September 2011

By: Oscar Wei, Senior Research Analyst                            

After dipping to the lowest level of the year in the prior month, California home sales improved on a month-to-month basis and on a year-to-year basis.  Sales of existing single-family homes increased 8.6 percent from 457,930 in July to 497,390 in August. Sales also jumped 10.2 percent from the same month of last year, experiencing the highest year-to-year increase in more than two years. The statewide median price continued to decline from the previous year for the tenth consecutive month, falling 7.4 percent from $320,860 to $297,060. Despite the decline, the median price inched up slightly on a monthly basis and was the highest since December 2010, partly due to the steady increase in the share of equity sales since the beginning of 2011. Equity sales (or non-distressed sales), which typically have higher prices than Real Estate Owned (REO) properties and short sales, made up 56.3 percent of total sales in August, up from the mid 40 percent range earlier this year.

Lean housing inventory is another reason why the statewide median price remained stable in recent months. The unsold inventory index in August was at 5 months and has been at or below 5.5 months for the last six months, which is well below the long-run average of 7.2 months.  Inventory levels, however, varied between different types of sales.  Using the long-run average of overall sales as a measuring stick, the unsold inventory index for short sales in August was slightly higher, while the indices for equity sales and REO properties were lower. In fact, the index for REO properties was less than half of the overall long run average at 2.6 months.

   

The lack of supply in REO properties relative to their demand is also evident when comparing the proportion of REO sales to the proportion of REO inventory. While REO sales comprised of 31 percent of all sales transactions from January through August in 2011, only 13 percent of the available inventory were bank owned properties during the same time frame. This disparity between the share of sales and the share of inventory suggests that there is an imbalance between supply and demand for REO properties in the current market. The short supply for REO properties creates a highly competitive market environment, which leads to multiple offers that drive up home prices, but could also constraints future sales growth if the issue of supply shortage remained unaddressed.

 

Ultra-low levels of REO inventory will persist as long as lenders’ lack of urgency in releasing these properties continues. The attempts to expedite the foreclosure process as announced by some of the major lenders in early September would meet some of the demand in the REO market as additional supply of housing units are being released to the market. However, the impact in terms of sales and price is yet to be determined.  But the increase in the level of inventory should help to minimize the gap between supply and demand of housing as more foreclosed properties are being push through the pipeline.

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