Cal Housing Market the Southern

¶ … Cal Housing Market

The Southern California housing market is mired in a prolonged slump. The average house price in Southern California declined 27% in May 2008 versus May 2007. Some experts believe that the prices will decline even further before prices are sufficiently low enough to entice buyers back into the market. There are a couple of key microeconomic factors that have contributed to this downturn on the demand side, and others on the supply side. Affecting the demand side is a reduction in cheap and easy access to credit. This access had fueled an abnormal surge in demand, contributing to rising prices which in turn fueled more demand. Also affecting demand is the increase in fuel prices, which has discourage many consumers from entering the housing market, especially in certain areas. On the supply side, the rising prices had encouraged developers to build more housing, and now this has resulted in excess housing. Also, the speculative buyers of the past few years have been attempting to sell to capture their profits. Plus, banks have foreclosed on many mortgages, and are trying to liquidate the properties quickly. These factors have increased supply just as demand was decreasing.

These two factors both impact the demand side of the economy, and there are supply-side pressures as well. In recent years, low mortgage rates and easy access to credit fueled a nationwide real estate boom. Mortgages could be had so cheaply that many people bought houses with the plan to sell them in a few years. The low rates offered at the time were not sustainable, however. As rates rose, buyers found that they were unable to meet their higher mortgage payments. In addition, this caused a supply side problem. The speculative buying had caused prices to rise to the point where many buyers could no longer afford to enter the housing market. The net effect of this was to reduce demand just as the speculative buyers needed to sell. Many buyers foreclosed, causing a glut of supply on the market as banks took title to the homes and tried to liquidate them. The recent rise in gas prices has also contributed to reduced demand. Higher gas prices are causing many buyers to live closer to work, to reduce gas price costs. Previously, low fuel prices had made it economical to live further away, but those economics no longer work. This has reduced demand in many places, especially in the outer suburbs where driving distances are far.

The types of shifts that would be consistent with the recent fall in housing prices are an increase in supply and a fall in demand. Prices rise when demand is high and supply is tight. For prices to fall typically the opposite will be true. I believe that the demand shift has been greater than the supply shift. The supply shift has occurred due to two main factors. The first is that speculative buyers found themselves unable to make their mortgage payments. They wanted to sell, which increased supply. If they were foreclosed upon, banks stepped in and would have put more downward pressure on prices as they were motivated sellers. The supply would also have increased as a result of construction. New home construction typically lags housing demand, thus new home projects would have started during the sharp rise in housing prices. The fall in demand derives from the increase in gas prices, which has altered consumer spending habits and encouraged home buyers from buying in outer suburbs. Demand has also fallen because of the lack of easy credit and the high price of homes. Much of the rise was attributable to easy credit, reasonable home prices and low fuel prices. The reversal of these factors has resulted in a steep dropoff in demand, which is causing most of the decline in prices. One exception may be the outer suburbs, however. That is the area where new supply was being created, and so those areas had a large number of new homes constructed. This gives those regions a greater supply problem than inner suburbs. That is why prices have fallen much further in the outer suburbs than they have in the inner suburbs and city. These less desirable areas have suffered steep declines, over 40% in outlying San Diego county vs. A decline of less than 10% in many beach areas.