June 2013: Perception Is 9/10’s Of The Law

Great news for property owners: Case-Shiller, S & P’s housing index, shows home values are up across the nation.  Prices in some areas like Los Angeles Metro, are up for the 15th consecutive month and up over 20% from the lows in 2011.  They indicate that inventory is up and that the market and home value appreciation may be cooling slightly. They also estimate that the inventory nationally stands at about 5 month’s supply (a 6 month supply is generally considered a balanced market), so this means it is still a seller’s market, if only slightly.  All very interesting and not particularly surprising if you are a real estate professional.

As a Realtor, I’ve watched as prices have risen, sometimes in dramatic fashion when looked at year over year.  From a month over month perspective, it is a little harder to see; it’s kind of the forest for the trees thing: looking from up close you see the trees but not the forest.  To understand what’s going you have to consider a few things.  First is the fact that we dropped so much.  The pendulum always swings too far to one side or the other before finally finding a balancing point.  Prices went down way too far (for a growing population coupled with nonexistent new construction), which by the way is why Wall Street big money jumped in, they saw this before most of the little guys.  Then as prices rose, the new price was compared to a month and year prior, so when you compare anything to the bottom, naturally the size of the spread is exacerbated.  This is what has been happening.  And what happens when the public sees these huge spreads between what was the value and what is the value today?  They jump in for fear of missing the boat.  It is said that possession is 9/10’s of the law, but I’d like to suggest to you that perception is 9/10’s of the law.  Once the public perceived that home value price declines were over, many buyers jumped in; not because interest rates were so low but because they perceived a bottom and there’s safety in numbers.  Consider a swimming pool… When everyone jumps in the water at the same time, the level of the water rises perhaps to the point of spilling over.  To some extent, this is what has happened.  As a few people begin exiting the pool, the water level comes down.  This would be both normal and healthy.  Of course should everyone leave simultaneously, the water level would go down too far, but that is not what has happened, and I don’t expect it to either.

So what do I expect?  I expect that as the market cools, inventory will rise and the seller’s market will shift to that of a more balanced market.  This is happening nationally as we get to the 5 months to 6 months inventory level.  By the way, I have always maintained that California’s balanced market “tipping point” is 3 month’s inventory.   The reason is simple, California has to be in a perpetual state of shortage with regards to supply vs. demand.  If we had the same tipping point as Houston, we would have the same prices as Houston.  That said, inventory is rising in California and after an historic, meteoric rise in values since a year ago, we are starting to see a cooling trend.  Rising interest rates are clearly the catalyst for this, but the effect rising rates will have on home values long term is probably going to be pretty small.  It is true that rising rates affect affordability but we can’t underestimate stagnant income growth and the recent run up in values as key contributors.  It is this combination of rising rates and values that will slow appreciation, not any one element alone.  The Los Angeles Times reported that at the peak of 2006, affordability in California stood at 12%.   Interest rates stood around mid 6% in 2006.  Today we are in the mid 30%’s so we have a long way to go before we hit bubble-like levels.

Shiller also reports values stand at about 20% below the peak of 2006.  So while we have recouped a big chunk of our price decline, there is still a long way to go before everyone who bought high, is whole again.   Of course California only dropped 30-35% on average so we may be closer to 15% below the peaks; less along the coast and more inland, but you get the idea.  It is interesting to me that when I look at Case-Shiller’s graph over the past 25 years and specifically over the past decade, there are two points that today’s values cross the arc of rising and subsequently falling values.  The point Shiller likes to refer to, is the earlier spot on the graph where the line crosses.  That is, where today’s values are the same as spring 2004.  But because values went up and then went down, today’s prices also cross the graph as prices were declining in late 2007.  So prices are the same today as they were in spring 2004 and fall 2007 (just imagine cutting the top off a mountain and you get the picture).  I like to point this fact out because while the market was in decline in 2007 (who knew how far away the bottom was at the time), it was still a pretty good market, just one filled with more price reductions.

Getting back to my expectations, I would suggest that we will see the rise in values year over year begin to shrink as price appreciation slows, coupled with fact that those new prices will be compared against the prior year when prices were on the rise, thus the spread will get smaller and smaller.  Going forward we should not be surprised then, to see appreciation moderate and even become flat.  The significance to this eventuality is not that flat is bad, rather how the public will respond and how the message will be conveyed by the media.  If perception really is 9/10’s of the law, then how the public views these changes will have as much impact on home values as just about anything, and that will be interesting indeed.

About Tim Freund

Tim Freund has been a licensed real estate agent/broker since 1990. He spent 14 years as a new home sales rep, ran his own boutique resale brokerage for 5 years and is currently an Estates Director for Dilbeck Estates/Christie's International Estates in Westlake Village, Ca. Tim is a Certified Residential Specialist (CRS), an Accredited Buyer's Representative (ABR), a Corporate Mobilty Specialist (CMS) and a Senior Real Estate Specialist (SRES). Tim has successfully negotiated a loan modification for a client and is a professional short sale negotiator. Tim has been married 28 years, has 2 children, is a native Californian and has been a resident of the Conejo Valley since 1991.
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