My thoughts on a couple of comments left at the previous post:
From yogamom:
Is the conversation a little simpler than this? Rising inventory as a result of fewer sales will bring prices down but we have very limited inventory. The sales will have to slow considerably to see price appreciation level off. The months of inventory can be used to predict the trend. Is this indictor no longer useful?
We’ve used the ‘months’ of inventory’ as an indicator, but it was never specific enough to tell us much about the trend. Let’s advance the conversation beyond the simplistic ‘hot or cold’ or ‘up or down’ – which is about all you get from this metric.
The main beef I have with measuring inventory is that having a bunch of over-priced homes sitting around not selling doesn’t mean sellers are going to lower their price. The ‘Priced-to-Sit’ strategy has never been so popular!
From livinincali:
Why insist on “a new normal”. Isn’t that just a catchy phrase for “it’s different this time”. We’re only 2 years into this run, why does it have to be a new normal? Why can’t it just be a period of irrational behavior just like the 4-5 year run of the bubble?
I think you can make a case that it’s been irrational for the last 10-15 years around here, and probably longer. Those who like to stick to the fundamentals are pulling their hair out in disbelief over the incomes-to-prices ratio, but here we are.
There are two things that are different this time:
1. Long-Term Dominance. The common thread of every market condition is that the majority of buyers (around here) are owner-occupants buying for the long-term. Moving up or down used to be so common and easy that buyers didn’t put much thought into owning forever – but now they do.
2. Government Support. The trillions thrown at the “housing crisis” probably indicates the end of the free market for real estate in this country. From now on, every time there’s a real estate hiccup, there will be calls for Uncle Sam to save the day. Even if he doesn’t, it is probably bred into the mindset, and buyers and sellers will be acting accordingly. Not to mention how the lack of foreclosures and lower inventory have driven buyers nuts. If the government would have let natural market forces cure the crisis, the distressed markets would have lasted longer, and cause a slower, more reasonable appreciation.
The film crew is here, and hopefully I’ll have a few videos of our time together over the weekend!
I don’t feel like I have a crystal ball, but I think fundamental supply and demand matters here. The supply of houses for sale (and new houses) is pretty meager. The qualified demand for those houses is also pretty meager. As MN points out, well-priced (i.e. at rental value or to make money with a flip) sell straight away to investors, all cash, or someone lucky (pocket listing anyone?). Hint: everyone else is not really trying to sell, they’re trying to cash a lottery ticket. So prices stay totally level – great.
So the question becomes what MN asked: am I buying into a bubble? And I think the answer quite clearly is no. Jim calls it “long term” but the real answer is, without double-digit appreciation people aren’t supposed to move every year. It costs 8-9% to move and it’s not viable without prices out of control. And everyone who survived the bubble has a qualified 4% mortgage with 20% cash into the house. Eager to sell? No. Can pay for the house? Yes. So if things cool off, maybe go down a few percent? Why are you selling?
The real issue was brought out in the MN post: someone buys at the height of the bubble in Mission Beach, freaks out and sells, lost 6 figures, and if they could only have lived there 7 years instead of 2 they’d counting the cash. If you’re horizon is 2 years by all means don’t buy! But choose wisely in CA and I bet you can pick any 6 years and you’d be fine.
And finally, this does mean overall housing volume is down – not great news for people who make their living here, but it’s no cause for freaking out. The sky isn’t falling when every loan is well padded and every borrower is 45% DTI, no fake documents.
“…or someone lucky (pocket listing anyone?)”
Oh you tease!
Next you’ll be hinting at dual agency.
next thing you know you will have to pay a tax into a fund to support artificially high home prices.
Its a big club, and unfortunately most of us aren’t in it.
@avgjoe
I think we already do in the form of Mello-Roos tax. The Franchise Tax board threatens to remove that as a line item deduction, but they haven’t so far.