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What’s Wrong with California Real Estate? [Infographic]

Lauren Tyson

Lauren is Movoto's resident Social Media Manager. She takes real estate, Facebook, and mustaches very seriously.

22 articles, 7 comments


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!

 
Read the responses from our network of trusted agents in Northern California
Read the responses from our network of trusted agents in Southern California

 

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Who is Movoto Real Estate, you might ask? Movoto is a national online real estate brokerage. Our blog has been recognized for its unique approach to city-based research by major news organizations around the world such as Forbes, CBS News, and The New York Times.

posted on: February 2, 2012
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15 Comments

  1. SoCal Agent Responses on CA Real Estate Market

    [...] What’s Wrong with California Real Estate? [...]

  2. Jonathan Squire

    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.

    • Lauren Tyson in response to Jonathan Squire

      Good to know that “real life’ in the field is reflecting in the data we’re seeing. Where are you located, Jonathan?

  3. Johan Vanden

    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.

    • Lauren Tyson in response to Johan Vanden

      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!

  4. Patti Davies

    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

    • Lauren Tyson in response to Patti Davies

      Yeah…let’s hope that “Economy Boost” part of the flow chart happens sooner rather than later!

  5. Paula Samuel

    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.

    • Lauren Tyson in response to Paula Samuel

      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.

      • Jadeja in response to Lauren Tyson

        The Housing Act (from 1994!!!) DIDN’T force any bank to make sub-prime loans, in fact sub-prime loans are not mentioned anhywere in the Housing Act.They were an invention of the Banks, whose internernal memos claimed (there is NO risk in the Housing Market) and instructed its officers to start making loans to anybody and everybody even with no pay stubs, regardless of the price.The Fannie Freddie talks were about TRYING TO GET THE BANKS TO STOP MAKING THESE LOANS!!!THEY REFUSED!!!! And kept right on giving them AGAINST the advice of regulators.The idea that Barney Frank had anything to do with this is just blatant right wing poppycock.

  6. Jodi Summers

    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.

  7. jody henderson

    Great article! Thanks. I love the info AND the humor.
    Jody

  8. Maureen Daley

    Very informative information. I appreciate the comments of others, which are quite accurate,

  9. Derek Jennings

    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.

  10. Terry Osburn

    Article brings up many good points. In my opinion the housing market will not gain full or sustainable recovery until the jobs come back. Some areas of the country apparently have seen some job growth. Overall there is much more room for improvement. I personally do not take much credence in graphs and percentages as they can be manipulated in many ways. What I do know is this, historically no matter what is going on in the economy there are homes selling. Keep stressing long term investment. In terms of short sales, many homes in distress are being delayed released to market as all efforts are exhausted for other alternatives for the borrower. BofA has indicated in recent days they will be more apt to do loan modifications, principal reductions and/or deed in lieu’s, even if homeowner presently has home on market as a short sale. Expect the seesaw effect for awhile, even though historically real esate has always had up and down curves I believe the ride will be a little more bumpy in the next few years….

 

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