WHAT WILL NEXT 5 YEARS BRING TO HOUSING PRICES?

Does this sound like a loaded question?  There may be as many answers to that question as there are people in the USA, but it seemed like a good lead off question for this month's report.  In fact, the opinion reflected in the following numbers are reported by "Pulsenomics", a group of 100 economists, investment strategists, and housing market analysts.  After their conference they reported housing prices to start upward in 2013.  Here is the 5 year projection:  (A) 2012 - (-).4%  (B) 2013 - (+)1.3 %  (C) 2014 - (+)2.6%  (D) 2015 - (+)3.2%  (E) 2016 - (+)3.5%.   The average pre-bubble (1987-1999) annual appreciation was 3.6%.  How can Pulsenomics make such a prediction when the housing market still seems in such dire trouble?  There are several factors to consider.  Firstly, the plummet of "shadow inventory."  It is at its lowest number since 2008.  In fact, according to Mark Fleming, the chief economist for CoreLogic, "Since peaking at 2.1 million units in January of 2010, the shadow inventory has fallen by 28%.  The decline in the shadow inventory is a positive development because it removes some of the downward pressure on house prices.  This is one of the reasons why some markets that were formerly identified as deeply distressed, like Arizona, California and Nevada, are now experiencing price increases."  Prices in southern California certainly have not skyrocketed, nor does any Realtor or economist wish them to do so.  A lesson, hopefully, has been learned regarding ascending markets that rise on false theories or practices.  However, there are slight bumps upward in certain areas only.  Literally, a price may rise for a certain neighborhood, based on competing properties, or simply more buyers for that area than sellers.  But you will note that overall, prices remain flat for 2012, even slightly down.  Those are national numbers and obviously California is on different footing, particularly southern California, which has been projected to recover more quickly than northern California, and the rest of the country. 

IF INVENTORY IS SO LOW, WHY AREN'T PRICES RISING NOW?

This is a good question.  Isn't housing economics simply the law of supply and demand?  And if it is, with inventory so low, (and inventory is low, with the possibility that pending sales will rise above available homes for sale, a true market anomaly), why aren't prices rising more quickly right now?  The answer to these questions may not be obvious, but there are some reasonable answers.  First of all we are in a counter-intuitive market.  So what would seem to be an obvious outcome is not, and in fact, the opposite occurs.  In this case, prices are still going down, despite some listings that sell over list price, in some price ranges or neighborhoods.  Remember that the list price was aggressively LOW, not HIGH, to begin with.  And although historically low interest rates, (seriously 3-4%??), are driving the demand which is rapidly lowering available inventory, there is a key factor which is keeping a lid on housing prices--- WAGES.  In fact, this column will report it first, that as long as wages stay flat, and they have been flat for the last 7 years, prices will be forced to keep a lid on it.  Why?  Simple.   Housing affordability is part and parcel to a healthy housing market.  We saw what happened in 2006 with double digit appreciation.  That was appreciation that was so fast, there was no way wage increase percentiles could keep up.  Housing appreciation went to 11% in southern California, and the industry created unsustainable financing, (a nicety for horrible loan programs), that propelled a booming market well past when it should have adjusted and created the terrible mess we have been in for the past 5 years.  Some industry analysts believe we are in for 5 more years of pain, some believe, as in the previous article, that we are beginning to climb out now.  Time will tell, but it does appear that the housing market has and is stabilizing.

WHAT WERE THE ACTUAL NUMBERS?

The total number of May sales for Orange County, (the last full month available), was 3,124, not including trustee sales auctions, where investors paid cash at the courthouse steps for 169 properties.  There were 1,542 equity sales, (non short), for single-family, and 506 equity sales for condos.  The short sales numbered 371 for single-family and 238 for condos.  Bank owned listings sold nearly all that was listed with 304 single-family and 163 for condos.  There were 1,294 Notices of Default recorded, down nearly 35%, and 987 Notices of Trustee Sale, which has declined sharply from monthly highs of over 1,700 in 2011.  The median price for all of Orange County for all homes was $435,000 which is up 2.4% for year over year for May (2011).  The slight increase comes from rises in condos and new homes, not single-family which actually declined 1%.  However, the big news is in the volume of homes sold which rose 23.1% in May 2012 compared with May 2011.  It would seem we are headed in the right direction.

CHAPMAN REPORT FORECASTS OC HOME PRICES TO JUMP 7.1% IN 2013

The median price in OC is expected to rise for 2012.  But does 7.1% seem like "pie in the sky?"  First of all, OC is predicted to lead California in recessionary recovery on almost all fronts, and California will likely beat most parts of the country.  But look carefully at what the Chapman Report actually reports.  They see a decline in the number of foreclosed homes and homes selling "short."  We already discussed the fact that the shadow inventory is shrinking.  The absence of those homes, that represent the low end of the market in pricing values, will allow equity properties to force prices up slightly for averages, but probably not a big jump in appreciation overall.  Nonetheless, we are on track for a stronger housing market.  They reported that homebuilding is projected to increase 27.3% this year and 15.1% in 2013, nearly triple what it's been.  Finally, Chapman predicts a housing shortage over the next eight years as construction still lags behind population growth.  As this column has reported in past months, the millennium generation believes in home ownership, is coming of age, and wishes to buy.  Expect the housing market to be as resilient as the citizens who live here.

WOW!! WHAT A DIFFERENCE A YEAR MAKES!

Don't believe it?  Well, believe these 3 headlines from the last 3 weeks of the Orange County Register from April 22 through May 6 (in order of oldest to most recent): 1) FORCLOSURE SALES DOWN SHARPLY  2) IS THE FORECLOSURE CRISIS OVER?  3) HOMEBUYERS SPRINGING TO LIFE THIS SEASON.  There has in fact been a huge shift in Southern California real estate in the last year.  According to statistics gathered by Foreclosure Radar and other sources, California property owners are losing homes to foreclosure at half the pace of 2011.  Part of the reason for the drop is that banks have finally figured out that short sales save them money.  When a property short sells, it's better for everyone.  The homeowner doesn't take such a big hit to his/her credit, they save a little dignity, and it will allow them to re-enter the housing market more quickly down the road.  For banks, the advantage is significant; they generally don't have to rehab the property, they don't have to put utilities in their name and maintain the property while it's being held for sale and they don't have a nonperforming asset on their ledger.  If you don't know what you're looking for when you study the numbers, you might miss it.  The casual glance at the numbers appears drastic.  The month of March saw 86,487 trustee sales scheduled.  That seems like a drastic number.  But 80% of them were postponed, many specifically to allow a short sale to proceed.  So far this spring,  Notices of Default are down 19.7%, foreclosures going back to the bank are down 62% and foreclosure sales to a third party are down 21%.  So, is the foreclosure crisis over?  There may be different interpretations of the data to come to that conclusion, but suffice it to say, foreclosures have definitely peaked.  The final headline regarding homebuyers begs the question, who is buying all these distressed listings?  The answer to that question is, well, everyone.  As the number of foreclosures drop, investor purchases will rise, because the investors come to the market as close to the bottom as they can reasonably figure.  The month of March, for example, Foreclosure Radar reported that 46% of all trustee sales were purchased by investors instead of them going back to the bank to become an REO.  A year ago the significant number was 71%, and that was the number of homes NOT being purchased, but going back to the banks.  Bank owned properties are down 20%, and only 44.7% of listed properties were distressed for March, which means over half the properties listed for sale were equity sellers.

HOMEBUYERS SPRINGING TO LIFE?

It's true!  Anything under $700,000 is flying off the shelves.  Agents can't keep enough properties listed to meet the demand.  Home sales for the 22 business days ending April 17th (all of April is not yet available), showed total resale houses sold at 1,916 for Orange County, up 16.1% from 2011.  Condominium volume was up nearly 12%.  One zip code in the city of Orange was up 37%, one in San Clemente up 83%.  With interest rates hovering around 4% or even a tad lower, and housing at its bottom for likely this century, it's easy to see why the buyers are out for a spring buying fling!

JOBS SOLIDIFY THE HOUSING TREND

You may have seen in the paper or a blog that the job numbers were a disappointment in early May for Wall Street.  But not the same for Orange County.  Unemployment actually ticked higher as people re-entered the job market for the first time in months.  Local employers added 13,100 to their payrolls in March, up from 7,900 in February.  But it's also the type of jobs.  These jobs are manufacturing, engineering, high tech, real estate (specifically loan processors, underwriters, etc), and health care, to mention a few.  According to Esmael Adibi, an economist at Chapman University, "It's a very good report in terms of jobs, and the job rate is accelerating.