Welcome to the summer SoCal housing season! This is typically the house horniest time of the year and real estate agents are getting ready for all the open houses they will be hosting for future big eyed buyers. Last year, housing lust was reaching fever levels and people were diving into bidding wars just to get into a house. The biggest purchase of your life and people were making offers sight unseen. The grunt crowd seeing investors pony up big money simply tried to follow the larger players at the table. Those larger players are exiting stage left in 2014. This summer has a different tone from the summer of 2013. Inventory is higher and slowly, buyers are starting to question current prices. Sellers are drinking their own Kool-Aid and think that a home with a hardwood floor and granite countertop suddenly adds $100,000 to the value of a place. Like purchasing a new car, the novelty of owning real estate wears off after you go through a few years of mortgage payments, maintenance, and other costs of daily living. It is interesting to hear from a few condo owners or those with very closely built homes that bought and are unhappy with their neighbors. Some are unhappy that their new neighbor has a place with multiple generations living under one roof! You make the biggest buying decision of your life and don’t vet your neighbors? Hope you enjoy that place because when you buy, you lock in for a good amount of time. The honeymoon wears off quickly but there is still plenty of “buy now or be priced out forever†perfume stinking up the atmosphere. The showdown in housing is here and as we highlighted before, like a giant ship, housing markets turn at very slow speeds.
Have you heard the good news? Today is a great time to buy in SoCal! So says the multiple flyers, e-mails, and recent phone messages I have been receiving from local real estate workers. What I find interesting is that in 2013, many were too busy to even pick up their phone let alone put out flyers as if they were searching for a lost and lonely pug. The market is slowing down dramatically because investors are pulling back. Real estate markets turn at a viciously slow pace for our instant gratification society that is hooked on news-o-tainment with multiple tickers and more split screens than NFL Sunday. It is all about entertainment and ironically this showboating has permeated into “staging†homes and putting lipstick on pigs to get house horny folks to commit to massive amounts of debt slavery. Yet budgets are being smashed as reality is now setting in and people are slowly gaining their sanity. You mean that piece of crap is $600,000? Indeed! And in some hot markets you get a juicy middle finger when it comes to upgrades and you will get a nice plate of deferred maintenance with your locked in bid. While the mania slows down, you now hear about steps to lower credit standards and going “non-prime†to goose the market again. Of course this is a great tell on an inflection point. In the mean time we are seeing inventory creeping back up and sales declining.
Housing markets have a very slow inflection point compared to say the stock market. When the stock market corrects, the reaction is nearly instantaneously and the visual cues are so apparent by thousands of flashing red signs. In housing however corrections happen in a multi-step process yet will feel like watching grass to those viewing the spectacle. With a couple of decades of watching SoCal housing, the turn in the market has followed a very similar pattern. This applies to the dip in the early 1990s to the epic crash of the 2000s. Sales tend to be the leading indicator of future change. Seeing a jump in sales volume usually will indicate price changes ahead. A sustained drop in sales usually means price adjustments ahead. Of course, this is not your typical housing market because of low inventory, investor demand, and stagnant incomes but even with these new paradigms the slow turn is appearing again. For example, we are already witnessing a ceiling on what some sellers can charge. Some are full on delusional and inventory is building back up. There are still plenty of house horny buyers but the larger trend is unmistakable. Let us look at some real estate history for SoCal to see what is in store for the market.
In most open markets a steady stream of demand will usually trigger a counter response with supply. This of course assumes open channels and healthy competition. Unfortunately this is not the case with heavily subsidized and often politically motivated real estate. The overall theme of housing in the U.S. recently has been one where more Americans are simply being priced out of the market and millions are becoming renters because of financial necessity. There is a simple formula when thinking of true household formation as it pertains to real estate: in a perfectly balanced market you would have home supply in new completions plus excess vacant properties for sale plus manufactured homes being in balance with housing demand in household formation plus demolitions plus second home purchases. Of course this assumes that builders can adequately predict future demand which they cannot. But builders are betting on many future households being renters and they are putting their money in the multi-family housing market. You would think with the big spike in prices in 2013 that builders would be rushing out to build homes to meet this demand. Yet this demand is coming from a fickle group of investors looking for deals rather than a “home†which is typical for most traditional buyers and prices are being pushed up on very low inventory. What happens if household formation doesn’t get back on track?
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