Market Update

Market Update

Southern California

Fourth Quarter 2014

During late 2012 and the first six months of 2013, the Southern California real estate market was a strong Seller’s Market with extremely low inventory and high Buyer demand.  These conditions were caused by all-time low interest rates (3-3.5%), high Home Affordability Index (HAI) of 53% at the beginning of the year and artificially low home values   The California HAI measures the percentage of all households that can afford to purchase a median-price single-family home. In 2006 the HAI was at 12% during the peak of the market.  Home prices have been recovering from the 2008 financial meltdown that created a high number of distressed properties (REO and short sales) and significant declines in real estate values.

The low inventory and high demand resulted in Buyer frenzy with homes selling in days with multiple offers often over list price.  Buyers were taking the risk of removing loan and appraisal contingencies and being prepared to bring additional cash to the table for any appraisal shortage.  Home prices were rapidly escalating at unsustainable rates.  The median price of homes sold in California in 2012 increased 10% over 2012, prices increased about 25% in 2013, at a more sustainable increase of 6% in 2014 and are projected to increase 5-6% during 2015.

In 2012 and 2013, the market was also impacted by a large number of cash investors consisting of large Hedge Funds and other investors from the United States, Canada, China and other countries purchasing a large number of homes.  The purchases were cash and did not involve financing, often times at market price or above.  Since these offers did not have appraisal or loan contingencies and could close in 10-15 days, it was extremely difficult for owner occupant buyers to compete, especially First Time Buyers. Many of these investment properties are being held as rentals with the strategy of positive cash flow rentals and re-selling after a 3-7 year period when the home prices appreciate to higher levels.   The high demand for rentals from homeowners displaced from their homes due to foreclosure or forced to sell as a short sale has caused rental price increases.

The number of distressed properties (REO and Short Sales) has decreased significantly from a high of 50 – 60% in 2012-2013 to a level of about 9% at the present time.  Homes for sale are now predominately standard sales.  The market is now transitioning towards a normal or balanced market.  A balanced market typically has about 5-6 month supply of inventory and at the current time, inventory levels (supply) are a little over two months, but increasing. The reasons for increasing inventory includes a sputtering economy, a large number of people without full-time or high income, interest rates remain low at around 3.5%, but have been increasing, the HAI has dropped to 34% in 4th Quarter 2015,  the traditional fall and winter seasonal slowdown, debt ceiling/default issues, uncertainties over health care costs and unrest throughout the world.  These factors have either priced Buyer’s out of the market or placed them temporarily on the sidelines resulting in less demand.  Reduced demand has allowed inventory to increase, resulting in longer market times and a softening or plateauing of prices.   As Buyers return to the housing market, they will experience a more balanced market with a larger selection.

The declining inventory has prompted builders to obtain building permits and resuming new home construction to meet the demand.  With the escalating prices of homes, more home owners now have positive equity and no longer need to short sale their home and damage their credit.

If you are considering selling your home, you may be pleasantly surprised at the increase in value of your home.  Contact us for a FREE Competitive Marketing Analysis (CMA) on the value of your home and Seller’s estimated proceeds from the sale.  If you are a Buyer, interest rates are still low and supply is higher providing more selections than when the market picks up again.  This may be the perfect time to buy!