It was a great summer for the real estate market in El Dorado County. The 281 home sales reported in August were 21 percent better than July and 28 percent ahead of August of last year. From June 1 through Aug. 31, the El Dorado County Association of Realtors reported 800 residential sales. Last year during the same three months there were 675. That’s an 18 percent increase in the number of closed escrows and the most summer sales since 2005.
Although sales activity is up, home values still have a long way to climb from their peak in 2006. That summer the median selling price of a county home was $515,000. This summer the median selling price averaged $272,000. That’s a 47 percent drop from six years ago. There is, however, evidence that home values are slowly increasing. During the last eight months the average median selling price has been $265,000; while during the same period last year, the average median was $258,000. Not a phenomenal increase but consistent year-over-year growth.
Today’s low interest rates are partly responsible for the robust sales activity. Owning a home today in many of our communities is less expensive than renting one. As an example, a 1,500-square-foot home in Cameron Park or Placerville will rent for $1,500 to $1,600 a month. The same size home can be purchased for around $200,000. With a minimum of 10 percent down payment, the monthly mortgage, including principal, interest, taxes, insurance and mortgage insurance, would be around $1,200 a month.
Low prices have attracted a combination of investors and first-time homebuyers. After years of waiting on the sidelines, both groups have decided that it’s not going to get much better than this. They’re right! According to the California Association of Realtors’ affordability index, homes are more affordable than at any time in the past 40 years. The index is based upon the relationship between the area’s median home price, median family income and average mortgage interest rate.
Investors are pulling money out of low-yield savings accounts and buying rentals that actually have cash flow, producing higher returns. It hasn’t always been like that. California investors have historically purchased high-priced, single-family rentals based upon future appreciation and tax shelter. A negative cash flow was tolerable when property values were appreciating 10 percent a year. That’s changed. Today, it is all about current yields and cash flow. Consider a $200,000 investment for a rental property will typically yield a monthly income of $1,500. After considering property taxes and insurance, the yearly return is 7.5 percent; substantially higher than bank CDs.
Will sales and prices continue to increase into the fall and winter or will this housing recovery lose its momentum? The short-term prognosis is: As long as interest rates remain below 4 percent and the economy doesn’t double-dip into another recession, strong demand for homes will continue. Sales, however, are going to experience a severe adjustment.
Here is the problem. The inventory of available homes continues to shrink to the lowest levels in recent history. Typically, the number of new listings coming on the market is greatest during the summer. As an example, last summer 928 homes were listed for sale. This year, the number of new listings totaled 514. During this past August new listings slowed to a trickle. Monthly sales are running 40 percent higher than new listings. That is a formula that cannot sustain itself. Without inventory to sell sales will be sparse.
Historically, when re-sale inventory is low, new home sales pick up the slack. That’s not about to happen this time. New single-family building permits this year are projected to be less than 80. Compare that to 5,000 to 7,000 a few years back. State and county regulations, along with costly impact fees, have guaranteed that new residential construction on that scale in our county may never again be economically viable for builders and developers. It simply costs substantially more to develop land and build a house on it today than it did a few years ago.
In theory, at some point, the increased cost of developing land and building a new home can be justified by passing it along to the new homebuyer. That theory works as long as regulations and fees decrease or remain constant while property values increase. That’s not happening either. The cost of complying with new building regulations and fees continue to ratchet up higher than a new home’s market value.
Where is that looming shadow inventory? It never really appeared and, if it does, it will likely not make a significant impact on our available inventory. Most of the foreclosures have been flushed through the system already. New foreclosure filings are at their lowest levels in five years. Lenders are aggressively attempting to convert financially troubled borrowers to a short sale situation or loan modification rather than another foreclosure. Of the county’s 650 active listings only 61 are REOs and another 64 are short sales. Last year REOs and shorts were 50 percent of our available inventory.
Underwater homeowners remain stuck. Nearly half of all homes purchased or refinanced prior to 2009 have no equity. The homeowners owe more on their mortgage than the value of their home. That’s changing slowing as property values increase but it will likely take many years before property values reach their 2005-06 peak. Until then, available homes for sale will be as scarce as truth is in a political campaign.
Ken Calhoon is a real estate broker in El Dorado County. He can be reached through his website at kencalhoon.com.