Stabilizing Home Prices Fuel Hope of Soft Landing

The expected drop in Los Angeles County home prices didn’t happen again in September, leading some observers to wonder if the housing market may experience a soft landing.

According to data released to the Business journal, the number of existing homes sold in Los Angeles County in September dropped 30 percent – about the same as the previous month. But the median price of homes sold was $550,000 – exactly the same as the previous two months. What’s more, the price is up 4.2 percent from the same month last year.

When the number of home sales started dropping almost a year ago, many observers expected prices to head south eventually. However, the median price has been stuck at or near the $550,000 level for six straight months.

The result: the talk of price swoons and the housing “bubble” bursting has gotten quieter – at least for now. “The indicators we are seeing are consistent with a soft landing, “ said Delores Conway, director of the Casden Real Estate Economics Forcast at the USC Lusk Center for Real Estate. “The market is stabilizing to some degree. But we still need more time.”

Indeed, no one has a crystal ball, and prices may well drop, especially if predictions that lenders seeking to cash in on the real estate boom issued no doc loans – requiring minimal verification of income and assets – to overextended buyers are true.

That could lead to a rush of foreclosures as the interest rates on the loans adjust upward after their initial introductory period, when their rock bottom interest rates expire. A recession would certainly push prices well down.

However, several observers pointed out that the regionally strong economy and historically low unemployment don’t appear to set up the Los Angeles area for a steep price plunge.

In fact, so far this year the median home price in the county has risen from $519,000 in January, according to data provided to the Business Journal by HomeData Corp., a Melville, N.Y. company that tracks housing prices nationwide. Still, the soft sales and flattened prices feel like a downturn, compared to the torrid sales of recent years.

“When you come off of an extreme sellers market it looks like doom and gloom,” said Steve White, president of the Southland Regional Association of Realtors. “And the fact that the year-to-year median price has increased moderately would show you we are in a relatively strong market.”

Homes Sitting
To be sure, even though median prices have not gone down yet, sales are definitely slower. Cory Weiss, a broker in Prudential Real Estate’s Beverly Hills office, said homes that are realistically priced are selling, albeit at a slower pace.

“Buyers are being cautious. They are taking their time. Deals are taking longer as far as negotiation,” said Weiss, who has clients in Beverly Hills, Brentwood and the Palisades area.

Weiss’ experience is in line with data released by the California Association of Realtors. The California Association of Realtors estimates that as of August, homes in Los Angeles County were staying on the market a median 51.9 days, compared to 29.2 days a year ago. That translates into a build up of county inventory levels to 6.8 months in August, compared to 2.6 months a year earlier. That means at the current pace of sales, it would take 6.8 months to sell everything that’s on the market now.

“Where homes were moving in a week with multiple offers, it seems to be between 30 and 60 days or perhaps longer now,” said Fran Butler, president-elect of the California Escrow Association. According to Leslie Appleton-Young, chief economist with CAR, a six-month supply of homes creates a balanced market for buyers and sellers.

Appleton-Young said that since 1988, the average unsold inventory level for homes in the county is 6.9 months. White said that the current county home market is balanced, though it is hard to recognize that after the price gains the region experienced from 2003 to 2005.

“Last year was just complete insanity in many ways, so it was difficult to use 2005 as a benchmark or 2004 or 2003 for that matter,” White said. “Those years were so far away from normal.”

Bod Edelstein, professor of business administration at the University of California Berkeley Haas School of Business, said that while it is not clear whether the market has “found its level” he does not anticipate a regional recession, which would severely impact the housing market. “The business sector is fairly healthy,” Conway said. “If that changes we could see more of a bumpy landing.”

Buyers Taking Time
Weiss said that in the high-end market, properties do still sometimes receive multiple offers from prospective buyers, though buyers are no longer consistently making offers at or above asking prices. he said that homes that have sat on the market are “seeing reductions in price as buyers are being more particular.”

In the Santa Monica 90405 ZIP code, September sales dropped 32 percent to 13 homes sold, with the median price down 12 percent to $1.1 million. In the Brentwood 90040 ZIP code, September sales dropped 55 percent to 10 homes sold, with the median price down 14 percent to $1.4 million.

“I still have a ton of active buyers in the upper-end market but they are holding out and want to feel like they are getting a good value,” Weiss said. Edelstein said that countywide slowdown is part of a typical correction before the market turns around. “People don’t give up on their house-price dream, but the idea that there are fewer sales means that less people are getting their dreams,” said Edelstein, co-chair of the Fisher Center for Real Estate and Urban Economics at UC Berkeley.

As the market continues to correct, there are fewer high-end homes selling. In September, 610 $1 million-plus homes were sold, down from 899 $1 million-plus homes sold in August. Also, there were just 31 $1 million-plus ZIP codes in September, down from 38 such ZIP codes in August.

“I feel that a lot of people wanted things to pick up after Labor Day but when we see things close, sale prices aren’t as close to the asking or over the asking prices as they used to be,” Weiss said. The county condo market also experienced a 30 percent decline in sales volume to 1,463 condos sold. The median condo price in the county rose 0.5 percent from a year ago to $410,000.

Conway said that seasonal factors will likely lead to a further decrease in the number of transactions during the late fall and winter months. This sort of seasonal reduction in volume is an annual occurrence fro the housing market. Conway said that in the summer months, families relocate and prepare for the school year, generally making that period a strong time for the market.

“Typically we have a decline from August to December,” Appleton-Young said. “I would expect that pattern to hold.” Despite this expected decline, many real estate professionals said the market appears to be functioning normally. “There is nothing in the Southern California economy that will portend doom,” White said.

Sellers, Buyers Adjust to Market Realities

While down by one-third from the torrid pace of last year's hyperactive housing resale market, sales of existing single-family homes increased slightly during August from the July total as buyers and sellers adjusted to the calm, new realities of methodical sales, two-way negotiations, a wider selection and modest price increases.

A total of 825 single-family homes changed owners last month, down 32.9 percent from a year ago when 1,230 homes closed escrow, but up 2.0 percent from the July tally. Condominium sales of 283 units f ell by 34 percent from a year ago and were off 10.7 percent from July.

Being 33 percent below a white-hot-out-of-control market that was unsustainable is still a very good market. For the last several months we've been right at a balanced market.

The continuation of 67 percent of a crazy market seems like all that was lost was the 33 percent of pure insanity. Today's market is sustainable and can be used as a benchmark not last year's inflated, artificial madness.

Prices continued to rise, although not at the 20 to 25 percent plus pace that was reported virtually every month over the last four years. The median price of the 825 single-family homes sold last month was $610,000, up 2.0 percent from a year ago. The record-high median price of $625,000 was set in June of this year.

Likewise, the condominium median price of $380,000 was up 1.3 percent from a year ago. The condo record high of $415,000 was set in February.

Sellers who are realistic, willing to negotiate and not pining for last year's mad market are selling their homes and finding the biggest selection of replacement properties in years. Buyers who are looking to live in a property for five to seven years have great opprotunities.

The only people who have to worry about what will happen in the next five to ten months are the investors who hoped for a quick flip and a fast profit. Looking back, homes bought five, ten 15 or 20 years ago are worth signficantly more than when they were purchased. Unlike not that long ago, buyers today find the widest selection of properties listed for sale in years.

A total of 6,832 single-family homes and condominiums were listed for sale at the end of Auguest. That figure was up 115.7 percent from 12 months ago when there were only 3,167 active listings.

At the current pace of sales, today's inventory represents a 6.2 month supply, up from the less than 1-month to 2-month supply common over the last two years., but still only slightly above the 5-to 7-month supply that is deemed to represent a balanced market.

An increase of 116 percent in active listings soun ominous, but the inventory was so low, for so long with so many buyers chasing too few listings and driving prices ever higher, that any increase in inventory is welcomed news.

The Valley would require nearly three times as many listings before the tables would be turned enough to suddenly transform today's balacned market into a buyers' market, and nother on the horizon suggests that will happen.

Unlike the economic upheaval of the early 1990's, the Southern California's diversidied ecomony remains solid with more g ood news coming from an array of industires than signs of stress. The housing market is taking a welcome breather, but this is exactly the kind of market needed by buyers wo want to stay in the region and upgrade to a nicer house.

Santa Clarita Valley Resale Home Prices Rise 6%

Resale prices of single-family homes sold during August in the Santa Clarita Valley showed solid gains even as the inventory grew and sales remained solid but fell by a third from the unsustainable levels of last year, the Southland Regional Association of Realtors reported.

A total of 250 single-family homes changed owners last month, down 29.4 percent from a year ago, but up 5.5 percent from the 237 sales of this July. The month-to-month increase reflects typical seasonal patterns while also bolstering arguments that the current market represents a more normal, balanced environment than the hyperactivity of the last four years that favored only sellers.

Sales of 106 condominiums during Auguest were 32.9 percent lower than a year ago and off by 13.1 percent from this July. A larger inventory of single-family homes offers buyers more choices than at any time in the last four years. Families once limited to only condominiums now have an opportunity to buy a single-family home.

Active listings increased to the highest figure on record during August - up 207.1 percent from August 2005 to a total of 2,598 active listings. But the record gain in inventory comes after months of record lows which means the inventory offers a wider selection, but is still not large enough to turn the market in favor of buyers.

At the current pace of sales, the 2,598 active listings posted at the end of August represented a 7.3-month inventory - just outside the 5- to 6-month range regarded by real estate experts as one indicator of a balanced market where neither buyers nor sellers hold undue negotiation advantage.

Some sellers cling to unrealistic price expectations and some buyers incorrectly think they can make incredibly low, equally unrealistic offers simply because sales are down from record-high, unrealistic levels. Buyers and sellers who understand the new realities realize that this is the kind of balanced market that will allow buyers who want to stay in the region to upgrade to a nicer house.

Yet some buyers and sellers are frozen in place by the turn in the market and fail to realize that in almost all instances home purchased five, ten, 15 or 20 years ago continue to show incredible price gains. Investors looking for a quick return dislike the uncertainties of today's market. But anyone intending to live in a house for at least five to seven years most likely will realize at least a modest increase in the resale value of their home.

Unlike the early 1990's, the outlook for the Southern California's diversidfied economy remains bright, even as the red-hot housing market cools off and the effects ripple throughout the region. Ther still are not enough homes available to satisfy demand which insulates the market from any dramatic plunge in resale prices.

The median price of the 250 single family homes that changed owners in the Santa Clarita Valley during August was $615,000, up 6.0 percent from a year ago. That is still a considerable price gain, albeit well below the 20 percent and 25 percent hikes that were common over the last four years. The record high of $643,000 was set in April of this year.

For the first time in five years, the condominium median price fell compared to the prior year. The August 2006 condominium median resale price of $370,000 was down 2.4 percent from August 2005 when it was $379,000. It also fell on a month-to-month basis by 1.3 percent. The condominium record high of $397,000 was set in January.

It does not surprise me to see prices vary over a wide range from month-to-month. I think price swings will be common until buyers and sellers get used to the new realities of a calmer, moderate, evenly paced residential housing resale market where neither buyer nor seller have the upper hand.