Guest Column: California's Spring Home-Buying Season – What Lies Ahead?

By Leslie Appleton-Young

There is no doubt that the upbeat expectations for the economy and the housing market in the first half of 2014 have failed to materialize. Nationally, the exceptionally cold winter has taken most of the blame for the 2.9 percent contraction in gross domestic product (GDP) in the first quarter. In the California existing single-family residential market, sales began declining last summer as the abrupt rise in rates experienced in late-spring forced the market to take a breather. The urgency factor declined as market participants waited to see what was going to happen next. This slowdown lasted through the first quarter of 2014 but appears to be over, at least for now. The last few months of data and the very robust pending sales figures that were released on June 30 indicate that the spring home-buying season is off to a strong start.

But will it last? Despite the fact that the California housing market has been in recovery mode since 2009, it's fair to say that 2013 was the "break-out" year for the industry, signaling a return to a "normal" market. In 2013, more than 80 percent of the sales of existing single family homes were traditional sellers with equity in their homes at the time of sale. Today (May 2014) 88 percent of the sales are traditional, equity sales. So the distressed-heavy market conditions are in the past. Looking ahead, what can we now expect through the end of 2014?

      
• Following the 5.9 percent drop in 2013, sales are now expected to decline 4.4 percent in 2014. What appears to be happening is that the somewhat higher inventory is being counteracted by the weight of deteriorating affordability and continued tightness in the credit market. (See Figure 2.) Prices and rates are both significantly higher than they were when affordability peaked in the first quarter of 2012. Since then the statewide index has dropped from 56 percent of the state's households being able to afford to buy the median priced home to only 33 percent in the first quarter of 2014, a drop of 23 percent. (See Figure 3 and Figure 4.)
• The statewide median home price is now expected to increase by 10 percent in 2014 to $447,800 as the demand for higher-priced, non-distressed properties drives the market. However, year-to-year price appreciation has slowed considerably and is approaching single-digits as the robust gains of the last few years pause to match income gains and financing concerns. (See Figure 5.)
• Inventory has gained slightly in the last few months, with May registering 3.6 months of supply for the state as a whole – still well below the six to seven months considered normal, but improving. In addition, price reductions are more common as over-optimistic sellers are experiencing buyers who are more willing to take their time and get a good value. (See Figure 6.)
• Looking forward, the strength of the market is inextricably tied to job growth and credit availability. In any other cycle, mortgage rates in the 4-4.5 percent range would have ensured a much more robust level of sales. The fact that this is not happening is tied to some of the unique characteristics of this particular cycle. For example, the rate at which jobs that were lost have been replaced in the recovery has been the slowest ever recorded. As seen in Figure 7, this recession/recovery trajectory is by far more severe than any of the others in the post-World War II period. This has meant a significant drop in household formation and significant growth in student debt – both factors that have inhibited sales and rentals. Most people know at least one household where a college graduate has come home to live, jobless and in debt. The fact that first-time buyers make up only slightly more than a quarter of all buyers is a cause for concern on many levels.
• At the same time, it’s important to remember that the growth in jobs and incomes we are experiencing is also beginning to bolster household formation. That trend will be positive for the demand for housing in the state moving forward. Assuming that the economy will have a decent growth in 2014, which appears likely, the housing market should be stronger for the last three quarters of 2014. (See Table 3.)

Leslie Appleton-Young, Vice President and Chief Economist for the California Association of Realtors, is a member of the Controller's Council of Economic Advisors. The opinions in this article are presented in the spirit of spurring discussion and reflect those of the authors and not necessarily the Controller or his office.

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Figure 2: Sales of Existing Detached Homes

California, May 2014 Sales: 391,030 Units, -11.2% YTD, -9.5% YTY

Sales are seasonally adjusted and annualized

Source: California Association of Realtors

Figure 3: Affordability Eroding as Rates and Prices Rise

California vs. U.S.

Source: California Association of Realtors

Figure 4: Affordability Peaked in 2012, Dropping Since Then

HAI Peak vs. Current

Source: California Association of Realtors

Figure 5: Median Price of Existing Detached Homes

California, May 2014: $465,960, Up 11.7% YTY

Source: California Association of Realtors

Figure 6: Unsold Inventory Index

California, May 2014: 3.6 Months

Note: Unsold Inventory Index represents the number of months it would take to sell the remaining inventory for the month in question.

Source: California Association of Realtors

Figure 7: Percent of Job Losses in Post-WWII Recessions

Aligned At Maximum Job Losses

Source: http://www.calculatedriskblog.com/

Table 3: California Housing Market Outlook

Indicator	2009	2010	2011	2012	2013	2014p	2015f
SFH Resales (000s)	474.9	416.5	422.6	439.8	413.9	395.7	417.9
% Change	24.5%	-12.3%	1.4%	4.1%	-5.9%	-4.4%	5.6%
Median Price ($000s)	$275.0	$305.0	$286.0	$319.3	$407.2	$447.8	$463.7
% Change	-21.1%	10.9%	-6.2%	11.6%	27.5%	10.0%	3.5%
30-Yr FRM	5.0%	4.7%	4.5%	3.7%	4.0%	4.6%	5.3%
1-Yr ARM	4.7%	3.8%	3.0%	2.7%	2.6%	2.5%	3.0%

Source: California Association of Realtors

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