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August 28, 2014

Golden State Rebound

Research and Analysis

Our latest MiMi release shows that the housing recovery plods along through the first half of 2014.  One surprising trend revealed in the latest MiMi quarterly report is the robust improvement in California.

On a year over year basis, California MiMi is up 11.99%.  And all six metro areas markets we track within MiMi are up at least 8% over that time.

What's driving the rebound in the Golden State? The maps below show the indicator value and annual percentage change for each of the four indicators in June 2014 for California and the six metros MiMi tracks in California.

These maps reveal that the improvements are in three indicators: Payment-to-Income, Current on Mortgage, and Employment. The only indicator not improving on a year over year basis in California and its six metros is the Purchase Applications indicator.

Purchase Applications, Pay-to-Income, Current Mortgage and Employment Indicator
Click to enlarge

Purchase applications remain weak across California for a variety of reasons.  The California Association of Realtors (CAR) reports that in July of 2014 existing home sales are down 10% from a year earlier.

Inventory of for-sale homes is extremely tight in California with  the months' supply of for-sale homes at just 3.8 months.  While that's up from last year, it is still well below historical averages.  (See CAR's interactive data visualization).  For the past few years cash buyers have played an important role.  So with relatively low levels of home sales activity and high levels of cash buyers, the number of home sales financed with a mortgage is at very low levels.  MiMi's Purchase Indicator is picking that trend up and we are seeing it across the state.

Home prices continue to grow strong in California.  Our most recent release of the Freddie Mac House Price Index shows California house prices were up 11% from June 2013 to June 2014.  Strong price growth has more than offset moderating interest rates and modest income growth in California (about 2% annual growth in 2013 according to Moody’s Analytics).  We’re seeing these trends reflected in the Payment-to-Income indicator, which has risen 13.66% year-over-year in California in June 2014.  Price growth has been so strong that the Payment-to-Income indicator in Los Angeles (120.7) is elevated.  The last time any metro area had a Payment-to-Income indicator over 120 was early 2010 (Virginia Beach).

Though the Los Angeles Payment-to-Income indicator is currently elevated, it is still way below the peak level reached in 2006, when the indicator was 187.3.

Metro Payment Indicator
Click to enlarge

Moderating interest rates have helped to support affordability recently in Los Angeles and California, but if rates continue to increase as we are predicting, then affordability in Los Angeles will start to decline further leaving current and would-be homeowners stretching to make their mortgage payment.

The good news is that employment growth in California has supported a rapidly rising Employment Indicator.  The annual rate of job growth has outstripped the nation since early 2012. Though the pace of job growth has slowed recently, it’s still growing over 2 percentage points a year and above the national pace. That strong job growth has pushed down the unemployment rate so that it is in the In Range status for that indicator or roughly within 2 percentage points of its historic benchmark average.

Growth Rate in Nonfarm Payrolls
Click to enlarge

Rounding out the indicators we have seriously delinquent rates falling rapidly across the state.  The current on mortgage indicator remains weak, at 75.8 for the state in June, but up 16.44% from one year ago.  All of the metro areas in California we track in MiMi are showing similar double-digit percentage improvements in the current on mortgage indicator.

All together we see an improving economic picture in California and several metro areas within the state.  The overall level of activity is still weak by our reckoning, but getting much closer to a stable range of activity. Continued gains in employment and declining delinquencies should bolster local housing markets.  The weak home purchase market needs to post some improvement, but as long as inventories remain low, affordability will continue to be a challenge in many parts of the state.

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