The year ends on a similar note to how it began. Low inventory seems to be the name of the game once again. The market has definitely softened here in Southern California. The latest figures reflect a shift from the blistering hot first half of the year. Last month sales fell by 10 percent from last year and the median price is no longer rising. In fact, the median price of $385,000 for Southern California is the same today as it was in June, right before rates moved up strongly. There seems to be a universal consensus that home prices can only go up from this point forward based on low inventory. Typically starting in January we see a steady stream of new inventory come online for the spring and summer selling seasons. That is yet to be seen since the year ended with inventory retreating rather strongly. Yet with foreclosure resales making up a small portion of the market, there can no longer be the excuse that the median price is distorted because of foreclosure sales.
The California housing market is showing signs of slowing down. Price reductions are now commonplace and you can go to an open house without feeling like you are entering an exclusive nightclub. There are signs that investors are pulling back and this should come as no surprise given the dramatic rise in prices over the last year. The fragile nature of the market was revealed simply by a modest rise in interest rates over the summer. That was it. The market took a 180 degree turn from the first half of the year. Since foreclosures are now a tiny part of the sales volume, we can expect that seasonal patterns will emerge and inventory will begin to increase once 2014 hits. Yet California is an unaffordable place for the middle class. Only one-third of families can afford to buy a place at current price levels and incomes. We also have an astounding number of people in poverty despite the economic recovery. Is California gentrifying the middle class out of the state?
The housing market and rally has been sustained largely by investor demand. This demand is showing some signs of weakening as the fast money crowd is now chasing yields in the raging stock market and with rates now increasing and prices much higher, good deals are harder to come by. Of course the general crowd is always late to the party. In California, only 1 out of 3 families can actually afford to buy a home based on their current incomes. For the last few years many have been outbid by investors coming in with alternative financing detached from the regular mortgage market (aka the Fed mortgage market). Signs of froth are everywhere including the rise in adjustable rate mortgage (ARM) usage and large numbers going with jumbo mortgages. The last time jumbo mortgage usage peaked was in August of 2007, right at the apex of the bubble. Does the jump in ARM usage and jumbo loans signify a late arrival of the public to this housing rally?
I seem to hear a familiar story among baby boomers with college-age kids. “When I went to college, I was able to find a good job with mediocre grades and have a middle class lifestyle with one income.â€Â Their fears are that their kids will not have the same opportunity. The reality is that California in more desirable areas is no longer a place for middle class families. This may sound harsh but it is true. The boomers who in many cases won a lottery of timing in terms of affordable real estate prices, plentiful jobs, cheap education, healthy benefits, and a global economy that favored the US won out. Yet their kids face a harsh reality of global competition not only in jobs but also in terms of real estate. When I talk with these boomers many enjoying the juicy Prop 13 tax assessments, have no plans of leaving the state and cashing in on their big win. They complain and pound their fist in the sand that their kids are being “priced out†yet enjoy the major profits in their properties. California is a tough place for young families starting out. But for baby boomer home owners they are going to go down into the grave with their gold plated granite infused hardwood floor housing sarcophagus. To be buried like a pharaoh seems to be the modus operandi.
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