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California housing inventory disappears into the sunset.

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Since 2009 all cash buyers have purchased roughly one third of all Southern California home sales. This is a significant number and unlike the early 2000s, many of these buyers are looking to hold onto properties as rentals. A good portion of buying has come from larger hedge funds and an increase of foreign money has caused competition on an already low selection of homes to become more pronounced. The latest inventory report for California is telling in many ways. Many of the larger metro areas in California are seeing annual inventory drops of 50 to 70 percent. Those looking to buy are facing added competition from a variety of unlikely sources. Last year in February we set a record with the number of homes sold to absentee buyers (29.9 percent). Where is all the inventory going in California?

Inventory disappearing

One of the more telling stories is the large decline in housing inventory available for sale. The trend is apparent nationwide but more pronounced in California:

inventory of homes

Source: Redfin

If you are out in the market to buy a home and are wondering why your selection is limited, look at the above. If you were looking to buy in Sacramento, you had a 71 percent drop in inventory from the previous year. San Francisco saw a major 68 percent decline. Los Angeles came in at 61 percent. These are all nearly twice as high as the nationwide inventory drop of 33 percent.

Is this growth coming from employment growth? We’ve been adding some of the jobs that have been lost:

nonfarm employment

We had more people working in the LA/OC area back in the early 1990s than we do today. The drop in inventory is a unique one and also one that reflects the management of shadow inventory from the banks.

The perception in the market is that inventory is running out and many people have the first California housing mania etched into their memory. Last year saw a big push from those sitting on the fence. This is why we are now experiencing this:

“(PSN) Real estate agent Alan Castillo recently listed a client's fixer-upper in Granada Hills for $278,250.

It was only 1,600 square feet -- but it drew 128 offers, most of them in cash.

The final selling price, after all of 10 days on the market? $377,872.

"I was very surprised," said Castillo, the owner of Financing Realty Center Inc. in Granada Hills, who has been in the business for 20 years.

"I didn't think I'd get that many offers. This was overwhelming."

A fixer-upper listed in Granada Hills for $278,250 ended up selling for $377,872 after 128 offers came and sold in 10 days. Many areas of California are now seeing signs of a second housing bubble. We’ve documented many cases of flippers in hipster areas putting in a little HGTV work and then selling the home in a matter of days for hundreds of thousands of dollars more.

What is causing this market to inflate again? The culprits remain the same: incredibly low inventory, record low interest rates, bank management of shadow inventory, foreign money, hedge funds, and flippers. It is true that sales have increased but in reality, the surge in prices is coming more from the massive drop in inventory and low interest rate leverage:

homes sold 2012

For example, home sales in the Inland Empire fell by 14 percent year-over-year but inventory fell by 57 percent. San Francisco saw home sales drop by 8 percent year over year but inventory fell by over 60 percent. In other words the push up in prices is happening because of a massively small amount of inventory being combined with all the other forces of low rates, investors, and banks controlling distressed properties. In other words, the market is completely manipulated.

I’ve seen some people arguing that we had a surge in population but that is not a reason either:

population growth

In fact, Los Angeles County for example saw its first annual population decline since the 1990s prior to this recession hitting. This was the slowest growth in population dating back to the 1970s. Population growth is back but at a more modest pace. Certainly this is not the reason for the current major push.

The drop in inventory is incredible and is the largest I have ever seen. The increase in sales is not so dramatic but with scant inventory available, for those seeking to buy a home right now conditions are extremely competitive.

What is interesting that a leading indicator in future changes is when home sales begin to decline. Take a look at areas that are seeing annual sales drop:

Las Vegas: -14%

Inland Empire: -17%

Phoenix: -15%

These areas are massive hubs of speculation from investors. For Las Vegas and Phoenix roughly 40 to 50 percent of all sales over the last few years came from investors. What happens when prices get so high that they are no longer attractive as rentals or to flip? What happens when the large pool of uncommitted money takes off? Keep in mind that for investors, they need families to eventually buy or rent these places. At a certain point, you need the real economy to make up the slack and incomes need to rise in proportion. This drop in inventory is stunning since very few organic homes are coming on the market. In California, you have many underwater homeowners and also, many that took out HELOCs and home equity loans that wouldn’t be able to sell in this current market even after the current surge in home prices.

Home prices are still off by 36 percent from the peak in the LA/OC area:

los angeles case shiller

If you are looking to buy, gear up for low inventory, bidding wars, flippers, and investors. Any stories from prospective buyers dealing with low inventory?

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Fri, 01/25/2013 - 16:14 | 3186326 pitz
pitz's picture

What happens to rent (ie: your return) when the interest rates rise?  Probably will crater as nobody will have any income left to pay rent.  That's the problem with RE -- it is inherently highly interest rate sensitive.  Just like the debt that is often used to buy it.

Fri, 01/25/2013 - 16:19 | 3186342 LawsofPhysics
LawsofPhysics's picture

Please, rates can never go up at this point.  All sovereigns will default in an instant.

Fri, 01/25/2013 - 15:58 | 3186275 GrinandBearit
GrinandBearit's picture

The following dichotomy of events is causing another housing bubble in So Cal RE...

1. The Fed is holding interest rates at historical lows.

2. Big banks are colluding with each other and supressing inventory to help keep prices propped up. 

3. Rich Asians are trading Yuan for expensive So Cal real estate.  They don't care what the USD price is.  Asians are notorious gamblers.  Next time you're in a casino, take a look around.

4. Flippers are at it again and making a killing.

5. Real estate agents are helping by bolstering buyers confidence (ie. doing what they do best... lie their asses off).

It appears to be working... so far.

I'ts amazing to see how the naive sheeple are routinely taken advantage of... they seem to have VERY short memories. 

I sit back, take it all in and laugh at all this nonsense.

Fri, 01/25/2013 - 23:05 | 3187232 andrewp111
andrewp111's picture

The Chinese don't care what the USD price is because they are buying a bolt hole in the USA. They are buying a place to go if they are suddenly scheduled for execution.

Sat, 01/26/2013 - 00:16 | 3187313 willwork4food
willwork4food's picture

Agreed, but I would suggest they are liquidating USDs for real assets in house. ..and not just the Chinese.

Fri, 01/25/2013 - 16:54 | 3186445 Joe moneybags
Joe moneybags's picture

The threat of future inflation surely is a factor in keeping real etstate (likewise stocks and precious metals) in the strong hands of longer term investors.  In my case, I've held on to my CA properties through the shakeout, and don't intend to put them on the market, for years.  I'm a stacker, too.

Sat, 01/26/2013 - 10:30 | 3187567 GMadScientist
GMadScientist's picture

Best of luck collecting rent in the end times and thanks for having the courage to admit that you're an unrepentant multiple schmuck who didn't get out of dodge in 2007 with 3 years of lead time.

 

Fri, 01/25/2013 - 20:08 | 3186953 BigDuke6
BigDuke6's picture

Don't forget your handsome , modest and have a big schlong too

Sat, 01/26/2013 - 10:32 | 3187570 GMadScientist
GMadScientist's picture

Shame about the epilepsy and polydactylism, but you'll find that special guy!

Fri, 01/25/2013 - 16:50 | 3186428 davidsmith
davidsmith's picture

Big banks are colluding with each other and supressing inventory to help keep prices propped up. 

 

 

This isn't exactly right.  Banks have had Treasury agents in them, running the show, since the financial crisis began.  No financial institution with housing to put on the market, can do so without the permission of the U.S. Government.  Everyone--at least in CA--knows that quite well.  If you have some Chinese pulling 600K out of the trunk of a care, fine.  Otherwise, keep it off the market, or on the market at some ridiculously high price so it will never sell.

Fri, 01/25/2013 - 19:25 | 3186875 GrinandBearit
GrinandBearit's picture

That's true, but this shadow inventory tactic has really become standard practice during the last 3 years or so.  After they realized how well it works, now ALL banks do it.  Government makes the rules, but let's not forget who owns the government... Wall Street banksters. 

TPTB are desperate and will do everything they can to keep their ponzi/fiat/debt based system afloat.

Fri, 01/25/2013 - 16:32 | 3186376 aerojet
aerojet's picture

I think #3 is maybe the most prevalent--think about it:  Foreigners sitting on paper wealth looking for something tangible and being sold on real estate in a "hot" part of the US which they have never personally visited.  It's another brilliant investment scam.

Sat, 01/26/2013 - 10:37 | 3187572 GMadScientist
GMadScientist's picture

Did you know that the Chinese have an amazing game called 'Go'?

They're buying our real resources (with the proceeds from bankrolling our debt no less) in the most densely populated state in the US (think high rent factor like NY or Tokyo).

You're working hard to pay taxes so they can make money renting out the place you used to live in.

Who's getting scammed again?!

Fri, 01/25/2013 - 17:09 | 3186508 Freddie
Freddie's picture

Charlie Chan says you guy are racists.

Fri, 01/25/2013 - 22:13 | 3187147 knukles
knukles's picture

Charlie Chan was played by Warner Oland who was a Swede, based upon a character created by Earl Derr Biggers, whose momma named him that because of the size of his....
Oh, never mind. 
It would just upset most people.

Sat, 01/26/2013 - 10:40 | 3187574 GMadScientist
GMadScientist's picture

Number one son!

Fri, 01/25/2013 - 15:52 | 3186256 Spacemoose
Spacemoose's picture

this explains a lot of what we just experienced at the builder's show in vegas where we exhibited earlier this week. this was the smallest show in years and was on a shortened schedule of three days as opposed to the normal schedule of four. we spoke to about 300 builders and vendors. now a caveat, i'm a cassandra and not a pollyanna and no one has ever accused me of having an optimistic personality. that said, here are my takeaways from the show:

1. there is a boomlet in new home sales. optimism reigns supreme. suitable land is becoming hard to find. over and over i heard, it is a seller's market right now. builders are scrambling to gear up to meet demand. this may be survivor bias, but this was the most positive IBS show we have been to in years.

2. activity is picking up strongly in the northeast. (bastiat would disapprove but this may be due to hurricane sandy.)

3 california is experiencing an exodus of the middle class which is driving a substantial pickup in sales in the bordering states. one idaho builder related the story of a friend who was going to buy 10 acres and "plant californians". this may bode well for some regional distributors of new home construction materials and furnishings.

4 ironically, given the above, california builders are still doing surprisingly well with strong sales (written before i read this article).

5. demand for luxury housing within commuting distance of the forbidden city washington dc metro area remains very strong.

Fri, 01/25/2013 - 19:48 | 3186920 Squid Vicious
Squid Vicious's picture

Here in NJ, commutable to both NY and Phila. there are homes for sale everywhere, including brand new ones...no inventory shortage here, more like a buyers strike

Fri, 01/25/2013 - 16:33 | 3186378 Jena
Jena's picture

I'll pass along this news to the California architects and builders whom I know that they're doing surprisingly well.  I bet they'll be surprised.

Fri, 01/25/2013 - 16:06 | 3186306 Dan Conway
Dan Conway's picture

I would respond location, location, and location.  Here in Baltimore (very close to DC), the housing market is modestly stable but no where near the boom years.  In the counties between here and DC (like anna arundal, howard) pricing and bidding is very competitive.  But most everyone looking and buying worries about cuts to military-related spending which will hurt the area.  But this is a deep blue state and will probably do whatever it takes to keep those jobs here.  If O'Scumbag wasn't running for president, I really wonder when they would build a wall between MD and VA to keep all of those liberals that want to pay lower taxes from moving to VA. 

Fri, 01/25/2013 - 16:22 | 3186348 LawsofPhysics
LawsofPhysics's picture

"liberals that want to pay lower taxes from moving to VA. "

-----------------------------------------------

Are you high? the fucking liberals stay where the free stuff is.  The V.C. guys and wall street lobbyist already all live in VA dumbass.  Go visit Old Town you dumb fuck and find out who owns all those mansions, it is the parasitic klepto-class of "free-market" GOPers.

Fri, 01/25/2013 - 16:01 | 3186293 GrinandBearit
GrinandBearit's picture

You believe this stuff, huh? 

Builders and the NAR will say anything and everything to re-inflate the housing bubble.

It might last a little while, but all this will end BADLY.

Fri, 01/25/2013 - 17:07 | 3186493 Freddie
Freddie's picture

Oh my local realtor says it is a once in a lifetime buying opportunity.    But she has been saying that for 10+ years.  I told her to get off the sauce.

 

Sat, 01/26/2013 - 10:45 | 3187584 S5936
S5936's picture

Real estate profession is the lowest on the food chain. They make life insurance salesmen look ethical.

Sat, 01/26/2013 - 10:44 | 3187583 GMadScientist
GMadScientist's picture

Of course it's "once in a lifetime"...nobody gets ripped off that badly the same way twice!

Fri, 01/25/2013 - 19:40 | 3186906 new game
new game's picture

what is once in a lifetime is 3.5 interest.

but, we thought that at 4.5

a little fear and the ben put and the ten year at 1.25 and walla; once ina lifetime 3.0 interest.

still like the open and notorious idea.

r.e. will be messed up forever as the markets have no real signals from fundamentals to go on.

you tell me what your home will be woth two years from now.

got the cabin with 37 acres for sale right now and the home next.

be happy to rent with all my equity in gold and silver.

and i was a r.e. broker for 20 years.

get out and don't look back

rent and quit putting money into a money pit

go enjoy life...

Sat, 01/26/2013 - 10:43 | 3187581 GMadScientist
GMadScientist's picture

3.5% of 125% of trend fair value principal doesn't excite me as much as 2.5% and 95% respectively.

I took your advice when there was still a bubble. ;)

Fri, 01/25/2013 - 22:39 | 3187196 Dick Buttkiss
Dick Buttkiss's picture

So, um, where are you going when TSHTF, Rent-A-Refuge?

Fri, 01/25/2013 - 15:42 | 3186225 knukles
knukles's picture

I got a fantastic idea for an investment.
Everybody interested in buying CA property buy up everything on sale, not on sale and not for sale within a 250 mile radius of my house at 3x the highest quote or offer price....

Bingo, bango, bonus time!

Sat, 01/26/2013 - 10:47 | 3187587 GMadScientist
GMadScientist's picture

Hey Knukles, there's this wrinkled old orange dude at the door with a stack of freshly printed Benjamins to see you...mumbled something about an indecent proposal.

 

Fri, 01/25/2013 - 15:39 | 3186215 steve from virginia
steve from virginia's picture

 

 

Seems bubbley from here ... lotsa spec activity in DC metro area with high prices paid for rentals.

 

Inner cities look attractive w/ car-free future that most of are facing.

Sat, 01/26/2013 - 10:49 | 3187592 GMadScientist
GMadScientist's picture

Because carrying your groceries back to a shoebox means freedom.

Fri, 01/25/2013 - 15:30 | 3186184 pitz
pitz's picture

Just in time for another housing crash, don't ya think? 

Fri, 01/25/2013 - 15:22 | 3186158 greensnacks
greensnacks's picture

I personally know someone who hasn't paid a dime on their mortgage in 4+ years. Banks continue to hold distressed properties and they will likely be first in line to dump this time around.

Fri, 01/25/2013 - 16:50 | 3186422 waterhorse
waterhorse's picture

I have a court order for a certain TBTF to take a property back (that they really don't own - but that's a long story and the court doesn't care anyway - if a bankster says its owns something that's good enough for them) and get it out of my name, yet they keep dragging their heels on it.  They are definitely manipulating the market.  Viva la corruption!

Sat, 01/26/2013 - 02:00 | 3187390 Real Estate Geek
Real Estate Geek's picture

Don't vacate until you see the whites of the Sheriff's eyes when he shows up with the bank rep to take possession.  Seriously.

There are more and more stories about people vacating, only to have the bank not follow through and take possession.  It doesn't take long for a vacant home to get vandalized and looted of copper, etc.  As far as your municipality is concerned, it's still YOUR responsibility to maintain the property and pay the taxes.  So the poor saps who moved out later learn that they're on the hook for the City's costs (e.g. boarding up the now-broken windows; lawn cutting, etc.),   And they're still owners of a now-trashed and probably uninsured house.  And of course there's still the mortgage.

Sat, 01/26/2013 - 11:39 | 3187650 tango
tango's picture

Why move out ever?  Become a moocher for life!  Like most here, I know someone (iModesto) who has not paid in 3 years and says he won't until his value returns (never).   I asked about the bank that made the loan in good faith that he would pay it.  Naturally, he turned to the "they're all a bunch of SOBs"  (so I have no reason to live up to my obligations).  All these defaults, non-payments, under water financing makes any chart watching iffy, the swirls are so wide and weird.

Fri, 01/25/2013 - 16:11 | 3186319 GrinandBearit
GrinandBearit's picture

4 years is a long time.  I know several in So Cal who have not paid anything in 3+ years.  A few people I know tried this when the bubble first popped in 2006-07, but they got tossed after 1 year.  Now banks are doing everything to keep the inventory low.  Over the past couple years banks have figured out that taking years of no mortgage payment losses is better than having to write off the entire price of the house.  Having two sets of books is also very advantageous.

Fri, 01/25/2013 - 16:41 | 3186400 Rainman
Rainman's picture

The other compelling issue for the banks is that the REO releases must be managed to avoid destroying the equity positions on the many other mortgages they hold in the zip code. There are still about one-in-four mortgages underwater....a primary predictor of a future default.

Fri, 01/25/2013 - 15:02 | 3186112 the grateful un...
the grateful unemployed's picture

you wonder if these funds are buying up entire distressed neighborhoods ahead of another round of gentrification? now that SCOTUS has given communities more leeway to condemn property in order to raise the tax base, (eminent domain) investment groups have a green light, as long as the local planning commission supports redevelopment (although RD funds have dried up, but that may only be temporary)

overpay for a home in Granada hills, rent to some drug dealers on sec 8, wait until the house next door goes up for sale. rinse and repeat

Fri, 01/25/2013 - 17:00 | 3186475 Room 101
Room 101's picture

Looks like we need more squatters.

Adverse possession; the poor man's TARP.

Sat, 01/26/2013 - 10:51 | 3187593 GMadScientist
GMadScientist's picture

As if a million meth labs cried out...and were silenced...

Fri, 01/25/2013 - 15:31 | 3186190 SafelyGraze
SafelyGraze's picture

nank can buy up MBS for a lot longer than most people can live under the bridges

bullish!

Sat, 01/26/2013 - 10:51 | 3187594 GMadScientist
GMadScientist's picture

Can he fix unemployment so they can pay their damn rent? - The Landlord

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