Last year we reported that the Golden State’s housing industry was in a rather strange place, and property prices were behaving contrary to the typical real estate cycle. Our data revealed California was decidedly a buyers’ market, with a lack of change in median list prices despite reduced inventory.
The market then bottomed out…and the change brought with it yet another bizarre twist in the California real estate market. Suddenly prices nationwide started looking better for sellers, and in California, they soared. Since around September, we’ve seen rapid hikes in list prices while inventory trended downward.
Exactly how did this switcheroo to a sellers’ market occur? With the help of a few key factors.
Something’s Still Wrong with CA Real Estate
We looked at the state’s 10 largest cities (by population) to get a better idea of just what’s wrong with real estate here. What we found:
- Number of homes on market has stooped even lower
- Affordable properties are harder to locate
- Cash buyers are only becoming more common
- Short sales are the new popular kids on the block
Each of these components is contributing to the atypical state of our housing market, starting with the jaw-dropping statewide inventory trend.
Your Pickings Are Getting Slim
As we recounted earlier this month, the number of available homes on market has dropped significantly in the past year. An analysis of the top 10 cities in California revealed that total inventory fell an average of 57 percent since January 2012.
Three words: The housing bubble. You may not immediately see what the housing bubble of the late 2000s could possibly have to do with current market trends, but it’s simple.
To explain ourselves, we first need to recap one of the many cycles that functions within the housing industry. Traditionally, homeowners purchase a property and keep it for five to seven years, then sell and relocate (likely because they can afford a larger or better-quality home).
But after the bubble burst, that cycle fell apart. Homeowners who purchased just before the market collapsed have been holding onto their homes, meaning fewer starter-type properties are on market. Think about it–if you know your property value is lower than when you bought it, you won’t plan on selling until that changes. You’d much rather stay put until you can make a profit. That leaves new buyers just entering the market with fewer options.
Hence the lower number of available homes for sale. Many of Movoto’s Partner Agents are seeing clients battle these historically low trends:
San Francisco is at an all-time low in terms of “month’s supply of inventory.” Across the board–SFRs (single-family residences), condos, and multi-units combined–we currently have a 1.2 month’s supply. Compare that to a 4.6 month’s supply back in January 2011. Incomes are high and people are qualifying for loans and successfully competing with all-cash buyers. The problem is there just isn’t enough inventory, and a well-priced property will typically see anywhere between 4 to 8 offers on average. Strategically underpriced properties will see double that range in offers submitted.
Six years may have passed since the housing bubble collapsed and left the Golden State a whole lot less sunny (at least in the housing market), but we’re still feeling the aftershocks today.
Even worse, the disrupted cycle is not only affecting the quantity of properties for sale, but the cost of purchasing a home as well.
A Dearth of Attractive Prices
Likely in response to the state’s dwindling inventory, home prices are climbing once again in a steep incline reminiscent of the bubble.
In California’s 10 largest cities, the median list price increased by a whopping 20 percent on average from January 2012 to January 2013. Now compare that to the housing bubble, when prices rose from around 7 percent year over year to a 12 percent increase at the bubble’s peak in 2005. Just look at Los Angeles for proof of this drastic climb, where the median listing price last month was $527,000, 26 percent higher than where it stood in January 2012.
Rising prices means two things: More expensive properties could be the only ones on market, because as we mentioned, many homeowners have opted to remain in their starter homes. It also means that costs have just gone up across the board.
Add to that the fact that foreclosures now make up half of what they did last January, and you have the perfect cocktail for sellers.
This market certainly IS a challenge for buyers. Short inventory and a flood of cash buyers have made getting into contract a little trickier than usual. We are seeing multiple offers on every attractive property and many over list price. In our market here in San Diego, listings are getting 96% of asking price COUNTYWIDE! If you are a seller this is amazing news; if you are a buyer we have to be creative to make sure your offer lands on top of the pile.
One year ago, you could purchase a home for a really good deal. In January of 2012 there were foreclosures aplenty on market—nearly 34 percent of all sale activity, according to DataQuick.
Today the average amount of distressed properties in the largest California cities stands at 16 percent. In cities such as San Francisco, that number fell even more from 2012 to 2013. Last January distressed properties in the City by the Bay were at 31 percent; last month they made up only 11 percent of available properties.
In summary, home buyers’ odds of securing property deals aren’t so hot–and the growing number of home shoppers able to lay down cash are making the search even more painful.
Payment Preferences Are Shifting
Last year we reported that tighter credit restrictions were limiting home loans, despite historically low interest rates. A much higher than usual portion of buyers paid in cash without any financing assistance. In January 2013 that trend continued with a sizeable statewide increase of nearly 16 percent in the number of California’s cash-only transactions.
The rise of the cash-in-hand home buyer is proving an obstacle for interested buyers with mortgage financing. In a recovering market such as California’s where the industry remains fragile, sellers will turn to whoever can offer the most cold cash:
People are now offering tens of thousands of dollars over the list price, and sellers are accepting even though they know that most likely it will not appraise and a price reduction will be needed. Even banks are accepting these grand offers. Here is a line we would hope a short sale or REO transaction could help put a damper on the madness.
Further harming the mortgage buyer is the recent upswing in mortgages rates. As the market turns around, so too are banks once again raising the interest bar–not exactly promising news for those of us without the means to pay out of pocket for a purchase as large as a house.
Say Hello to Short Sales
In the past year, banks have begun swapping foreclosures for short sales, otherwise known as selling underwater homes for less than is owed on the mortgage.
As previously noted, foreclosures declined significantly between January 2012 and last month. Yet short sales continue to make up over a quarter of the properties on California’s market (26 percent in January 2013).
The upturn in short sales marks a shift for both buyers and sellers. Those selling their home benefit from fewer dirt-cheap foreclosed properties on market. Buyers still maintain an advantage of cheaper options–though short sales don’t offer quite the selection of deals that foreclosed homes do.
And since there are fewer properties altogether for sale, sellers once again hold the upper hand–at least for the time being.
The Movoto blog is a service of Movoto Real Estate. If you’re looking for a new home, keep us in mind. We have up-to-date real estate listings and local agents throughout the country. When you want to take a break from browsing homes, you can keep coming back to read awesome blog posts like this one.