For two years now, real estate market’s gains have been slowing towards flat to only slightly up. In the East Long Beach markets of 90808 and 90815, the average home sold for $709,000 in 2017. In 2018, the average home sold for $734,000 representing a 3.5% price increase. Good news, but down from the previous years (2016-2017) gain of 7.3%. For 2019, the average home in these two zip codes is now $750,000, which is a 2.2% price increase over 2018’s average price.
I have to say that this market stability is actually kind of nice. SoCal has often alternated between explosive price appreciation and scary price declines. One fuels the other. Outsize property price gains fuel speculation. Then the dark side of this frenzy rears its ugly head and prices come back to reality.
Fortunately, this “Economic Recovery” (put int quotes intentionally), has been rather tepid. The benefit has been a somewhat skeptical buying public that has not bid up prices to unsustainable levels. So there will likely not be a bust which often accompanies a boom, because there really hasn’t been a boom.
In my previous 2019 Newsletter (https://lbre.com/2019news/) I wrote, that interest rates are the biggest threat to this current real estate market. In this article, the first quarter of 2019 showed prices up only .9% from 2018 (yes that is a small “Point 9” percent, not 9%). Today, on 10/7/19, I have re run the numbers. This represents about 8 months of closed sales, as most properties take 30+ days to close escrow. The average home in 90808 / 90815 is now $750,000 which is up 2.2% from 2018 prices. So prices are still on slow upward trend, likely the result of favorable interest rates. Further bolstering market stability are a solid volume of sales during 2019 relative to past years and a still current low inventory of homes for sale.
So I do not see the real estate market as a bubble. I have heard the term “Everything Bubble”. This relates to all assets being relatively pricey. Why is this? I believe it is because interest rates are artificially low and there has been massive monetary easing by central banks. The other day I was trying to explain, to my wife, negative interest rates on government bonds that exist in much of Europe. Due to her high level of common sense, she had a hard time wrapping her head around this concept. “You mean I lend the government money and they pay me back less?”. My response, “Yes, you heard that correctly, it’s crazy”.
So if there is a real bubble, in my opinion, it exists in Government bonds. This lack of investment return on government bonds then causes speculation in other hard assets that generate a return, like real estate. Hence the everything bubble. Just like home prices vary with interest rates, many other financial instruments vary in based upon interest rates. If interest rates rise sharply there is likely to be a repricing of most financial assets, real estate included.
However, based upon today’s interest rates, I deem current real estate prices to be fairly valued. The slow upward march in prices confirms this. So I leave this article with the same caveat as in my last article. The biggest threat to the real estate market will be higher interest rates. This was the case in late 2018, where the threat of higher rates caused the market to stall. Then the FED changed course to a return of the low rate easy money policy, which put the market back on course. Should rates stay favorable, the real estate market is likely to remain stable.
Which reminds me of a famous quote “The only constant is change”. These are indeed exciting times we live and how long prices remain in this steady state is any ones guess. The strange thing is while I should be at ease with a stable real estate market, stability feels very odd. The last 30 years has either had prices headed either up or down. Now they are stable? What has this world come to.