Southern California
Changes In Existing Home Market Conditions
When we analyze and forecast new home market conditions, we first examine changes in recent sales volume for existing homes, as it is resale volume that supplies the equity rollover that supports many new home sales. Our Existing Home Sales Report offered at RealEstateEconomics.com compares current market statistics to those of the same period 12 and 24 months previous, and provides our clients an accurate interpretation of the direction of overall market conditions. The new home market is especially sensitive to changes in the resale market, as resale homes not only provide equity rollover that potentially flows to a new home purchase, but resale listings may also represent increased competition during times when the number of listings balloon. This report highlights various existing home market changes, lending insight to the overall near-term health and direction of the new home market in Southern California .
The chart below presents year-to-year changes in the existing home price and price-per-square foot averages for all of Southern California, defined as Ventura , Los Angeles , Orange , San Diego , Riverside and San Bernardino Counties :
As shown above, a 6.0% increase in the average price of existing homes has been observed during the past 12 months, which is far below the gains seen 12 to 24 months previous, but is unjustified, given the current market disruption. The average price per square foot (a better indicator of appreciation) has increased by only 1.5% during the past 12 months, reflecting almost no upward price pressure.
Even these modest price gains should have occurred. Current price levels are perceived as overstated, and the impact of overstated pricing has been a dramatic reduction in existing home sales volume, as shown below:
The serious decline in sales volume shown above has not been due to an economic downturn. Rather, it originated from the ‘artificial' price inflation caused by far too many speculative purchases during the past 24 months. Once speculative buyers left the market, prices were left at a level beyond where they can be supported by the economy. Even though speculative buying has ceased, the continued increase in prices (albeit modest increases) will likely need to reverse before sales volume stabilizes. Existing home prices have reacted to the drop in sales volume far more slowly than the new home market, and both the new and existing home prices will need to recede further in order to stabilize sales volume.
Based on our measure of supportable prices (in the table below), the housing market is still over priced by about 4.5%:
As prices recede to levels that are supported by the regional economy, existing home sales volume will stabilize and lead to improvements in the new home market. This stabilization in existing home sales volume is becoming apparent in select Southern California markets (mainly coastal markets), and given continued stable economic growth, market stabilization should become apparent throughout Southern California during the next few quarters.
Our existing home market database is updated each month. A review of existing home market conditions and our near-term new home market forecasts for Southern California are presented in The Residential Economic Report, and can be accessed at http://www.swiftpage5.com/SpeClicks.aspx?Acc=REE.Mike&SPCED=C070530184300&LNK=3&UId=122.
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