What’s Wrong with California Real Estate? [Infographic]
Sellers are “missing in action”, investor cash is flowing freely,
and no one likes what’s on the market these days.
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You’ve heard that real estate is about location, location, location. With plenty of major metro areas, attractions, and that whole…Hollywood thing, California’s real estate market is something to watch and avidly follow (with popcorn).
And normally, the differences between NorCal and SoCal’s real estate markets are immediately apparent, like the differences between skinny hipster jeans and surf shorts. I was gearing up to spend an entire week researching each metro area, noting the subtle differences and reporting my findings. But imagine my surprise when my extensive data pointed me to an unexpected conclusion: every major California market is trending in the exact same direction!
That’s pretty much exactly what I am seeing…more buyers than sellers and plenty of cash floating around in the market. I’m hoping we get sellers popping out of the woodwork in the spring. Otherwise, it’s going to be a frenzy as too many buyers fight over an already picked over inventory.
~Dave Roberts of Sonoma.net
Our January Market Summary made a great case for why it’s a good time to buy, and that holds true if you live in California. But let me qualify that with a reason: interest rates and prices are the lowest they’ve been in ten years. That doesn’t mean that your choice of home inventory is going to magically improve, and I’m not saying there should be a frantic rush to buy. But, if you are thinking about buying a home, it’s no longer a “Home-Buying Armageddon” where you are rolling the dice on your future equity. Take your time, find a home you that suits you, and enjoy the home search. That’s the key element that most recent market reports are missing; it’s going to be Buying Season for the foreseeable future!
Our housing data shows that California price levels are essentially flat from the end of January 2011 to the end of January 2012—across all 15 major metro areas that we analyzed. However, inventory levels are anywhere from 20% to 70% lower during the same time period. We usually expect reduced supply to lead to higher prices – why hasn’t that happened? We consulted experienced California real estate agents, reviewed what’s going on with interest rates, foreclosures and government programs, and asked Siri (actually where to get a pizza at 11 pm) and came up with a few possible explanations for such peculiar market conditions occurring in California:
1. People are refinancing instead of selling.
Assuming your property value is above your loan balance, refinancing at 2011 interest rates saved California homeowners a small fortune. Let’s say you have a $200,000 mortgage rate at a 7% interest rate. That means your mortgage payment is about $1330/month. If you refinance to the current low rate of 3.96%, your mortgage rate falls to about $950/month. That’s almost $6000/year in savings—you can finally afford those granite counter tops you’ve always wanted.
- More support from big wigs.
It looks like President Obama is also trying to perpetuate the refinancing extravaganza. In his recent State of the Union address, the President proposed letting underwater mortgage holders (meaning they owe more than their home is worth) who are current on their payments refinance their mortgages with government approval. It’s not a given that Congress will go along with this plan, but if it passes, it would keep even more owners in their homes.
2. Urgency to sell now reduced.
Dataquick is reporting that foreclosures are down 11.9% across the state of California, relative to the same time period a year prior.Excellent news, not just for the economy, but for my own delicate sensibilities whenever I read about foreclosure hardships in the news. Even Paul Krugman of the New York Times sees the economy improving. The magical flow chart of economic success is revving up, and that eventually means:
3. Sellers are waiting for the market to favor them.
It may be hard for sellers to hear, but it’s likely that the seller’s market won’t be thriving this year, as prices should continue to remain relatively flat (i.e. prices haven’t changed much and are not expected to). Also, the current homes on the market all across California are slightly bigger than last year at a price point of about 4% less than last year. This reduces the price per square footage 5-8% across the state, compared to the same time period last year. Not quite the upswing that sellers have been waiting for.
- Move-up buyers are out of the market.
Move up buyers make up the core of a healthy, strong housing market. They’re the ones buying bigger, better digs, which free up the smaller starter homes for first-time buyers. The recession has kept them stationary, and for that reason a good chunk of the best part of the market isn’t looking to buy.
4. Buyers don’t like the merchandise.
In a market with a smaller inventory, you would expect prices to rise (the laws of supply and demand usually dictate that as supply shrinks, price rises). That means that the real problem may lie on the demand side. Prospective homebuyers are either shunning what’s currently on the market (foreclosures, short sales, or maybe just some really ugly houses), or the overall economic forecast scares potential buyers out of the market. My bet is that it’s a bit of both.
- As further proof of potentially “bad” inventory, current sellers have dire motives.
It almost feels like those brave sellers out there are doing it because they absolutely have to. What’s the logic behind that conclusion? Well, generally, you can get a sense of how sellers behave in a market by asking them over and over and looking at the results over time. That’s what the guys at Housingwire.com did, and you can see that only ~8% of people think that it’s a good time to sell. So, likely many sellers are obliged to sell for some reason or another (*cough*too many babies*cough*) and as a result, buyers aren’t loving what they see on the market.
5. Tight credit limits the number of potential buyers.
If you’re living in, say, Detroit, cash deals may not seem out of the ordinary. For Californians—especially in places like San Francisco, Los Angeles, and San Diego—cash deals don’t seem possible unless you’re Scrooge McDuck with a swimming pool filled with money…or Mark Zuckerburg making his face public. In a normal market, 18-20% of all home transactions are paid in cash; right now, a whopping 38% of home transactions are cash deals. Cash buyers (typically investors) are more of a “sure thing” than buyers who finance, which means that they are swooping up inventory while pre-qualified buyers pause to deal with various financing woes. The result is that there is less inventory available, while prices stay static.
For sure that is our biggest challenge, we have so many buyers (many foreign) with cash but there are so few “good” homes. For the first time ever I have more buyers than sellers it has always been about 80% sellers but it looks like we may be at 60-70% buyers this year.
~Christophe Choo at Christophe Choo Real Estate Group
Hopefully, this gives you a better understanding of California’s buying forecast (partly cloudy?) and the possible explanation behind such a dearth of inventory on the market. If you’re selling, I wish you the best of luck, truly. Happy House Hunting!
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What a great article – really well researched and written. Best of all, it confirms what we are seeing on the ground but have been scratching our heads over. There are a bunch of properties available – but great quality homes are scarce – investors with a long term buy and hold tpe strategy will still find potential though.
Good to know that “real life’ in the field is reflecting in the data we’re seeing. Where are you located, Jonathan?
I am definitely seeing these same problems. It’s very hard to predict what’s going to happen, but I think the two big variables are obviously interest rates from the fed and the pace of economic recovery.
I believe the reason that prices are not going up is because people buy houses based on the payment they can afford, which hasn’t gone up for the average American. Supply/demand are important economic factors, but there are still enough home builders to over-build for surges in demand. I can’t imagine what’s going to happen when interest rates go back up.
Scary to think about, huh? It reminds me of the federal homebuyer tax credit a couple of years ago; everyone was happy that the government was literally throwing money at homebuyers, but there was significant worry about what would happen once they stopped. Fingers crossed!
so Cal is distressed, sellers are working it, They want to see how far they can go without making a payment, Standard sellers are upset they are loosing cash equity, and are waiting for the market to improve
Yeah…let’s hope that “Economy Boost” part of the flow chart happens sooner rather than later!
Excellent article and research and right on the money. There is no inventory, period. There are lots of buyers, some cash some financing, but there is no inventory. This is a great time to sell if you have equity in your home and, it’s a good property. I’ve also found that about 90% of my clients who initially think they will be able to purchase a short sale and/or foreclosure, give up and move into the standard market.
Glad you like it! What’s the short sale wait time in your neck of the woods, Paula? I think that scares off buyers just as much sometimes.
Here’s the sack! In January 2012, residential property prices in Santa Monica at a median price that was 43% higher than Jan 2010 > from $838,000 $1,200,000 > that’s an impressive rise of $362,000. Even with a 36% drop in properties sold, that’s noteworthy increase, wouldn’t you say?
Santa Monica’s 36% increase is particularly noteworthy since statewide the median price declined 6.2% on a year-over basis to $285,920, according to the California Association of Realtors…Fortunately, it’s looking like the rest of the state is off the bottom; for the second month in a row, prices are on the rise…even though they note there is still downward pressure on prices for more expensive homes that are not coastal.
In SoCal, DataQuick reports that the median home price in the six-county region continued a string of year-over-year declines, falling by 6.9% to $270,000 in December 2011. The regional median price has now fallen on a year-over basis for ten consecutive months.
Great article! Thanks. I love the info AND the humor.
Jody
Very informative information. I appreciate the comments of others, which are quite accurate,
Well this similar thing happened in the late 1970′s, lots of foreclures, however the price spike was not as high, that’s whats so intense about the last ten years of California Real estate.