As you prepare for the year ahead, it is important to revisit what transpired in the housing market in 2010 in order to help determine what can be anticipated in the coming year. It is evident that 2010 has been a year of transition toward stability in the housing market when looking at three main housing indicators: median price, sales and unsold inventory.
The state median price, at $296,820 in November, experienced its first year-over-year decline after 12 consecutive months of gains. With a 21 percent rise above the February 2009 trough of $245,230, the median price in California could be an indication of the beginning of stability in the housing market.
Year-to-date sales dropped 9.8 percent in November, consistent with our forecast of a 10 percent annual decrease. The seasonally adjusted sales in November were up 93 percent from the trough of 254,650 three years ago, and were 19 percent above the long run annual average over the past 39 years. Despite the year-to-date drop, sales figures are faring reasonably well when historical data is taken into consideration.
The unsold inventory index is a good indicator of home prices; when the housing supply falls below seven months, it usually leads to price appreciation. The November unsold inventory index was 6.2 months, indicating the length of time necessary to sell the entire, current housing supply. This figure is 13 percent below the long-run average of 7.1 months and 63 percent below the recent peak in January 2008 at 16.6 months. Because this index has maintained a relatively healthy range in 2010, between 4.6 and 6.6 months, it is another indication of the beginning of stability in the California housing market.
In addition to these three main housing indicators, it is necessary to also examine other factors affecting the state of the housing market, such as the type of sales, size of downpayments and types of mortgages.
Other Indicators of Stability – Annual Housing Market Survey
The breakdown of type of sales from C.A.R.’s 2010 Annual Housing Market Survey helps to paint a more accurate picture of overall market conditions. More specifically, the number of distressed sales compared to overall sales is particularly important in determining the health of the real estate market. For the past few years, we have seen significant numbers of distressed properties on the market. In 2010, the share of distressed sales relative to all sales declined to 41 percent from 46 percent in 2009. Although there are still many distressed properties on the market, this reduction is a good sign that the housing market is heading in the right direction.
When comparing the various components of distressed sales, there are some noteworthy distinctions. While the percentage of foreclosures and REOs declined since last year, the percentage of short sales increased from 14 percent in 2009 to 22 percent in 2010. Short sales also tend to be higher priced and to stay on the market and in escrow longer than REOs and foreclosures. They are also in better condition because they are typically occupied and maintained during the short sale process, unlike foreclosures and REOs. Because short sales are more favorable financially for banks and we are seeing them in higher frequencies, this could lead to improvement in lending conditions, which would be favorable for the housing market.
After shrinking consecutively over the past four years, the median downpayment increased 25 percent from $40,000 in 2009 to $50,000 in 2010. More buyers are now putting down the recommended 20 percent of the purchase price, compared to only putting down 12 percent in 2006. The percentage of buyers with zero downpayment has declined to 4.8 percent of buyers, compared to 21 percent of buyers in 2006. Buyers also turned to their savings, rather than creative loan products, for their downpayments in 2010. These are all indicators of a healthier environment for recovery.
There has been a significant change in the distribution of loan products in the last several years of the housing market cycle; the gap between FRM, ARM and other loan products was smaller between 2004 and 2006 for new first mortgages. That gap has widened tremendously with FRMs now consisting of 97 percent of all new first mortgages. The share of first time buyers who used an ARM declined from 53 percent in 2005 to only two percent in 2010, with repeat buyers following that same trend. The proportion of transactions with second mortgages has also diminished since 2006. Consistent with the trends in types of sales and sizes of downpayments, mortgages also exhibited signs of increasing solidity.
With the tightening of credit standards, FHA loans have risen in popularity and made up 29 percent of all loans in 2010, compared to only one percent in 2006 and 2007.
Now that the government incentives that stimulated the housing market, such as the first time buyer tax credit, have run their course, the market must operate on its own moving forward. While we still anticipate 2011 to be a transition year, as 2010 has been, it will continue moving further toward stabilization. We expect the annual sales and median price to increase two percent to 502,000 and $312,500, respectively.
Although foreclosures appear to be on the decline during the second half of 2010, they are expected to remain high in 2011 as foreclosure filings rise, employment statistics remain weak and the economy continues its struggle to emerge from the recession. The November REO inventory of 112,000, according to Foreclosure Radar, translates approximately to an additional 2.4 months on the Unsold Inventory Index (UII); coupled with the 6.5 month MLS listings figure, the total UII would be about nine months. While this is above the 7 month long run average, it is well below peak levels that would trigger a significant decline in prices. This inventory is unlikely to worsen in the long run, according to the trend that we’ve seen over the past year. This means that overall, with notices of default decreasing while REOs are increasing, the market is showing continued signs of stabilization with respect to the “shadow inventory”.
There are some wildcards that will prevent the housing market from reaching a full recovery in the near term: the possibility of another recession, Federal economic policies, negative equity homeowners and shadow inventory. Despite these uncertainties, there will be some tremendous opportunities in the housing market for first-time buyers, investors, long time owners and international buyers. These opportunities will pave the way to recovery in 2012 and beyond.