Someone asked me if I thought the bubble will burst again. I said no.
Not in the same way that the previous two bubbles have ended – with foreclosures driving down prices across the board.
Because of these reasons:
1. The Foreclosure Process Has Been Compromised - Banks have been handing out loan mods like candy, and keeping defaulters in their houses at all costs. Of the 13,154 houses that have closed escrow this year in San Diego County, only 293 were bank-owned, or 2.2%. Only eight of those were in our La Jolla-to-Carlsbad coastal region, out of 1,730 closed sales YTD (0.5%).
How can banks reverse course, and start foreclosing again? They can’t, and instead the ‘loan-mod’ will become standard banking policy – though vague.
2. Recent Buyers Were Well-Qualified – No exotic financing this time around. Everyone who got a regular mortgage over the last six years had to qualify AND use a down payment. Thanks to recent prices increases, most have tacked on some extra equity too – they aren’t going to panic-sell now.
3. Those Who Do Panic-Sell – The kids who come to town to liquidate their parents estate will more likely sell to a flipper offering quick cash. There have always been investors working the obits, but it is a cottage industry now – and they will improve and flip for a retail price.
4. Boomer Liquidation Less Likely, and Multi-Generational is the Substitute – Many of us have discussed the fear of baby boomers needing to tap their equity, and wanting to downsize. Here is an article:
If they need money, the reverse mortgage is still around, and likely to stay. If aging boomers want to downsize, they need to leave town to have it pencil – because it’s virtually impossible to buy a smaller one-story house in the same area and still save big money.
Plus their kids – who could have afforded a decent house 2-3 years ago - are now left holding the bag. It’s better for the kids to move in with the folks and take care of them, then to buy the crapshack.
5. Sellers are Resilient – If they can’t get their price, they will wait – and agents will wait with them. It is typical for agents to take six to twelve month listings and hope that’s long enough for the sellers to eventually wear down if nobody comes along.
6. Higher Capital Gains Tax – The sweetheart 15% capital-gains tax went back up to 20% at the end of 2012 – a 33% increase! Even though they can sell for more now, investors are very reluctant – they hate paying tax! Especially when a spouse can “die correctly” and leave rental properties to the other spouse with a stepped-up tax basis.
I don’t think we’re going to see the roller-coaster ups and downs any more. It’s much more likely to feel likely a bloated, stagnant slush of goo than an exciting crash. Thankfully, agents work on commissions, otherwise sales could come to a halt!