Explaining Southern California's economy

Why it's risky to buy a house in Southern California right now

Foreclosure

Kevork Djansezian/Getty Images

It might look terrible, but you can't afford it.

The California Association of Realtors has just released data for September pending home sales in the state. The report contains what should now be a familiar refrain to both potential home buyers and sellers in California's market: we just don't have enough houses for sale to meet buyer demand.

One of the real areas of stress is with foreclosed "real estate owned" (REO) properties. According to the CAR, there's barely a two-month supply of REOs in the entire state. Coupled with other inventory shortages — we haven't buily much new housing in California since the bubble burst four years ago — this is driving up prices, particularly at the lower, entry-level end of the market.

There's a whiff of consumer panic in the air. Constrained supply is leading to ferocious competition for sub-$500,000 houses. We're feeling the REO crunch in Southern California generally – and L.A. in particular – as supply has fallen substantially since this time last year. Historically low interest rates — dirt-cheap money — are colliding with surging demand to create a bit of a bubble. Prices look attractive, given how far they've fallen from their highs in the mid-2000s. 

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


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.

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Distressed home sales are declining across Southern California

Distressed-Sales-August

CAR

Distressed homes sales have been declining in Southern California large counties both year-over-year and month-over-month.

Inventory-Tight

CAR

The supply of homes for sale has been getting tighter and tighter since last year, reducing pending sales but pushing up prices in many cases.


The California Association of Realtors released data on August pending and distressed home sales today — data that shows that the housing market in the Southland and elsewhere in the state is improving to the degree that a lack of housing inventory is becoming a problem. 

This could ultimately be a good problem to have, if its spurs builders, such as L.A.-based KB Home, to start constructing new houses. KB beat earnings expectations last week and now seems to be pretty bullish on a housing recovery.

It's also good for sellers, as a shortage of supply is pushing prices up. It's worth noting that market is now clearing the overhang of distressed properties, a process that we've been waiting for particularly in hard-hit California. As you can see from the charts above, distressed sales — short sales and foreclosed properties, or "REOs" ("real estate owned") — have been falling year-over-year and month-over-month is Los Angeles, Riverside, and San Bernardino counties. 

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