Today the Orange County Register's May Housing Report reported a $30,000 rise in the OC median home price from April to May 2009. The reported gain in the median price misleads many into believing the housing market has bottomed. On the contrary, a rise in the median could signal we are headed for more price declines. An understanding of how the median is calculated and the stages of foreclosures in Orange County will help to see what the future holds.
The median home price reflects the exact mid point in a line up of all the homes sold from lowest to highest. For example, consider the 7 home transactions below. The $450,000 house that falls in the middle is the median.
$250,000- $300,000- $300,000- $450,000- $450,000- $550,000- $2,000,000
The flaw with the median is if a few pricier homes outnumber the lower priced homes one month or vice versa the median can rise or fall due to the make up of homes sold. Consider the following make up home sales:
Month 1- Seven homes sell for the following prices:
$200,000- $200,000- $250,000- $250,000 - $300,000- $500,000- $500,000 Median=$250,000
Month 2 - Seven Homes sell for the following prices:
$200,000- $250,000- $250,000- $300,000- $500,000- $500,000- $500,000 Median=$300,000
In this example the median price increased 20% in one month. This can be deceptive, though, because prices could be stagnant with the cause of the increase being due to the fact that one less home sold for $200,000 and one more home sold for $500,000. Another possibility for an increase in the median, and which is the case in Orange County, is when higher priced homes decline it attracts more buyers. So in actuality prices are falling but the median is rising. This makes perfect sense if you consider the cycle of foreclosures the market is going through.
This first wave of foreclosures from 2007 to 2008 was due to sub-prime loans which correspond to the lower tiers of the market. The large price declines at the low end spurred buying among first time buyers and investors. Inventory is declining for the inexpensive homes as the foreclosures in this category begin to tamper off. The higher end homes have yet to correct as much as the entry level homes. The delay is due to the Alt-A and Option Arm loans associated with pricier homes that are just starting to go bad. 2009 is showing record foreclosures in the upper tiers of the market. From April to May Foreclosure Radar reports California foreclosure auctions are up 75% from March to May with distressed sales increasing in the upper tiers of the market. The result is increasing price declines for larger homes. The Register reports that Orange County's pricey coastal region experienced the second to highest price drop from a year ago.
The bottom line is home prices will continue to decline with the largest drops in the higher end and a flattening out of prices in the lower end. The good news is we need home prices to return to an affordable level to diversify our local economy and sustain growth. Homes need to be affordable so enough money is left to spend on other goods and services. The positive effects of affordability returning to the market can already be seen in the rebounds in consumer discretionary spending in the last few months.