Livinincali left this comment Thursday:
If history is any guide you’d expect sales volume to start dropping before seeing any movement down on price. The sales volume numbers back in winter of late 2012, 2013 were seasonally higher than they have been and that marked the beginning of the price appreciation. Now it seems as the sales volume have fallen off a bit and price appreciation has moderated. If sales volume continues to be soft expect appreciation to be minimal this year. It seems like some segments of the market are still hot but it doesn’t feel like the frenzy of last year around this time where everything in the county was hot.
Historically, sales are the leading indicator, and prices have always followed.
Many are very committed to the fundamentals, and that in itself could help propel the actual market activity – a self-fulfilling prophecy. A loan rep in the OC named Logan has sparred with me about it on Twitter, and he has included the Trulia economist in the conversation – which is fine by me because they share the same view that history will repeat itself, regardless.
Logan is entitled to one man’s opinion. But Trulia stories get published everywhere now, and could carry considerable influence with home buyers. They are a mainstream-media source for market data, and have a responsibility to dig for the truth.
The Twitter war above got started over this article, which is now being published by media outlets everywhere:
http://www.latimes.com/business/realestate/la-fi-home-prices-20140326,0,4729002.story#axzz2xIS4jHJV
Suggesting that bubbles are forming in areas where prices rising faster than those incomes is shallow and incomplete. Let’s consider additional facts.
Do reports of fewer sales have to be contributed to stagnant incomes, un-affordability, employment, economics, DTI, etc., that will drive prices down, or are there other explanations?
1. It was predicted here six months ago that people would be comparing 2014 sales to the ultra-hot frenzy months of 2013, and claim the sky is falling. You could say that the low rates of 2013 alone were driving people to buy; now that higher-and-steady rates aren’t driving the market, sales look pretty similar to recent years – IN SPITE OF HIGHER PRICES.
Detached-Home Sales Between Jan. 1 – March 15:
| Year | ||||
| 2010 | ||||
| 2011 | ||||
| 2012 | ||||
| 2013 | ||||
| 2014 |
Take out the 2013 frenzy-driven era, and sales look similar, or better, than previous years, even though pricing is substantially higher.
2. A preliminary sign of a market top would be more homes not selling, and inventory rising. If inventory was rising steadily, AND sales were flat or declining, then a call for lower prices would be obvious. But the inventory is about the same as last year:
A big difference that is critical to the equation is that 2013 sellers were caught off-guard at rapid rebound in pricing. But the word is out now, and the 2014 sellers are VERY WELL AWARE of the improved market/higher pricing. Yet sales are strong.
3. This year’s sellers are more elective. They didn’t have to sell last year, and waited until they could get even more money this year – and they are only selling if they get their price. Yet sales are strong.
4. Every seller wants more, not less. It is the sellers’ creed – tack on a little extra to what the last guy got. Yet sales are strong.
5. If prices did falter, sellers just wouldn’t sell. The ego of a seller is powerful, and selling for any less than ‘their price’ is ‘giving it away’. Sellers will avoid that at all costs, and just cancel their listing instead. You’ll know that pricing is heading downward when you see inventory dry up further. Yet sales are strong.
6. There is absolutely NO threat of distressed sales undermining the market. Of the 1,180 NSDCC listings this year, 12 have been short-sales, and one has been an REO. Yet sales are strong – stronger than when buyers could have gotten a deal.
7. Multiple offers are everywhere. I can only speak about the north-coastal region of San Diego County, but everywhere I go, there are multiple offers – even on houses that aren’t that great. You will see bidding wars dry up before sales start to drop. Yet sales are strong.
8. We have never seen the inventory sustain at levels this low. There is an awareness and appreciation about one’s home that is superseding price – people aren’t interested in moving, no matter what they could get for it. The Z-man said yesterday that the low inventory is due to 20% of the country being underwater. Did he interview each one of those people? They could have short-sold anytime over the last few years if they wanted to move – but they didn’t.
In summary, buyers are ready, willing, and able to buy homes today – at these prices, and these mortgage rates. There would be as many – if not more – sales this year, than in 2013, if there were just more decent homes to sell at today’s prices.
Homes that aren’t selling today are the ones priced outrageously – anything close to the right price is selling. Hopefully it means there is a price ceiling – and we have arrived at the unaffordable plateau for now.
Sellers are insisting that we stay at these prices, or higher – they aren’t backing down. For now, buyers are agreeing. I haven’t seen any house sell for less than the comps this year – have you?
Until the bidding wars dry up, and then sales start to falter when compared to non-frenzy months, then prices should hang around these levels.
To sum up further – there will need to be a standoff or pause before sales and prices drop.
No standoff now – sellers are winning.
“prices are rising beyond economic reality in so cal, that’s why sales are down…”
Do inflation adjusted metrics support this conclusion?
Prices don’t have to be supported by local incomes if there are foreign buyers or big investment companies grabbing properties.
Can someone chime in with a 20-30 year chart showing wages, home prices and inflation? I suspect that current 2014 “agressive” pricing is right on the line it is supposed to be on. Should we be looking at the forest or the trees?
“Prices don’t have to be supported by local incomes if there are foreign buyers or big investment companies grabbing properties.”
I agree with this. There are tens of thousands of properties being bought up by these good folks, intended as rentals, creating a “false” housing shortage, as well as “fake” higher prices that follow. This is a new factor in figuring out the market that Trulia does NOT address. I suspect the big brains at Turlia may say it omits these important facts because they make the story too complicated for typical buyers to understand, or because their “reporters” don’t have the skill, intelligence, or resources to figure out what it all ultimately means for buyer and seller.
Hedge funders would rather they NOT be brought into the analysis mix, and since Trulia does leave them out of the plot, it makes one wonder why…
The big investor (aka hedge funds) into residential real effect is a new phenomenon and it’s currently has a positive effect on the market in terms of higher prices. The problem is that how long can it last and what are the negative effects to come when that trade unwinds.
The cap rates in desirable areas are less than 5% when you factor in taxes, maintenance and vacancy. So it’s certainly getting to that point where it doesn’t quite make sense as an investment and becomes a game of being able to sell to the greater fool in the future.
The problem is that rising interest rates create a massive negative feedback loop for this investment trade. Assume you bought a $500K investment property in cash that yields $2500/month in rent. The taxes are about $6000 per year and then you might have to factor in some vacancy and maintenance. Lets just say 1 month of rent in vacancy/maintenance so your cap rate is 2500*12=30000 – 6000 – 2500 = 21500 / 500000 = 4.3% cap rate. To buy the house with a traditional 80/20 mortgage with a 4.25% interest rate works out to about $2000/mo plus the $500 month in taxes and it’s basically break even. Costs the same to rent as to buy.
Now what happens if interest rates go back up to 7% and bank CDs are yielding close to 4%, making it more attractive and a lot easier to just buy a CD or other passive holding investment to get a 4% yield. At 7% a 400K loan is almost $2700/mo and to get a payment back around $2K the loan needs to go back to $300K. So what needs to happen for your investment to work out in a higher interest rate environment? You need large increases in wages. You need higher rents to boast the yield or you need higher wages so that people can purchase the property.
For example if you say 40% of gross income spent on housing the current $2500/mo renter/buyer should be making $75000/year. At $3200/mo which is what the loan would cost at 7% you should be making $96K which is an increase of 28% or about 5% wage inflation each year for 5 years. The problem is that as wage inflation gets higher it’s going to become really difficult to keep interest rates down.
I would speculate that wage inflation won’t be able to keep up rising interest rates in an inflationary environment. I would also speculate that a hedge fund using other peoples money might be inclined to take a principal loss on real estate investments just to be able to chase the next hot investment. The best case scenario I see for real estate is slow but stead appreciation with continued low interest rates and low single digit wage increases (2%-3%).
I don’t agree with this:
The big investor (aka hedge funds) into residential real effect is a new phenomenon and it’s currently has a positive effect on the market in terms of higher prices.
Investors aren’t the ones paying higher prices – they checked out once they couldn’t get deals.
This market is driven solely by owner-occupants, and the reason why prices exploded – they don’t care about them making sense financially, they just want a house.
I don’t think the instituional investors have been running around open houses for the last year buying North County. And I doubt they ever bought too many high end houses (read: north county coastal) since they never pencil out very well, no matter what you do. Now, I do think foreign ‘investors’ have played a roll to some extent because they are just looking for a safe place to park money. Best I can figure, they seem more than happy to make 2-3% on their money. Different motivating factor for them.
Jim, There is a lot of talk about foreigners buying the prime real estate. Do you see this? Would you mind sharing what percentage of your clients (buyers) are foreigners (i.e. don’t have US passport or a work permit)?
I’ve only had one who was a pure foreigner, and generally I don’t know how big their share is of the overall pie – I would think it is pretty small. I wouldn’t be spending millions in a country I couldn’t enter, but these are those who do.
I think the buyers with foreign ties are plentiful throughout SoCal.
The estimate I heard from someone else, who is in the know, was 70% of CV new-home buyers are Asian.
Overall, I believe foreign buyers are 4.8% of the market, with Chinese being the single largest nationality with barely over 0.5%. There may be neighborhoods where they move the needle, but…
GREAT job, this is why I keep stopping by! Man, do you work hard. I hope Buyers AND Sellers are paying attention – THIS is added value.
Thanks Doug!