The Economic Watch

Volume: 4 Issue: 9 September 2012

THE HOUSING REBOUND, PART 2: PRICES ARE CLEARLY RISING, ESPECIALLY FOR THE DISTRESSED INVENTORY by Mark Schniepp
Home Prices are Rising Again
Mortgage rates are at record lows, and the labor market is creating more jobs. Apartment and single family home rents are rising, and the credit markets are slowly thawing. Taken altogether, home buying has become a more attractive alternative for many households. As distressed homes sell or their owners wiggle out of financial trouble to avoid foreclosure, properties on the market represent a larger proportion of conventional homes for sale (that is, normal non-distressed homes). Values for conventional home listings have not been slashed to the core. These homes fetch the highest price they can get (rather than the lowest price for an REO) raising the median selling value for all transactions. Furthermore, because the inventory of conventional homes for sale is so low, an environment has emerged in which multiple offers for homes is becoming more common. The median home selling price for all sales in California leaped sharply in July to a near 4 year high. Year-overyear appreciation was 12.7 percent (and 17.7 percent in the San Francisco Bay area). Home prices for many of the most housing distressed areas of the state are showing very strong gains. Why ?
thousands of dollars

The Distressed Inventory

The inventory of distressed homes is declining along with conventional homes for sale. The shortage of inventory has had the most dramatic effect in the REO market, where available homes represent a 1.5 month supply and the share of REO sales had declined 35 percent over the past year. Home values for REOs are clearly rising. The distressed inventory of all transactions in California last month was 40 percent. Fifty percent of all purchasers of distressed homes are Investors, and they are bidding up homes anywhere from 5 to 25 percent over list prices. Theyve been purchasing homes over the last 18 months because (1) home prices are 30 to 50 percent below the 2006 peak, and (2) the demand to rent them by people with damaged credit, limited savings, or lack of confidence in

Median Single-Family Home Selling Price Selected California Regions 2012 February April Southern California San Diego County Orange County Los Angeles County Inland Empire MSA Ventura County South Santa Barbara County North Santa Barbara County Northern California San Francisco County Santa Clara County Sacramento County California $645,363 $580,417 $166,370 $289,013 $729,347 $676,167 $172,749 $323,603 13.0 16.5 3.8 12.0 $365,363 $494,877 $277,470 $177,957 $412,230 $761,100 $216,633 $386,760 $552,470 $310,837 $186,153 $426,543 $808,333 $226,250 5.9 11.6 12.0 4.6 3.5 6.2 4.4 MayJuly percent change

Median Home Selling Price / California

July 2008 - July 2012

360 340 320 300 280 260 240 Jul-08

Jan-09

Jul-09

Jan-10 Jul-10 Jan-11 Jul-11 Source: California Association of Realtors Source: California Assciation

Jan-12

Jul-12

Source: California Association of Realtors, Santa Barbara Association Of Realtors, Santa Maria Association of Realtors, and the California Economic Forecast

The Investment Home Buyer

In 2011, investors purchased 1.23 million homes in the nation, a 65 percent increase over 2010. Half of these sales involved no mortgage and were all cash transactions. Investment-home buyers had a median age of 50, earned $86,100 per year, and bought a home that was relatively close to their primary residence--a median distance of 25 miles. The primary reason for the investment was to generate rental income. Furthermore, nearly half of investment buyers said they were likely to purchase another property within two years.1
Bloomberg Businessweek online, August 30, 2012

The Train Has Left the Station

There is no going back. With low inventory, stronger demand, and positive price appreciation, the residential market is now participating in the economic recovery and it will remain sustainable. This alone will accelerate the overall economic expansion in the state and nation for the remainder of this year and in 2013.
1 National Association of Realtors 2012 Investment and Vacation Home Buyers Survey

Selling prices are rising for all homes, even distressed homes in the form of Investor purchased trustee sales or Bank owned foreclosure sales (REOs). The average price of homes sold at foreclosure or as an REO by lenders rose 7 percent this year. The number of transactions dropped 22 percent because the inventory is so scarce.

owning a home, is keeping purchased properties occupied with cash flow to Investors. Average monthly rents for apartments and rental homes is rising. The National Association of Realtors projects a 4% average increase in rents nationally this year and another 4% in 2013. Rents are up about that much in both Ventura and Santa Barbara Counties over the last 12 months.

California Economic Forecast Staff

Mark Schniepp - Director Ben Wright - Economist Peter Holoien, Borys Aptekar, Kai Borer - B.A. candidates, UCSB For more information call (805) 692 - 2498 or visit www.californiaforecast.com