State of the California Housing Market – Q1 2013

At the Realty World of Northern California and Nevada Conference last week, Vice President and Chief Economist of the California Association of Realtors, Leslie Appleton-Young, gave a presentation to the assembled agents and brokers about the state of the California housing market, and, importantly, gave guidance for where the Association sees the market going, as well as what risks lie ahead.

It’s clear to even the most casual observers that the California real estate market of 2013 is markedly different from the year before – and especially different from the several years before that.  The percentage of distressed sales in 2013 continues to decrease, to the point where these sales are no longer the defining facet of the market as in years past.  Rather, there are two distinguishing characteristics of today’s market:  a) painfully limited inventory and b) sharply increasing home prices.  There is a strong correlation between the two – the increase in home prices is largely due to the decreased inventory, however, as prices continue to rise, inventory should increase as more home owners finally move to take advantage of higher prices.

It should be noted that the increase in home prices is not simply a function of decreased inventory. There are some other factors at work here – for example, the presence of investors in the market place.  30% of homes sold in California in 2012 went to cash buyers, as housing at current pricing is seen as a good buy.  In addition, mortgage interest rates remain at or near historic lows, which stokes demand and fuels the purchasing power of buyers.  And locally at least, the economy of the San Francisco Bay Area is among the strongest in the nation, with increased consumer confidence whetting the appetite of home buyers.

There are a number of risks that face California’s still-fragile housing recovery.  Consider what happens when (not if):

  • Cash-buyer-investors stop looking at the real estate market as a smart place to put their money and these investors turn from buyers into sellers?
  • Interest rates, inevitably, begin to rise and erode purchasing power?
  • Many homeowners – perhaps “trapped” in their homes by underwater mortgages – finally see an opening and move to put their homes on the market?
  • Banks step up foreclosure activity and put more “distressed homes” back into the market?

And, there are some larger issues as well – what effect will the Euro Zone crisis have on the U.S. and California economies?  What will slowing economic growth  in China mean for the California real estate market?  How will the perennially-planned reforms of Fannie Mae, Freddie Mac, and the FHA impact the market, should they come to pass?

While considerable risks remain, there are some additional factors which should provide strength to the market going forward.  Due to the weak economy of the past few years, new households have formed in California at a much slower rate than in years gone by, contributing to weaker demand.  As the economy continues to improve, and, in particular, job growth – we should see the return of an increase in the rate of household formation, which augers well for housing demand.  Also, the next several years will see “boomerang buyers” – those who have been foreclosed on or did a short sale on their previous house will be returning to the market – likely in huge numbers.

Even given all the uncertainties, the California Association of Realtors did provide a market forecast for 2013.

California Housing Market Forecast - 2013

The CAR forecast shows an 11.1% increase in median home price for the entire state in 2013, with sales volume increasing just 1.3% over last year.  Interest rates are projected to be 4% on average over the year, which sounds about right given that the Federal Reserve has pledged not to raise rates until the unemployment rate hits 6.5% – not expected until the year 2015.

Although the California housing market is demonstrating a radical change from the market of last year and especially the years before, there is a loud chorus of voices casting doubt on the veracity of the recovery.  The market is rigged, the numbers are funny – Quantitive Easing, artificially low interest rates, the Fed buying mortgage backed securities, bank-owned inventory purposefully kept off the market (the fabled “shadow inventory”), the presence of large institutional investors in the market buying up the low end of the market – the list of these “artificial conditions” boosting the market is long and seems to keep getting longer.

It is clear that there are a number of factors – many of them “artificial” – which are playing a part in the “recovery” here in California.  It’s an open question, though, if “artificial” means “bad.”  Certainly to die-hard free-marketers, any government action through regulation or economic/fiscal policy is bad – nay, evil!  Other people – probably, most people – would take a more nuanced approach to the problem and say a free-fall collapse in the housing market is too painful for too many and imperils the middle-class society we so value as a nation, therefore some artificial intervention is warranted and beneficial until more organic strength can take hold.  This is something that – finally! – does seem to be happening, although the degree to which that is the case cannot be clearly demonstrated.

Will the median home price in California increase 11.1% in 2013 as CAR is predicting?  Will the median home price continue to increase the years after that, and if so, at what rate?  Or, as the doomsayers insist, is all this just so much smoke-and-mirrors and a new, perhaps more serious, housing crisis is waiting to rear its ugly head next quarter?

Nobody – nobody! – can say for sure.  The only thing certain is death and taxes.  But looking at the big picture, it is difficult to conclude that the market will get much worse, or that real (inflation-adjusted) prices will increase greatly, over the next 5-10 years.  Inventory will rise and fall, as will interest rates, home prices, unemployment, and so many other variables.  Forecasting beyond the next sunrise is a chancy business.

No matter the state of the market – today’s, tomorrow’s, or yesterday’s – there’s one North star that should guide you:  a house is first and foremost something to live in, not an investment.  Make sure your home is something you can afford, and will be able to continue to afford, for a long time to come.  Expect to build equity over the long haul, and be prepared to hang on to whatever home you buy for the long haul as well.  This remains true for whatever market you’re in.

The San Francisco/Monterey Bay Area Housing Market is...

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