A host of factors could send the real estate market back into a tailspin.
Will "Taxmageddon" send us back into recession?
Will Freddie Mac, Fannie Mae and FHA continue to exist?
Will the mortgage interest deduction and low down payments disappear?
Will the euro fail?
Will unemployment and weak manufacturing data in the U.S. and China continue to be the norm?
At the recent AFIRE (Awesome Females in Real Estate) conference, Sara Sutachan, the chief research analyst for the California Association of Realtors (CAR), shared the association’s latest research regarding the trends taking place in that bellwether state. While many aspects of the economic news still remain negative, there are an increasing number of signs that we may be witnessing the beginning of a housing recovery:
1. Signs the California market is coming back to life
In 2000, California logged $129 billion in sales. The market peaked in 2005 with $327 billion in sales volume. Predicted sales volume for 2012 is $154 billion, up 8 percent from 2011. CAR is predicting an additional increase of 5 percent to $162 billion in 2013, up $33 billion from 2000.
The best news, however, is the amount of inventory. Before the recession hit, in January 2006, the inventory was averaging between five and six months. This is a balanced market where the supply and the demand are approximately the same. At the height of the downturn in 2008, there were more than 16 months of inventory. At then end of first-quarter 2012, this number was less than four months. This means that California is in the early stages of a seller’s market.
Moreover, multiple offers are back and the median price of existing detached homes has increased 6.6 percent between May 2011 and May 2012, according to CAR.
2. Increase in new housing permits
In California, household growth bottomed in 2009 and then increased slightly in 2010 and 2011. While the numbers remain below 50,000 new units per year, there were 47,015 new housing units constructed in 2011, up 5 percent from 2010, according to the California Building Industry Association.
3. Gradual reduction in underwater mortgages
Since the fourth quarter of 2009 when the number of homes with negative equity in California was at 35 percent, this number has gradually declined to 29.9 percent in fourth quarter 2011, according to CoreLogic. The number of California homes defined as being "near negative" equity has held steady in the 4-5 percent range.
4. Housing affordability reaches a new high
While you may believe that things are much worse today than they were 10-12 years ago, this is not the case when it comes to affordability. During the first quarter of 2000, only 35 percent of all California residents could afford to purchase a home. As of the second quarter of 2012, that number has increased to 56 percent.
The national numbers are even better. In 2000, approximately 55 percent of all U.S. households could afford to purchase a house. At its lowest points in 2006 and 2007, that number was hovering around 45 percent. During the first quarter of 2012, that number broke through the 70 percent mark. This is the highest percentage since 2000.
5. The most troublesome finding
Of all the findings Sutachan discussed from CAR, perhaps the most disturbing is the number of people who intend to purchase once they sell their homes. In 2003, this number peaked at slightly above 70 percent and remained above 60 percent until the recession. In 2010, that number dropped to a little above 30 percent and improved to about 37 percent in 2011. What this means is that the rental market in California will continue to remain strong since such a large proportion of homeowners are choosing not to purchase a replacement home at this time.
6. Real estate: still the best investment
The Pew Research Center’s "Home Sweet Home" study looked at the percentage of people who agreed with the statement that: "Buying a home is the best long-term investment a person can make." According to a 1991 CBS/New York Times Poll, 35 percent of those surveyed "somewhat agreed," and 49 percent "strongly agreed" (84 percent positive.)
What’s particularly surprising are the numbers from 2011. Forty-four percent of those surveyed "somewhat agreed" with this statement and "37 percent strongly agreed" (81 percent positive.) While the "strongly agreed" category decreased significantly, real estate is still overwhelmingly thought of as the best investment people can make.
7. What does 2013 hold?
CAR is predicting an increase in the number of residential sales from 516,500 to 530,000, a 2.6 percent increase. Median prices are expected to increase from $297,800 to $305,000, a modest increase of 2.4 percent. Interest rates are projected to increase by 1/2 percent, from 4.1 percent (fixed) to 4.6 percent.
8. Five key conclusions about the future
Leslie Appleton-Young, CAR’s chief economist, provided the following economic forecast:
- The worst of the recession is over. We are 2.5 years into the recovery, but the process is slow.
- Unemployment is both cyclical and structural.
- Interest rates should remain low through 2013.
- The biggest wild card: the eurozone crisis.
- The biggest policy issues that will impact real estate: the future of Fannie Mae, Freddie Mac and FHA.