Is This What Finally Drives Prices Down?

Dated: 04/09/2020

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After 7 years of mostly solid appreciation people are wondering if the Pandemic is what finally brings prices back down? It’s an impossible question to answer but I will offer what is likely to happen here...

Years ago, in a room full of friends and clients someone I had helped sell and buy said to me “look around this room and think of all the money you helped these people make.” It was an odd statement that I didn’t really accept, and I still don’t. The market goes up or down based on many factors and my role is simply to guide people as to what a good choice might be. Timing markets is almost impossible. It’s certainly true that for many of my past clients the value of what I helped them buy has doubled and even tripled. Even newer clients that have bought just in the last few years have likely experienced nice appreciation with their home. It’s also very likely that after the pandemic Real Estate will continue to be a solid investment over time as it always has been. For now, though, with the world in a place it’s never been we are naturally questioning what will happen with the value of our homes.
I’ve been thinking a lot about home values lately because with the Stock market losing over 25% of its value, people naturally are nervous. By far the #1 question I’ve received in the last 30 days is “what will happen to home prices when this is over?” Some think there will be a lot of pent up demand and we will resume the strong seller’s market we had in February before this really started. Many think the opposite and I’ve had more than a few buyers wonder if they can somehow time purchasing for when things “bottom out.” Another great client I’ve known 25 years asked me yesterday if he should buy a home he has waited for a long time that came available in Palm Springs…“You know, with everything that’s happening right now?” I asked if he planned to own it long term. “Yes.” Well then, “Of course!”
There are many reasons why it’s very likely that prices stay relatively stable but it’s the fact that no one knows that make it such a tricky topic. Looking back on this in a few years I certainly don’t want to publish an Over or an Under reaction to the crisis we are all dealing with as it relates to Real Estate prices. It’s potentially insensitive and at the very least embarrassing if you get it wildly wrong. I still have my New Year’s 2006 letter in which I predicted a “soft landing” with prices likely adjusting down 10% for the year not knowing that thousands of loans were phony baloney with no equity and that the inventory would double by 2007. That was the beginning of a very difficult 5 years in Real Estate for many homeowners in which at one time we hit 2,500 homes for sale in Santa Clarita and over 80% of the homes for sale by 2009 would be foreclosures or short sales. So, it’s important to acknowledge the truth (when you have it) and the truth is there are some serious financial hardships happening right now and perhaps worse some very real fear that we all share. Unemployment and loss of income is the number one reason people feel confident to buy or NOT buy a home and we all know the headlines there. Let’s look then as to what is likely to be the outcome on what for many is their most valuable asset. Not the Stock market, their home.
It's particularly painful to reflect back on just over 30 days ago. Lowest unemployment ever recorded. The highest stock market ever. Strong consumer confidence and an almost certain strong Real Estate year fueled by the lowest interest rates most of us have ever seen. Almost a “perfect storm” of a real feel good year for homeowners. In Real Estate, confidence and psychology play such an important part and to say we are now 180 degrees the opposite of that isn’t overstating it. With that said, there are some very obvious and undeniable facts that cause values to go down - or not. In short, nothing about today is like 2006-2007 which many seem to be referencing right now. Real Estate is always based on supply and demand and though demand has certainly been hit hard, supply really hasn’t and I’m not sure that it even could be to any great extent before this is over. Real estate doesn’t go up and down quickly like the Stock market. It takes many months, even years before major declines can occur. So with that in mind let’s consider the following.
Unlike 2006-2007, virtually everyone has equity in their home. In fact, it’s the highest it’s ever been. You can’t have short sales and foreclosures when people aren’t under water. Further, because lending guidelines have been so much tougher for the past 10 years the risk factor on those loans is as low as it’s ever been. Sellers can’t and won’t put their homes up for sale unless they feel they are getting their equity out as evidenced by the few homes that are for sale right now in the middle of all of this. The big issue for future values right now isn’t risky loans and no equity sellers like 2008, it’s the fact that lenders are tightening guidelines so much that well qualified buyers can’t buy right now! Some potential buyers with good jobs may have difficulty getting a loan in a few months if their income has been disrupted by the pandemic, and many have. This needs to change, or we will certainly have problems in a few months and I’m optimistic it will once the worst is over. If financial markets don’t get back to normal, that is something watch. You can’t sell homes without loans.
Next, you won’t have declining prices if sellers don’t accept low offers. Think about that. Evaluating seller and buyer mindset when this is over will be fascinating and it can be a bit of a game of chicken in which buyers ask for things and sellers do or don’t agree. Unless sellers THINK prices are going down or have some real hardship and have to accept a low offer, prices don’t really fall. It’s hard to explain but you really need hundreds of sellers across all parts of Santa Clarita to simply accept lower prices to say with accuracy “prices are falling.” In the late spring of 2018, after a strong run up in prices over the first 5 months, all of a sudden buyers just stopped making higher offers. I wrote about it at the time. Because prices and interest rates had gone up there became an expectation that prices had peaked. Between June and January 2019 buyers waited and…nothing really happened. Sellers that had to sell during that time lowered their prices, but the amount that did so didn’t really move “the market.” Many sellers at that time simply took their home off the market and came back and sold last year which was a nice steady year for values. The pause in the market turned out to be almost entirely psychological. It’s likely that after this we have sellers and buyers evaluate and when they think we are somewhat back to normal, resume as such. To think that mass sellers would just automatically cut their price is unlikely.
Last and perhaps most important, let’s look at supply and demand which is what always drives prices up or down. We certainly have less buyers looking NOW, for obvious reasons. But we don’t have a lot of sellers. Today in the Santa Clarita valley there are 329 homes available with another 79 listed on “hold”. Let’s assume all of those hit the market once we have a normal ability to view homes, get loans and resume traditional real estate activity. That is the lowest inventory we have ever had at this time, just as it was before the pandemic hit. We would need over 900 homes for sale to have a “normal” 3-month supply of homes. That’s not even considered a “buyers’ market” yet. Many buyers are excited to move forward after this ends and many are actually still buying right now though the vast majority are in the lower prices ranges where supply and demand still leads to multiple offers. There are more homes in escrow, 332, than there are for sale. This will shift a bit as homes close escrow that contracted in February and are not replaced by new escrows as we sat out most of March but don’t let those numbers in a month’s time fool you. Until we have hundreds more homes for sale there simply isn’t a mechanism to drive prices down. So, predictions? Less transactions this year for sure. Longer marketing times obviously. Big drop in prices? Hard to see that happening.
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Neal Weichel

I have been fortunate to help over 4000 families buy and sell Real estate since 1991. Real Estate has changed a lot in that time with utilizing the best of modern technology being critical today. To b....

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