I would make a friendly wager that most people you ask what is ahead for the California housing market will say, “It’s going to get MUCH worse! Prices are going to drop like a rock!”…especially with how the media is pouring it on right now.

However, something is changing.  Something major.  Buyers are starting to wade back into the pool in increasing numbers.

Investors, market watchers, and the news media seem to be fixated either on foreclosure rates or year-over-year data…I almost pulled my hair out Googling trying to find recent data for unsold inventory levels over the past few months.

<You see, unsold inventory is a measure of unsold houses on the market.  I think that and sales volume blow away all other economic data for good news or bad when it comes to flipping houses.  I don’t care how much they say houses are worth if no one is buying!> 

….anyway, all the news I could find is about how unsold inventory has doubled since last year and median home prices are down 27% over last year…WHO CARES!?  Yes, we know sales have plummeted and inventory has shot through the moon- I just want to know immediately when unsold inventory STOPS increasing, I want to know month-over-month, you don’t have to tell me things are worse than last year.

Also, we never stop hearing about the exploding foreclosure rates….we know, we know….(we really do know because we have tracked them closely every week for the past decade).

…but what they are not looking at is that when home prices drop to a certain level (especially in California), first time homebuyers, buyers from other states, and buyers from other countries step in to support the price level - that’s what I care about and that’s what I’m looking for- because I need to calculate how long my property will sit and how much it will depreciate while it sits…let’s take a look at the last foreclosure explosion:

In 1994, foreclosures were exploding off the charts, much like they are now.  In Southern Cal, there were 58,372 foreclosures in 1994 (more than there were in 2007 by 25%), about 56,000 in 1995, and about 70,000 in 1996 and 1997.  This is still the all time foreclosure record, around 70k.

Yet, a peculiar thing happened.  Sales activity started to pick up when houses reached right around 40% affordability (40% of the population could afford to buy a house), and

…unsold inventory actually FELL in 1996 and 1997,
the very same year record number bank foreclosures were flooding the market! 

Buyers saw the historical opportunity and entered the market - more people could afford houses and they started to take advantage of it.  Now, home values did not go up, they just sort of went sideways, even declining slightly.  But once unsold inventory got under 8-9 months of unsold houses, that was it!  That marked the beginning of the next boom.

…So it’s like a giant race, can the market dump more foreclosures on the market
 than the hungry buyers can or will buy?

What about the time before that?  In 1980 foreclosures started going up until they exploded out of control to a “then” foreclosure record of 28,500 in 1983.  Again, unsold inventory started to drop, prices went sideways for a couple years until about 1985.

When unsold inventory went under 10 months worth of houses on market, voila!…another one of the greatest boom markets in California history that went from 1985 to 1989 until guess what?…houses got unaffordable, and unsold inventory started to jump, foreclosures started to explode, and the exact same cycle repeated itself.

So, what’s my point?….my point is that unsold inventory is currently going back down!  This is HUGE!!  Do I think we are on the verge of a boom market?…no.. do I think we must be starting to bottom if buyers refuse to let prices drop substantially before gobbling it up?…absolutely. 

So, what caused me to frantically start Googling these indicators?  Because of what we are seeing with our own eyes.  8 months ago Cindy and I couldn’t find a “sold” comp to save our lives in our farm area.  Now, we are seeing over 30 houses in escrow! 

Buyers are coming back in in droves!  Check it out- here is one our farm areas, The Cove in La Quinta.  Here are all sold properties over a 3 month period from July 1 2007 to October 1 2007 - this is it, all of ‘em:

ONLY 30 SOLDS IN 3 MONTHS!!!!!!!!!
July 1, 2007 - October 1, 2007; La Quinta Cove
(I’m sorry it’s hard to read, but just look at the 5th column in blue, these are “Solds” for June to October, not many of them at all)

Now, a boom market can’t happen until that unsold inventory shrinks down to manageable levels, and we are far from that…BUT just LOOK the activity over the past two months!

Over 40 Pending Sales and over 30 Solds!…..WOW!  8 Months ago is was RARE to see more than 2 Pending Sales!
(This is only page one! …it is the exact same geographical area over the same amount of time, the last 3 months - the yellow in the 5th column says “Pending”, houses that are in escrow being sold!)

So what did I find out when I checked the unsold inventory?  Did it match what we are seeing in our own backyard?…

UNSOLD INVENTORY LEVELS
(January 2001-March 2008)(again, hard to read, but this starts with Jan 2001 to present.  Note the very bottom of unsold inventory in June 2004.  That was the beginning of the end- I could feel the market slowing in early 2005- no one believed us - for future reference in the years to come, if you see unsold inventory creeping up, start selling inventory!)

….it SURE DID!  I really don’t think the drop in inventory is a hiccup.  Now, the media won’t start to pick up on it until all of these pending sales start to close, then you will start hearing how unsold inventory is dropping.  You heard it here first.

What does this mean?  Well, for starters, sales activity is what I care about most when we flip- I would rather flip in a price neutral market where the fish are biting then a supposedly climbing market where my house sits.  This means the fish are coming back.  There is one more reason this is important, you don’t have to guess in the dark what you can sell it for! ….man, 2007 was like a giant guessing games, no “solds” on the market, how do you know if it will sell!!?  It also signals a potential bottom which means you buy and holders out there better think about starting to get in gear or you are going to miss the party.

Cindy and I sold our primary residence right in 2005 because we saw affordability hit that magical 16% (the party is always over when affordability hits 16%- it has been the last 3 cycles), and we took our equity and ran.  We have been renting for the past 2.5 years, and now I think it is time for the Squyres clan to become proud homeowners again.  Again, don’t go out and say that I said the market is coming back, that is a ways off, but you should join us in scrutinizing inventory levels.  In fact, I think I will have an entire page we will dedicate to Unsold Inventory- be on the lookout.

Be Happy And Prosper,

Kurtis