Southern California home sales way off in March

March home sales in Southern California were way off from 2006 levels, with drops of 14% year-over-year (YOY) in Los Angeles and 41% in Riverside – 31% in all across California.

The California Housing Forecast believes that the drop is sales is attributable to tighter lending guidelines.

There is no doubt in my mind that the plunge in home sales is due to tighter lending guidelines. Our spring sales are just horrible. We are down 14% (LA) to 41% (Riverside), in year over year sales this March, compared to March 2006. We had stabilized our sales, with February sales fairly close to those of last year. Then in March, a sudden drop in sales. With low unemployment and buyers still out shopping, the only explanation for this sudden drop in demand is tighter lending.

This can be attributable to more stringent underwriting guidelines at the high loan-to-value (LTV) loans, including 95% and 100% loans. For example, before February, subprime borrowers (with credit scores below 620) could still qualify for 100% financing. Now Countrywide has eliminated 100% and 95% LTV products for its subprime market. I am not too familiar with other lenders, but if they followed suit (and they probably did) that would mean that a subprime borrower would now have to bring 10% in to any purchase transaction to get a loan.

With the median Orange County home price being $629,000 the down payment would need to be $63,000 to qualify for a subprime loan with Countrywide now. This effectively slams the door on subprime first-time home buyers.

I believe that along with tightening lending standards a general sense of unease is overtaking the home sales market in Orange County; I don’t have evidence of this, just anecdotal – but my neighbors are always talking about the latest sales prices in the neighborhood and seem to share a general concern that their home is losing value. If this attitude has permeated the purchase market it is probably making buyers more demanding on sellers in terms of price point; and sellers don’t want to drop their home prices because they feel their house is worth their asking price. This stand off keeps sales at bay until one gives – which in this market will definitely be the sellers.

Be sure to read the California Housing Forecast’s excellent article on the subject.