Is there a chance our home values could drop 20% to 30% like we saw in 2009?
There aren’t enough homeowners who will sell for today’s market value. If prices drop, wouldn’t there be fewer homeowners interested in selling?
Probably – unless there was a panic.
Who might panic?
Some think it would be the recent home buyers – they were the ones who paid too much, and would panic to get out while they could before losing money. But this isn’t the stock market – they bought a home for the long-term, and like we saw during the last crisis, people don’t sell just because they are underwater – or heading that way. They have to live somewhere, and they will hunker down.
It’s the long-time homeowners who could sell for substantially less, because they have a boatload of equity. If they had to dump on price to sell their home, they could do it, and still make out fine. But would they?
Will baby boomers wreck the future one more time?
We see articles claiming that 40% of boomers are broke or close, and they all can’t be renters. But for long-time owners to finally capitulate and dump on price in a panic, other things would have to happen:
- They would NEED the money.
- Somebody else would have to go first (and second and third).
- We’d go back to cyclical real estate.
- Realtors encourage dumping.
Need the money? They need to live some place too, and does anyone really want to move to Hemet? Selling the long-time homestead and renting doesn’t sound desirable either. But if older folks can cash out by selling the house and move in with their kids, they might do it – but do the kids want them? It’s more likely that the aging will stay put, and have nurses live-in or visit, if for no other reason than to avoid the capital-gains tax on profits over $500,000.
Somebody else needs to go first – and it will take a few lower sales nearby to make it obvious that it’s time to panic. Denial is more than a river in Egypt!
Previously there were real estate cycles. In the 2000s, the exotic financing stretched out the up-cycle, but then the reversion was shorter than usual too – just a couple of years. Why? THEY CHANGED THE RULES, and stopped foreclosing. This is the key fact – lenders always led the previous down cycles by dumping REOs for whatever they could get, and sucking down home values for all. But now banks don’t have to foreclose on defaulters, let alone dump houses for whatever the market will bear. Without banks being the catalyst to start the dumping, who else will do it?
Realtors could get the party started by telling sellers to dump and run. But in reality, it works in the other direction. Somewhat-desperate sellers would rather shop around for a realtor who will take the listing at their lofty price, than believe they’d have to sacrifice their hard-earned equity (not!) just to sell. Desperation is so high among realtors that it’s not hard to find one who will take a listing with a price based on comps +10%. For most agents, that’s all they’ve ever known, and they don’t read blogs.
Bottom Line: There may be a slew of negative soundbites, but unless homeowners see panic happening right around them, they won’t believe it. Real estate ignorance is bliss!
For the record, I’ve picked up another website name:
http://www.permabubbleinfo.com
Stock market is starting to unravel. This is a confidence game in stocks and Real Estate. Boomers will panic when their 401k and their real estate is tanking at the same time! FAANG stocks have lost $905,000,000,000 in market cap since August 31, 2018. Everyone is long on this stuff. In the SF Bay Area these tech workers ain’t feeling so rich anymore. Layoffs will happen in tech sector and prices will be affected.
Boomers will panic when their 401k and their real estate is tanking at the same time!
Yeah, I know, I know….
But are they going to sell their house and move to a much-lower priced area? They can’t move down the street.
I’m serious – it would need to be as far away as Hemet or similar. New doctors, new shopping, new veterinarian to take care of the dog (because they aren’t giving up the dog!), new everything, plus be further away from friends and family (grandkids) just because they see panic on TV? NFW.
Just turn the TV off instead.
I think in the ultra-affluent parts you’ll have slow liquidations, as you predict.
Here’s a bold prediction – average price now will be the average price within 10% ten years from now.
A lot of folks remain stretched – duel income couple who bought in 2013-2014 for 700k at 4% and the house is now “worth” 1M, but they haven’t been making any 401k payments banking on the house being worth 2M in 20 years. Is that still possible factoring in the debt levels and income growth? Can they afford to wait it out if one loses their job in the next downtown (which has already started)
I don’t see any demand from move-up buyers, triple your tax rate? Easier to stay put.
There’s many 1M houses – but I don’t see the job or income growth to support it. Even putting down 500k still leaves you with a payment of almost 4k a month.
Maybe I’m in the wrong line of work.
Here’s a bold prediction – average price now will be the average price within 10% ten years from now.
Very likely, and a result of Stagnant City!
The boomer liquidations will be more of a boomer fizzle-out and quietly ooze on down the street without much notice.
There’s many 1M houses – but I don’t see the job or income growth to support it.
Thankfully there are 1,700 new millionaires every day, but they won’t all come to San Diego.
We have 500 houses for sale over $2,000,000 today between La Jolla and Carlsbad, or a 8-month supply. I would expect the supply to grow to one or two years worth before long – why stop at a million…..everyone will want $2 million!
What about the life expectancy of the Boomers? They are in their 70’s now and my parents friends are dropping like flies. Cancer and other health issues. I have numerous 40 year old friends whose parents both are dead already. In 10 years half of boomers will be dead. Don’t count on their kids to come through on the inheritance and keep the place. Kids will dump it because their financial condition will not be good as a whole and most of the grandkids will be ready for a $200,000 college education. Kids will need the $. Plus government is so broke they will be taxing inheritance through the roof. Next 10 years will be interesting. Collapse of the USA? Very possible.
There are probably readers who are thinking, “Geez Jim, for a guy who has been around as long as you…..you haven’t learned much.
Real estate is cyclical, and will always revert to the mean!”
It used to be, but it’s different now.
For those who were here, you remember us discussing daily in 2010, 2011, and 2012 how there was much further to go.
They came up with this hokey national loan-modification program that was a joke, and would never work. They were just kicking the can down the street.
The default rate was sky high – higher than ever – and these foreclosures would need to work their way through the system, even if it took a few years.
I was all for it – I was a REO listing agent for BofA!
But what happened?
All of the smartest and rightest people were left behind, as people just starting buying again.
The bottom of the San Diego market? April, 2009, barely two years after the real disaster began. And it’s been nine years of up-market ever since.
Are we set up for the biggest crash ever? Only if there was a mass exodus out of California.
BTW, those 10,000 travelers in Tijuana aren’t bugging you, are they?
Kids will need the $.
Agree, but they will need a home to own too, and this might be their only chance – take over the family homestead.
The California Association of Realtors is going to put a big change on the 2020 ballot, and if it passes, it will discontinue the ability of kids and grandkids to inherit the parents’ ultra-low tax basis. It would be good if grandpa dies before then.
Collapse of the USA? Very possible.
Trump needs to get busy on defaulting on our debts.
In the next post we’ll discuss the buyer-side of the equation.
I’ve got a t-shirt around here someplace that says “I’m Not Going To Give It Away.” Glad I saved it.
There aren’t any 1br apartments for rent nearby at anywhere near the low carrying costs of my modest 1960s California Ranch home. Price for many is more about a trading medium. If you can’t move sideways or even downsize without saving a pile, why bother?
Yes, and we are getting to the point where the only buyers will be newcomers.
I wouldn’t worry about real estate until there are job losses. Though, the current market action and rising rates might be a precursor to that situation. People can make their payments with work.
On the other hand, hopefully people aren’t up to their eyeballs in adjustable rate mortgages again.
Not quite time to panic *yet* imo.
I’ve got a couple of those shirts. Some are long sleeve. Have they increased in value?
Have they increased in value?
No, still under a million! 🙂