Explaining Southern California's economy

If you want to buy a house in Santa Monica, bring $1 million or go home

ferris wheel santa monica pier

Photo by guyprentice via Flickr Creative Commons

Gorgeous. You can visit, but if you want to live with this view, you'll need a million bucks.

This week, real estate tracking firm DataQuick released its annual report on the condition of the million-dollar (and up...waaayyy up) home market in California.

There was the usual drive-by-and-gawk stuff. The Woodside manse that went for $117.5 million in 2012. A 13-bathroom (is that unlucky?) palace in Bel Air. The seemingly impressive 26,993 homes that sold for a million or more in 2012 in California, a 27 percent rise from 2011.

Why seemingly impressive?

Because in 2007, the total was 45,502.

How far we have fallen.

The report also contained this astounding factoid: "Virtually all home sales in some communities were in the $1 million-plus category." 

One of those communities was Santa Monica. Specifically, what DataQuick analyst John Karevoll identified as the "enclavish" zip code of 90402, where 91.2 percent of the homes sold in 2012 changed hands for at least a million bucks.

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California 'shadow inventory' of real estate drops through October

Foreclosure

Kevork Djansezian/Getty Images

For sale signs are posted on a foreclosed house in Glendale, California. According to CoreLogic, fewer homes in the state are headed for bank ownership.

There are more signs that the housing market is improving. Real estate analytics firm CoreLogic has just released new data on the so-called “shadow inventory” of homes. Those are properties that have delinquent mortgages, are headed into the foreclosure process, or have been foreclosed and belong to the bank, but haven't yet shown up in real estate listings.

"Don’t be afraid of the shadows," is CoreLogic's message. Why? Because nationally the shadow inventory has declined more than 12 percent since last year. During the three months that ended in October, California saw the second largest drop in the type of mortgage delinquencies that typically lead to foreclosure — almost 10 percent, behind Arizona at just over 13 percent.

California has a housing shortage at the moment. That means there’s demand for these properties. So any home that's on the verge of emerging from the shadows will rapidly find a buyer. In a statement, CoreLogic chief economist Mark Fleming addressed the national shadow inventory situation:

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California home sales, foreclosures, and the fiscal cliff

Reed Saxon

A foreclosure sign in Pasadena. As the backlog of foreclosures has been worked through, borrowers who are less underwater are turning to short sales. But the expiration of a Bush era tax law could upset this market.

Distressed homeowners who are underwater on their mortgages, owing more than the house is worth, have two main options, if they don't try to pursue a government-sponsored modification program: foreclosure or short sale.

Financially, foreclosure makes more sense for borrowers who are way underwater, owing say $400,000 on a house that's now worth $300,000. Struggling to make the monthly payments, maybe because some financial cataclysm has befallen the family, just adds to the pain. Super-distressed homeowners quit making payments and wait for the bank to repossess the home. Unfortunately, this process tends to depress prices and lower overall home values if a region is particularly hard-hit. 

If you want to look for places where foreclosures are in crisis mode, the bankrupt California cities of Stockton and San Bernardino are a good place to start (although the pace of foreclosures in those areas has slowed substantially in recent months).

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3 reasons why you don't want to buy a house in Southern California right now

Justin Sullivan/Getty Images

A construction worker on the top of a home under construction at a new housing development in Petaluma, California. Sales of new homes have been rising, as have prices. Meanwhile, interest rates are low. But that doesn't mean it's a good time to buy.

The Commerce Department released data on August new homes sales today. Bottom line: sales were flat from July to August, but well up over last year: 18 percent. That sounds great, but there are several other factors to take into account. First, the latest Case-Shiller index provides strong evidence that housing prices in the U.S. are forming a bottom (don't get too excited — we're only back to 2003 levels, even with hard-hit regions like Phoenix posting double-digit price gains). 

Second, housing inventory in Southern California is tight. The supply of foreclosures coming to market is being reduced, and during the downturn, homebuilders didn't do much building.

Third, that lack of supply is colliding with a surge in demand, as buyers decide to take advantage of low prices and historically low interest rates. The interest rates are the Federal Reserve's doing; the central bank wants people to buy houses and bid up prices to get the housing market back on its feet and restore equity appreciation to borrowers who now owe more on their mortgages than their homes are (for the time being) worth.

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Housing: It's getting better, but are we missing a bigger trend?

Justin Sullivan/Getty Images

A construction worker cuts a piece of wood on the top of a home under construction at a new housing development in Petaluma, California. New homes sales have picked up, but in California, economists argue we still lack supply.

The Commerce Department released data on sales for new homes in the U.S. today. And the news is good — for the most part. We saw national sales at their highest level in two years, along with a nice bump the sales from April, up 7.6 percent. 

What's driving this is tight supply and low mortgage rates, plain and simple. As Bloomberg reports, the number of houses on the market is at "record lows." However, fewer houses for sale are languishing in foreclosure and short sales (that's when the lender agrees to take a sale price for the house that's less than the total amount owed on the mortgage), and that's helping prices to get some much-needed support.

My feeling is that the news on prices is better than the news on sales — even news on sales of new homes, which implies some life in the beleaguered building trades and construction industries. We need to see a return to reliably, if modestly, ascending prices to achieve two things: get people who are currently underwater on their mortgages — but not by much — and current on payments back to even; and to re-establish the ability of borrowers to build equity in their homes so that first-time buyers can become first-time sellers and then second-time buyers.

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