The California Real Estate Rollercoaster
The year 2010 brings to a close one of the most volatile decades in the history of the California real estate industry. Median home prices increased at an unprecedented rate to all-time highs five years ago, while the second half of the decade witnessed the sharpest decline in home prices ever recorded. It's hard to imagine that the same ten years that saw homes being purchased sight-unseen at twenty percent above asking price also experienced widespread foreclosures and lofty inventories of properties for sale. Home builders that were once purchasing as much land as they could find were soon abandoning partially completed developments. Homebuyers that once struggled to find a home they could afford were suddenly availed to a wide array of reasonably priced houses. So now that the California real estate rollercoaster has rapidly taken us up and down, what does the future hold?
Excitement aside, it seems safe to say that market stability would be much more favorable when compared against the extreme fluctuations experienced over the previous decade. Thankfully most real estate economic indicators over the past several months do point towards a leveling out of housing values. However, the primary concern in the back of every real estate professional's mind is whether a second wave of foreclosures will negatively impact housing values in the near future. Should we be ready to pull back the safety bar and lift our arms in the air to prepare for the next plunge on the rollercoaster?
This determination should begin with an analysis of two of the most prominent real estate market statistics: housing sales and median prices. A look at California homes sales shows that between 500,000 to 600,000 single family residences have been sold each month in the state for the last year-and-a-half consistently. These stable statistics are well above the trough of 254,650 home sales that occurred in October of 2007. So given the currently high levels of affordability compared to the peak years of the housing boom, a dramatic drop in the number of homes sold seems very unlikely.
A quick examination of California median home prices during the first quarter of 2010 may initially raise fears of a potential double dip as housing values decreased from $306,820 to $279,840. However, it is important to note that the median price of $279,840 was actually 14.1% above the median from a year ago. Affordability is also more than double than the levels of a few years ago when the median home price in California exceeded $550,000. The fact that more buyers can afford to buy homes should continue to drive demand and prevent a significant decline in home prices.
When applying the law of supply and demand to housing values, one must assess the number of homes for sale in order to ensure that this supply, or housing inventory, does not exceed the current level of demand. The first quarter of 2010 revealed a housing inventory of 6.3 months – the time it would take for all of the homes currently on the market to sell at the current rate of sales activity. Although this figure may seem large, California's long-run average is 7 months of inventory. Accordingly, inventory levels below 7 months have always fueled year-to-year price gains in the past. So if inventory levels can continue to be contained, housing values should begin appreciating again in the near future.
Housing inventory is what leads us to the primary quandary as to whether record breaking loan default notices over the past year will lead to yet another wave of foreclosures that will ultimately be re-sold by lenders in bulk. In theory, this could dramatically increase housing inventories beyond demand and cause another drop in home prices. Fortunately this event seems unlikely now that both banks and the Federal Government are increasingly working hard on various levels to promote foreclosure avoidance through loan modifications and short sales. These efforts in combination with recently instituted housing tax benefits, increased affordability, low inventories and increased demand should all help to counter the effects of future foreclosures.
So even though most patrons don't enjoy a relatively slow and stable rollercoaster, it is safe to say that most Californians welcome the idea of this ride becoming a little safer and predictable.
About the Author
Brian S. Icenhower, Esq, BS, JD, CRB, CRS, GRI, ABR is the CEO of Keller Williams Realty Tulare County, a real estate broker, an attorney, President-Elect of the Tulare County Association of REALTORS, a California Association of REALTORS State Director, a real estate litigation expert witness and former real estate law instructor at the College of the Sequoias.
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