The cities and the numbers leap off the page. Of the top ten markets where year-over−year list prices increased the most last month in Realtor.com’s database ─ which is based on about 1.5 million listings from 900 MLSs ─ six are in California: Santa Barbara-Santa Maria-Lompoc; San Francisco; San Jose; Sacramento; Oakland; and Riverside-San Bernardino.
Not exactly a coincidence, but impossible to explain on purely economic terms. It would be difficult, for example, to find two markets that are more dissimilar than posh Santa Barbara and gritty Oakland.
Nor are we talking small potatoes. Year-over-year increases range from 32 percent in Santa Barbara to 12.56 percent in Riverside. That’s 41 to 10 times the national median.
Last year we noticed a similar event when one state, in this case Florida, dominated the price increases. We called it the “Florida Phenomenon” which we defined by the perfect storm of economic forces that came together to put prices on fast track: price points that produced once-in-a-lifetime bargains in attractive resort destinations, large scale investor participation (both foreign and domestic), shrinking inventories due to shell-shocked sellers and high levels of negative equity. There was another factor that lit the powder keg: foreclosure processing virtually came to a halt in the wake of Robogate and a sea of litigation in the state that has yet to be sorted out. With the foreclosure spigot turn off, at least temporarily, prices for lower tiered properties zoomed.
(By way of disclosure, I am a contractor to Move, Inc. and I help to develop, interpret and publicize data from Realtor.com.)
Is something similar going on in California?
When the pattern became clear in the August data, it was easy to assume the Florida Phenomenon had simply moved west. There certainly were similarities. California, with its high housing prices, has virtually the same number of underwater homeowners as Florida, about 2 million. It also has as large number of investors, though mostly domestic, not foreign. Residential real estate investing as we know it today has its roots in the California-centered subprime crash of 2006 that ignited the national housing crash. Like Florida, California markets suffered peak-to-trough ratios well over 50 percent.
Yet Florida’s markets enjoy many similarities that don’t match up to California’s situation: large market share of resort and retirement housing, foreign investors, similar local economies.
However, there is one event both states have in common: dramatic draw downs in foreclosures resulting artificially from legislation or litigation. ForeclosureRadar reports September Notice of Defaults in California were down 20.7 percent from the prior month, and down 48.1 percent compared to last year.
“There has been speculation that the banks would rush to clear inventory before the CA Homeowner Bill of Rights takes effect in January 2013, causing an increase in the number of foreclosures. Clearly this is not the case as we continue to see the number of Foreclosure Starts decline. Notice of Trustee Sales remains basically flat, up 1.9 percent from the prior month,” reports ForeclosureRadar’s Susan Sierota.
California investors are more than accustomed to a long history of political intervention in the foreclosure marketplace in the form of moratoria, freezes and other games. If in fact the September NOD freeze is an early wake-up call illustrating how the new law will affect the marketplace, in the new year investors may find themselves hunkering down once again to survive for a double whammy: soaring prices and a trickle of supply.