Explaining Southern California's economy

Are homebuyers too optimistic about rising prices?

Homes

KPCC

Buyers are looking to buy housing again. And according to the California Association of Realtors, they expect prices to rise.

It looks like the pendulum has swung back to the optimistic side for California home buyers. The California Association of Realtors released a study Tuesday showing that buyers are increasingly confident prices will go up in the future.

Which raises an obvious question: Are buyers in the state being too optimistic about rising prices, after being excessively pessimistic about prices falling in the aftermath of the housing bust? When the pendulum swings back, it often swings too far.

About 25 percent of the 800 home buyers surveyed by the trade organization think prices will be higher next year. That’s more than a threefold increase over what buyers said in 2009, in the depths of the housing crisis.

But that pales by comparison with the five-year and 10-year outlook. For those periods, home buyers expect 41 and 73 percent price increases, respectively. Clearly, there's a high probability that prices will be higher a decade from now than they are today. There's a little thing called inflation, after all, which typically runs at about 2-3 percent per year and, absent big upticks in home prices, provides the steady, reliable asset appreciation that homeowners buying for the long term are looking for. They don't call real estate a hedge against inflation for nothing. 

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California foreclosures and short sales are a smaller part of October market

Reed Saxon

A foreclosure sign in Pasadena. Foreclosures and short sales are a smaller part of the market in October, according to the California Association of Realtors.

California’s real estate market has been anything but healthy since the housing bubble burst. But there are now signs that the patient is on the mend. And really, what a difference a year makes! Last October, so-called “distressed sales” made up half of all monthly transactions in California real estate.

In this case, "distressed" means foreclosures and short sales. Short sales in particular have become popular. That's when the lender accepts less for the house that what the borrower owes.

A year later, the numbers have been reversed. The California Association of Realtors now reports that in October, distressed sales fell to just over a third of the market. Los Angeles County mirrored this statewide trend.

One reason why distressed sales are falling is that there simply aren’t as many of them on the market. There was only a 2-month supply of foreclosures in September and a 3-month supply for short sales. Those inventories could rise as banks put more foreclosures in the market and borrowers who remain underwater on their mortgages, just not as much as a year ago, decide to go for a short sale. 

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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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