I’m not usually quite so local in my blog. That is, I base my thoughts and opinions on what I am seeing locally but since The Real Estate Conversation is now being read from Spain to Australia, Back East to around the corner, I try to be a little more general in my perspective. Today however, I’m going to talk real local.
The sales and appreciation data that was just released, has many an economist predicting a slowdown in housing. Many of these pundits are speculating that the coming year is going to see a significant increase in inventory as investors continue their withdrawal from the buying populace and because prices and interest rates have risen, homes are less affordable and subsequently will lead to an easing of demand. Logic, they would have you believe, makes a case for flat growth and sagging prices. Nothing could be further from the truth, that is, the truth as I see it. As you know from reading my articles, I have been pounding the drum of “low inventory equals price appreciation” and no matter what color paint you want to use, with inventory low, your picture is going to be rosy. So let me give you some stats as compiled by statistician and real estate professional, Chuck Lech.
I picked this week, week 49, as my reference point. I have hard data going back as far as 2003, the first year of the ramp up which was to become the Great Housing Bubble. In the Conejo Valley at that time, you could still drive around and find new model home complexes. Those new homes are not part of this data but suffice to say, if they were, the numbers would tilt even higher by increasing the number of homes available to purchase. So what am I talking about? In the 49th week of 2003, the Conejo Valley had 372 total active listings. Is that a lot or a little you ask? It’s a little. This is why the prices were ramping up: supply was too low to meet the demand. In response to this inequity, the market did what a market does and it rose to meet that demand by gradually increasing available supply. By the 49th month of 2004, total active listings stood at 773, up more than 100%. Inventory continued to rise during the housing boom, until the bubble burst in middle 2007, so that by the 49th month in 2007, total active listings stood at 1219; a 227% increase in available homes for sale from the low of 2003.
By 2008, Lehman had collapsed and housing values were in a free fall. The easy lending standards (zero down, no asset, employment or credit verification required) that had been instrumental in boosting demand and pushing prices ever higher, had disappeared. Suddenly you had a confluence of conditions: restrictive lending policies combined with a slew of unqualified homeowners unable to meet their mortgage obligations, resulting in the first avalanche of foreclosures. This caused inventory to explode at the same time of waning demand and prices seemed in an endless downward spiral. The following years have been well documented: with little demand for houses, prices declined rapidly, home building ceased, people lost their jobs, then their homes and Wammo! the terrible economy known as The Great Recession. However, by 2011 the active available inventory for the Conejo Valley stood at 767, almost half of 2007 and we began to see the first signs of a stabilizing market. The 49th week of 2012 offered 336 total units available for purchase (less than 2003) and the table was set for a spike in appreciation. Fueled by the combination of cash investors, a real estate weary but ready-to-buy public and incredibly low interest rates, home sales and values exploded. Boom, 28% appreciation for 2013. Yet, most if not all of that appreciation actually took place from January to August. This means that for the past 5 months, prices have been flat and not coincidentally, total sales have been in decline. Herein lies the crux of the housing naysayer’s argument. Sales are down, investors aren’t participating to the same degree (fewer foreclosed and discounted homes available) and with rates and prices are higher, fewer people can qualify to buy. All this they say, will lead to a decline in the housing market. But this argument ignores the reality of low inventory.
The 49th week of 2013 has inventory standing at a modest 481 total units. The only lower totals were 2003 and 2012, both years of incredible property value appreciation. This is the crux of my argument. While demand may not be as strong as 2013 for all the a fore mentioned reasons, the rapidly improving national economy will lead to more jobs and higher wages which in turn causes greater household creation. With more people starting families and more young people moving out, the demand for housing will go up. Coupled with the lack of home building over the past 6 years, demand will once again I predict, eclipse supply. In fact according to the average over the past 35 years, California finds itself 770,000 units short of where it should be due to the lack of home building. This means a shortage of available housing in California not just now, but for years to come. This, along with property owners holding historically low interest rate mortgages (thus not motivated to sell) and the last of the underwater properties as yet still unable to sell, all adds up to shortage, shortage, shortage. And shortage equals appreciation. Thus I believe we will have a very vibrant housing market in 2014. So while it won’t be as crazy as last year and we almost certainly won’t experience double digit appreciation, we will see some and it will still be harder to buy than to sell. At least that’s how it appears where I am, the beautiful Conejo Valley and somehow I suspect, where you are too.