Stablizing Home Prices Fuel Hope Of Soft Landing

House prices still haven’t fallen, and that could be additional evidence to bolster the theory of a soft landing in the real estate market.
By: DANIEL MILLER: Los Angeles Business Journal Online
The expected drop in Los Angeles County home prices didn’t happen again in September, leading some observers to wonder if the housing market may experience a soft landing.

According to data released to the Business Journal, the number of existing homes sold in Los Angeles County in September dropped 30 percent – about the same as the previous month. But the median price of homes sold was $550,000 – exactly the same as the previous two months. What’s more, the price is up 4.2 percent from the same month last year.

When the number of home sales started dropping almost a year ago, many observers expected prices to head south eventually. However, the median price has been stuck at or near the $550,000 level for six straight months.

The result: the talk of price swoons and the housing “bubble” bursting has gotten quieter – at least for now.

“The indicators we are seeing are consistent with a soft landing,” said Delores Conway, director of the Casden Real Estate Economics Forecast at the USC Lusk Center for Real Estate. “The market is stabilizing to some degree. But we still need more time.”

Indeed, no one has a crystal ball, and prices may well drop, especially if predictions that lenders seeking to cash in on the real estate boom issued no doc loans – requiring minimal verification of income and assets – to overextended buyers are true.

That could lead to a rush of foreclosures as the interest rates on the loans adjust upward after their initial introductory period, when their rock bottom interest rates expire. A recession would certainly push prices well down.

However, several observers pointed out that the regionally strong economy and historically low unemployment don’t appear to set up the Los Angeles area for a steep price plunge.

In fact, so far this year the median home price in the county has risen from $519,000 in January, according to data provided to the Business Journal by HomeData Corp., a Melville, N.Y. company that tracks housing prices nationwide. Still, the soft sales and flattened prices feel like a downturn, compared to the torrid sales of recent years.

“When you come off of an extreme sellers market it looks like doom and gloom,” said Steve White, president of the Southland Regional Association of Realtors. “And the fact that the year-to-year median price has increased moderately would show you we are in a relatively strong market.”

Homes Sitting
To be sure, even though median prices have not gone down yet, sales are definitely slower.

Cory Weiss, a broker in Prudential Real Estate’s Beverly Hills office, said homes that are realistically priced are selling, albeit at a slower pace.

“Buyers are being cautious. They are taking their time. Deals are taking longer as far as negotiation,” said Weiss, who has clients in Beverly Hills, Brentwood and the Palisades area.

Weiss’ experience is in line with data released by the California Association of Realtors.
The California Association of Realtors estimates that as of August, homes in Los Angeles County were staying on the market a median 51.9 days, compared to 29.2 days a year ago. That translates into a build up of county inventory levels to 6.8 months in August, compared to 2.6 months a year earlier. That means at the current pace of sales, it would take 6.8 months to sell everything that’s on the market now.

“Where homes were moving in a week with multiple offers, it seems to be between 30 and 60 days or perhaps longer now,” said Fran Butler, president-elect of the California Escrow Association.

According to Leslie Appleton-Young, chief economist with CAR, a six-month supply of homes creates a balanced market for buyers and sellers.

Appleton-Young said that since 1988, the average unsold inventory level for homes in the county is 6.9 months.

White said that the current county home market is balanced, though it is hard to recognize that after the price gains the region experienced from 2003 to 2005.

“Last year was just complete insanity in many ways, so it was difficult to use 2005 as a benchmark or 2004 or 2003 for that matter,” White said. “Those years were so far away from normal.”

Bob Edelstein, professor of business administration at the University of California Berkeley Haas School of Business, said that while it is not clear whether the market has “found its level” he does not anticipate a regional recession, which would severely impact the housing market.

“The business sector is fairly healthy,” Conway said. “If that changes we could see more of a bumpy landing.”

Buyers Taking Time
Weiss said that in the high-end market, properties do still sometimes receive multiple offers from prospective buyers, though buyers are no longer consistently making offers at or above asking prices.

He said that homes that have sat on the market are “seeing reductions in price as buyers are being more particular.”

In the Santa Monica 90405 ZIP code, September sales dropped 32 percent to 13 homes sold, with the median price down 12 percent to $1.1 million. In the Brentwood 90049 ZIP code, September sales dropped 55 percent to 10 homes sold, with the median price down 14 percent to $1.4 million.

“I still have a ton of active buyers in the upper-end market but they are holding out and want to feel like they are getting a good value,” Weiss said.

Edelstein said that countywide slowdown is part of a typical correction before the market turns around.
“People don’t give up on their house-price dream, but the idea that there are fewer sales means that less people are getting their dreams,” said Edelstein, co-chair of the Fisher Center for Real Estate and Urban Economics at UC Berkeley.

As the market continues to correct, there are fewer high-end homes selling. In September, 610 $1 million-plus homes were sold, down from 899 $1 million-plus homes sold in August.

Also, there were just 31 $1 million-plus ZIP codes in September, down from 38 such ZIP codes in August.

“I feel that a lot of people wanted things to pick up after Labor Day but when we see things close, sale prices aren’t as close to the asking or over the asking prices as they used to be,” Weiss said.

The county condo market also experienced a 30 percent decline in sales volume to 1,463 condos sold. The median condo price in the county rose 0.5 percent from a year ago to $410,000.

Conway said that seasonal factors will likely lead to a further decrease in the number of transactions during the late fall and winter months. This sort of seasonal reduction in volume is an annual occurrence for the housing market.

Conway said that in the summer months, families relocate and prepare for the school year, generally making that period a strong time for the market.

“Typically we have a decline from August to December,” Appleton-Young said. “I would expect that pattern to hold.”

Despite this expected decline, many real estate professionals said the market appears to be functioning normally. “There is nothing in the Southern California economy that will portend doom,” White said.