Housing recovery hopes crushed as July home sales plummet
Dashing hopes for a second-half recovery, existing home sales in Southern California steeply declined in July 2014.
Do you remember all the happy talk and wishful thinking that dominated financial reporting over the last few months? Weren’t we lead to expect a better second half of 2014? Supposedly the first quarter was weak due to bad weather, then the second quarter… well, economists and reporters really didn’t have a plausible excuse for completely missing the ongoing slowdown in the second quarter, and now the much-anticipated second half recovery is turning into an epic disaster.
This wasn’t difficult to foresee. In the post Bold California housing market predictions for 2014, I said sales volumes would decline from 2013 levels because investors would pull back and owner-occupants would not take up the slack. Considering investors were already pulling back due to high prices in 2013, and potential owner-occupants were not getting new jobs and raises to take up the slack, to me it seemed a common-sense prediction, but most economists missed it.
The decline in existing home sales was just as easy to see coming. Unexpectedly low mortgage rates is the only thing keeping owner-occupant sales volumes up with higher prices and ongoing weakness in hiring and wage growth. Also, over the last several months, beginning early in the prime selling season, mortgage purchase applications began to drop. This is a leading indicator of sales, so unless all-cash buyers were going to dramatically increase their purchases, sales volumes were going to drop — and they have.
By Andrew Khouri
Southern California home sales plunged in July and show little signs of rebounding. And that, economists say, could stunt the region’s economic growth.
Buyers scooped up 20,369 new and resale houses and condos in the six-county region last month, down 12.4% from a year earlier, research firm CoreLogic DataQuick said Wednesday. The sharp drop follows steady declines since October, as would-be buyers struggled to afford houses after prices surged last year.
The drop in sales could have economic repercussions. When someone buys a home, they often splurge on items such as new furniture, fresh paint or new carpeting. Then there are real estate agents, mortgage brokers and moving companies to pay.
“The housing multiplier effect is very significant, because there are so many things that happen with a home purchase,” said Leslie Appleton-Young, chief economist for the California Assn. of Realtors. “That is dampened when you have lower home sales.”
The pain is especially acute for brokers, who depend on a commissions.
The president of CAr provided lip-service justification for why increased home sales volumes are good, but in reality, she is only concerned about the good it does for realtors.
“There are a lot of hurting agents right now,” said South Bay agent Leo Nordine, who said his volumes have been roughly flat this year. “There are too many agents and not enough sales.”
Fred Sands said it best back in 2007: “you might want to think about what you were doing before and get back into it — you can come back in a couple of years.”
The steady declines come despite more homes on the market compared with last year. With prices sharply higher, there are simply fewer buyers able to afford them.
Changing demographics are also playing a role, experts said. Surveys show most young adults still want to own a home, but significant barriers exist for that large demographic group.
Student debt is high, income growth is meager and many are putting off marriage, which historically has spurred purchases. And the massive baby boom generation isn’t downsizing en masse, further limiting home sales as its members hold onto their spacious suburban homes, Appleton-Young said.
“It’s clearly a concern,” she said of low sales volumes. “And I’m not seeing the way out of it.”
The one and only way to increase home sales volumes is for more high-paying jobs to be created. realtors will continue to lobby for lower lending standards, particularly since they aren’t the ones taking the risks, but qualifying more people doesn’t solve the problem unless those people have high-paying stable jobs.
Others experts aren’t so dour. Sales of previously owned homes, the largest segment of the market, have an economic impact, but a small one, said Richard Green, director of USC’s Lusk Center for Real Estate.
In other words, when the CAr president was touting the benefits of increased home sales, she speaking bullshit and spin — as realtors generally do.
Housing’s economic punch comes chiefly from new home construction, which demands legions of laborers and raw materials, he said.
New home sales fell 1.9% last month, after rising 4.4% in June.
The broad sales drop stems from less demand not only from families but also investors. Foreclosures, a favorite target of those buyers, flooded the market after the bubble burst, depressing values and wrecking credit for those forced to leave their homes. With the availability of those low-priced properties rapidly shrinking, investors have pulled back.
Once distressed sales — foreclosures and short sales — are removed from the data, conventional sales fell only 2.8% in July.
Why would anyone make this distinction? Sales are sales. It isn’t as if owner-occupants were barred from buying distressed properties; in fact, since these are often the best deals in the market, owner-occupants covet them. In my opinion, the only reason someone came up with this false distinction is to find another way to spin the numbers to make bad news look good. Further, did you notice the word “only” in the statement that sales fell 2.8% in July? Any drop in sales on a Y-o-Y basis is bad because population keeps growing, and the economy is supposed to be improving. In a real recovery, home sales would be up, not down by “only” 2.8%.
“This is just all part of getting back to normal,” said Bill McBride, who writes the financial blog Calculated Risk. “We are getting rid of the foreclosures.”
The road to “normal” is much longer than “normal” due to all the market manipulations. We will eventually get there despite efforts by the government, federal reserve, and lenders to reflate the old housing bubble. For now, we must consider a new set of conditions as “normal.” (See: Four traits of the new normal in the US housing market)
Families, however, haven’t filled the void created by the investor retreat, even though more homes are for sale, mortgage rates are near historical lows, and price appreciation is slowing. The Southland’s median home price rose 7.3% to $413,000 in July, the smallest year-over-year gain since June 2012.
“Prices came a long way in a couple of years, and now a lot of would-be buyers just can’t stretch their finances enough to buy in today’s more conservative lending environment,” CoreLogic DataQuick analyst Andrew LePage said.
His statement implies today’s prudent lending standards are conservative and may be safely relaxed. That isn’t the case. In fact, mortgage standards are not as tight as the 1990s, and there is plenty of mortgage money available.
And if demand for homes remains subdued, builders aren’t likely to ramp up construction to historic levels, further blunting housing’s economic impact.
Home sales last month were 19.4% below the 26-year average for July, CoreLogic DataQuick said.
“We haven’t had an average month in more than eight years, and I don’t think we are going to see one in the next six months,” LePage said.
No, we won’t. Annual home sales have been off significantly since 2005.
We continue to see sales well below historic norms.
This is particularly troublesome considering population continues growing while sales keep falling.
I said it last week, but it bears repeating: a decline in home sales is a precursor to a weakness in pricing, making this fall and winter a buying opportunity.
Fall and winter is a buying opportunity
Home buyers tend to run with the herd. As other buyers pull back and prices start to fall, rather than sensing an opportunity, buyers will wait until prices start rising again before they begin shopping seriously. Of course, by the time house prices start moving up, inventory is less abundant, and other competing buyers force them to bid more eliminating any chance of a real deal.
This fall and winter will see more discretionary sellers who will be motivated to sell their houses. The people who buy this fall and winter will get better deals than those who wait for next year’s spring rally. Last year the market had too much momentum and seller’s expectations were too high to provide the proper environment for buyers to find good deals. This year is different. If you are considering buying a home, this fall and winter is a buying opportunity.