Explaining Southern California's economy

Southern California house prices: It's deflation, folks

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A for sale sign is posted in front of house on September 15, 2011 in Glendale, California. Sales in California are on the upswing, but prices are unstable.

DataQuick has crunched the numbers on March housing sales and prices in Southern California. There's good news and bad news. From my perspective, the bad news is much more bad than the good news good. 

This is from DataQuick:

March sales of newly built homes rose almost 9 percent from a year earlier, marking the second consecutive month with a year-over-year gain. But March’s new-home tally was still the second-lowest for that month in DataQuick’s records back to 1988. Last month’s sales of existing (not new) single-family detached houses were the highest for a March since 2010, while resale condo sales were the lowest for that month since 2009.

BUT:

The median price paid for a Southland home last month was $280,000, up 5.8 percent from $264,750 in February but down 0.2 percent from $280,500 in March 2011. The March median was the highest since the median was also $280,000 last September. The year-over-year decline in the March median was the smallest since February 2011, when the $275,000 median was unchanged compared with a year earlier.

Last month’s median was 13.4 percent above the low point for the current real estate cycle – $247,000 in April 2009 – and 44.6 percent below the $505,000 peak in mid 2007.

So we had a big drop from 2007, and we're in the context of very sluggish and uneven recovery. But although sales are picking up, it's a constrained trend, while prices are not building any kind of stable upward trendlines. Are we seeing ongoing deflation in SoCal home prices? Quite possibly. And that wouldn't make us unusual, given the national context. This is from USA Today:

Asset prices...have been falling. Consider housing. The S&P/Case-Shiller Home Price index has fallen 31% from its high in July 2006. And, according to the National Association of Realtors, housing is close to all-time record affordability. (NAR measures affordability by looking at the median price of existing single-family homes, average income and mortgage rates.)

Affordability sounds great. But of course you have to remember that even if you buy a house at what looks like a great price, you may have to endure a period of unclear expectations as the housing market decides whether it's in a deflationary, inflationary, or simply stagnant mode.

I've blogged about this before, in the context of the SoCal housing market seeking a true bottom. If we're up 13.4 percent from 2009, the bottom was likely back then (a drop of more than 10-12 percent in prices now would signal another recession, or worse). But we may not revert to an historic trendline on prices for quite a while.

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