I’m not sure I can explain why the Case-Shiller Index posted a decline for January except to say their numbers aren’t reflective of my experience. Further given the National Association of Realtors’ Pending Home Index numbers reported just a day early showing skyrocketing activity, I can only presume that Shiller’s numbers are what economists call a statistical anomaly. Either that or Shiller is just wrong.
Why do I feel that way? Simply put, our market is on fire. I looked at the numbers where I live and work, the Conejo Valley, on Monday and it confirmed my experience that buyers are buying with a fervor not seen in a long time and that the available inventory is declining. How much you ask? Allow me to preface by saying that all real estate is local so my numbers along the Los Angeles/Ventura County Line is just one market and yours may be different. Here’s just a little local historical perspective: In fall of 2007, at the worst of the financial meltdown, out local inventory stood at just over 1300 active listings and a mere 10.5% of the total, under contract. Last month that number stood at 677 total actives and 44% under contract. Because there are so many short sales under contract which are so long in closing, that 44% number is somewhat distorted. About half of those 44% pending sales were short sales (where the homeowner is selling for less than is owed and the banks or banks have to accept less than is owed in order for the transaction to close). Given that sensationally high number of pending sales, 44%, I also looked at the “regular sales” by excluding all distressed properties completely. The number of homes under contract using this approach was considerably lower, but still ran at 31% of the regular inventory. In other words, 31% of the non-distressed inventory was under contract. That’s quite a lot when compared to 10.5% using all available inventory in fall of 2007. Fast forward to Monday when the total number of active listings was down from 677 to 581 – that’s a 14% decline month over month – this, when we should begin to see an increase in inventory heading into the traditionally hot, spring selling season. The pending numbers were even more telling. Considering all properties distressed and non-distressed, a staggering 50% were under contract! That is absolutely incredible. Moreover, looking at only non-distressed properties, the number of homes under contract jumped from an already high 31% to an unbelievable 39%, an 8% rise in non-distressed pending sales month over month.
So what’s it all about Alfie? Here’s my take: the market is rebounding and Case-Shiller is wrong. Perhaps Shiller’s numbers are wrong because there was a rush of investors or low end buyers trying to close before year end and that drove the median price down; I blogged about median price sales statistics recently in case you missed it – or perhaps banks sold and closed a rash of foreclosure resales before year end and that influenced that number. An article by none other than Zillow in November 2010 hypothesized that Shiller’s Seasonally Adjusted (SA) number was disproportionately tilted towards the negative because of the decline in regular sales during the last quarter as non-distressed sellers either pulled their homes off the market for the holidays or postponed closing them until after the first of the year, thereby reducing the offset of higher priced regular sales against the lower priced distressed sales.
No matter how I look at it however, I see one thing: inventory is declining and sales are increasing. In economics we are taught about a thing called supply and demand. The concept is simple: when the supply outstrips demand the price for those goods and services have to decline to entice buyers. Conversely, when the demand exceeds the supply, prices rise. Seldom is there truly balance. I once asked another Realtor about recognizing the bottom of the market. She said, “Picture a ball being dropped. When it hits the ground, that’s the bottom, but by the time you realize the ball’s hit the ground, it’s already bouncing back up”. This is what I think is happening. The market is rebounding and that is going to put pressure on prices.
Last summer when Ben Benanke told the world he was going to hold interest rates down until 2013, I was highly critical of him. I argued that by guaranteeing low rates for the next two years, he effectively took away one of a Realtors’ best sales tools: the “fear of loss close”. We couldn’t say, “You’d better buy now before rates go up”, because everyone knew rates were not going to go up any time soon. But now I have a different spin on this. As our economy continues to improve and as we draw closer to the 2013 date, the pressure for buyers to jump in and buy is increasing. And as that deadline gets nearer, that pressure is going to become acute and prices will inevitably skyrocket. It’s starting now, albeit only as evidenced by the declining inventory, but that is the first step. In the Bay Area’s Silicon Valley for example, sellers are pulling their homes off the market or delaying listing all together because of the looming explosion of already announced hiring by Facebook, following their much anticipated IPO. The thinking is that all these new employee’s and millionaires are going to drive pricing up. For us not living in the golden valley of technology, does that mean we should follow their lead and wait to sell since prices are going to go up in our neighborhoods? That really depends on where you plan on moving after you sell. If you are planning to sell and then buy, isn’t it better to sell low and buy low rather than sell high and buy high? The answer in my opinion is definitely yes. If however, you are leaving the area or planning on renting after you sell, then there’s likely no harm in waiting for your home to go up in value before selling. Who’s right then, me or Case-Shiller? Call me cocky, but I believe I am, so hold on tight, because this ride’s about to get wild.