Californians have heard about the doom-and-gloom in real estate for years now—news of declining real estate prices and higher foreclosure rates fill the pages of most newspapers. When few were looking for good things, however, something much different occurred: the beginning of California’s real estate comeback.
Home sales in November 2008 were 102 percent above the trough of September 2007, and 22.3 percent higher than year-over-year November 2007. This is a strong indication that no matter what you hear or read, buyers are out there and making offers. And homes are selling faster.
The closely watched “time on market” is now taking an average of 44.3 days, compared with 61.6 days for the same period in 2007.
Even with more than 260,000 foreclosures in 2008, the unsold inventory of homes has continued to drop. The current inventory of homes for sale in California now stands at 6.9 months, compared with 14.3 months for the same period last year.
Even the foreclosure news is getting better. In 2008, there were 453,421 California homes in the preforeclosure process, with 260,709 ending up lost to foreclosure, compared to 94,969 homes lost to foreclosure in 2007. But that’s only part of the story.
In the third quarter of 2008, the number of foreclosed homes neared 90,000 for just those three months, a high for 2008 and the highest in recent history in a quarter. But in the fourth quarter, there was a dramatic decline of nearly 40 percent in actual foreclosures. What’s driving this California comeback?
In short, homes are more affordable today than we’ve seen in quite some time—and that affordability is driving a surge in buyers. California’s median price was down nearly 42 percent from $490,500 in November 2007 to $285,500 in November 2008. This was the first time the median price dropped below $300,000 since 2002.
Dropping prices and historically low interest rates translate into a typical mortgage payment on a median-priced home of $1,456 month, which is down 25 percent from $1,951 just one year ago.
What lies ahead?
Historically low interest rates and affordability should accelerate the comeback and drive home sales in 2009. Inventories of unsold homes will drop quickly this year as people come off the sidelines and realize that today’s home deals are the best they’ll likely see in their lifetimes, both in terms of affordable prices and low interest rates.
Even though some reports focus on more adjustable rate mortgages due to reset and project resulting foreclosures, the facts don’t support that view.
With current mortgage rates at historic lows and dropping, those with resetting mortgages who qualify will be able to refinance and enjoy lower monthly payments, not higher ones. Those who can’t will end up either selling their homes preforeclosure or losing them to foreclosure.
California is a known trendsetter and, much as the problems in this real estate market began here, the comeback is beginning here as well. Nationally, indicators are favorable, with housing affordability, the growing population and interest in buying foreclosures among the things driving buyers.
Housing affordability. Nationally, housing is the most affordable it’s been since February 1994, when a mortgage on a median-priced home equated to 18 percent of the median income. Credit Suisse estimates today’s mortgage payment on a median priced home in October 2008 represented 16.7 percent of median household income (based on a 6.23 percent mortgage). As interest rates go below 5 percent, affordability is more likely to be under 15 percent of the median income.
Growing U.S. population. The Census Bureau projects that, with births, deaths and immigration, the U.S. population will increase by one person every 14 seconds in 2009. More people means more demand for housing.
Buyers for foreclosure properties. Tighter housing supplies mean buyers will look to foreclosure homes as viable purchase options. We’re under-building right now, but whatever new foreclosures hit the market are offsetting the losses of the new housing we need but aren’t getting.
Unemployment is an issue, but not as large as some think. The unemployment rate released by the government for December was consistent with economists’ consensus estimates and came in considerably better than a private forecast released in early January. At 7.2 percent, unemployment is just shy of the 7.8 percent experienced during the 1990-1991 recession, but still well below our double-digit levels of the early 1980s.
Finally, people may be surprised to hear what’s coming in the longer-term: a housing shortage. Housing construction has plummeted, hitting record lows nationally in November, off 18.9 percent to a seasonally adjusted annual rate of 625,000 units. New building permits plunged 15.6 percent.
The dramatic decline in construction is great news for existing housing markets, because when fewer homes are being built at the same time the population—and housing demand—is exploding, the shortfall has to be made up somehow.
In this case, it opens the door for the nation’s 1 million foreclosures to be easily absorbed in the market and for housing supply finally to catch up with demand. It’s already begun in California—let’s hope it continues throughout the new year.
