Has the Real Estate Recovery Process Truly Started?

     The California real estate market has shown some signs of improvement over the past few months.  Home prices have received upward pressure from a demand-heavy marketplace amidst limited supply of available listings.  Highly competitive bidding wars are being commonly reported.  In fact, C.A.R. October press release shows 57 percent of home sales received multiple offers, representing the highest percentage in the last 12 years.  Moreover, on average, each home received 4.2 offers, up from 3.5 in 2011. 

     Another welcomed trend, as reported by DataQuick, shows the share of equity sales in California in September to have reached its highest level in 4 years, climbing to 63 percent, as compared to a mere 50.8 percent of all sales as recently as September 2011.  Let’s not get too excited, however.  The percentage shift being seen is a result of a more constrained REO-dominated market as opposed to an increase in equity sale numbers.  Regardless, this market shift is a welcomed discovery, as it does lend to an increase is median home values.

     Despite the above reports, I still find myself reluctant to label these recent developments as the start of a full-blown market Recovery.  I’m no pessimist, and I do regard the glass as being half full.  But simply categorizing home price appreciation as the start of the full-fledged Recovery may be a bit premature.  Instead, let’s call my sentiment regarding these real estate market improvement one of Cautious Optimism, and below I will explain why…

     For starters, Freddie Mac’s study of fixed mortgage rates continue to reveal mortgage rate indexes are hovering near record lows.  Frank Nothaft, chief economist for Freddie Mac, remarked “Mortgage rates remained relatively unchanged this week on signs of a growing economy and low inflation.”  The increased affordability of home loans should help fuel sales, but prolonged levels of low rates [as recent forecasts show] are good barometers of the overall economy condition, indicating the real estate market is not yet strong enough to support interest rate hikes.

     Additionally, C.A.R. Vice President and Chief Economist Leslie Appleton-Young, even amidst positive indicators of an improving market as noted above, still maintains the 2013 forecasts are inconclusive. “The wildcards for 2013 include federal, monetary and housing policies, state and local government finances, housing supply, and the actions of underwater homeowners – not to mention the strength of the overall economic recovery,” says Appleton-Young.

     All that being said, I am very pleased the market is finding ways to improve, and optimistic such trends will continue their upward climb, albeit more slowly than we would like.  My hesitance to label market improvement as an all-out Market Recovery is largely predicated on forecast studies like the below C.A.R. October press release…

     2013 California median home prices are expected to rise slightly, but not necessarily due to a strengthening of the marketplace, but more so due to supply shortages.  The most intensive bidding wars are still predominantly among cash investors, edging out first-time homebuyers and handicapping a more comprehensive market rebuilding process. Interest rates are expected to remain at historic lows, which is perhaps a leading indicator the market will not be strong enough to be labeled as being amidst full Recovery.  Instead, these forecasts do show the market will continue to be quite fragile, not yet strong enough to sustain higher mortgage rates nor healthy levels of available supply.  Any unanticipated changes in monetary and housing policies could derail these trends of improvement.  As a result, I will maintain my stance of Cautious Optimism when it comes to my analysis of the market recovery.