California’s existing single-family home sales decreased 5% in November on a seasonally-adjusted basis relative to October. On a year-over-year basis, sales rose 5% to a run-rate of 536,720 units. Sales activity continues to be supported by a large mix of heavily discounted foreclosure re-sales, which accounted for 40.6% of November’s re-sale transactions, according to DataQuick. Notably, however, this is the lowest percentage of foreclosure re-sales since May 2008, 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. Importantly, we believe the moratoriums and modification efforts have helped limit the supply of available inventory, especially at low-end (below $300,000), which in turn has resulted in discernible home price stabilization.
Median home prices rose 6% y/y to $304,500, marking a major milestone in California’s recovery. The home price increase was the first since August 2007. Median prices have increased sequentially in each of the last nine months and are now up 23% from the low in February 2009. 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 have noted for several months now that we believe there are clear signs of true pricing bottom in California, and data from the Case Shiller Index (measuring repeat sales transactions) continues to confirm this underlying trend.
Homes remain affordable as the typical mortgage payment buyers committed themselves to paying in October was $1,106, down from $1,249 a year ago, according to DataQuick. Adjusted for inflation, November’s monthly payment is 58% below the cyclical peak in June 2006. We would also highlight that y/y median prices in Sacramento (+2%) and San Diego (+9%) rose, while price declines in Riverside/San Bernardino (-12% y/y) and Los Angeles (+0% y/y) have steadily moderated in recent months. Notably, the October seasonally adjusted Case-Shiller index reading for Los Angeles (+0.6%), San Diego (+1.0%), and San Francisco (+1.5%) showed home prices increased in all three cities relative to the prior month with prices down 6.3%, 2.4%, and 2.7% respectively on a y/y basis.
Activity at the high-end improves. First time buyers continue to drive the overall sales volume, however, on a year-over-year basis sales in the more expensive regions of the state performed better than the more affordable ones. Specifically, on a year-over-year basis home sales in the more expensive Santa Barbara South Coast (+115%), Santa Cruz County (+50%), and Santa Clara (+46%) regions outpaced the more affordable High Desert (+0%), Riverside/San Bernardino (-14%), and Sacramento (-17%) regions. That said, the y/y comparisons can be misleading and it is important to note that 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 12.3% in November) 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 34% y/y to ~201,000 units, which on the surface represents 4.5 months of supply, down from 7.1 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 9.0 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/$3.75/Underperform), Brookfield (BHS/$7.97), KB Home (KBH/$13.82/Market Perform), and Lennar (LEN/$12.91/Outperform) have the largest exposure to the state of California.
Raymond James & Associates