Before California can step into its positive forecast for the next two years, it has several hurdles that it needs to overcome. While the Golden State is faring better than the rest of the nation, according to the Real Property Report from PropertyRadar, housing affordability and tough market conditions are still impeding sales.
A couple weeks ago, HousingWire wrote on the 5 awesome facts impacting California’s housing future, which include one disclaimer. “One of the biggest problems facing California is the rapidly rising cost of housing, driven by a lack of new supply.”
But to the Real Property Report, this problem is definitely hindering the strength of the California recovery.
“Lackluster sales volumes so far this year should come as no surprise given the fact that in many California counties houses have simply become unaffordable,” said Madeline Schnapp, director of economic research for PropertyRadar. “The decline in affordability in concert with the rapid decline in lower priced distressed properties for sale has exacted a toll on demand.”
The previous HousingWire article cited a report from Beacon Economics that said California’s economy will continue to steadily improve throughout the life of the state forecast in 2019.
“Every metropolitan area in California has now returned to job growth,” says Jordan Levine, Beacon Economics’ director of economics. “Although the jobs and broader economic recovery has been more robust in some areas of the state than in others, the overall numbers are indicative of real, sustained improvement statewide.”
But first, California has to overcome these 3 hurdles. (Click next page to see full list)
California single-family and condominium sales increased 3.9% in July, but is still down 9.2% from July 2013. To put it in perspective, year-to-date sales for the first seven months of the year are the lowest since 2008.
Here are 3 reasons why:
1. Just can’t afford it
Rapid home price increases mixed with a lack of affordable inventory is leaving little room for first-time borrowers to jump into the market.
According to the latest home price data from Trulia (TRLA), although prices aren’t rising as fast as they did in spring 2013, price increases continue to be widespread, with 97 of 100 metros posting year-over-year price gains, and 94 posting quarter-over-quarter gains.
The median price of a California homes grew by $1,100, or 0.3% to $390,100, the slowest monthly increase since January 2014.
At some point, this will need to change in order to help normalize the California housing recovery.
2. Distressed properties disappeared
In July 2013, 25.6% of sales were distressed properties, now they only make up 17%.
In addition, the PropertyRadar report stated that the median price of non-distressed homes only marginally increased by 0.2% over last year, indicating the gain in median prices was due mostly to a shift from less expensive to more expensive homes.
And the foreclosure inventory is only going down. However, this is a good thing.
Foreclosure starts declined 2.9% between June and July, falling 22.2% from July 2013. This follows a long-term trend that started in March 2009 and looks to continue. So there's some good news.
3. Throw in jobs and tight credit
“Last year’s rise in home prices and interest rates went too far,” said Madeline Schnapp, director of economic research for PropertyRadar. “To see prices increase further from here will require either increases in income, or easing of credit terms.”
That's probably not going to happen in the near-term.
A recent Fannie Mae survey found that 36% of lenders say they expect to tighten their credit standards as a result of QM rules, while 6% say they expect to ease their underwriting criteria.
And while the job market is tight in California, there is still hope, with a recent surge in white collar jobs.
Despite the brighter employment outlook, it's fair to say point #1 outweighs point #3. So until income growth passes home (un)affordabilty, all three points will work in concert to continue to cripple housing in California.
