The Breakdown | Explaining Southern California's economy
Business & Economy

Weird California real estate: Why the distribution of sales is abnormal

A "for sale" sign stands outside a home in Pasadena. The California real estate market is improving, but its fundamentals remain distorted.
David McNew/Getty Images

This week, real estate analytics firm DataQuick released a report that says cash-only housing sales in California in 2012 were at their highest level ever:

A total of 145,797 condos and houses were bought without mortgage financing in 2012, a record. That was up from 125,812 in 2011, the previous high. In 2007, as the housing market deflated, cash sales totaled 39,731....

Cash purchases accounted for a record 32.4 percent of California's overall home sales last year, up from 30.4 percent in 2011 and more than double the annual average of 15.6 percent since 1991, when DataQuick's cash statistics begin.

That's unusual, but it's far from the only thing that's odd about the Golden's State's current real estate market. For example, DataQuick also reported that annual home sales — bought with all cash or financed with a mortgage — are running significantly below the average since 1988: about 512,000 transactions per year. 

The total number of sales for 2012 was 447,573.

I asked DataQuick's Andrew LePage about why the current California market is so distorted. He explained that the state is currently working through several problems.

"Inventory is a wildcard," is how he put it, meaning there aren't enough homes for sale to meet demand. Unfortunately, people who are still underwater on their mortgages — owing more than their houses are worth — aren't inclined to sell right now, as they would have to write a check to cover the difference between what they can get in a sale and what they owe.

However, prices in California have been moving up steadily over the past twelve months. That means underwater borrowers may be getting closer to being able to sell.

"Some of these people can't budge," LePage said. "Even though they might need to move — for a job, a bigger house, a smaller house, whatever."

But when they can budge, they'll put their homes up for sale, and — combined with homebuilders undertaking new construction to meet demands — the supply crunch will "be tamed," according to LePage.

As for the depressed annual number of sales, LePage said that around 500,000 on average is about as good as it gets in the boom-and-bust California market. 

But he advised not to get too distracted by the annual average. What's more important for a healthy market is the distribution of sales across different price levels.

"In 2009, sales were lopsided and concentrated at the lower end of the market," he said. "There wasn't a lot of activity in mid-to-high end. Now there's more activity in the mid-to-high end, but less at the low-end because that market is starved for foreclosures to sell."

Foreclosures as a percentage of overall sales have been falling over the past six months, replaced by short sales — a transaction in which the lender agrees to accept a sale of the property for less than what's owed on the loan.

LePage would define the California market as healthy if the overall market returns to normal distribution across all prices ranges, with a high-end that "isn't comatose." 

For that to happen, homebuilders will have to keep building; banks will have to get more aggressive about moving on distressed loans, particularly in California's inland areas, where housing supply is tight; and the upward trend for prices will need to persist, giving underwater borrowers an escape hatch in the future.

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