SAN DIMAS, Calif. -- Western Corporate's Vice President of Economic and Market Research Dwight Johnston said recent affordability figures suggest Southern California's residential real estate market may be settling back down to historic norms. However, he cautioned against too much optimism, saying normal isn't guaranteed.
Caution aside, though, it is good news. Johnston said according to Irvine, Calif.-based Robert Burns Real Estate Consulting (www.realestateconsulting.com), which has produced affordability statistics for more than 50 years, Southern California's most populated counties have returned to normal or near normal affordability ratios. And in theory, normal affordability means normal prices.
Nationwide, about half of Americans can afford median home prices, Johnston said. However, in California, affordability has historically run around one-third, with high-value areas like San Francisco typically in the teens.
"Despite quick increases in home prices, or a combination of events, like a drop in interest rates and income growth, affordability has always come back to the same basic rate statewide, always showing a long-term trend line," Johnston said.
In the height of the mortgage boom, affordability dropped as low as 13% statewide. The affordability of inland suburban communities like the San Bernardino/Riverside metro-area dropped the furthest from the norm, from around the national average in the high 40s down to the teens. Orange County and San Diego County dropped into the single digits at one point, Johnston said.
But, since then, median prices have fallen drastically throughout California, particularly in Southern California, where affordability ratios are now at, or quickly closing in on, historic trends.
Prices in San Bernardino/Riverside have fallen so far and so fast, they're already 41% off 2007's peak. Now, the current affordability numbers are exactly on the Inland Empire's historically normal trend line. Orange County is close behind, already 31% of 2007's peak median of $720,000, requiring only another 3% reduction to reach trend line norms. Los Angeles County's median price high of $570,000 would require a 39.5% reduction to return to its historic trend line, and so far has settled at 32%.
However, the back-to-normal trend is as confined to Southern California as its fish tacos. Troubled real estate markets in Las Vegas and Washington, D.C., still require at least a 10% reduction in median prices to return to normal affordability trend lines. Denver's peak of $240,000 only requires a 16% reduction, but today's median is only 11% off peak, which suggests the Mile High City's value losses are only two-thirds of the way back to normal.
However, because prices reached such record-breaking highs, historical trend lines may no longer apply.
"Of course, we run the risk of experiencing a pendulum effect," Johnston said, "and there's certainly a risk of swinging back the other way below the trend line. The drop in median prices isn't necessarily going to stop."
However, affordability isn't the only measure that indicates good news for the housing market. Single family home starts have finally dropped to pace home sales, Johnston said, which will allow inventory to come back into balance with demand. Sales have stabilized over the past year, too, sticking close to five million annualized.
"This bottom is pretty low, we're talking a 17-year low here, both on starts and sales, so it's not like staying here will be a good thing," he said.
Plus, another jump in foreclosures could throw that balance back off, Johnson pointed out.
"But the good news is, we've probably seen construction job losses in that arena run its course," Johnston said. He added yet another downer, though: commercial construction job losses are probably on the way, as long-term contracts signed before the downturn expire and aren't renewed.
Katrin O'Connor, NAFCU staff economist and author of the group's Sept. 24 Macro Data Flash, said inventories did improve in August, but supply still outpaces demand to the point where prices must drop further before the industry can build a stable price floor.
However, O'Connor's report wasn't all bad news, either.
"I do definitely see that we've seen a stabilization in existing home sales numbers," O'Connor said.
However, the NAFCU economist also salted up her good news, saying uncertainty in financial markets prevent her from declaring five million annualized sales a reliable floor.
"If we can't find a way to stabilize the financial market, sales might decline even further, because the credit crunch could get even worse," O'Connor said.
"Even if people in the West are lured back into the market because foreclosure prices are so low, they can't qualify for a loan because underwriting has tightened, liquidity isn't there, and banks certainly aren't willing to take any risks," she added.
O'Connor said NAFCU's economists have scrambled this fall to provide economic forecasts for member credit unions that are knee-deep in 2009 budgeting. Nearly every day brings news that requires an overhaul to yesterday's numbers, she said.
On the bright side, when affordability returns to California and other hard hit markets, the real estate and mortgage industry won't have to wait for the trend to ripple throughout the country before coming back into vogue.
"Most of the country never got out of line," Johnston said. "It was just this crazy coastal thing that has driven this whole process, so when those areas get back to normal, it will stabilize the overall housing market, and the securities market it supports."
Johnston's gloomiest comments involved the job market. The economist said interest rates, inventories and median prices won't mean a thing if borrowers don't have steady income.