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Low inventory, high prices cause state's slowdown in home sales

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California has experienced a “significant” slowdown in residential home sales activity over the last few months, with numbers down 14 percent from last year.

Selma Hepp, senior economist at the California Association of Realtors, discussed the state and local housing market at an event hosted by the Pacific Southwest Association of Realtors on Thursday.

She listed a few factors that could be contributing the state’s slowdown in sales, including low inventory; the Fed’s tapering of its bond buying stimulus program causing interest rates to increase; drastically increasing home prices scaring people away from the market; and investors leaving the market.

The slowdown in sales has caused a slight increase in inventory, but the state is still experiencing historically low levels.

Inventory was snatched up by investors as housing affordability hit historic highs, while at the same time low rates made investing in real estate more favorable than other investments. This high demand was combined with little new construction over the past five years, underwater borrowers unable to move up, the drying up of the foreclosure pipeline, and about 82 percent of investors choosing to rent instead of flip.

The inventory in San Diego County in January was 2.8 months, Hepp said, adding that a healthy market has about six months of inventory. The number of residential homes sold in San Diego County in January was 2,006 units, down 22.2 percent from December and down 15.9 percent from January 2013, Hepp said. The median price was $409,000, down 2.6 percent from December and up 15.2 percent from January 2013.

First-time homebuyers are continuing to be priced out of the market. The long-run average share of first-time homebuyers is about 38 percent, and has decreased to 28 percent. That number reached about 50 percent in 2009 when tax credits were available.

Housing affordability has dropped from about 55 percent in 2012 to 32 percent in 2014. For each percentage point drop, about 120,000 households in the state are unable to qualify for a median-priced home, Hepp said. Between 2012 and 2014, about 2.4 million households were disqualified in California.

Home prices increased 22 percent in California last year, partly due to a change in the units sold. In 2009, 30 percent of homes sold were equity sales, and that number is up to about 85 percent today. Equity sales, or traditional sales, are typically more expensive than distressed sales.

As traditional sales continue to outweigh distressed sales, Hepp said she expects the share of sellers planning to repurchase to continue to increase.

Hepp forecasts the number of single-family home resales in California to increase to 426,600 in 2014, up 3.2 percent from 413,600 in 2013. The median price of a single-family home is expected to increase 6 percent from $407,100 in 2013 to $431,500, taking the mix of sales out of the equation and returning to “true appreciation,” she said.

She also anticipates the 30-year fixed-rate mortgage rate to increase from 4.1 percent to 5.3 percent. When rates are increased from about 4 percent to 5 percent, the mortgage payment on a median priced home of $431,510, assuming a 20 percent down payment, increases by $200 and homebuyers need about $9,000 more in income to qualify. The housing affordability index will drop from about 33 percent to 29 percent, equating to about 480,000 households no longer able to qualify.

While home prices are increasing, Hepp said it’s important to note that the market today is unlike the market in 2006.

“Buyers have more skin in the game,” Hepp said.

In 2006, 43.2 percent of buyers had at least a 20 percent down payment, compared to 52.2 percent of buyers today; and the percentage of buyers with zero down payment in 2006 was 21.1 percent, compared to 5.9 percent today.

The percentage of cash buyers has increased from 11 percent in 2006 to 27.4 percent today. The percentage of homebuyers with a second mortgage has fallen from 43.4 percent in 2006 to 2.2 percent today. And the percentage of buyers with an adjustable rate mortgage fell from 32.6 percent in 2006 to 4 percent today.

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