The Breakdown

Explaining Southern California's economy

Housing: It's getting better, but are we missing a bigger trend?

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The Commerce Department released data on sales for new homes in the U.S. today. And the news is good — for the most part. We saw national sales at their highest level in two years, along with a nice bump the sales from April, up 7.6 percent. 

What's driving this is tight supply and low mortgage rates, plain and simple. As Bloomberg reports, the number of houses on the market is at "record lows." However, fewer houses for sale are languishing in foreclosure and short sales (that's when the lender agrees to take a sale price for the house that's less than the total amount owed on the mortgage), and that's helping prices to get some much-needed support.

My feeling is that the news on prices is better than the news on sales — even news on sales of new homes, which implies some life in the beleaguered building trades and construction industries. We need to see a return to reliably, if modestly, ascending prices to achieve two things: get people who are currently underwater on their mortgages — but not by much — and current on payments back to even; and to re-establish the ability of borrowers to build equity in their homes so that first-time buyers can become first-time sellers and then second-time buyers.

In California, unfortunately, we're lagging the national trend. According to Bloomberg, "Purchases rose in two of four U.S. regions last month, led by a 37 percent jump in the Northeast, while the South climbed 13 percent. Demand dropped 11 percent in the Midwest and 3.5 percent in the West." 

But in California, if you accept the analysis of some economists, we're beginning to see our real-estate market break in half. On once side, we have a still-struggling single-family residential segment. On the other, we have a minor boom in multi-family residences. This is all in terms of new home starts, by the way. 

You can see what's going on: We overbuilt on single-family during the boom, and beyond that we've created a bulge in supply with short sales and foreclosures of existing homes coming onto the market. So for single-family, the market remains out of whack.

Meanwhile, we have young people who can't get on a sound enough financial footing to engage in "household formation" — econo-speak for moving out of mom and dad's and setting up their own nest, either with a partner or without. This group is paired with all the people who've lost their home and need to rent until they can shape up the finances enough to reconsider buying.

These folks make up the new "rentership society," as it's been dubbed. They need apartments. And that's what "multi-family" is all about. "We're seeing decent numbers in multifamily," said Jordan Levine of Beacon Economics at last week's Pepperdine economic forecast. "While single family has been flat."

Levine actually pointed to a fact of life for California housing that suggests we have complex problem to solve here. First, we have the price collapse, which I already discussed. Those homes may never have been truly worth what they were at the height of the boom, but they're overly depressed now: the pendulum has swing too far.

But historically in California, our prices have been too high. Levine argued that this harms our competitiveness. The Inland Empire, which was hit hard by the downturn, still has home prices that are "on par with the most expensive market in Texas — Austin," Levine noted. 

Bottom line: We don't have enough houses. "California lacks inventory," Levine said. "So we have to pay higher wages to attract workers because residents end up paying higher percentage of income for housing. But then they just see those higher wages eroded by housing costs."

I know this can be a little hard to wrap your head around: We built too many new homes, we have people losing their houses, prices are struggling to mount sustained gains, and yet — we need to build more housing, especially multi-family?! 

But we have to remember that the aftermath of the bust, which we're still working through, is happening in the context of larger trends. The cost of housing — due to several factors but strongly related to limited supply — in California has been highlighted as a drag on our economy. The economics writer Ryan Avent argues that it has curtailed innovation in Silicon Valley, because talented engineers can't afford to live there. Sure, we get a lot of innovation. But we don't really max it out.

This is the long-term bad news. But the short-term news on the housing front is starting to look more positive than it has for a while.

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

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