wages stay flat, and they have been flat for the last 7 years, prices will be forced to keep a lid on it.  Why?  Simple.   Housing affordability is part and parcel to a healthy housing market.  We saw what happened in 2006 with double digit appreciation.  That was appreciation that was so fast, there was no way wage increase percentiles could keep up.  Housing appreciation went to 11% in southern California, and the industry created unsustainable financing, (a nicety for horrible loan programs), that propelled a booming market well past when it should have adjusted and created the terrible mess we have been in for the past 5 years.  Some industry analysts believe we are in for 5 more years of pain, some believe, as in the previous article, that we are beginning to climb out now.  Time will tell, but it does appear that the housing market has and is stabilizing.

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