After getting LeBron, I couldn’t go a whole week without a reference to the soon-to-be World Champion Los Angeles Lakers!
But seriously, the frenzy is over.
As the year got started, there was a weird phenomenon where the hotter listings were getting shown the first day on the market, but offers weren’t coming in for a few days.
The frenzy causes buyers to react. You’ve already lost a bidding war or two, and you’re on the edge of your seat. You’re going to get the next one, and when you see it – boom, fire an offer without thought.
Buyers are thinking now.
They are thinking about any reason NOT to buy. For those who have only been around since 2009, this is what a normal market looks like.
Buyers should be careful and cautious – YES!
Buyers shouldn’t think it’s going to be different any time soon. It won’t.
Seller optimism has never been so high, and every new listing is still shooting for the moon. There aren’t going to be many sellers who are so motivated that they are going to voluntarily give up a chunk of equity without a fight.
Back in the old days, foreclosure was a threat. Not any more – sellers who can’t or don’t want to make their payments can go months or years without paying, so those folks aren’t going to give it away.
The only place you might see an actual dumping on price is where several sellers in one neighborhood are unusually motivated and are experiencing a race to get out. But that will be extremely rare – sellers who see others dumping nearby will just give up and wait, rather than give it away.
There has been some tightening of the reverse-mortgage HUD guidelines that could prevent that option from being a lifeline. But there are private lenders working to get in the game to pick up the slack.
One of the biggest hurdles are the agents. The ones that don’t recognize the shift will just carry on like they always have. They will put unrealistic prices on listings, and then not know how to adjust, or if they get lucky and get a lower offer, they will berate and insult the buyer’s agent and blow the deal. Expect more ‘back-on-markets’, and they will be due to ‘no fault of the property’ (it was the listing agent instead).
No need for panic though, this is natural:
Christopher Lee, president and CEO of Los Angeles-based CEL & Associates, is one such person. His expertise is real estate, and he recently offered some insights into the future at a meeting of NAIOP San Diego.
For some time, he’s been predicting that we are getting close to seeing the real estate cycle to begin trending downward. We’re in the seventh inning, he’s said.
How does he know this? Real estate follows a familiar pattern, he said. He’s written on the subject in a paper called, “Real Estate Cycles: They Exist … And They Are Predictable.”
He writes: “Most real estate cycles have begun around the third year of a decade (1973, 1983, 1993, 2003) and usually end by the eighth year of that same decade (1978, 1988, 1998, 2008).”
And what year is it?
Yikes! It’s 2018!
Because of the new components (reverse mortgages and no foreclosures), the start of the next cycle may be extended and in slow motion. It should feel like Stagnant City, or be labeled a ‘plateau’ of pricing. But we’re here!
Zillow’s panel of economists is forecasting the next recession, with 66% of them predicting it will start between 4Q19 and 1Q21:
Experts in housing are predicting a recession starting in 2020, according to Zillow’s 2018 Q2 Home Price Expectations Survey; however, they anticipate monetary policy—not the housing market—as primarily responsible for the swing.
Panelists were also asked to project the pace of growth in the Zillow Home Value Index over the next five years. The average of all expectations among the 114 experts offering a prediction was for home values to end 2018 up 5.5 percent over the end of 2017, a slowdown from current annual growth of 8 percent. On average, panelists said they expected home value growth to slow further in coming years – to 4.1 percent by the end of next year, 2.9 percent in 2020, 2.6 percent in 2021 and 2.8 percent by 2022.
This guy says a housing bubble is brewing because: A) incomes aren’t going up as fast as homes prices, B) the cost of building materials has risen, and C) oil production should collapse. But if gas prices go up higher, aren’t electric or hybrid cars the answer? For home prices to fall, we would need desperate sellers who need the money so bad they will sell at any price, which sounds more like a boomer liquidation sale – which has been elusive so far, and mitigated by reverse mortgages.
Hat tip to Richard for submitting – here’s the summary:
For these reasons, I see a 3 Stage Collapse of the U.S. Housing Market. The 1st stage of the housing collapse will occur when the broader markets experience a 25-50% sell-off. At this point, the U.S. median home price will fall 40% to $200,000. As U.S. oil production continues to decline, we will enter the second stage as the U.S. median home price drops 60% to $120,000.
The 3rd stage of the U.S. Housing Collapse will occur likely by 2030 (or possibly sooner) as domestic oil production falls 50-75%. As Americans and citizens of the world understand that oil production will continue to decline, the value of stocks, bonds, and real estate will also continue to fall. Which is why I see the U.S. median home price to $40,000 in the 3rd stage of the collapse.
Of course, my timing could be off by a few years, but not decades. Either way, the notion that real estate values will always rise in the future will be DEAD for GOOD as the market is impacted negatively due to falling oil production.
More news today on the surge in home pricing, with Diana happy to point out that half of the nation’s 50 largest markets are now considered overvalued, meaning home prices are at least 10 percent higher than the long-term, sustainable level.
“The dream of homeownership continues to fade away for the average prospective buyer. Lower-priced homes are appreciating much faster than higher-priced properties, making the affordability crisis progressively worse,” said Frank Martell, president and CEO of CoreLogic. “CoreLogic’s Market Condition Indicators now indicate that half of the top 50 markets in the country are overvalued because home prices in those areas have risen so much faster than incomes. This is clearly an unsustainable condition that can only be remedied by aggressive and coordinated public/private sector actions.”
Looking ahead, the CoreLogic HPI Forecast indicates that the national home-price index is projected to continue to increase by 5.2 percent on a year-over-year basis from March 2018 to March 2019.
The concern about overvalued areas is probably coming from the other states whose prices are substantially above the last peak. Or in other words, it’s always been crazy in California, and we’re used to it! Click on image:
While this map makes it look like California is lagging behind Texas and others, we probably had a higher peak, relatively. Most of the subprime lenders with no-doc and neg-am loans were in California, and sales and prices were very bubblicious. This time it’s different!
An article based on research from a mortgage insurance company, who has a stake in the game (unlike economists). The image above shows virtually no risk of prices falling in Southern California over the next two years.
Housing bubble coming? According to one mortgage insurance company’s latest reports, there’s only a slim chance Southern California home prices will fall in the next two years.
Arch MI gauged the economic foundations of home values in 100 major metropolitan areas to determine local housing markets with “minimal” risk. Locally, Arch MI found solid performance among regional businesses and limited development of new homes as factors that should keep home prices firm.
Orange County was the riskiest market in the region — if having a 4 percent risk of a price decline in the coming two years is what you consider dicey. That compares with the county’s 28-year historical average of 25 percent chance of falling home values.
Arch MI noted Orange County’s home prices were up 12 percent in the two years ended in 2017 — only the 52nd highest among the 100 large metros studied. Per-capita homebuilding of 18 single-family homes per 10,000 residents — ranked No. 63 out of 100. Business output rose 5.2 percent last year, the 40th fastest growth nationally.
Los Angeles County had 2 percent risk of decline as 2018 started vs. a 1980-2018 average of 27 percent, according to Arch MI.
That score came as L.A. home prices surged 15.9 percent in two years — No. 32 biggest gain; per-capita homebuilding of 6 houses per 10,000 population was fourth slowest nationally; and business output rose 4.9 percent last year, No. 51 fastest.
In Riverside and San Bernardino counties, Arch MI found risk of home-price declines at 2 percent vs. a 28-year historical average of 25 percent.
Inland Empire home prices are up 15.6 percent in two years — No. 33 highest — as per-capita homebuilding of 26 per 10,000 — ranked No. 52 — while business output rose 5.5 percent last year, 29th fastest.
Arch MI doesn’t find much risk out of the region either: The nationwide risk of decline was 5 percent even after home prices rose 12.6 percent in two years. Yes, that was up from 2 percent a year ago.
“Housing markets in most cities are exceptionally strong due to a shortage of homes for sale,” Arch MI wrote. “Construction has lagged the growth in households and employment for nearly a decade. Even recent interest rate increases and higher taxes on some upper-income earners didn’t slow the market, as many had feared.”
Riskiest big markets, by Arch MI’s math? Texas and Florida!
No. 1 diciest was Houston (22 percent chance of price declines within two years) followed by San Antonio (20.3 percent); Tampa-St. Petersburg (19.2 percent); Cape Coral-Fort Myers (17.8 percent); Austin (17 percent); Fort Lauderdale (16.9 percent); and Miami (16.4 percent).
“Housing markets aren’t likely to cool until the economy slows, either from substantially higher interest rates or an unexpected economic shock,” Arch MI wrote. “Short of a war or stock market crash, housing markets could continue to surprise on the upside over the next few years.”
I sent yesterday’s post to Lawrence – and this was his reply:
Home values falling 8% to 12% were based on taking away all of the deductions- no MID and no property tax deductions.
Fortunately, MID is set at $750,000 and $10,000 for state and local tax deductions. With these in place in the final tax bill, we have not said of those price declines. Our forecast is for a 2% price gain nationwide. You, nonetheless, bring a good point that there are still many consumers thinking of what we had said earlier. We’ll work in getting the updated info out more aggressively.
I thanked him for his response.
Are potential home buyers going to bother with calculating the specific impact of tax reform, and then not buy a house if they don’t like the result? Or would they spend less on a house?
Californians are used to heavy taxation. I’m guessing they will shrug off a few thousand more in taxes if it means getting the right home.
For those who want to estimate their taxes, and are WSJ subscribers, here’s a basic calculator:
Yesterday I sent a note to the C.E.O. of the National Association of Realtors to counter the idea that home values will be going down 8% to 12% this year. I’ve been asking for two months – show us your math.
Here it is – see link below. They commissioned a study by Price Waterhouse, who used their microsimulation model to determine that demand will drop so severely that home values would tank by 8% to 12%. The study is dated May, 2017, so it’s not based on the final tax reform legislation – they used samples of what they thought it could be.
Here they note that the mortgage-interest deduction would drop by almost $800 billion when the law that was passed had NO IMPACT on the ability of existing homeowners to deduct the same mortgage-interest as they’ve been deducting all along.
They also drop the Property Tax Deduction to zero – which is wrong too.
So Lawrence and the N.A.R. are publicizing the negativity based on an old report from six to twelve months ago that used faulty assumptions.
The data point I included in my email was the bidding war in Carmel Valley this week on a tract-house listed for $1.2 million that garnered 16 offers. Apparently, the tax reform didn’t impact those buyers the way the microsimulation model expected.
Here’s the email from Lawrence:
Hello Mr. Klinge,
Our CEO shared your note with me, as it mentions my name.
Thanks for sending us the market info on the ground from San Diego. We always appreciate member feedback. We have also heard similar condition of multiple bidding and the lack of inventory in CA coastal cities and in many parts of the country. I will use your comments in my presentations about variations in the country: with upper-end market needing to cut prices in CT and IL and still multiple bidding in San Diego.
We regularly conduct a survey of Realtors® for that exact reason of gauging what is happening on the ground. The latest monthly Realtor® feedback, which we call the Realtor® Confidence Index, is attached. Getting a feel for the market from these 3,000 Realtors® greatly helps me and my staff. I am asking my staff to contact you subsequently to be part of this survey. There is an open-ended question at the end where we delve into issue not mentioned in the questionnaire and comments like yours will be helpful for us to understand what is happening on the ground and to identify “turning points” in the market.
I’m very glad to hear that the tax deductions limit on mortgage interest and property tax appear not to be impacting your market. The strong job market in San Diego is no doubt helping boost home buying confidence. That is not what we are hearing in other markets, however. Here’s a couple news interview of academics. I am attaching a link of Dr. Robert Shiller’s interview with CNBC at a recent NAR event, when he gave talk about the market condition. He, unlike most other economists, does not believe that consumers are always rational. In fact, people are more irrational then rational, in his view. Always interesting to hear his perspective and it’s here:
Most economists would be like Mark Zandi, believing consumers are mostly rational in their behavior, and has called for negative home price impact from limit real estate tax preferences. Here’s Dr. Zandi’s interview with CBS
After taking into account of current market momentum, the job market, local housing starts, interest rate forecast, we have CA home prices rising by only 1% in 2018. It would be presumptuous to imply this NAR forecast will be the reality for 2018. Indeed, CA may experience for the remainder of the year what you are seeing currently. Given that many members have asked for our views for outlook in 2018, and the below forecast is our attempt at that.
One big issue we have been working on is to boost inventory and housing supply. As such we have been working with University of California Berkeley … to boost housing supply and homeownership in a sustainable way. Here’s the paper and my presentation at the University is attached.
Based on Realtor® feedbacks, we know how critical it is to have more inventory. Therefore, my presentations have focused on this issue. I am attaching 2 powerpoint presentations that talks to the great undersupply in CA.
Housing Conference at University of California at Berkeley
Homeownership Conference at HUD, with Dr. Ben Carson presiding.
For day-to-day update on the ever changing market conditions, follow us on social media, along with other 100,000 + fellow realtors®. I am sure you will not agree on all things shown, but it is my hope, some of the info can be used in your business.
Finally, if not already, please consider becoming a major RPAC donor. Many very successful Realtors® like to give their time back to the organization by volunteering and by investing in RPAC to help protect private property rights.
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