Home sellers saw big profits in October
The bulk of Southland homeowners who sold their homes in October doubled their money, according to data released Tuesday, suggesting that the housing slump may not be as big of a drag on the economy as feared.
The majority of last month’s sellers in five Southern California counties owned their homes at least three years, allowing them to avoid a tax hit on huge equity gains netted during the recent housing boom, according to statistics compiled by Christopher Cagan, an economist who heads the real estate research arm of Santa Ana-based title company First American Corp.
Cagan’s research showed that homes sold in Los Angeles, Orange and San Bernardino counties more than doubled in value compared with their previous sales. The median profit earned in Orange County was $331,000. In San Bernardino County, it was $203,500, while Los Angeles County sellers raked in a median profit of $266,000, the data showed. The median is the point at which half earned more, half less.
In San Diego County, where the median profit was $243,000, home sellers earned 91% profit, while in Riverside County, they earned a median profit of $178,000, for an 80% return.
The magnitude of such gains suggests that many homeowners profited handsomely in the housing boom and may not be hurt too much if prices level off or even decline slightly.
After stimulating the state and national economy during its five-year boom, housing is now seen as the weakest part of the economy. Cutbacks in residential home building were the primary factor behind the anemic U.S. economic growth in the third quarter.
As home prices level off or decline while interest rates teeter, some economists fear that recent home buyers, especially those with adjustable-rate mortgages and little equity, will find themselves “under water” -- owing more than their homes are worth. They could be forced to sell at a loss or enter foreclosure.
But less than 6.5% of sellers last month lost money, according to Cagan, indicating that -- at least for now -- the number of homeowners in financial distress is low.
“The current slump isn’t going to have as severe an economic impact, if the vast majority of homeowners are doubling their money or more,” Cagan said.
Cagan has said that the homeowners who have risky adjustable-rate mortgages and are expected to face higher monthly payments represent a fraction of the total housing market.
His earlier research shows that about 13% of people who bought homes in Los Angeles and Orange counties from 2004 through the first half of this year using adjustable-rate mortgages are likely to default, resulting in $12 billion in losses spread over five years, out of some $223 billion in total loans.
It will be a painful scenario for these homeowners but “not something that will break the economy,” he said.
“The great bulk of the economy has done well and is going to do well,” Cagan said. “The problem is on the fringe, which gets the most attention.”
It’s not clear whether sellers’ profits earned last month were higher or lower than those earned a year ago or anytime before, because this is the first time Cagan has collected such data and he did it only for last month.
The county where the most sellers lost money was San Diego, reflecting the fact that it was the Southland’s first to see depreciating prices on a year-over-year basis. There, 6.4% of sellers failed to earn any profit. In Los Angeles County, 1.8% of sellers lost money; 2.4% did so in Orange County.
