Guest Column: California Housing Market Moves Toward Health

Published September 9, 2014

Open house signs in SacramentoBy Gerd-Ulf Krueger

The latest statistics for California resale home sales are still relatively sluggish. DataQuick registered 39,254 sales in July 2014, which was up 0.9 percent from June but down 8.7 percent compared to last year. July’s sales were 14.0 percent below the average sales for all months of July since 1988. Volume-wise, the California housing market is still not thriving.

But there are some signs that the stars for California housing may start to align better than in the past. Here are some thoughts:

  1. The median price rose year-over-year by only 8 percent. The annual increase in the California median home price was the first year-over-year increase below 10 percent since June 2012. The slow-down in price growth could actually be a good sign. It may signal that sellers are becoming more realistic.
  2. The other good news is that distressed sales continue to drop. Both foreclosure resales and short sales represented merely 12.2 percent of total sales in July 2014. That was way down from peak numbers in February 2009, when it was close to 60 percent. The decline of distress is the best sign that housing is in the middle of a major healing process.
  3. Remember that many would-be buyers were pushed out of the housing market recently by wealthy investors making cash purchases. So it is good news for the average homebuyer that cash buying is receding. Cash purchases declined to 24.5 percent in July this year from 30 percent the year before in Southern California. In the San Francisco Bay Area, cash purchases represented 20.2 percent of the total in July, down from 23.5 percent a year earlier. If this trend continues, middle-class home buyers will face a more fair competitive environment in the home buying process.
  4. Another good sign is that resale listings have been on the rise lately. The California Association of Realtors (CAR) reports that the months of unsold inventory in California rose from 2.9 months in July 2013 to 3.8 months in July this year. While this represents rather tight supply conditions, it means that buyers are beginning to have more choices.
  5. The rapid rise of home prices last year has created a renaissance in home owner equity. Today around 89 percent of California mortgages have positive equity, according to CoreLogic. The recovery of homeowner equity could trigger repeat buying activity as homeowners begin to sell their homes. That would help with listings and add a new demand element to the housing market.
  6. Even the often complained about toughness of mortgage underwriting seems to be easing. The Federal Reserve Board recently reported in its Senior Loan Officers Opinion Survey that a small majority of domestic banks eased their standards on prime residential mortgages. If this easing continues, it would be just what the doctor ordered.
  7. New housing construction is on the mend. Year-to-date, total housing permits increased in July by 5.1 percent, led remarkably by a 10.4 percent rise in single-family detached housing permits. This means that builders are finally responding to higher prices and demand.
  8. In California, 30 percent of its households could afford a median-priced home in the second quarter of 2014, according to CAR. That’s a low number but by no means critical for California, which has experienced good sales volume in the past despite even lower affordability. Looking forward, there is the risk of rising interest rates, but the European Central Bank has sharply eased its monetary policy lately. Suddenly, American interest rates look attractive compared to those of Europe. This is likely to keep interest rate risks low. At least for another year, California’s housing affordability, although difficult, should remain manageable for would-be buyers.

All in all, the California housing market has made major progress toward a full recovery in its health. That can only be good news for Californians and the California economy.

Gerd-Ulf Krueger, a noted economist in the real estate and land development business, is a member of the Controller's Council of Economic Advisors. The opinions in this article are presented in the spirit of spurring discussion and reflect those of the authors and not necessarily the Controller or his office.

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