August 2013 California single-family residences (SFR) and condominium (CND) sales (distressed and non-distressed) fell 1.8 percent from July but gained 1.5 percent in the past 12 months (y-o-y). A 7.3 percent monthly drop in sales of distressed properties drove the decline in August sales.
Despite the ongoing California real estate market recovery, large numbers of underwater homeowners remain a drag on the market. In August, 2.0 million, or 29 percent, of California’s 6.8 million homeowners with a mortgage are underwater or barely-above-water and are effectively shut out of the California real estate market.
The August median sale price of a California home fell 1.4 percent to $360,000 from $365,000 in July, the first monthly decline since January.
Cash sales as a percent of total sales continue to trend lower. In August 2013, cash sales represented 24.0 percent of total sales, down 2.1 percentage points from 26.1 percent in July. Despite recent declines, from a historic perspective, cash sales remain high and are an important part of the real estate marketplace.
August 2013 investor purchases, defined as a market or third party purchase at a trustee sale by a limited liability corporation (LLC) or a limited partnership (LP), fell 13.4 percent from July. In general, investor purchases have been gradually trending lower since late last year because rising prices reduce return-on-investment.
As the California real estate market recovery continues, August foreclosure activity appears to have bottomed in May is is now trending sideways. August foreclosure sales fell 5.5 percent from July. Meanwhile, Notices of Default (NODs) in California dipped 0.7% and Notices of Trustee Sale (NTS) were up 3.1 percent for the month.
What caught my eye this past month is both August sales and median prices fell simultaneously for the first time since January. After a 12.0 percent pop in July, August sales fell 1.8 percent as the California real estate market digested a 100-basis-point increase in mortgage interest rates in mid-June. The decline in August sales caused the nearly uninterrupted 20-month increase in median home prices to finally take a breather.
This will be interesting to watch. The combination of the rapid increase in mortgage interest rates and decline in sales, primarily due to the decline in distressed property sales, cash sales and investor purchases, will likely result in decreased demand. The decrease in demand, in turn, will likely depress prices and cause an increase in inventory.
Assuming interest rates don’t rise much further, the increase in inventory will be welcome news for the California real estate market which has been challenged by an acute shortage of inventory for much of the past year. Many potential homebuyers looking to finance their home purchases have been shut out of the market due to lopsided bidding wars against cash buyers.
While mortgage interest rates have jumped in recent weeks, we doubt they will rise much further because the Federal Reserve is keenly aware of the importance of the housing market to an ongoing economic recovery. I believe the Fed is not likely to remove its support from the housing market anytime soon. Mortgage interest rates are still low by historic standards. Homebuyers with solid incomes and good credit should have an easier time finding and purchasing a home.
Addendum to Madeline’s Take – 9/18/2013:
The Federal Reserve’s decision to maintain current levels of stimulus is, of course, great news for the housing market. Within seconds of the Fed’s announcement, yields on the 10-year Treasury note fell 10 basis points to 2.75% and will likely trend lower. Mortgage interest rates are sure to follow.
With the cloud of uncertainty gone, we believe the recent volatility in the mortgage interest rate market will likely retreat until sometime next year when talk of tapering will likely return.
In our opinion, the Fed’s are keenly aware of the importance of the housing market to the economic recovery. For that reason, we doubt the Fed’s will consider reducing support anytime soon.
The recent interest rate hikes should result in price declines. Homebuyers have always bought as much home as their banker told them they could afford – and they can now afford 10 percent less than they could before the rate increases. That won’t happen quickly. Sellers, unlike buyers, tend not to believe that such a correction is necessary, and therefore do not drop prices to reflect what buyers can now afford. They are buoyed by mistaken analysis that because both interest rates and prices rose in the 80′s, rising rates don’t mean lower prices. But those were different times. Then we had high inflation, which included wage inflation, allowing buyers to digest both the rise in rates and price. That simply isn’t true today. The next few months will be fascinating to watch. Will prices correct to reflect the new rates, I doubt it. More likely we will see slower sales and more inventory.