The slowing down SoCal housing market: Sales drop 10 percent year-over-year and investors begin to pullback.
The year ends on a similar note to how it began. Low inventory seems to be the name of the game once again. The market has definitely softened here in Southern California. The latest figures reflect a shift from the blistering hot first half of the year. Last month sales fell by 10 percent from last year and the median price is no longer rising. In fact, the median price of $385,000 for Southern California is the same today as it was in June, right before rates moved up strongly. There seems to be a universal consensus that home prices can only go up from this point forward based on low inventory. Typically starting in January we see a steady stream of new inventory come online for the spring and summer selling seasons. That is yet to be seen since the year ended with inventory retreating rather strongly. Yet with foreclosure resales making up a small portion of the market, there can no longer be the excuse that the median price is distorted because of foreclosure sales.
Foreclosure resales no longer a factor
Foreclosure resales are no longer an issue when it comes to price distortions:
Last month only 6.3 percent of all properties sold were foreclosure resales. Compare this to the nearly 60 percent figure back in early 2009. At this point, at least when it comes to foreclosures, there is very little foreclosures out on the market (after all, you can sell into this momentum as prices surged and the economy found its footing).
Yet there is also a pullback from cash buyers. For Southern California the peak of cash buyers was close to 36 percent reached earlier in the year but the latest figures show it at 27 percent. The gap is being made up by increasing jumbo buyers, FHA buyers, and those taking on adjustable rate mortgages.
Sales follow a very seasonal pattern. During the fall and winter sales typically fall. This is why year-over-year measures are good to track. So the 10 percent drop in year-over-year sales is significant especially with the very low amount of inventory in the market. Take a look at the seasonal sales pattern for SoCal going back to 2000:
From 2000 to 2007 we only went under 20,000 sales per month a couple of times regardless of the season. That is it. The latest sales figure? 17,283 in the midst of the median home price increasing a whopping 20 percent from last year.
As I mentioned earlier the median home price has stalled out from June:
The current SoCal median home price is $385,000. Keep in mind that much of the investors that were buying were buying with the notion that prices would only go up. So we enter a self-fulfilling prophecy phase; will investors continue to buy while prices don’t go up? Obviously the stalling out in appreciation has caused cash buyers to pull back. The figures highlight this and with a massive amount of buying coming from investors this will have some sort of impact.
California swings from euphoria to panic and this has been the case since the late 1990s with it accelerating in the early 2000s. The pace of stock market growth and also real estate appreciation seems unsustainable based on fundamentals. It is clear that on the price front, SoCal is starting to see some stalling out. From double-digit price gains to suddenly seeing the median price not move from June for the region. What is moving however is a drop in sales but also inventory. When you read media analysts they talk about “normal” seasonal patterns and if this is the case, we should see an increase in inventory starting in January. It is yet to be seen if this increase in inventory will be accompanied by more investor buying.
I’m not sure why some try to down play cash buyers because in California cash buying is now a big segment:
Contrary to the idea that cash buyers are buying up all prime properties many are looking for investments. This is why the median paid by cash buyers for last month was $342,750 (or 12 percent less than the overall median price for SoCal). The good news for would-be buyers is the nuttiness of the market for the last couple of years is starting to ebb. At current prices and with current interest rates it makes no sense for investors to buy in most of SoCal. If this group continues to pullback, it will be interesting to see if the market can stand on its own two legs given weak household income growth and higher interest rates. I think we are going to find out shortly.