Explaining Southern California's economy

LA home buyers beware! Investors are inflating the real estate market

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A construction worker installs a window in San Mateo, California. He needs to build a lot more homes in Southern California in order to get the market back to normal.

DataQuick released data on October Southern California home sales Tuesday, and while the news looks superficially good — sales are up, prices are rising, foreclosures are down — the market remains distorted.

There are three factors that should make prospective homebuyers wary:

  • There's a shortage of housing supply in Southern California, creating a bubble, with demand outstripping existing inventory and pushing up prices.  Few new houses have been built in the region the past four years.
  • Money is cheap. Mortgage interest rates are at historic lows. Combined with prices that were depressed by the bursting of the big housing bubble four years ago, this is drawing buyers into the market and convincing sellers that now is the right time to put homes on the market.
  • Investors are major players in the market.

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In Southern California, declining foreclosures are helping home prices rise

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A "for sale" sign stands outside a home in Pasadena, California. Prices in Southern California are gaining strength as foreclosure activity ebbs. And according to DataQuick, August sales haven't been this good since 2006.

RealtyTrac, a Southern California-based real-estate information service, released a report yesterday on August foreclosures that showed a big 42-percent drop in foreclosure starts in the state.

Now DataQuick, also SoCal-based, has put out an August report in Southland home prices that indicates a decline in foreclosures is helping prices in the region gain some upward momentum. This is from the company's press release:

Home prices have edged higher this year as greater demand, triggered by super-low mortgage rates and a mild economic recovery, has been met by a shrinking supply of homes for sale. But recent gains in the median sale price also reflect two other trends: a sharp drop in foreclosure resales, which often sell at a steep discount and are concentrated in lower-cost areas, as well as a substantial increase in mid- to high-end transactions.

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Not enough houses! Lack of supply is driving up prices in the West

New Home Sales Hit A Record High

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The West needs more houses. A lack of supply is driving up prices — and pricing out first-time homebuyers.

The National Association of Realtors (NAR) has released data for existing home sales in July, and overall, the news is pretty good. Median prices in the U.S. extended a five-month streak of year-over-year increases. Home sales also rose across the nation.

However, in the West region, sales were flat from June-July, but up about 6 percent from July of last year. More important, the median price of an existing home in the West made a big jump from 2011: a whopping 25 percent, far more than any other U.S. region.

This is due to good old-fashioned supply-and-demand. There aren't enough existing homes for sale in the West to meet demand. NAR took particular note of this, not just in the West but nationally. The lack of "inventory," as the organization defines it, is affecting lower-priced homes, where first-time borrowers bearing mortgages collide with investors carrying suitcases of cash.

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Visual Aid: What's dragging down the mortgage market

There are plenty of homes for sales, both in California and the nation. But new homes sales fell again in August, continuing a six-month trend of decline. What gives? Interest rates are at historic lows, and Federal Reserve monetary policy for the past two years has been designed to keep them there — and drive them even lower. The above chart, from the Federal Reserve Bank of Cleveland, is telling. To sell a house, you need three things: a seller, a buyer — and a bank that will write a mortgage. What we have right now is a distinct absence of banks willing to make loans, or only willing to make loans on restrictive terms. Until that changes, we're looking at below-average mortgage-origination levels for a while.

Also note that refinancing originations don't look too good, either. This is proof that plenty of borrowers are too far underwater in their homes to make refinancing an option. 

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