The real estate market in Southern California is facing a dramatic downturn, with home values dropping sharply and significantly impacting demand for new houses. In the past month, only 1,813 new homes were sold across six counties, marking a staggering 53% decline from December 2007 and a 63% drop from the 20-year average for that month. Meanwhile, overall home sales saw a surprising increase of 51% compared to the same time last year, driven largely by bargain hunters eager to capitalize on foreclosures and distressed properties. The median price of a Southland home fell to $278,000, which represents a 35% decrease from December 2007, according to MDA DataQuick.
As home prices continue to tumble and lenders unload foreclosed properties at deep discounts, the appeal of purchasing new homes has diminished. Builders are now in a precarious position, effectively hitting the brakes on new construction projects. MDA DataQuick President John Walsh noted that builders are currently in a "holding pattern," trying to survive until the market stabilizes. However, this pause in construction may prolong the market recovery, creating a vicious cycle that could hinder future growth.
The freeze on home building could help address the oversupply of homes currently on the market, but it has also led to a significant loss of construction jobs, which has become a primary driver of unemployment in the state. In November, California lost 67,700 jobs in both residential and commercial construction, accounting for 32% of total job losses within that period. This ripple effect is likely to delay the broader economic recovery necessary to stabilize the housing market, according to economists.
Economist Edward Leamer from UCLA emphasized that a slow revival in home building would play a crucial role in stimulating the economy, not just by boosting employment, but also as an important indicator of recovery that could entice investors back into the mortgage market. The urgency for new constructions has never been clearer, as the housing market could face another mania if supply doesn't catch up with potential future demand.
In early 2008, builders attempted to attract buyers with slashed prices; however, the surge of foreclosures outpaced these efforts. The median home sales price in January 2008 was $415,000, with 23% of sales being foreclosures. By the end of the year, foreclosures accounted for 56% of sales, driving the median price down to $278,000. Areas like San Bernardino and Riverside counties have seen the lowest median sales prices, with foreclosures becoming a significant challenge for builders.
Current construction activities have come to a near standstill due to the oversaturation of available properties. In Los Angeles County, building permits are currently at only 18% of their peak level from the housing boom, with similar declines noted in Orange County and other regions. Major builders, such as KB Home, reported an 86% decrease in homes under construction compared to their peak in 2006, further illustrating the current state of the market.
Moreover, California home builders are advocating for a federal tax credit to stimulate home purchases, as the California Building Industry Association estimates that fewer than 64,000 new homes were built statewide in 2008, the lowest number since 1954. The December sales total for new homes was a shocking 79% below the peak sales month of December 2005.
Despite the oversupply of existing homes, new construction will soon be essential to prevent future housing crises. Leamer pointed out that while there was an overbuilding period from 2004 to 2006, the current underbuilding trend poses risks for the market's long-term health. As demand may eventually surge again, the lack of available units could become a critical issue.
While strong demand may still be on the horizon, falling prices and mortgage rates are making homes increasingly affordable. Recent data revealed that Los Angeles County's median sales price was down 32% from December 2007, while other counties also experienced significant declines. The typical monthly mortgage payment for Southland buyers was estimated at $1,239, down sharply from previous years.
For anyone keen on understanding the dynamics of the Southern California housing market, it is clear that both challenges and opportunities lie ahead. The current landscape may be daunting, but the potential for recovery remains, contingent on strategic actions by builders, policymakers, and the market itself.
