SCV Home Sales Slow Down

Home prices throughout Southern California rose by 22.5 percent in May, the highest year-over-year jump in five years, MDA DataQuick reported Tuesday.

But some housing economists say that pace will not hold up much longer. In fact, they think it could actually reverse course and result in lower prices by year’s end.

The reason? Prices have risen only because the housing market is returning to a normal mix of low-, medium- and high-cost sales. From now on, it will be the economy, not interest rates or government stimulus programs, that determines supply, demand and price levels. And the economy is not recovering fast enough to stimulate much demand.

The overall median for the six-county region was $305,000, compared with $285,000 in April and $249,000 in May 2009. It was the biggest year-over-year boost since the 23.6 percent jump in January 2005, when the market was on an upward tear. And it was the highest median price in almost two years. DataQuick reported Monday that May’s median price for San Diego County stood at $340,000, up 4.5 percent from April and up 15.3 percent from a year ago.

After an unusual drop from March to April — as buyers in the region delayed purchases to take advantage of the reinstated California home-buyer tax credit — sales picked up in May. The 22,270 regional transactions were 7.2 percent higher than in May 2009.

But with the federal tax credit ending this month and the state credit for first-time buyers virtually exhausted, the housing market is entering an uncertain phase at the peak of the buying season.

The National Association of Home Builders picked up on the same uncertainty in its latest survey of builder sentiment about the future. The HAHB/Wells Fargo Housing Market Index, issued Tuesday, dropped five points to 17, indicating a loss of confidence in new-home-buyer interest. The West fell four points to 15. An index value of 50 or more indicates that most builders view conditions as good.

“In the second half of the year, the market will have to stand on its own again, barring new forms of government involvement,” DataQuick President John Walsh said. “Prices will be tested if there’s any sudden move by lenders to release a flood of distressed properties.”

So far, that flood has not arrived. The proportion of sales involving foreclosures completed in the previous 12 months dropped in May to 33.9 percent regionwide, down from 36.4 percent in April and 49.8 percent in May 2009.

David Stiff , chief economist at Fiserv Inc., the company that generates the widely watched monthly Standard & Poor’s/Case-Shiller Home Price Index, said lenders have spoken of ramping up foreclosure sales sometime this year after trying to work out loan modifications for troubled borrowers.
“If we see banks trying to push through more bank-owned (foreclosure) properties, that will create additional demand,” Stiff said.
He added that there are 21,000 properties in San Diego County that are in various stages of foreclosure, compared with the current inventory of about 11,000 homes listed for sale.

Fiserv estimates that by the fourth quarter of the year, prices countywide will be off 8.3 percent from the same period last year. Based on DataQuick’s figures, that would mean San Diego County’s fourth-quarter 2010 prices would end the year at $298,025, compared with the May figure of $340,000.

Esmael Adibi, an economist at Chapman University in the city of Orange, was not as pessimistic. He predicts that Southern California prices will probably be 5 percent to 7 percent ahead of year-ago levels by December. That would mean a median of about $324,000, $16,000 less than in May.

San Diego and Orange counties probably will be on the high side of any price rise, since their economies are in relatively better shape than the region as a whole, Adibi said.

The reason prices might backslide stems from the nature of the median, Adibi said. As the market mix changes and any appreciation or depreciation occurs, the median — the midpoint of all prices — changes as well.
The median rose rapidly this year in the face of fewer low-priced sales. But with the normal mix that set in late last year and continuing now, large year-over-year price boosts are unlikely, Adibi said.

“In all likelihood, the low end, below the median, is probably stabilizing,” he said. “For any home below the median for any region, probably the worst is over in terms of price decline.”

But for homes above the median, the inventory runs increasingly ahead of demand.  “The high end — I’m worried about it,” Adibi said.

For upper-end buyers, purchasing an expensive home is not so easy unless they have great amounts of cash. They first have to sell their present home. Then they have to find affordable financing — not so easy when it comes to jumbo loans above $417,000 and the tougher underwriting standards that banks require.

“The demand relative to supply is still too soft,” Adibi said. “Because of that, I think there would be further declines in the more expensive homes.”
The only way prices will rise broadly, he and Stiff said, is if the economy picks up, jobs improve and unemployment declines significantly — conditions many economists do not expect to see until next year or the year after.
“Job creation is very anemic,” Adibi said. “So demand is not there to sustain, especially, the high-end market for people to come in and buy.”
Stiff said more government tax credits are not the answer to righting the housing market.

“If the government were to contemplate ways to improve the housing market it would be better off trying to boost job growth than create tax credits for housing,” he said.
 

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