California’s housing markets have been enjoying double-digit price gains for several years now – and we’ve been celebrating that change as a sign of recovery after suffering huge losses during the recession. Home sales on the other hand have been lackluster in the state and largely viewed as a disappointment by the markets and the media (Kevin G. Hall, “July new home sales disappoint,” McClatchy Washington Bureau, 8/25/14). But what is not making it into the public discourse is the very positive reason home sales are so low (a reason that has also helped drive the state’s rapid price recovery) – and that is the ongoing reduction in new foreclosures. In fact, when foreclosures are netted out of the sales mix, home sales in California have actually been trending upward since the beginning of 2011.
Yes, a precipitous decline in distressed mortgages is the leading culprit behind the state’s dreary home sales. The headline home sales numbers may be lackluster, but the view at Beacon Economics is that the underlying trends are much better than headline numbers suggest.
Home sales have indeed been weak on the surface. Sales in California have contracted for the past 9 months consecutively, and have been virtually flat since the expiration of the first-time homebuyer tax credit in 2010. To date, there have been fewer sales in 2014 compared to 2013 in virtually every major metropolitan area of the state. However, the argument is about the underlying causes behind these trends and the implications they have for the future of the state’s housing market.
The reduction in home sales has largely (and publicly) been attributed to low inventories. There was 3.8 months of supply of homes available for sale in California as of July 2014—well below the historical norm of 6.7 months supply. Low inventories in turn have been blamed on underwater or distressed mortgages, which prevent homeowners from taking advantage of an improving market.
While we do have low inventories, this line of analysis masks the more important, and encouraging, aspect of the state’s current housing market: the reduction in new foreclosures across California. The chart below illustrates the difference in home sales in the state when foreclosures are omitted from the equation. This is important because the trend in non-foreclosure sales signals that California’s housing market is returning to “normal.” While the headline figures have disappointed some, they are the result of very positive trends: a reduction in distressed mortgages as a share of home sales, improving overall economic conditions, and the return of the retail home buying market.
Instead of celebrating the fact that the housing collapse is gradually fading from view, these statistics are being offered up as evidence that the housing market isn’t functioning properly. In reality, the opposite is true. Sure, California is enjoying fewer home sales overall than it was one or two years ago, but many of the sales from 2011, 2012, and 2013 were investor-driven transactions that were either investment properties or being flipped back onto the market in a way that did not benefit the average Californian.
Today, in a more stable and normalized market with fewer distress sales, more homes are being purchased by the retail owner-occupier. This group is fewer in number but has greater potential to bolster new home construction activity as demand for housing expresses itself. This trend will also boost economic conditions in general through increased retail spending, demand for services, and local tax revenues, benefits not gained from real estate investors who may or may not live in the areas where they invest. Kevin G. Hall, “July new home sales disappoint,” McClatchy Washington Bureau, August 25, 2014.
California still faces many challenges and its housing shortage is chief among them. Low levels of housing inventory are a critical concern and home unaffordability has the potential to seriously affect California’s future growth. Our leaders must to begin to unshackle the state from the damaging effects of the California Environmental Quality Act and other burdensome regulations that may have been well intended at first, but have morphed into albatrosses around California’s neck.
But despite our supply problems, today’s underlying trends in the housing market, in terms of both prices and sales, are encouraging. So, while home sales trends may be viewed by some as a disappointment, at Beacon Economics, the statistics have been pleasantly disappointing.