I was a kid when the jogging craze exploded. The year was 1977 and a new book entitled The Complete Book Of Running was taking America by storm. It advocated running as a way to stay healthy and that active people lived longer. It’s author Jim Fixx became an overnight celebrity and jogging became a part of our nation’s fabric. Unfortunately 7 years later Jim Fixx was dead of a massive heart attack to due closed arteries. It seems too much of a good thing can be bad for your health. Such is the case of today’s real estate market.
For 5 years our real estate market has been dogged by too many distressed properties, an overly restrictive lending environment and just too many homes for a population over extended and financially stressed. The result was record declines in property values the likes of which no one had ever seen. The decline in value made the cost to build greater than the market value of the homes to be sold and so builders essentially shut down. This confluence became the Great Recession and lead to the single largest loss of personal wealth in our nation’s history. Most would say, and correctly so, that the boom years of easy money was too much of a good thing, and that’s what lead us down the rabbit hole we’ve been stuck in for 5 years. However, we are now in the throes of another, “too much of a good thing,” and that is the ever declining inventory of available homes for sale.
Today’s housing rebound is kind of like a car being fueled by rocket fuel rather than gasoline and traveling at the speed of sound on our freeways is nothing short of disastrous. Consider my local market here along the Ventura/Los Angeles County line where I specialize. In looking back to the peak of the housing market sales, say around 2004, I have sales statistics that show in October of 2004 our area closed some 284 homes. At that time there were a little over 800 homes available for sale. The equates to about 2.8 months of inventory. In other words, if not no more home came on the market, at that sales rate it would take 2.8 months to sell all the available homes. The national Association of Realtors and most economists estimate that 6 months inventory is a balanced market. I however, have long espoused a slightly different number for California. My theory is this: For California to maintain the high prices it does relative to the rest of the nation, we must be in a perpetual state of short supply or else why would property in Malibu sell for $1000 square foot while a comparable home in Dallas sells for $100? Thus my balanced market number for California is a 3 month supply. Extrapolating that concept to October of 2004, a 2.8 month’s supply is a slightly leaning seller’s market. Keep in mind that this was a market that was experiencing a 1-2% monthly appreciation. Again, too much of a good thing leads to trouble.
Fast forward to today. My local market has about 370 homes for sale while we are selling about 200 homes a month (about a 1.8 month’s supply). Yes, if you go back to the crazy time of 2004 and look at that number, you are correct, it was 800 available for sale. In other words, we currently have less than half the homes to sell as we did in the Boom-boom-boom years. Bear in mind that the fall inventory is the precursor to the spring selling season and the rise in inventory during the fall months is essential to meet the demand during the selling season. Yet here we are, and from everything I read it’s roughly similar in most parts of the country, with inventory half of where we should be for this time of year. Typically in Southern California spring inventory drops by half from fall. In the slow years it dropped about 30% and at the peak it dropped by a staggering 75%. But our fall inventory is half of where we should be. So what is going to happen if our supply of available inventory does not increase and substantially increase as we move towards the spring? Well best case is that sales slow and we only see a drop of 30% which would put us at around the same inventory levels of 2003 and 2004. Yet those years saw a drop of 75% and 50% respectively from fall to spring. Thus a conservative number I’ll use is 50%, which is about average, and that puts us at somewhere around 185 homes to sell in the spring. I don’t have to tell you, though I will, that if that is the case, we are going to see appreciation like it has never been seen before. Unfortunately like Jim Fixx and running, too much of a good thing is not a good thing at all. And this, I fear is a recipe for disaster and one no one is prepared for. If there is a silver lining in all this, it’s that construction activity should eventually rise to meet the shortage of inventory by building more homes. I have been saying for months that this is going to be the engine that truly kick starts our economy, even though I am at odds with Wall Street who maintains the opposite, that this will be a construction-less recovery. So put on your track suit and grab a pair of those new fangled running shoes and hit the road, ’cause you better start training now in anticipation of the sprint we are heading into this spring. By the way, if you are thinking of selling, please call me. I need some listings and soon.