California Sunsets

Posted by: Chris Palmeri on August 15, 2007

It’s one of the things that has intrigued me the most about this real estate slump, how home sales volumes can crash but prices stay up. Doesn’t this fly in the face of economics 101, less demand, lower prices?

”laguna

The latest numbers for Southern California—that’s a Laguna Beach sunset at the right—sheds light on the phenomenon. A total of 17,800 homes sold in Southern California in July, according to real estate researcher DataQuick Information Systems. That number was down 27% from July of last year and remarkably is the slowest July since 1995, the bottom of California’s last housing slump.

“The last time we had sales this slow, Southern California had been in recession for a few years,” explains Marshall Prentice, DataQuick’s president. “Jobs were being lost in droves, people were leaving the area and home prices fell significantly.” But the median price last month actually climbed 3.7% to $505,000!

DataQuick has an explanation. What’s happening is that fewer lower-priced homes are selling. Prices are flat or increasing in the top half of the market. So when you adjust for this shift in type of home sold, you find that the typical dwelling has actually declined in price, roughly 3% below where it was a year ago.

One potentially heartening scenario is that buyers of entry-level homes are holding off, concerned about falling prices. When they do feel more secure this pent-up demand will lift home prices even higher. A worse scenario is that buyers at the high-end begin to feel the same skittishness. They hold off buying and prices as a whole spiral downward. There’s two ways to look at that California sunset—a prelude to a sunny new day or a long dark night.

Reader Comments

Jim D

August 15, 2007 12:02 PM

"A worse scenario is that buyers at the high-end begin to feel the same skittishness."

An 8% interest rate on a jumbo loan would increase that skittishness, yes? How about (as reported in the NY Times) a 13% rate? Ouch.

Expect the numbers coming out of California for August to be alarming. Expect the numbers in September to be terrifying. (One bubble blog reported the sales numbers for Pheonix to be down 33% YOY for the first two weeks of August, yikes.)

Seriously, if this doesn't finally put a stake in the heart of the bubble, I'll give up yapping about it.

Darren

August 15, 2007 12:45 PM

Pent up demand? I here this, but it is not reality on the street. You know what caused the bubble and the same in reverse is causing our current collapse.

1. interest rates lowered by greenspan
2. then increased move to home investment after
Dot-com bust.
3. more increase in speculation after lenders
started toxic loans and no-doc 0% down.
4. This caused prices to rise rapidly as subprime and investors bought at rapid pace.

Back to reality today, with 40% subprime,investors gone and lenders no longer offering 100% financing even with great credit.Who is going to buy all these homes. About 10 to 20% of population if they can sell their own home.

Lord

August 15, 2007 3:23 PM

Buyers couldn't buy if they wanted to for the most part. No one will fund until all the corpses have risen to the surface. Meanwhile prices will be slow to fall since sellers can't negotiate with themselves.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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