Apr022013

Orange County home resale volume very weak by historic norms

A lie, if repeated often enough, becomes accepted as truth. The mainstream media is reporting that home sales are strong and demand is robust. Compared to the depths of the housing bubble crash, sales are up somewhat, mostly due to investor demand, but sales are still very low by historic standards, and we’re nowhere near a healthy real estate market. If not for the dearth of inventory, the anemic demand wouldn’t be pushing prices up at all.

Below is a chart from a recent Wall Street Journal article purporting to show sales are doing well. It does tell part of the story. Inventory is way down, and investor sales are up which is causing house price to rise. Unfortunately, the chart of sales is very misleading as it conveniently crops off the period of sales volume (not price) normalcy that preceded the severe sales recession.

The chart below puts sales in proper context.

California has endured two real estate sales recessions due to the collapse of two housing bubbles. The total sales per year in Orange County, when California is not in recession, average about 45,000 units. Based on the chart above, it’s apparent that we are still mired in a housing recession.

It’s also worth noting that the increase in demand is entirely investor driven. The Wall Street Journal chart shows the percentage of investor sales at auction is up considerably, and DataQuick reported that absentee buyers set a new record of 31.4% of all sales. The monthly average since 2000, when the absentee data begin, is 17.9 percent. The NAr reports a similar trend on a national level.

As I’ve repeated many times, owner occupant demand is moribund and showing no signs of life whatsoever. If not for investor demand, the housing market would still be languishing.

Another misconception perpetuated in the media is that sales are near historic norms. DataQuick likes to report sales as compared to the average since 1988. This is not a good way to look at sales volumes. First, from 1990 to 1996, and again from 2007-2012, we had a severe housing recession. Prices got pushed too high for people to afford them, so market pricing fell on very low sales volumes. If you average in these recession years, it brings the average down considerably, and it misrepresents what a “normal” and healthy market looks like. If you look at total sales measured against the 1997 to 2006 period and include 1988 and 1989, the current sales volume is still 23.6% below normal.

Second, population has grown significantly since 1988. A much more accurate way to look at sales is to divide total sales by population to account for the larger buyer pool. By that measure sales are more than 30% below normal.

The mainstream media doesn’t want to analyze the data and provide a true picture of sales health. They would rather paint a Pollyanna picture of a recovering housing market to make everyone feel good. Right now, I do believe house prices will continue to go up, so I guess that makes me a real estate bull, but remarking that prices are going up doesn’t cause me to ignore the truth about the market manipulations making it happen, nor does it prompt me to ignore the lingering issues that make this market anything but healthy.

The idea that Orange County resales are strong, well… that’s just bullshit.