Some Markets are Rapidly Improving - Indicators of Sellers Market?

Southern California Real Estate MarketSince 2007, the real estate markets have been collapsing all across the world. With so much talk about the troublesome economic conditions in Europe, increasing delinquencies in FHA mortgages and still slower than desired job growth, some people thought we still had room to fall in real estate.

Those people, to a degree, are right. The real estate markets are still falling in certain, less desirable, lower income areas–or at least not improving. A lot of this can be attributed to delinquencies still increasing and a lack of owner occupant buyers. Investors are still in these markets, like Palmdale/Lancaster, but they have switched strategies.

Investors in these areas are not rehabbing and flipping, they are rehabbing and renting because there are not many end user purchasers. When rehab properties are bought and never flipped, it keeps prices artificially low because the home is sold in rough condition and then never resold in good condition.

Luckily for the greater whole of the Southern California real estate market, things are really improving. Just like most economic changes, this change is being driven by supply/demand forces and consumer confidence.

Supply and Demand shifts everything, especially in housing. Since 2007, the markets have been marked with excess inventory and few qualified buyers. The inventory build up was due to too many housing starts during the boom. Millions of excess units were built new by developers and millions more were added through apartment and other types of conversions. This abundance of inventory gave buyers lots of substitutes and all the negotiating power when buying homes. The inventory surplus alone would have been enough to force the housing market down several percentage points.

At the same time this inventory build up was happening, the number of qualified buyers in the market was shrinking dramatically. This is attributed to a number of factors. First and foremost, unemployment. As the unemployment reached recent highs, more and more people lost their jobs and people do not buy homes without jobs. Next came fear. Unemployment in Southern California reached as high as 14% in some areas, this means 86% of the workforce was still employed. However, many of these people had so much fear about losing their jobs, they too refused to buy. Finally came the icing on the cake, the tightening of credit markets. Banks cut lending dramatically and the requirements to qualify for home loans became more stringent. This forced many of the employed buyers out of the market too.

Supply levels have completely shifted. In my REO disposition work with banks, I hear from my broker network every day that inventory has dried up. All across the state of California inventory levels are down. The LA Times released an article this week highlighting this very fact. What is causing this inventory? Banks. It’s that simple, the banks slowed the take over of homes in pursuit of other possible exit strategies, including but not limited to short sales, principal reductions and rental programs.

The lack of inventory, which on its own can create a competitive housing market, is being exasperated by a flood of buyers coming into the market, proven by the increasing number of mortgage applications. The rest of the world has also caught onto the incredible value that can be found in US housing markets. Favorable exchange rates and prices have brought many foreign buyers into the US housing market. Check out this Wall Street Journal video interview about the surge of foreign investors into the US housing market.

The true test will be in what happens with the distressed inventory that still needs to be cured. There are still millions of homes in default and that number increases daily. Just because there is a current lull in the REO product does not mean we are through with it. Below are the California foreclosure stats for May 2012, with the percentage change from April 2012 in parentheses. All the stats moved in favor of foreclosures coming back in force, the number of starts and sales were up and the time to foreclose was down.

California Foreclosure Stats (May 2012):

Foreclosure Starts: 19,748 (+4.4%)
Foreclosure Sales: 8,074 (+6.1%)
Time to Foreclose: 274 days (-0.7%)

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