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Pedestrians are reflected in a window as they walk by a sign displaying mortgage rates inside a Bank of America office on June 7, 2012 in San Francisco. Mortgage rates are at record lows and home prices are rising in Southern California.
In April, Southern California saw a 3.6 percent year-over-year increase in the median house price, to $290,000, according to DataQuick, a company that tracks housing data. In May, that trend — if you can call two consecutive months and trend — improved: the median price moved up 5.4 percent, to $295,000.
The good news here is that we're no longer seeing price deflation. In March, were weren't seeing very much of a year-over-year price decline — it was a barely perceptible 0.2 percent. But it was there. It was worse in February. In fact, the median price didn't increase in Southern California for two years: the April uptick was the first sign of life.
But before we get to excited, it's worth noting that prices are still dauntingly off their 2007 highs. That was a bubble, of course. But what we need to see now is a sustainable trend of year-over-year price increases. This will remove the risk of a return to deflating home prices, which can be reinforcing: buyers expect prices to fall in the future, so they don't buy today, and that creates a disastrous spiral. It doesn't matter how far interest rates fall. Savvy buyers avoid investing in a declining asset. Smart buyers invest in a rising asset while it's still cheap and they can borrow cheaply to buy it.
If we continue to see rising prices in the Southland, then we could see the combination of low prices and low interest rates push the market higher and solve a critical problem: that of homeowners who are underwater on their mortgages — owing more than the house it worth — but current on their loans. They'll have a better chance of getting back to even.
But those homeowners will then face a tough choice, which could affect the housing market: sell or stay put? This could mean more houses for sale in the future. But by then, the market should be functioning more normally.
I'm not ready to stop worrying about price deflation in the SoCal housing market. Back in April, I wanted to see a steady upward trend. There's an inkling of that now. What's worrisome is the global macroeconomic situation. A meltdown in Europe could tip the U.S. into recession, given that we were only running at about 2 percent GDP growth in the first quarter. That could quickly flatten the positive trend in Southland home prices that we've seen established in the last two months.