By Mike Southwick
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In my last article titled “The Housing Revolution” I spoke about the shortage of available homes for sale, which continues to remain a major factor in most local real estate markets throughout California. This shortage of homes, and the continued demand from buyers wanting to get in or back into the market, is causing home prices to dramatically increase (5 percent-plus per month in some areas), as well as fueling a significant wave of growth in the overall real estate market that we haven’t seen for some time.
When I was thinking about a title for this article and some sort of iconic image to reflect what I believe captures what the real estate market has faced these past seven years, I thought of the book “The Little Engine That Could.” As the markets began to stall in 2007 and the subsequent fall of home prices by as much as 50 to 60 percent followed, it has been an uphill climb to where we are today but nearly all historic indicators are hinting at a positive growth pattern. There remains a sense of cautious optimism in the air and the overall economy remains a little fragile, but the housing market is clearly the engine that is driving us forward.
Here are a four important indicators that evidence this:
• We have seen a significant decline in distressed real estate transactions (REO and short sales) that once dominated our market by as much as 65 percent. In May 2012, for instance, bank owned sales and short sales (where the owner owed more than they could sell their house for) made up 44 percent of the sales and by May 2013 that number changed to 22 percent. This means that equity sale (where the seller sold and received a profit) transactions made up 78 percent of the closings in May 2013. This is trending in a positive direction.
• Home prices across all major markets in California are up anywhere from 12 to 15 percent year over year. According to the S&P Case-Shiller report, “The recovery is definitely broad based,” and we are finding that in some of our local markets the month-to-month change from there is anywhere from 5 to 10 percent.
• Mortgage rates (though still low) are witnessing a significant jump and although some might see this as a negative influence on the housing market, it is actually spurring buyers to move rapidly to secure a home and close escrow before rates climb even higher. Very few consumers, if any, like higher interest rates but this increase was expected and already built in to most financial forecasts. Rising interest rates and unemployment are two significant components that have a direct impact on long-term, sustainable growth — not just the real estate market but also in the overall economic picture. Those factors will continue to be a large influence and necessitate wise choices by our economic decision makers as well as consumers.
• New home construction is the final component that I would like to show as evidence of an upward trending real estate market. A recent article from Bloomberg Businessweek (June 17) mentions that “confidence among U.S. homebuilders surged in June to the highest levels in seven years.” In Bay Area markets such as Sunnyvale some builders like O’Brien Homes have had to implement a lottery system to handle the huge demand for new construction and other builders like Shea Homes and Shapell Homes have followed suit with similar lottery systems to sell their new homes.
These types of lottery models for selling homes are driven by the pent-up demand by the consumer to obtain a quality home and builders are preparing themselves to meet that need. In areas where there is a fair amount of open land, the builders are beginning to break ground for both small scale and large subdivisions.
In El Dorado County there are at least five major building projects or subdivisions in process and could bring anywhere from 5,000 to 7,000 residential units to that area. These new construction projects, when properly planned, bring construction jobs, commercial business, schools, parks and other forms of supporting employment to those regions.
The buzz in the air is that real estate is back and all indications are that this Little Engine That Could is gaining steam and heading in a positive direction.