1995 was a pivotal year. Prices stopped going down. It had been 5 long years since prices peaked in 1989/90. Each year seemed to drag on with no end in sight.
The fact that prices weren’t going down anymore seemed like little consolation because the market still felt dour, unexciting. Maybe prices weren’t going down because all of the selling was done. The property owners who were left were in it for the long haul, and selling was the last thing on their mind. It wasn’t until somewhere around the middle of 1996 that the market started taking off.
The first thing that happened was that inventory in the first half of 1996 disappeared, then in the second half of 1996, bidding got more aggressive. Then in 1997 prices started to climb, but not across the board. In 1997, I remember trying to push the list price of a home in Lakewood, only to have the home sell in line with previous sales. That weekend, the Data Quick sales by zip code told the story that I had just experienced. Prices were flat in Lakewood year over year, but 90815 was up 5% and 90803 was up 10%. The wave of price increases was working its way from the beach (ie high end homes) inland.
I chalked up the Lakewood recovery stagnation to its very solid performance during the down years 1990 – 1995. Lakewood held its own during the downturn because it was a nice yet affordable neighborhood, while the high end homes got hammered. The high end had been pushed down more aggressively and had more to bounce.
This time around certain trends seem to be similar while the areas benefiting the most price wise are the quality middle price points.
Mark Twain said “History doesn’t repeat itself, but it does rhyme”. Like the quote, this recovery is similar and yet different in some ways. One similarity is that the inventory of homes is very low. There are only 344 single family homes on the market as I write this article and on average a little over 200 homes sell every month citywide. This is extremely low. If inventory is compared to sales, it would be fair to say that there is less than a two month supply of homes, and in some neighborhoods there maybe less than one months supply of homes.
Below is a history of supply and demand for the Long Beach housing market. The blue line are the number of homes for sale, while the red line are the number of sales per month. It doesn’t take a rocket scientist to see the buildup of homes for sale heading into the 2007 credit crash. This buildup was also coupled with a significant slowing in sales. This increasing inventory and slowing sales was the recipe for a sharp drop in prices. Conversely, in the last year, the inventory has continued to drop, particularly since June of last year, and sales are slightly on the rise.
While there is a relative malaise over the economy, similar to how things felt in 1995, home buyer confidence has turned the corner. I don’t have any empirical evidence to document this confidence, but anecdotally you can see the signs. It is most obvious during negotiations when there might be an appraisal problem. Over the last year, I have sold several properties for significantly more than the appraised value. Several years ago this would be a deal breaker. As soon as the buyer got wind of the low appraisal, they felt they were over paying and would walk. Buyers today have much more resolve. They are usually competing against other offers and sense that with the low rates they are paying, homes are now a solid value.
So while the housing market is finally gaining ground, it is doing so against a weak economic backdrop. This is a positive statement about the strength of the housing market, because if the housing market is showing signs of strength even with a weak overall economy, how much better might it be if the overall economy was actually healthy?
In the last recovery which started in 1997, the price increases started at the high end of the marketplace first and worked there way down. This recover is being led by the middle.
Last month, a Los Altos resident asked me what his home was worth during each of the last 5 years. I searched Los Altos homes with 1500 – 2000sf and was hit with a $30,000 jump in prices for 2012 vs 2011. Anecdotally, over the last several months, we have had multiple offers on our listings, with the goal of seeing how much we could push the price. So, it is clear, that the market is heading higher; but just how much and in what areas?
I started by comparing citywide trends, 2011 vs 2012 year to date. This yielded a rather tepid increase of only 3.22% for all homes in Long Beach. But a $13,000 price increase is certainly better than the large price drops we experienced every year since late 2007.
The trade up neighborhoods of Belmont Shore, Naples, Park Estates, Bixby Hill and University Park Estates were up only 1.74% year over year. While the entry level market of North Long Beach was essentially flat. The big winner was the neighborhood of Los Altos, which was up 5.6% versus 2011
Turn Around Timeframes
The Real Estate Market is not like the stock market. The stock market has much better liquidity and can turn on a dime. The Real Estate Market is much slower at reversing a trend, usually taking 2 years or more.
Look at the previous three reversals. When the market peaked in 1989/90, prices held pretty strong for another year at least. I do remember when the phones stopped ringing in June of 1990. Advertising calls dried up. But for one to two years, most sellers said “I will wait until next year to sell when it gets better”. Then finally the selling pressure opened up in 1992 when many potential sellers realized it wasn’t going to get better anytime soon, and bit the bullet.
1995 was the last bottom in Real Estate, but 1996 was the year where there was enough inventory to satiate demand, and it wasn’t until 1997 that prices started to rise. During the most recent market top, the market started slowing in 2005 as inventory started to build, and while prices got a little softer in 2006, it wasn’t until late 2007 that the flood gates opened.
If history is a guide, then changes in market direction take about two years to complete. My best guess is that we are already at least one year into this turnaround. So I would not be surprised if 2013 saw prices up smartly. Certainly the low inventory would indicate the likelihood of higher prices.
Extremely Low Inventory
Certainly one of the big reasons for prices bottoming and heading back up is the low inventory. Lack of inventory is a real problem. There are plenty of buyers interested in purchasing property, and in most instances there just isn’t enough supply.
One of the on going threats to the housing recovery has been the alleged “Shadow Inventory”, which can be defined as the “Pending supply of distressed property that will hit the market? I think this threat is over estimated, and locally in Long Beach, not even a real threat. From a personal prospective, I wish that this shadow inventory was a reality, not because I want prices to go down, but because there aren’t enough properties for the buyers I represent. I don’t believe this shadow inventory will ever materialize, at least as far as Long Beach is concerned. The drying up of short sale listings confirms my hypothesis.
Short Sales – Almost a Thing of the Past
Short sale listings are a good proxy for the “Shadow Inventory”. After all a short sale IS the supply of distressed properties that IS hitting the market. The number of short sales currently for sale is dwindling to the point of being a thing of the past. If homeowners no longer have to compete with these distressed properties, buyers will have less opportunity to drive a bargain.
2008 was the first year with a big drop in prices. This started the wave of short sales, as the tide of high prices receded, exposing risky high loan balances. I immediately started tracking how much of the market was being controlled by short sales, because these short sales where likely to play havoc with the market.
The seller of a short sale has no financial interest in maximizing the sales price. These home sellers would very likely let their property go for less than market value just to get out from under the payment. So tracking the sales was important. What percentage of the market were short sales, did they sell for significantly less than conventional sales? These were all questions I needed to answer, to properly advise my clients.
In 2008 when short sales first came back on the scene, I started tracking their impact. In 2008, short sales immediately became 25-30% of the active inventory of homes. During 2009 & 2010, short sales listings made up about
32% of the inventory of homes for sale. In 2011 short sale listings peaked at around 36% of total inventory.
During this period (2008 – 2011), short sales didn’t dictate market values, as in some inland empire neighborhoods, but they did greatly influence values, and not for the better.
Last year I stopped tracking short sale listings relative to the entire inventory, because they had become less of a factor. But I now see this as short sighted, because the real story is on the other side of the coin.
Right now in Long Beach, short sale listings are only 10% of the inventory. This is almost an inconsequential number. If short sales depressed the market, and if their influence is now negligible, then we are poised for a significant bounce in 2013.
I believe the underpinnings of this are already in the process. Why are there so few homes on the market? Because sellers don’t want to sell at todays prices. With short sales virtually disappearing over the course of the last year, there will not be enough inventory to satisfy demand.
It is for this reason, that I predict home prices will be significantly higher next year. How much higher will depend upon whether rates go back up from their ultra low 3.75% rate. Previously, it was my contention that the market would remain firm, but that higher prices would be kept in check by higher interest rates, and that these two opposing forces would balance out.
I am now however revising my outlook. I believe that the lack of distressed inventory will be the springboard to significantly higher prices next year, and this drying up of the short sale pool of listings will be a stronger influence than a reversal of interest rates from a 3.75% to a 5% loan. I think the market will be strong enough to handle higher rates without anymore downward pressure, and if rates do stay at 4% or less, expect demand to drive up prices into next year.
If I were a betting man, I would predict that prices will be higher next year, possibly by around 5% or maybe more if rates stay low. But then predicting the future is no easy job.
Should you have questions about your own property, we welcome your inquiry. Call John at 562 572 2296 or email – John@LBRE.com