As the real estate market continues to transition, recent news with regard to increases in the number of defaults in sub-prime loans and foreclosures continues to capture the attention of many industry professionals. This has led to close monitoring of real estate markets for any signs of precipitous declines in resale volume and prices across various regions of the country. During the past 12 months, the inventory of actively selling homes has nearly tripled in some regions, creating challenging real estate market conditions for sellers, as well as lenders who wish to dispose of foreclosure properties.

Real Estate Economics’ Existing Home Sales Report compares current market statistics to the same period 12 and 24 months previous, providing our clients an accurate interpretation of the near-term direction of the new home market, as existing home sales volume tends to lead new home market changes by a few months. The new home market is especially sensitive to changes in the resale market, as resale homes not only provide equity rollover that potentially flows to a new home purchase, but resale listings may also represent increased competition during times when the number of listings balloon. This report highlights various existing home market changes, lending insight to the overall near-term health and direction of the new home market.

The chart below presents year-to-year changes in the existing home sales price and price-per-square foot averages for all of Southern California, defined as Ventura, Los Angeles, Orange, San Diego, Riverside and San Bernardino Counties:

As shown above, a 7.0% increase in the average price of existing homes has been observed during the past 12 months, which is far below the gains seen 12 to 24 months previous. The average price per square foot (a better indicator of appreciation) has increased by 0.4% during the past 12 months.

Though the year-to-year average existing home price change has been marginally positive, prices are perceived as overstated, and the impact of overstated pricing has been a dramatic reduction in existing home sales volume, as shown below:

The serious decline in sales volume shown above has not been due to an economic downturn. Rather, it originated from the ‘artificial’ price inflation caused by far too many speculative purchases during the past 24 months. Once speculative buyers left the market, prices were left at a level beyond where they can be supported by the economy.

Though existing home prices have yet to recede, they soon will. As prices recede to levels that are supported by the regional economy, existing home sales volume will stabilize, which will be quickly followed by improvements in the new home market. This stabilization in existing home sales volume is expected to become apparent in select Southern California markets (mainly coastal markets), and given continued strong economic growth, market stabilization should become apparent throughout Southern California by Year 2008.

Our existing home market database is updated each month. A review of existing home market conditions and our near-term new home market forecasts for Southern California are presented in The Residential Economic Report, and can be accessed at www.RealEstateEconomics.com.

If you need assistance or technical training on how to analyze your specific market areas, please contact Jennifer Banks at (949) 502-5151 ext. 108 or at Jennifer.Banks@RealEstateEconomics.com.