One of the bright spots of the economy is the rise in economic indicators for the last ten months. But in January 2010, five out of the ten indicators that rose weren’t the ones that mattered most. Jobs, money supply, building permits and capital goods ordered all declined.
The home building industry posted its first production gains in years in January, but new home units are still 75% below where they were at the peak of the housing market. Further hampering construction recovery are the rising costs of lumber and any goods derived from oil.
That’s a good thing for California home sellers, whose properties don’t need more competition. Foreclosed homes are being dumped on the market and selling at an average 28% discount (according to research by Zillow.com). This has driven housing prices to pre-boom levels, with the supply of properties carefully managed by banks. What’s changed? Jobs—8.4 million have been lost in a little over two years.
Tight credit slows hiring, and jobs are exactly what the economy needs right now. The Federal Reserve released notes on February 17, 2010 that it expects the jobless rate to fall, but not by much. Currently, the unemployment rate is 9.7% and expected to fall to 9.5% by the end of the year, to 8.5% in 2011, and to 7.5% in 2012.
While the market has choked down most of the bad loans from sub-prime lending, now prime loans are going into default due to job losses. Out of all FHA-guaranteed loans made in 2007, about 25% are in claims by lenders.
Data from the Center for Community Capital, University of North Carolina at Chapel Hill, found that the number of loans in the process of foreclosure increased 52%, or 252,000 loans, between October 2008 and October 2009. The Analysis of Mortgage Servicing Performance, Data Report No. 4., January 2010, found that the number of prime loans accounted for 71% of the increase in the total number of loans in the process of foreclosure. Jumbo loan defaults (loans above conforming ranges to $729,750 in high-cost areas) have risen 32 months in a row, according to Fitch Ratings. Two-thirds of delinquent “jumbo” loans are concentrated in five states—California, New York, Florida, Virginia, and New Jersey.
But money should become more available soon. The Mortgage Bankers Association reported that the number of 30-day defaults is down, and banks are announcing fewer foreclosures, which could signal a bottom to the foreclosure market and improve lending confidence.
Mortgage lenders are expanding their loan-to-value criteria to 95% on conventional loans. This will provide more options to borrowers, contributing to the trickle-up effect. “Prior to this change, FHA/VA was the only option for loans with less than 10% down,” explains Danny T. Valentini, SVP-Regional Manager for HomeServices Lending. “But despite the expanded criteria for conventional loans, borrowers must have FICO scores of 720 for single-family homes and 740 for condominiums to qualify.”
The answer is unprecedented affordability. The prevalence of distressed homes has created a more affordable market. Consider this: the percentage of households able to buy an entry-level home in California reached 64% in Q-2, 2009, according to the California Association of REALTORS®.
Affordability is even more appealing for move-up buyers, who can now buy the luxury homes that eluded them from 2004 to 2008. Homes priced above conforming loan limits ($750,000 and above) represented 4.4% of the total U.S. market in 2007—but by 2009, following the housing “correction,” they made up only 2.3% of the market.
In California, the numbers are slightly better, but still reflect little volume in luxury homes. According to the California Association of REALTORS®, homes priced over $1 million were 4.6% of total sales in 2009. In contrast, homes priced at $1 million and above comprised 8.7% of sales in 2005.
Today, homes priced at $1 million and above are where they were in 2004, before the boom, suggesting that luxury sales prices and volume are returning to normal and are back in harmony.
Sales volume could have a trickle-up effect. Home inventories decreased a whopping 32.1% in 2009, and overall sales volume was up 23.7% over 2008 due to affordability. MDA Dataquick reported in mid-February that California’s median price peaked at $484,000 in early 2007 and hit a low of $221,000 last April. The January 2010 median price is $247,000, up over 10% from January 2008.
Prices are rising, but they’re still under pressure because of the high volume of distressed homes. Of the existing homes sold last month, 44.0 percent were foreclosed properties. As bad as that sounds, that figure is down significantly from 58.8% in February 2009.
If lenders continue to manage foreclosures well and not flood the recovering market with more homes than it can absorb quickly, California real estate should continue to do well.
Advice for Buyers: Do the math with your real estate agent and loan officer. Be prepared with income and asset documentation before you shop for a home, so you can make a solid offer the seller will accept. Shop early; even though luxury sales do not qualify for tax incentives, their impending expiration will cause lender pipelines to clog, slowing closings.
Advice for Sellers: With FHA rules minimizing seller incentives to buyers, it’s more important than ever to make your home stand out from the competition in terms of both price and features. Make sure your home is immaculate and move-in ready, with no repairs or critical work left undone.