The median price per square foot in the valley surged by $5 in December, ending the year at exactly $180 per square foot. This is the highest price since mid-2008. This December surge should not really come as a surprise, because December has always been the strongest month for price gains. All told, the median price per square foot in the valley has risen more than 80 percent since October 2011.
This surge in the valley’s median price was matched by similar gains in seven of the nine major cities, with only Palm Springs and the city of Coachella slightly lower in December than in November. One city — Indian Wells — had a one-month gain of 36 percent in December, but this is probably an anomaly, primarily because there are so few sales in the city and a few high-priced homes can skew the results. However, we have long been expecting a surge in the higher-end markets, so we’ll watch this carefully.
Sales Are Low, Inventories Are Rising
Home sales continue to be slow, but they no longer appear to be declining. With low sales and higher inventories, however, months of sales (inventory divided by the sales rate) remain high — just below seven months. It is important that sales increase for the continuation and broadening of this housing recovery.
For sales to increase, we need the number of qualifying home buyers to grow. A natural number of homes come to market every month, and if the number of home buyers does not grow to match this constant flow, inventories of unsold homes can build, which puts downward pressure on prices. We are not yet at a critical level, but we are getting close. Growth in home buyers at this point depends 100 percent on banks loosening their credit standards.
Home Buyer Credit Requirements Need Loosening
The average FICO score needed to get a home loan in 2014 was 744, historically a very high number. This is the sole and major barrier to full housing recovery.
In the years before the real estate bubble, FICO scores averaged 713, and this was considered safe. During the bubble years, it dropped to only 698. These may seem like small changes, but they translate to lots of people. For example, dropping FICO requirements to 713 would qualify 30 percent more home buyers and raise sales a corresponding amount. Lowering average FICO scores by even half that amount would increase home sales 15 percent, with little risk.
Bad Credit Did Not Cause the Crash
Contrary to popular belief, the financial crash wasn’t caused by bad credit but rather by the overuse of adjustable-rate mortgages (50 percent to 70 percent of all loans). Incomes were qualified against the adjustable-rate mortgages’ starting rate. When payments reset, waves of homeowners had to sell — not because of bad credit but because they never should have been offered that loan in the first place. This major loophole has now been fixed. It’s time for the banks and the government to get homeowner credit back on track.
Save the Date
Want to find out what’s happening in the valley’s high-end housing market? Attend our next Market Watch seminar, Wednesday, April 22, from 8 to 10 a.m at Villa Portofino in Palm Desert. Visit http://www.palmspringslife.com/marketwatch for more information.