January 2012

Improved Economic Conditions Provided Support to the Housing Market
By: Oscar Wei, senior research analyst

The California housing market ended 2011 on a solid note, with seasonally adjusted annualized sales reaching 520,940 units in December, an increase of 3.3 percent from November but virtually unchanged from December 2010.  It was, nonetheless, the highest sales level since January 2011.  For the year as a whole, 2011 exceeded 2010 by 1.1 percent with annual sales of existing detached home at 497,860 units.   The statewide median home price improved slightly by 1.8 percent to $285,920 from November, but dropped 6.2 percent from December 2010.

A particular highlight worth mentioning is the strong sales trend of distressed properties towards the end of the year.  While equity sales in December had a healthy month-to-month increase of 5.7 percent in sales (non-seasonally adjusted), distressed sales increased significantly more with a 14.5 percent jump from November.  As lenders pushed to close bank owned properties (REOs) and short sales to move them off their balance sheets before the end of the year, distressed sales tend to show a stronger performance than equity sales towards the year-end.

 

Sales in the fourth quarter of 2011 were relatively strong when compared to the rest of the year and one contributing factor was the improvement in the level of consumer confidence.  After hitting a recent bottom of 40.9 in October 2011, the consumer confidence index bounced back and surged in the November and December. The index jumped to 55.2 in November and climbed again to 64.8 in December.  The back-to-back increase was the effect of the economy showing some signs of growth in the last quarter of 2011.  The unemployment rate declining consecutively for four months, retail sales increasing on a year-over-year basis in each of the last three months of 2011, and the fourth quarter GDP showing the largest year-over-year increase in the last six quarters were all encouraging news to consumers that bodes well for a recovering housing market. 

Another reason for a strong year-end finish in sales was the record-low interest rate levels.  Mortgage rates had been trending downward since July of last year after the Federal Reserve announced its commitment to keep interest rates low until at least 2013.  The average rate for 30-year fixed rate mortgages had since declined to below four percent, and set a historical record low of 3.96 percent in December 2011.  With rates dropping more than three quarters of a percent in the last twelve months and home prices holding steady at or below the same level as a year ago, the increase in housing affordability convinced many buyers who were previously on the fence to finally make a home purchase