California Housing Market Nearing a Bottom
Signs of a bottom in the California real estate market are taking hold, with buyers snapping up the most affordable properties and long backlogs of unsold homes starting to be absorbed.
An improving jobsoutlook in Northern California, continued low mortgage rates and the ongoing influx of new residents into the Golden State provide support to a healing housing market.
“Coastal California is bouncing back in the single family residence market,’’ says Eric Smith, a real estate investor in Paso Robles. “There is definitely a price cutoff though. The lower-priced properties are being bought rather quickly, while the higher-end properties are still sitting on the market for a while.”
Many of those lower-end sales are coming from all-cash buyers, and they extend from the rural coastal counties of Monterey and San Luis Obispo, where home prices are up 14.7 percent and 7.8 percent year-over-year, respectively, to landlocked cities like Modesto in the Central Valley and the communities of the Inland Empire east of Los Angeles.
Such activity has enabled prices in the Inland Empire, which fell 0.8 percent over the last 12 months, to hold up better than the state overall, which saw the median price of a single-family home drop 1.7 percent. While still negative, the change was the smallest year-over-year decline since December 2010.
Don Faught, president-elect of the California Association of Realtors, points to three metrics that confirm housing is back on an upward trajectory: inventory, time on the market and spread.
Inventory has dropped 30 percent over the last year to 5.3 months, due to a limited number of foreclosed properties and homes with delinquent mortgages hitting the market. Sellers are also holding back to see if prices will improve.
Inventory in the Bay Area has fallen nearly 40 percent to 4.2 months. In San Francisco, the total number of properties for sale in February was down 38.2 percent from the previous month and down 62.9 percent from February 2011.
“That’s a very substantial drop,’’ says real estate attorney John Corcoran.
California homes are also selling faster. Time on the market for single-family homes has decreased 9 percent to 59 days and condos seven percent to 67 days, according to the Realtors association.
And finally, the spread between asking and selling prices is narrowing.
“First-time home buyers are still looking for steals and not looking for a deal,’’ says Faught. “The marketplace is not in the same condition as three years ago; people are still writing under the asking price but should be writing offers at asking price.”
A stronger jobs market and higher incomes for technology workers has brought back bidding wars in San Francisco and Silicon Valley. Properties listed at $1.5 million are getting bids $200,000 to $300,000 higher.
Faught says selling prices in the tightest Bay-Area markets bear no relation to appraised value. Instead, buyers are waiving appraisals while sellers are looking for the best terms to close a sale rather than trying to max out their selling price.
California is facing the same financing conundrumhurting potential home buyers across the country. The state affordability rate, which measures the percentage of the population able to afford the median-priced home, is approaching 70 percent. That’s a vast improvement over the 11 percent level in 2006 and the highest level in the Golden State since early 2000.
Affordability has been driven by low interest rates, but much tougher lending standards and lower appraised values are still making it difficult for buyers to close escrow, say real estate agents and mortgage brokers.
Paul Habibi, a lecturer at the UCLA Ziman Center for Real Estate, expects home prices to bounce around a narrow range for the next several years, giving potential buyers time to straighten out their financial houses and improve their chances of qualifying for a mortgage.
The indicators Habibi scrutinizes are also suggesting a bottom has been reached for single-family home values.
Mortgage delinquency rates have plummeted, which suggests foreclosure rates will drop. The acquisition of distressed properties by investors is adding stability, while the price-to-rent ratio — which compares home values to their 12-month rental income potential — has retreated to sustainable levels.
“The worst is behind us, units are being absorbed, and we’re not seeing a lot of new supply coming online,” Habibi says.
While new construction has resumed in areas of the state lacking inventory, the volume is not yet significant enough to affect existing property values.
Condo sales in desirable coastal regions with improving economies are another sign that supply and demand are getting back in line. While condo prices are down 8.3 percent statewide over the last year, sales are up 9.3 percent over the same period.
Says Faught: “In markets where single-family homes are selling quickly, condos are also doing well because people want to buy a home.”