The trend in California home sales during the initial years of the 2010s remains grim for sellers.Not so for buyers whose dollars spent on home purchases are going further than anytime during the past 15 years.

Sales now and into 2013 will remain excessively lender-driven and speculator-riddled, but will be easily predictable for SFR agents and their brokers. The center of this action is the multiple listing service (MLS), the marketplace supporting anybody affiliated with SFR sales and the financial base for the lifestyle of SFR-reliant sales agents and brokers.

For a forward look, some review of the recent past is needed to set the stage. Mid-2005 saw sales volume peak for all types of real estate in California. Early 2006 produced both the peak in sales prices and the initial precipitous decline in sales volume.Nearly 30% fewer sales were recorded in 2006 than in 2005. Sales volume dropped another 30% from 2006 to 2007.

2009 sales were artificially higher than anticipated due to subsidy-induced purchases, but remained 40% below the 2005 peak year. 2010 saw a decline from the year earlier in both sales volume and prices, and 2011 is likely to continue that declining trend. The continuing widespread overpricing by sellers and seller’s agents discourages buyer activity at all levels, particularly wealthy buyers in the more expensive housing market —the effect of the sticky price phenomenon. [For more on home pricing in separate tiers, see first tuesday’s Market Chart, California tiered home pricing; for more information on the sticky price phenomenon, see the July 2011 first tuesday article, Budging from sticky pricingA seller's irrational reliance on past home pricing as a basis for setting current pricing (or not).]

2008 and 2009 introduced massive quantities of real estate owned property (REO) re-sales. REOs continue to arrive in a slowly declining trend. That condition will continue for years, well into 2016, before delinquencies and REOs begin to return to anywhere near their historic norms. Lender-owned properties continue to be dumped at price reductions and on terms for payment and escrowing which attract too high a percentage of investors and speculators. Such activity does not support sales volume for the long-term, and crowds out potential homebuyers who are forced to migrate to higher-level apartment/condo rentals instead of purchase.

In turn, the speculators and buy-to-let investors artificially drove 2008 and 2009 sales volume above 2007 sales, with a sales volume peak in July 2009. This 2008-2009 fast-track rise and sudden peak represents the classic initial dead cat bounce in a real estate recession. Homebuyer subsidies followed, artificially preloading sales activity but doing nothing for the overall recovery. Sales volume (and prices) are headed back for lower, long-term levels and will not likely hit a bottom from which the recovery of real estate can begin until well into 2012 or early 2013.

History repeats itself, with a twist

Now fast-forward into late 2011 and 2012. In 2010, unemotional, objective real estate factors combined to push down sales volume in spite of tax credit stimulus to bridge home sales and get the market moving again. The last homebuyer’s tax credit, in 1975, was unnecessary to boost real estate sales, but then we had notable consumer inflation, and in the recent recession we had essentially none.

As a result, sales volume will be unstable well into 2012 and will most likely remain level (though with vacillations) for at least four years forward. However, in 2013 or early 2014, monthly sales volume is predicted to pick up from the current plateau, with a small rise of approximately 20,000-30,000 additional sales annually.

Anticipate modest price increases to follow in 2014, then fall back for a year or so. Pricing and volume will probably peak during the 2018 period. In the interim, the Federal Reserve (the Fed) will need to raise short-term interest rates in order to keep a lid on the recovery (as they did in both 1984 and 1994), but will then permit them to decline into the 2016 period. [For more on the Fed’s role in regulating recession and recovery, see the July 2011 first tuesday article, Suspect behavior: why and how the Fed creates a recession.]

The real estate market is now settling into a long, dormant waiting period. Buyers simply are not available in sufficient numbers (and, in fact, the 2009 tax credits for first-time homebuyers cannibalized 2011 sales). [For more information on the effect the 2009 tax credits on current home sales, see the August 2011 first tuesday article, Homebuyer tax credits — good intentions, bad results.]

For home sales volume to achieve the kind of dramatic but stable recovery which took place in the 1996 period following the 1990s real estate recession, employment will need to increase at the rates experienced in the mid-1990s: 400,000 additional jobs created annually for three years. 2012 may get us half way to this annual number, with 200,000 to 250,000 jobs likely to be added to California’s labor force.

Once Californians feel the effects of two or three years of healthy increasing employment numbers, their confidence about the future will improve and they will once again be willing to invest in the economy. Only then will buyers return in sufficient numbers for sales volume to increase. [For more on the optimism of homebuyers, see the first tuesday Market Chart, Homebuyers feel ready and willing to buy, but not financially able.]

Until 2016, sales volume and pricing will be static, bumping along at current annual levels. Prices will rise, at most, at the level of consumer inflation. The composition of buyers will shift back and forth annually between occupying homebuyers to speculators and buy-to-let investors.

In 2016, sales volume will begin to pick up significantly. Employment will have reached its 2007 peak, and will continue to grow quickly. 2017 will see home prices jump well beyond the rate of consumer inflation.Mortgage lenders with an eye for profits will then begin to loosen their lending standards to whatever extent federal regulators permit. The memory of the grim mid-2000s will be quickly pushed aside, and mistakes will be repeated. [For current statewide employment numbers and forecasts, see the first tuesday Market Chart, Jobs move real estate.]

Factors leading to recovery

At some point in the mid-to-late 2010s, another wave of investors and an upsurge of household formations by Gen Y will kick-start the sales volume, and in turn, drive pricing momentum upward once again. Keep your eyes on homebuyer demand (not sellers, median prices or the MLS inventory). Homebuyer demand is driven by age demographics, interest rates, tax credits, new jobs and rising real estate prices.

Many favorable market factors are currently at work:

• lower income taxes beginning in 2011 (for 95% of homebuyers);
• an increasing number of new jobs, as job losses bottomed out in 2010;
• expiration of government-subsidized down payments (tax credits of $6,500 and $8,000 homebuyer grants, both ended April 30, 2010);
• government largess in the form of direct lender subsidies for loan modifications on modestly upside-down mortgages;
• much lower high-tier home prices (as well as more price declines in the low-tier and mid-range homes), stabilizing in 2013;
• no competitive new construction starts into 2013;
• high levels of MLS inventories for better selection at lower prices (fueled by a rise in REOs as employed negative-equity homeowners continue to default in increasing numbers);
• increased short sales (lenders will discount as their expectations will allow them to take on REO risks and as the Attorney General’s office litigates to push foreclosure resolutions);
• growing consumer confidence and spending, slowly but surely; and
• the recapitalization of the private mortgage insurers (PMIs) to eventually replace government guarantees of home mortgages.

However, sales volume will be inhibited by the public’s generally anti-business, anti-big and pessimistic attitude about American economics which has methodically intensified since 1980. In addition to the fact the public has a generally negative bias about businesses, many unfavorable market conditions are still at work restraining the rise of home sales volume;

• deflationary pressure on consumer and real estate prices (labor and materials for replacement of improvements and the price of land have become less expensive, commodity price jumps delivering no long-term inflation rates as they will not continue to rise indefinitely, and will soon return to normal);
• an increased level of personal savings (will hurt sales volume now but increase sales volume in 2014 and beyond) [For more information about personal savings rates, see the June 2011 first tuesday article, The 20% solution: personal savings rates and homeownership.];
• impending stockholder wealth – while significant at the moment – will decline as the Boomers dis-save by continuing to leave the stock market (though not the real estate market, as those who sell their homes tend to buy replacement homes);
• the weakest homebuyer demographics in 15 years (Boomers retiring and selling in the 2018-2020 time period, the same period that will see the their Gen Y children peak in their pace of household formations and first-time homeownership);
• excessive rental vacancies and reduced rents in inland areas and away from city centers (as landlords compete to rent excess shelter at a better value than suburban home purchases);
• the temporary exodus of SFR speculators and income property investors, and the dumping of properties acquired by speculators in 2008- 2010, followed by speculator dumping of larger un-flipped vacant income properties;
• lease-option and land sales contract schemes exposed (due-on violations, reassessment avoidance and judicial foreclosures – including actions on wiped-out home equity loans);
• scandals in mortgage loan modification services and the status quo or a pick up in the pace of foreclosures;
• the slower-than-usual recovery of the 1,500,000 jobs lost statewide after November 2007; and
• tightened loan standards as lenders are forced to both lend and apply the forgotten fundamentals of sound mortgage lending practices (20% down payment on all non-FHA loans, and FHA down payments as low as 5%, lower income ratios, the need for risk-free credit scores and full verification/documentation of income and funds for qualifying).

Future sales volume analysis by SFR brokers and their agents will indicate they need to consider adding SFR-related services to supplement their income. Those that do add related services will restructure their practice as all-service brokers, integrating transaction-related services into their offices to remain solvent and grow. SFR brokers should consider performing services for their clients such as:

• escrowing their transactions in-house under the broker’s license;
• entering into or expanding property management services (a recession-proof real estate niche);
• inspecting vacant homes and issuing broker price opinions (BPOs) for REO lenders;
• negotiating equity purchases for investors from sellers-in-foreclosure who have a positive equity or the chance of a short sale discount;
• demanding that prospective buyers commit to exclusive representations by a broker and agent to locate a home (or other property) by signing an exclusive right-to-buy listing agreement just as sellers are asked to do when they employ brokers and their listing agents;
• specializing (in particular property types, loan forms, locations and sales approaches);
• providing mortgage loan broker services for business loan origination by private lenders (no endorsement or registration required);
• arranging carryback financing and loan assumptions in which sellers have an equity and new loans are not available (and buying and selling those carrybacks);
• negotiating options to buy;
• exchanging properties with equities to help owners relocate their wealth held in real estate; or
• using barter credits in lieu of greenbacks, etc.