Having recently attended the annual Palm Springs Life “market WATCH” seminar at the exquisite Toscana Country Club in Indian Wells, I was inspired not only by breathtaking views of mountains, fairways, and lakes but also a favorable forecast for the 2015 real estate climate here in our burgeoning Palm Springs Valley!
Our region’s housing markets include the Primary or Local Market, Second Home/Vacation Market, and Retiree Market. Comprised of buyers and sellers, they are driven by supply and demand. One might assume that a healthy economy yields a larger crop of buyers. This is not necessarily the case, as explained below.
When measured against past affordability, prices throughout California are historically rather high. Local home price gains continue to parallel those of the state and show an overall increase of 3.5% since December 2001. Cathedral City, Desert Hot Springs, Coachella and Indio have experienced the highest 3-year median price per square foot gain off the bottom (October 2011).
Although prices have recovered, total Valley home sales are 30% to 35% below the pre-bubble norm (1998 – 2003). Higher prices cause lower affordability which creates “price risk” resulting from too few buyers. Increasing affordability is the recent large decline in mortgage rates. Larger incomes – not more jobs – will also be key to broadening the recovery. A 1% drop in unemployment increases homebuyers only 1%!
In addition, 10% of Valley households have been unable to purchase homes due to prior foreclosures. Starting in 2015, about 2% of these will exit the 7-year foreclosure penalty box annually and return to homeowner eligibility. Consequently, a “renter to owner” switchback and a normalization of new home sales could occur.
The primary reason for low sales is that government-sponsored loan “put back” policies are compelling banks to protect themselves from loss by doing only large down payment and high FICO score loans. If average FICO scores decline as hoped, more homebuyers would qualify and a 20% to 30% increase in retiree migration could occur. Because of record household net worth, the wealth-based housing markets of Indian Wells, and sections of Rancho Mirage, Palm Springs, Palm Desert and La Quinta should continue to thrive. Tight credit is not a significant factor.
After 3 years of low inventory, numbers are beginning to rise in every Valley city. Higher inventory and lower sales are pushing the “months of supply” (city inventory divided by average 12-month sales) close to 7 months.
The 2015 market outcome depends on changes in credit conditions more than any other local, economic or financial factor. Innovative first-time homebuyer mortgage products will influence the size of a resurgence. If bank credit loosens significantly, the Valley’s median home price could rise 10%. If it doesn’t, prices should remain near current levels. The consensus view is the FED will begin raising the short-term Fed funds rate by this summer, with higher rates to follow. However, the increase is anticipated to be small, affecting short-term ARM rates minimally, if at all. 15 and 30-year mortgage rates should not be affected. In fact, they might even continue their long-term decline which has been a result of global forces.
Embark on an exciting journey to our awesome Palm Springs Valley and be inspired!
By Hilary Christiansen