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Current Housing Market Conditions in Southern California

Over the past few weeks, Sullivan Group has conducted field work for active engagements in every county in Southern California and has participated in a distressed property tour for national investors in Los Angeles County and the Inland Empire. In the course of this activity, we have visited a number of new housing projects – including a few that are selling quite well in the current market – and we have analyzed big picture market statistics. As Halloween approaches, there continues to be a lot that is scary about the general economy and housing market, but there are a few positive things to report.

Sales Volumes in the Existing Market Have Improved in 2008: Across Southern California, sales of existing homes are running higher on month-to-month levels, with the region on pace to see +/-185,000 existing home sales in 2008, up from just 168,000 sales in 2007. While this is far below the decade-high of 348,000 sales in 2004 (and in fact is the second lowest level since 1995), improved sales volume shows that buyers are responding to the “bargains” in the housing market. The August 2008 median home values reported by Dataquick are down 30% to 40% in Southern California counties, putting median home value in five of the six Southland counties at or under $400,000 (and the two Inland Empire counties are under $250,000). Of course, a higher percentage of foreclosures in the mix of available and sold homes is the major reason for the sharp price declines. Foreclosure resales made up 45 percent of Southern California resales in August 2008, with the highest levels in Riverside County (65%) and the lowest in Orange County (33%). Further pricing erosion will occur until the level of defaults stabilizes, but improved volume is an encouraging sign.

Resale Inventory is Falling Back to “Healthy” Market Levels: Three to six months of unsold inventory is the usual bellwether of a “healthy” housing market. As the chart below shows, the total number of active listings in Southern California was about 130,000 units at the end of September, or about 6.5 months of supply at the sales rate over the past two months. When looked at in a historical perspective, using average monthly sales from the 2000 to 2005 period, current inventory levels average 5.02 months overall, and four of Southern California’s counties have under 5.0 months of unsold inventory. Still too many homes on the market, but coming down to healthier levels.

The Price to Rent Ratio Has Fallen To More “Normal” Levels in Some Areas: The price-to-rent ratio, which provides one measure of how much premium home buyers place on owning versus renting spiked across Southern California earlier this decade. Now, with sharp drops in home prices, some areas of Southern California are seeing current pricing that tracks more closely to rental costs. This can lead to sales success. One KB Home project, Calico Terrace in Terrace has sold 70 homes in 2008 to-date by dropping larger, more expensive plans and focusing on smaller homes priced in the low $200,000s. At current rates, homebuyers can get monthly payments into the $1,800 to $2,300 per month range, making it very competitive with rental rates in the same area. Ownership costs that are competitive with rental rates are a sign that price declines are coming in-line with area incomes (and are close to “bottom”). This project performance is particularly remarkable in that Palmdale is otherwise a distressed market with high levels of foreclosure and abandoned projects.

Appropriately Priced Homes Can Sell Well: Affordability, a convenient location to jobs and services and compelling product have never been more in demand and builders across Southern California are working to reduce unit sizes and prices where they can to bring product back in-line with area incomes. In some cases, new product on land that has been sold by one builder to another at a lower land basis is also entering the market. In the Norco area of Riverside County, Van Daele is selling over 11 units/month between its two Sumner Ranch product lines on lots acquired in late 2007 from Centex Homes. Pricing ranges from the high $300,000s to the mid $400,000s for homes in an area where similar product was priced in the high $500,000s and $600,000s at market peak. Look for more of this as more distressed land deals are traded and re-introduced with product sizes and prices that work in today’s market.

Builders Have Cut Production Sharply and This is Constraining Overall Sales Rates: Despite the immense population and job base gains in Southern California in the past six decades, building permit data shows that the region is on track to build the fewest new homes in 2008 since the end of World War II. At the end of August 2008, excluding cancelled and sold-out projects, there are 1,275 active projects throughout Southern California, down from over 1,500 at this time last year. With few projects opening into this market, the pipeline supply of new product continues to tighten. Recent visits to sales offices in areas ranging from the Antelope Valley, Santa Clarita Valley and all areas of Orange, San Diego, Riverside and San Bernardino Counties shows low levels of standing inventory (particularly detached units), small numbers of homes under construction and a meager pace of new product releases by wary builders (and their lenders). This discipline in inventory management will ultimately lay the groundwork for market improvement as the economy, consumer sentiment and credit availability improve.

Buyers are Reacting to the Turmoil in the Economy with Relative Calm: The impact of the crisis in the U.S. economy and housing market is certainly being registered, but sales agents we talked to in Orange County and elsewhere in the past few days report that prospective homebuyers are still relatively calm, particularly in the entry-level price ranges that are most active at this point. While some agents, particularly in the higher-price ranges reported that fear levels are higher and used the term “zombies” to describe buyers, the most common sentiment was that sales and traffic levels are starting to slow as they typically do in mid-October, but there are still interested buyers and shoppers. For qualified buyers with steady income prospects, the relative bargains in the housing market and the expectation that interest rates will climb are an incentive to act.

Sullivan Group Real Estate Advisors conducts feasibility studies, strategic plans, repositioning and product, pricing and absorption analysis for homebuilders, developers and lenders all over the United States. In addition, we assess commercial properties and provide fiscal impact studies. In the last 12 months, we have completed 350 studies in 50 metro areas. Please contact Tim Sullivan at 858-523-1443 x152 or at t.sullivan@sgrea.com.