Research from Sterling Pacific Financial - November 25, 2015

Last month Sterling Pacific Financial celebrated our 10 year anniversary. It was a great opportunity to reflect on where we’ve been, what we’ve been through, and look towards the future of the firm. Our self-reflection allowed us to consider the services we provide for our clients, and to think about what we can do better moving forward. Something we had discussed and wanted to put into practice was original research; a resource that would prove useful when making decisions, forecasting trends, and help to not only understand markets better but also to help educate investors as to what’s going on in the local market.

When making the real estate deals we do, it’s important to not lose sight of the forest for the trees. The data and research we’ve compiled and will continue to amass help us to better understand the big picture and outside trends that may affect the market beyond this singular deal. This foresight has served Sterling greatly in weathering the previous recession, allowing us to remain strong when several lenders were unable. This ongoing project will continue to grow, giving our investors a direct view of the pulse of the market, on a local, state, and national level, all in order to better understand what’s happening and where things are going.

The Sterling Pacific Financial Research Page

As this project continues we’ll regularly release write-ups giving our take on the data we’re collecting and releasing. This commentary by members of the Sterling staff will serve to give a new perspective on the numbers, and help to make sense of it all. For this post, we will examine The Federal Housing Finance Agency’s House Price Index for California, and explain why the oft-touted bubble isn’t all it’s made out to be.


House Price Index for California Metros

Many of you have undoubtedly heard grumblings of another bubble. As home prices reach pre-recession levels it’s an easy conclusion to make, but one that fails to take into account a number of factors. Below we see the movement in several metro areas throughout the Central Coast and Central Valley, the two main regions in which we lend. While the clutter of having so many MSA (Metropolitan Statistical Areas) makes it a little difficult to follow the course of individual markets, it does provide a very clear view of movement on the whole. The graph starts at the first quarter of 2005, and immediately after we can see the sharp rise of the HPI, with the sudden descent in 2006. Not a single market was spared though some weathered it much better than others. As the data continues, we see a much more steady rise heading into 2015. This has been a key difference between the bubble in 2006-06 and the current rise in prices. A slow and steady rise in prices is normal for a market, and while it cannot rise infinitely, this controlled and steady rise hardly the smoking gun for a new bubble.



Other Factors

Beyond simply looking at the growth of the housing market and rising prices, we can examine a few other factors that help to explain why the housing market is on much better grounds now, but one in particular stands out in its importance. CoreLogic recently reported on the significant difference in performance between legacy and current mortgages. Following the previous bubble, lending requirements tightened significantly. This has resulted in current mortgages performing much better than those issued before the crisis, and the extremely low foreclosure rate is indicative of stronger overall market health.


While some pundits may continue to wail about the real estate market and stoke fears of another bubble, the numbers simply do not back this standpoint. While tighter lending laws have made things tougher on lenders, they’ve also provided a better foundation from which to grow the housing market. And although we are reaching pre-recession levels in many markets, the growth has been at a controlled pace as opposed to the skyrocketing price jumps we saw a decade ago.

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