Real Estate Recovery coming, just not yet

California Association of Realtors economist Leslie Appleton Young

“Reading the headlines, it’s easy to extrapolate a three martini lunch,” Leslie Appleton Young told 200 Shorewood Realtors during her annual address to the company last Wednesday at the Manhattan Beach Neptunian Club.

But following the talk, featuring over 100 financial power point charts, agents could have been excused for having at least a beer with lunch.

The real estate market is recovering, the California Association of Realtors’ chief economist said.

“It’s been the best first quarter in three years for Los Angeles County,” she said.

Manhattan Beach median home sale prices in April were up 23 percent over April 2009. April’s sales transactions were up 39 percent over April 2009.

The problem is that the real estate market is digging out from a very deep hole, or what the economist characterized as a “violent cycle.”

During the last severe real estate downturn, in the early 1990s, statewide median home prices declined 25 percent over a five year period.

During the recent downturn median prices in Los Angeles County dropped 50 percent, from $600,000 in August ’07 to $300,000 in January ‘09, a span of just 16 months.

Prices are recovering, Appleton Young said, but slowly. Los Angeles County’s March median prices were at $329,000, a recovery of just 11 percent from their ’07 peak. Manhattan’s 23 percent increase, to approximately $1.5 million in April, was still $500,000 less than June ‘08’s $2 million median price, when Manhattan prices peaked.

“Remember me saying [in previous years] that housing prices are ‘sticky’ on the way down because home sales are discretionary. If sellers don’t see market support [for the price they want] they can wait it out.”

That theory has gone out the window, she conceded.

“In this market there were a lot of non discretionary sales. Foreclosures sent prices plummeting,” Appleton Young explained.

Foreclosures were also responsible for the fact that statewide transactions were up 20 percent last year, over 2008, but the dollar volume was flat, and will remain flat, she said.

“I’ve been with CAR for 26 years and I’ve never had so many dear friends tell me they are working twice as hard for half as much income,” she said.

It’s all about jobs

The 246,000 jobs lost in Southern California during the recent recession are ultimately responsible for dragging the market down. Job recovery is needed to bring the market back up, she said.

Paradoxically, California’s recent increase in unemployment, now at 12.5 percent, is a positive indicator because it indicates “people are more optimistic” about finding work, she explained.

But because employment is a lagging indicator, she didn’t foresee unemployment declining before the end of the year.

She predicted that salaries and consumer prices will remain flat for the next year, but that inflation will rise to four or five percent within two years.

“I will guarantee you that mortgage rates will be higher a year from now,” she said, adding that buyers should factor that in, especially if they are waiting for prices to fall.

If Shorewood’s agents were looking for consolation in Appleton Young’s comments, it could be found in the fact that few of them are in commercial real estate.

“The commercial market tracks the labor market more closely than residential, and the number of distressed commercial properties has been awe inspiring. And it will get worse before it gets better. Big loans come due in five to 10 years…and the secondary market for refi’s doesn’t exist.”

The value of “distressed” commercial properties in California was $115 billion and rising at the end of ‘09, a 10-fold increase over January ’08.

The beach cities’ high end homes, the economist said, may now be paying the price for what enabled their prices and volume to continue rising through the summer of ‘08. The rest of Los Angeles County peaked in August ‘07.

“You can’t have a 75 percent decline at the bottom and have the high end drop only five percent. At the high end we’ll see prices adjusting downward for most of the year,” she said.

Despite Manhattan’s strong showing in April, Hermosa’s $837,000 median price in April was down 46 percent from  April ‘09. Redondo’s $697,000 median price in April was down one percent from April 2009.

“You have unique market,” Appleton Young told her audience. “But the market now is not driven by geography as much as it is by price category. A good distressed sale will go quickly. High end properties with unrealistic sellers will sit there a while.”

In April, Manhattan Beach’s inventory (of 179 homes for sale) – the anticipated length of time it would take to sell the homes – was four months. In December 2008, when fewer than a dozen Manhattan Beach homes sold, the 275 homes on the market equated to a 37 month inventory.

The F word

In past years, Manhattan rarely had homes in foreclosure. Currently, nearly 50 Manhattan Beach homes are in foreclosure or pre-foreclosure. In Hermosa the number was 26 and in Redondo 101.

“Foreclosures will continue to be with us a couple more years. We still have people being sucked into the vortex of the downturn,” she said.

Appleton Young dismissed fears that “banks have a huge inventory they are waiting to lay on the market to send prices plummeting.”

But that was not to say the so called “shadow inventory” is entirely a myth.

“The reality is,” she said, “banks are not taking properties back. People are staying in properties they have not paid mortgages on for six to 18 months. Bank of America can’t afford to recognize such significant losses on their balance sheet.”

If anyone has suffered more than Realtors from the real estate downturn, it has been home builders.

California housing permits fell from a high of approximately 210,000 in 2004 to approximately 40,000 in 2009. The state has lost over 400,000 construction jobs since the industry’s 2006 peak.

The state lost another 1,400 construction jobs in April, the Los Angeles Times reported on Monday. “But that was still considered good news because the loss was a lot less than in previous months,” the Times article stated.

Appleton Young said recovery in residential construction is at hand.

“In every housing cycle, housing starts begin to go down before a recession and come up before the recovery. It’s happening now, also.”

Realtors, she advised, should take consolation in the fact that “there are plenty of transactions. It’s all about market share.”

“As long as we have over 500,000 sales statewide, we have a robust market. We’ve been at that pace for 19 months,” she said. ER

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