The Breakdown

Explaining Southern California's economy

California real estate market is stranger than it's ever been

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That's the takeaway from today's California Association of Realtors Housing Market Forecast for 2013. CAR Chief Economist Leslie Appleton-Young presented the data, and the date is...basically unprecedented. Appleton-Young said that she's never seen a market quite like it.

However, she doesn't think that the market is distorted. You could be excused for thinking that it is. For starters, according the the CAR, prices in California fell almost 60 percent from their bubble highs before the financial crisis. But at the moment, several factors are intersecting. There's not enough supply to meet housing demand in the state. Combined with historically low interest rates, this is pushing up prices. And investors snapping up properties they consider to be historically underpriced are sweeping into the market, using all-cash offers to gobble up homes.

This last factor is keeping first-time buyers from getting into the market. It isn't helping that banks are engaged in what Appleton-Young characterizes as "defensive" lending. Burned by the crisis, they want to make load to high-quality borrowers who have big down payments. It's all about risk for the banks: their ultimate objective is to sell their loans to investors, and the last thing they want is to deal with default risks down the road and be forced to take back the loan.

The bottom line is that the CAR expects home prices in California is continue rising in 2012 and 2013, but it doesn't anticipate the market will normalize for another 3-5 years. A major constraint is the national economy. If we're lucky, we'll see GDP grow 2 percent for all of 2012. Right now, we're barely above 1 percent — and trending down. But Appleton-Young and her team a forecasting moderate improvement in 2013, with annual GDP climbing to 2.3 percent. 

That scenario, combined with the other factors unique to California, will continue to move home prices upward. The "speed bumps" that the CAR now says the state has to negotiate on its real estate highway are the inventory crunch and the new conservatism that the banks are exhibiting.

So just how tight is inventory? I grabbed several charts from Appleton-Young's presentation today and arranged them into the slide show, above. This first shows that unsold inventory is back to pre-crisis levels.

The second shows that unsold inventory is a problem for all price levels.

And the last shows that there's an extremely short supply of REO properties — foreclosures — to sell. As distressed properties go, these are easier to sell than short sales, where the homeowner asks the bank to accept less for the home than the amount owed on the mortgage. That takes more time. And because it takes more time, short sales can't help ease the price and inventory pressure for other categories.

The inventory problem is at its worst in the Central Valley and the Inland Empire, CAR notes. And there's a wildcard: homeowners who are underwater on their mortgages. It's unclear whether rising prices will induce them to stay put or rush for the exits.

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

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