California Home Sales hit six-year low

California single-family home and condominium sales fell 1.4 percent in February from January, and declined 16.1 percent from February, 2013. According to the Real Property Report from PropertyRadar, last month marked the lowest sales for the month of February since 2008.

“Rapid price increases and rising interest rates in concert with sluggish income and employment growth have slowed demand,” said Madeline Schnapp, director of Economic Research for PropertyRadar. “Tougher borrowing standards, elevated prices, increasing borrowing costs and historically low inventory continue to exert a drag on market activity.”

Although home sales volume decreased in California, the median price for a home in February increased by $5,000, or 1.4 percent, to $350,000. Median home prices have jumped 21.1 percent year-over-year.

Schnapp noted, “The uptick in median home prices in February means little as seasonal factors continue to impact both sales and prices. Given the lackluster sales volume, however, median prices are unlikely to see the rapid gains that characterized the first half of 2013.”

Negative equity is also on the decline—a positive note for Californians.

The number of California homeowners with more than 10 percent equity in their homes increased by 2.3 percent—nearly 120,000 homeowners in February.

“But, it is important to keep in mind that 1.2 million California homeowners, or 13.9 percent, remain underwater and will continue to create significant headwinds for the California housing market recovery,” Schnapp cautioned.

She continued, “In sum, the California housing market continues to improve, just more slowly than most analysts expected, given that we are in the fifth year of an economic recovery.”

2014 Home Sales Depend on Strong Job Market

Growing optimism in the housing purchase market stems from faith in a strengthening job market nationwide. Recent snapshots of the national housing economy by Fannie Mae and Zillow cite job growth as a spur for more robust markets, particularly in western states, where new jobs and competition for houses are escalating home prices.

Now Freddie Mac has joined the chorus. In its latest Economic and Housing Market Outlook, released Wednesday, the agency expects home sales to grow along with wages this year, despite a still-tough job market in most sectors. Freddie is projecting a 3 percent rise in home sales and a 20 percent rise in new home construction in 2014, which the agency expects to level out to a 5 percent overall growth.

Freddie’s latest analysis paints a complex picture, particularly when measured against job figures from 2007, the last time the national job market was considered solid for the entire calendar year. Compared to then, most job sectors, particularly manufacturing and construction, are down. In February, construction employment was 5.9 million, 1.5 million less than December of 2007, according to Freddie.

But these sectors are on a steady rise, with construction at about 80 percent of its 2007 peak and manufacturing at about 90 percent, according to the report. Freddie’s numbers bolster Fannie Mae’s February report showing that construction jobs and the number of new houses built are up since the beginning of the year. And these factors are key to a healthier housing market, said Frank Nothaft, VP and chief economist at Freddie Mac.

“In order to have solid home sales in 2014 we need to see continued improvement in the labor market,” Nothaft said. “Manufacturing and construction are the two sectors that have been slowest to recover. With increased economic growth, these two sectors should start to improve.”

Considerable growth, according to Freddie, is happening in mining and office jobs, but particularly in education and health services, which has grown by 2.4 million jobs since 2007. Despite substantial progress, however, the labor market remains below its potential, and unemployment is stubbornly hanging on at 6.7 percent.

But these numbers are not as black and white as they may at first seem. While it may look bad that the employment-to-population ratio dropped from 62.7 percent to 58.8 percent in February, annual wages measured that same month grew by 2.5 percent, which is well above consumer price inflation.

Also, according to Freddie, about 40 percent of this drop-off was driven by baby boomers who have retired between December 2007 and February 2014. This may open the door for more jobs as boomers continue to leave vacancies in the workforce.

“With more jobs, wage growth should continue to accelerate, giving American households much needed income to help sustain the emerging purchase market,” Nothaft said.

Investors retreat from housing market as prices heat up

Investors, who have been an important chunk of the housing market’s recovery, are shrinking as a share of existing-home sales.

With spiking home prices (one gauge says they rose 13.4% in 2013), it’s harder to get an attractive deal.

“Not only are fewer deals available, but once found, the deals are not as sweet: as supplies of distressed homes contract, the discount has narrowed,” economists at IHS Global Insight wrote in a Thursday research note.

A preliminary estimate from NAR spokesman Walter Molony indicates that investment properties made up about 22% of home sales last year, down from 24% in 2012 and 27% in 2011.

When investors buy a property, they’re looking to make a nice return, rather than, say, a home that has enough room to accommodate a growing family. So it makes sense that 2013’s skyrocketing prices are slowing their purchases.

“We think a lot of the big pop in housing has gone out,” Stephen Schwarzman, chief executive of Blackstone Group, which has bought at least $7 billion worth of houses, said Wednesday on CNBC. “For us an exposure in the $7-to-$8 billion range is big enough.”

The low-price properties that investors liked to scoop up are seeing dropping sales trends, according to NAR data released Thursday.

Sales of single-family existing homes priced between $100,000 and $250,000 (this range includes the median price of $189,200) fell 7.2% in February from the year-earlier period. Meanwhile, sales of homes between $250,000 and $500,000 rose 1.9% over the past year.

Looking broadly at the existing-home market, dropping affordability and bad weather have cut sales rates in recent months.

Since the financial media is out of excuses for housing’s poor performance this year, they finally acknowledge that their previous wishful thinking was wrong.

Home Sales Usually Pick Up in Spring, but This Year May Disappoint

The spring home-selling season really begins to ramp up in March, but there are signals that demand this year might fizzle.

February’s drop in existing-home sales was one ominous sign, especially since traffic reports — which are a proxy for home sales 30 to 60 days out — show a slump in buyer interest.

“The spring selling season is off to a weaker start than people in the industry had been expecting or hoping for,” said Tom Lawler, founder of Lawler Economic & Housing Consulting LLC.

To be sure, it’s still early in the year. The pace could turn around, and the brutal winter played at least some role in depressing the level of sales in February. But housing also is in the midst of a kind of gear-shifting that involves moving away from a market driven by cash deals and investors to one with fewer distressed properties, homes that are more expensive, and a higher share of regular buyers whose jobs and paychecks are the bottom-line for what or whether they buy.

One reason for the slump in existing home sales is that fewer investors are buying. But the same forces that are pushing away investors — higher prices, less to buy — have also soured some regular homebuyers.

A February survey of buyer traffic from Credit Suisse showed a marked drop from January, with declines in 42 of the 50 markets it tracks. Unlike data from real estate agent groups, which measure closings, the Credit Suisse data give a sense of where demand will be 30 to 60 days down the line — the heart of the spring selling season.

Of course, most U.S. cities remain very affordable, so buyers should come around eventually. Home prices are about where they were in 2004, and interest rates, while higher, are still low compared to decades past. For the most-recent quarter century Americans have spent about 25% of their income on mortgage principal and interest payments. Despite rising prices and rates, it’s only at 20% today.

The problem is that now that housing is getting closer to normal, the onus of the recovery has shifted to the normal issues such as job and income growth. Job growth was relatively steady in 2013, but has slowed down in the past few months.

Income growth has also been weak, and with rents continuing to rise, many potential homebuyers — particularly first-time home buyers — are having a harder time saving up a down payment.

Housing is profoundly healthier than it was a year ago, but as it shifts away from last year’s frenzy it will become more tied to the regular economy. And that’s still just so-so.

China’s property prices appear to be falling again

CAN bubbles ever pop twice? In late 2009 the world began to worry about a Chinese property bubble, symbolised by Ordos, a newly built city, bereft of citizens, in Inner Mongolia. In the spring of 2010 China’s government broadened its curbs on multiple home purchases and mortgage borrowing. The following spring, prices in nine big cities fell at last, according to one widely watched index. “The Great Property Bubble Of China May Be Popping” declared the Wall Street Journal in June of that year.

This week the same newspaper cited “compelling signs the Chinese property boom is over,” noting that “Cassandras” have been predicting a crash for years. (The Cassandra of Greek myth could tell the future but was never believed. For China’s property Cassandras, things are the other way round: their direst predictions are often believed, but have yet to come true.)

Bubbles often go on longer than expected. This newspaper warned about America’s internet and housing bubbles years before they burst. What is unusual about China’s bubble is not its persistence but its prevarication. It seems to be bursting for a second time. Property prices did peak in 2011, as the Journal noted. But the following year, they started to rise again.

Prices are still rising in 69 of the 70 cities tracked by the official statistics (Wenzhou in Zhejiang province is the exception). But residential sales fell by 5% in the first two months of the year, compared with a year earlier. And other statistics paint a darker picture, points out Nomura, a bank, which believes that property now poses a systemic risk to China’s economy.

Nomura (among others) calculates an alternative property-price index by dividing the official figures for the value of housing sold nationwide (599 billion yuan, or $96 billion, in the first two months of 2014) by the floorspace sold (94m square metres). That suggests the price per square metre was about 6,400 yuan. By this (volatile) measure, prices fell by 3.8% compared with a year earlier (see chart). That has not happened since February 2012.

Falling prices would be a natural outcome of China’s frenetic pace of homebuilding. China now has almost as much floorspace per person as Italy enjoyed in 2009, Nomura calculates. GK Dragonomics, a consultancy, thinks China needs to build roughly 10m homes a year to keep up with the growing size and aspirations of the urban population (see article). Until 2011, China’s annual homebuilding was below that figure. In 2012, it surpassed it.

In most countries, that would be reported as good news. A rapid expansion of the housing stock means fewer people living in the boondocks or in urban discomfort. In China, however, this building frenzy is seen as an economic threat, not a triumph. One fear is that China’s developers are building houses for the wrong people (speculators) in the wrong places (backwaters). Instead of accommodating China’s overcrowded urban masses, too many houses stand empty, serving as stores of value for people dissatisfied with bank deposits and distrustful of the stockmarket. Another fear is that if homebuilding falls sharply, China may struggle to shift labour and capital quickly enough to avoid an abrupt slowdown in the overall economy.

But the first fear should allay the second. China’s building boom has left some parts of the country with too much floorspace and other parts with too little. Nearly half of all migrant workers still live in dormitories or on worksites. Where housing is oversupplied, prices will have to fall, inflicting losses on homeowners. But where housing needs remain unmet, scope remains for further construction to fill the gap. For example, the government has said it will spend more than 1 trillion yuan this year renovating shoddy housing. This will help keep homebuilders busy.

Realignment of the industry will be painful for local developers that cannot diversify across regions. These smaller firms have also suffered disproportionately from the government’s efforts to curb bank lending to the sector. Cut off from banks, they have borrowed at punishing rates from less regulated trust companies instead. Some went further. The biggest shareholder of Zhejiang Xingrun, a property firm, was recently detained for “illegal fund-raising”, local reports say. It has debts of 3.5 billion yuan ($565m) that it seems unable to repay. It would not be the first property default in China. But it would be one of the biggest.

Because China has misallocated housing, some parts of the country remain overcrowded while others remain empty. A bubble is always bursting somewhere, even as another inflates elsewhere. In China’s patchwork housing market, the Cassandras are never right everywhere but they are often right somewhere.