Palm Springs Real Estate Market Shows Signs of Life

Prices rise and inventory shrinks as Coachella Valley real estate regains its health

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For four years, the housing market in the desert has been dominated by foreclosures and short sales; at their worst, they accounted for 70 percent of all sales. Unlike equity homeowners, banks are often more interested in selling distressed property than in getting the best price. In July, the median selling price per square foot for distressed property throughout the Coachella Valley was $88, while the median price per square foot for normal sales was $145 for homes of comparable size. The continual pressure of distressed properties over the four years caused home prices to decline anywhere from 50 to 70 percent from their peaks. But this cycle is now coming to an end.

For two years now, the pool of delinquent mortgages in the valley has been shrinking as distressed property sells faster than it comes in. Calculations now indicate this pool — often called the ‘shadow inventory’ — should be back near pre-bubble levels by next summer. That means foreclosures will soon cease to be a significant factor controlling prices. The need for short sales should fall away correspondingly as prices rise.

The recent decline in distressed sales can be seen pricewise in the graph below. From Aug. 1, 2011, to Aug. 1, 2012, the median selling price per square foot of all sales (normal and distressed) rose from $105 to $120, a 14 percent gain. This price gain, the first in years, is very good news. It was forecast a year ago using a price model based on the analyses of the pools of foreclosures and delinquent mortgages rather than the economy and unemployment. That model continues to be very positive, essentially forecasting further gains of 10 to 15 percent next year as the distressed inventory continues to fall.

Just as a glut of foreclosures caused prices to drop, the decline in distressed selling will cause median and home appraisal prices to rise. Median prices no longer will be dragged down by lots of low-value sale prices, and they will move up toward the already much higher, normal sales prices. Some of this year’s large price gain, in fact, was a result of this effect.

Individual City Results

The tables below (slide show) show indexes for eight cities in the Coachella Valley. Each index is the median price for all sales over the previous 90 days. We use a 90-day time period to help “smooth out” data and reduce any statistical errors that may ensue from a too-small sampling size.

Over the last 12 months, the largest price gains were in the cities of Palm Springs, Indio, and Indian Wells. We think it’s important to note that, over the year, Indio and Palm Springs saw large declines in the percent of sales from distressed property. Palm Springs went from 37 percent of sales down to 28 percent, while Indio went from61 to 44 percent. While not the sole cause, this undoubtedly did allow the positive effect from declining distress sales to manifest more fully in the price changes of these two cities.

Vic Cooper and Mike McDonald are partners in Market Watch LLC, a nationally recognized real estate advisory company that produces The Desert Housing Report. Visit www.marketwatchllc.com.