This year-end Realtor Report is provided by Gene Wunderlich, director of government affairs for the Southwest Riverside County Association of Realtors. For space reasons, some of the comments and charts in Gene’s Realtor Report do not appear here. Direct questions to GeneWunderlich@srcar.org.
By Gene Wunderlich
SRCAR Director Government Affairs
A simple game plan for 2014 – housing was to step up to its customary role as catalyst-in-chief for the economic recovery. After all, in six of the past eight recessions, housing led the recovery.
The combination of pent-up demand, low interest rates, increased inventory and attractive prices would lead to more home buying, then more new construction, meaning more new jobs, leading to increased consumer confidence, then more home buying – then young families would finally get their piece of the American Dream, existing homeowners would finally start moving up, industry would flourish, employment would really take off and everybody would sit down and sing Kum-ba-ya and Auld Lang Syne. After all, housing got us into this mess, it was now up to housing to help get us out.
That was the plan. The reality, in hindsight, was considerably different. Eighteen months of explosive price increases priced many would-be first timers out of the market. Investors saw their profitability evaporate so they withdrew. Millennials, who were supposed to start forming households in droves, kept living in their parents’ basements.
Interest rates spiked, then retreated. Unemployment abated but the new jobs didn’t pay what the old jobs had. Concerns about Obamacare, oil prices, Ebola, financial problems in Europe and government dysfunction left many unaware that we are entering our sixth year of economic recovery since the recession officially ended in June 2009.
As a result, demand dropped and housing sales stagnated. In Southwest California, housing sales were at their lowest ebb since 2007, selling fewer than 7,000 single family units this year, off 5% from last year and down nearly 30% from their 2008 peak.
In real numbers we sold 6,974 homes this year compared to 7,361 last year, selling 43 fewer in Temecula, 101 in Murrieta, 106 in Menifee – not that significant really when you realize that new home construction offset some of those declines. Still, the drop of nearly 3,000 units from 9,665 sales in 2008 represents a significant decline, one not offset by anywhere near that number of new homes. We only wish new home construction had brought 3,000 new homes to market in the past few years.
After posting gains of anywhere from 18 to 26% between 2012 and 2013, median price appreciation also stalled out in 2014. The region appreciated nearly 10%, with Temecula and Murrieta adding 6%, Menifee, Lake Elsinore, Hemet and San Jacinto increasing 11 to 13%.
Appreciation was higher in the first half, then tapered with prices actually posting a slight decline in the fourth quarter. Again, not a bad thing as it removed earlier fears of another bubble forming from too-rapid appreciation and gave the market a chance to moderate. Had appreciation continued at the 20%-plus pace in 2014, sales would likely have been even slower this year increasing the likelihood of a deeper correction next year.
As it is, this year may have been our correction phase with the market returning to a more normal pace next year. Most prognosticators remain optimistic about 2015 and maybe they’re right. Of course, as referenced in the opening paragraph, most were optimistic about this year too and we see where that went.
But the fact remains that there is a fairly significant pent-up demand out there. Lack of equity has so far prevented many move-up buyers from making their move. When they do, that will free up more lower-cost homes for first time buyers.
At some point, millennials will start forming households and, whether they choose to rent or buy, that will spark more construction. California has built fewer residential units (single and multi-family) in the past four years combined than the state needs to build every year, so the need to ramp up construction lurks right behind any increase in demand.
We’re also seeing some loosening of regulatory barriers, reductions in down-payment and credit requirements and easing of lending standards that were ratcheted up too tight following the melt-down. All of these elements might indeed be a cause for optimism in 2015. As always, you’ll find the local results right here.
We started the year with distressed sales making up 16% of our closed sales volume. By March, distressed sales dropped to 12% of the market, 10% in August and just 8% in September. Last month it comprised 11% of sales.
Long-time readers will recall that as recently as 2009-2010, distressed sales made up over 90% of our sales volume most months, so our market has made a significant shift to where standard sales now account for nearly 90%. Most experts believe the market for distressed properties will return to pre-bust levels in 2015, meaning approximately 4 to 5% of the market.
Inventory and demand have also returned to more normal territory this year. In 2013, inventory levels rarely exceeded one month, with some cities having only a two to three-week supply of homes on the market.
Demand, a function of the number of new homes listed every month compared to the number of homes sold, shot up such that in January of 2013 we sold 1.9 (190%) homes for every home listed. By February that climbed to 2.18 (218%) and peaked in March, selling nearly three homes for every new listing. Of course prices were rocketing along then too in response to such a strong sellers’ market.
By September 2013, inventory started to climb and sales slowed such that, by last December, demand was at just 68% and inventory had increased to 3.4 months.
This year, our inventory level has hovered between three and four months for much of the year, with inventory increasing every month through August. In September we saw inventory start to decline somewhat, although weak sales kept demand low as well. In December inventory dropped 500 units under its July peak, reducing months inventory to 2.9 months. Strong December sales also propelled demand back to 152%, or 1.5 homes sold for every new listing.
Don’t get too excited – inventory always drops around year-end as people who don’t have to sell prefer to keep their homes off the market during the holidays. Also a quick peek at pending sales indicates we drained the well in December and January sales will probably fall off quite a bit.
Keep in mind that while inventory has been climbing, a balanced market inventory is considered to be six to seven months. According to the numbers, we should still be in a strong sellers’ market. We’re not.