This article originally appeared on the Irvine Housing Blog.
Hope springs eternal, and denial rules downtrodden financial markets. However, locally it appears that housing market watchers are beginning to accept that house prices will not be going up soon.
There’s gonna come a time when the scene’ll seem less sunny
It’ll probably get druggy and the kids’ll seem too skinny
There’s gonna come a time when she’s gonna have to go
With whoever’s gonna get her the highest
The Hold Steady — Stay Positive
No matter how bad things get, some people just choose to stay positive. It is a healthy way to manage one’s emotions, but it is an incredibly poor way to manage one’s finances.
BY JONATHAN LANSNER — Sept. 30, 2010
Perhaps “flat” is the “new normal.”
It’s hard to find anybody who’s really excited about housing’s short-run outlook as the real estate market seems to be having some difficulty adjusting to homebuying without federal tax incentives.
LOL! Having some difficulties? If by difficulties he means that New Home Sales Plummet with Expiration of Tax Credits and Existing-Home Sales Sink to Lowest Level Ever Recorded, then yes, the market is having some difficulties.
Take housing tracker Veros from Santa Ana. They project Orange County home prices will rise 2.2 percent in the year ended September 2011.
Eric Fox, Veros’ economic modeling VP, says “affordability is the driver” that will keep local housing prices up. Previously, Veros’ forecast that home price will be up 1.8 percent in the year ending June 2011.
To Fox, local home affordability – a mix of depressed values and cheap mortgage rates — will largely offset the area’s relatively weak job market. Fox also think rent-seeking investors will play a big role in supporting local home prices, as these cash-rich buyers won’t have the tall hurdles — overall angst or loan qualification challenges — that currently chill some buyers seeking their own shelter.
Nearly every market myth in one brief statement. I can’t say Mr. Fox has earned much of my respect.
First, market values are not depressed. We are recovering from a housing bubble, and prices are still artificially elevated not depressed.
Second, cheap mortgage rates are not offsetting the weak job market. Low Interest Rates Are Not Clearing the Market Inventory. The banking cartel’s withholding of inventory is what is offsetting the weak job market. Demand is very low as sales volumes are well off historic norms. Only the lack of inventory is preventing a total price collapse.
Third, rent-seeking investors are not attracted to Orange County’s housing market. Why would anyone accept a 4% return in Orange County when they can get an 7% return in Riverside County or a 9% return in Las Vegas? Only foolish speculators who believe rapid appreciation will return to Orange County are buying at current valuations.
Forth, foreign cash buyers can not, will not, and are not saving the Orange County housing market. This dumb idea is brought up periodically, and it is crazy. Perhaps FCBs have some small impact in some small neighborhoods and isolated enclaves where the activities of a few buyers can make a difference, but the OC housing market is much too large, and the number of FCBs is much too small to stem the tide.
That outlook for essentially flat pricing fits a pattern we’ve seen lately: Home-price gains – at least what’s reported in various indexes — have been shrinking.
The latest reading of the price pulse in Los Angeles and Orange counties in July’s Standard & Poor’s/Case-Shiller housing indexes:
- On a month-to-month basis, LA/OC prices rose 0.35 percent in July — fourth consecutive gain but the smallest since a drop in March.
- On a year-over-year basis, LA/OC home prices rose 7.5 percent in July — seventh consecutive gain but also the smallest since March.
- Sobering thought: Even with the recent gains, LA/OC prices by this measure are 35.6 percent below the 2006 peak.
Be prepared to watch the Case-Shiller index roll over in the coming months. We all know that the market hit some severe “turbulence” in May when the tax credits expired. Since the Case-Shiller is both a moving average and delayed by three months, we are only now seeing the impact of the sudden drop in demand and pricing. Nobody watching the market since May has reported increasing demand or rising prices. Going into the fall and winter with elevated inventory, these numbers can only get worse.
… HARD SELL …
And it’s not just pricing, as buyers pull back in many parts of the market
In the 22 business days ending September 8, DataQuick found 52 of 83 O.C. ZIPs had year-over-year sales declines as overall countywide sales were off 14.9 percent vs. a year ago. The current sales pace is 69 percent of the average 3,597 homes sold per month in the 20 years ended in 2009.
Statewide, California Association of Realtors said August’s homebuying was down 14.9 percent from a year ago. And what sells takes more effort: CAR’s unsold inventory index for single-family resales in August was 6.1 months (to deplete the supply of homes on the market at the current sales rate) vs. 4.6 months a year earlier.
These sales numbers are a catastrophe. If the majority of the market were not tied up by banks who refuse to sell, prices would crater.
As expected, homeowners sense house shoppers’ change of heart.
According to surveying by online real estate trackers HomeGain, 15 percent of Californian homeowners predicted this summer that their home’s value will rise in the next six months — slightly less than half of the 34 percent who foresaw appreciation just three months earlier in the spring. Nationwide, the drop off wasn’t as steep as 18 percent expected appreciation in the most recent survey vs. 27 percent in the second quarter.
But here’s what really noteworthy: when just 15 percent of Californian homeowners see appreciation — and that makes our state a national leader in property optimism!
That is a very low number. Homeowners are the group most likely to have a rosy outlook for appreciation because they all want home prices to go up. Position bias is strongest among those who stand to make large amounts of money if a position goes in their favor.
HomeGain’s third-quarter survey placed California in a tie for 9th place ranking among the states (along with Maryland) for the share of folks predicting upcoming appreciation. (Back in the second quarter, optimism was tied for 7th with New York and Colorado!)
California real estate agents, who were also polled, had equally and curiously “high” relative optimism — as 14 percent told HomeGain pollsters that they foresaw appreciation within six months. That tied us for the 6th most upbeat real estate pros among the states (withTexas.)
I am shocked! realtors think house prices are going up? Actually, I am surprised that so few (only 14%) do believe house prices are going up. Of course, all of them are telling their buyer-clients that house prices are going up in order to manipulate them into buying, but secretly only a small handful truly believe prices will rise. The duplicity is disgusting.
Perhaps, growing Californian pessimism comes from what buyers (or the lack thereof) are saying, as pollsters found agents saying 25 percent of California homebuyers currently believe homes are overpriced by 10 percent or more vs. 13 percent in the second quarter
… BUT NO ‘DOUBLE DIP’?
Still, the market watchers at Beacon Economics don’t think the current malaise will turn to anything ugly.
“Although home prices are not going to rocket back to pre-recession peaks anytime soon, fears of a significant double dip in home prices are likely exaggerated,” Beacon economists wrote in a recent forecast. “The fundamental drivers of long-term home prices paint a picture of a housing market that has emerged from collapse healthier. Home prices have largely stabilized despite a small drop in the wake of falling sales; the price of an existing home is still more than 16% above the April 2009 trough. Additionally, measures of affordability show that California appears poised for slow but steady growth once the labor markets have healed. At roughly 6-times per capita income in the state, home prices are beginning to make sense again. As income continues to grow at a moderate pace, home prices will likely follow suit at a more tepid but sustainable pace.”
Six-times income is now a good measure of affordability? It is amazing how super-low interest rates distort reality. Ordinarily, I embrace most of what I read from Chris Thornburg and Beacon Economics, but the above statement reads a bit like market cheerleading. I’m sure many loan owners read that will a small sense of relief. Denial requires constant reinforcement.
Flat is not where it’s at
House prices are going to head lower in Orange County. When the bulls start to accept that prices may actually stay flat, it becomes pretty obvious that prices will head lower. We are not witnessing the despair after the crash which signals the bottom, we are witnessing the acceptance that comes before capitulation. Expect to see house prices grind lower for the next two or three years with greater declines at the high end than at the low end. Afterward, expect tepid appreciation until the overhang of distressed inventory is pushed through the system. The bear rally engineered by the Federal Reserve is over. The second leg down — a less steep and more controlled decline — is about to begin.