California’s existing single-family home sales increased 6% in October on a seasonally-adjusted basis relative to September. On a year-over- year basis, sales rose 1% to a run-rate of 562,520 units. Sales activity continues to be supported by a large mix of heavily discounted foreclosure re-sales, which accounted for 41.2% of October’s re-sale transactions, according to DataQuick. Notably, however, this is the lowest percentage of foreclosure re-sales since May 2008, down considerably from levels earlier this year when foreclosure re-sales
comprised 60% of all sales. Overall, we believe the recent moderation in sales activity can be attributed to a decline in the pace of foreclosure sales, which have been affected by various statewide foreclosure moratoriums and efforts by servicers to modify loans.The rate of price declines in California moderated for the eighth consecutive month in October as median prices decreased 3% y/y.
Notably, this is the smallest y/y decline since September 2007. Importantly, however, monthly median prices can be heavily skewed by the mix of homes sold, and we believe part of the upturn in median prices may be the result of an increased number of sales at the high-end of the market. Earlier this year, we suspect that tightened underwriting standards for jumbo mortgages, higher availability of FHA financing, and interest in the federal and state new home buyer tax credits all helped skew the median price downward. Conversely, seasonal increases in the number of non-distressed sales and jumbo transactions, as well as the lagging effect of foreclosure moratoriums, have likely helped skew the median price calculation upward in recent months. That said, we believe there are clear signs of a pricing bottom in California, in particular at the low-end price range ($0-300,000), where months of supply (2.8 months) remains well below the state average (4.0 months).Homes remain affordable as the typical mortgage payment buyers committed themselves to paying in October was $1,097, down from
$1,362 a year ago, according to DataQuick. Adjusted for inflation, October’s monthly payment is 58% below the cyclical peak in June 2006.Sales at the high-end showed signs of life as sales of homes priced over $1 million rose y/y for the first time since July 2007, according to the California Association of Realtors. Notably, on a year-over-year basis sales in the more expensive Santa Barbara South Coast (+11%) outpaced the more affordable High Desert Region (-1%). That said, the majority of homes being sold continue to be low-priced entry level homes or foreclosures and mortgage availability at the high-end of the market continues to be constrained.
As of September 30, over 2.4 million mortgages were "underwater" (35% of total) in California, of which ~1.3 million loans had loan-to value ratios (LTVs) of 125% or more, according to First American Core Logic. Unfortunately, we believe the staggering number of homes in negative equity combined with weak employment trends (statewide unemployment at 12.5% in October) may result in more foreclosures
and/or distressed sales, which, in our view, could prevent home prices from materially appreciating for an extended period of time.California single-family listed inventory declined 33% y/y to ~187,000 units, which on the surface represents 4.0 months of supply, down from 6.1 months a year ago. Very importantly though, we believe banks and mortgage servicers have continued to extend the foreclosure process for millions of homeowners this summer and, accordingly, have not materially accelerated any liquidations or property repossessions from the foreclosure backlog. This, in turn, has kept the amount of active real estate-owned (REO) inventory in the market at unusually low levels. Nevertheless, a significant amount of distressed "shadow inventory" (REO homes, seriously delinquent loans, and recent foreclosures) not actively listed in statewide MLS systems continues to obfuscate the true inventory situation, in our view. For reference, according to Mortgage Bankers Association data, as of September 30, more than 800,000 California mortgages were either in foreclosure or seriously delinquent. Even assuming a 50% workout rate on those loans, we estimate this implies an additional eight months of supply statewide above what is currently being reflected in the realtor data.
As a percentage of estimated total 2008 unit closing volumes, Standard Pacific (SPF/$3.14/Underperform), Brookfield (BHS/$5.49), KB Home (KBH/$13.62/Market Perform), and Lennar (LEN/$12.86/Outperform) have the largest exposure to the state of California.
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