When The Economy Changes, What Happens To Real Estate?

When the economy changes, naturally the value of real estate is affected.  But how is it affected and how quickly does the change register?  By all measures the national economy is improving.  Consumers are spending more money, the declining price of oil means there is more available money in everyone’s pocket than there was just a few months ago pump and lending is a little looser than it was.  The GDP (Gross Domestic Product) or the measure of how much the economy is growing, is on the rise and more people are employed.  Real estate, like every other aspect of the U.S. economy should be improving too… but is it?  And if it is, when do we know if it is?

The obvious answer is that real estate must be going up in value if the economy is improving. (Search for homes here)  Better job security leads to more people choosing to purchasing a home over renting and more people are selling and moving up.  More people purchasing means greater demand and as demand increases on any good or service, prices rise unless supply rises at the same pace.  With real estate, new supply is limited by the number of sellers at any given time, particularly in areas where buildable land is in short supply like Southern California.  When there is distress in the economy like we had, people are often forced to sell as they move in search of employment and when personal finances dictate they must sell.  This is what happens in a down market: the number of sellers increase but demand is slack and can’t keep up with the supply so prices drop.  When times are better, selling is more by choice; the desire for new digs, a bigger place, a different layout, a better neighborhood.  With increasing prices comes increased mobility as the afore mentioned challenges resolve themselves.  This should help boost supply but simultaneously it boosts demand.

The improving economy is allowing more people to move.  Fewer homes are under water and employers have begun paying to bring in new employees, so for the first time in years corporate relocation is increasing.  Rates are at historical lows so affordability is good even after the uptick in values in 2013.  Moreover, with arrival (finally) of the Millennial generation of first time buyers, there exists an environment where real estate should be transacting at apace not seen in years.  All this adds up to increased liquidity of real estate (because it can be transacted more easily) which should in turn lead to higher prices.  What’s throwing a wrench into the works is that buyers are resisting this notion, holding on to what was seen as softness in the market this past fall.  This leaves us with a tug of war; buyers want lower prices, sellers want the prices they had a year ago.

In December I listed a beautiful home in my neighborhood and it sold quickly for full price.  That buyer recognized the value.  Last week I listed another, smaller place in the same neighborhood for $769,000.  11Most would agree it’s one of the nicest properties under $800K in our area.  Within 4 days I had 3 offers, yet each was 4% off ask.  Strange don’t you think?  I mean a brand new listing with multiple offers in week one should mean a sales price at or above ask.  None are willing to up their offer to a price close enough to asking price for my seller to agree.  How can this be?  It’s the tug of war.  The buyers are looking at comps from the fall when the market was softer as is always the case for fall, while sellers are looking forward to spring.  Spring is the buying/selling season in Southern California.  Sellers normally achieve their best appreciation this time of year.  Now the question becomes, “Who’s going to win the tug of war?”

The latest Case Shiller numbers show a tangible increase in home values at +4.5% year over year for this past month.  This is a pretty big number when looking back just one month prior when that number was in negative territory, suggesting a market in decline.   Equally if not more interesting is the seasonal component that these figures were from December, traditionally a very slow time for sales.  In other words, the market did a 180 degree turn around in December.

But hold on, does real estate actually appreciate, “Just like that?” Or does it take time to show up in our consciousness?

Because every home is different, there are many metrics that people look to, to evaluate real estate values.  An appraiser will look at backward data, recently sold homes along with a pending sale or two, to establish to a lender whether a home’s agreed sales price is justified.  A buyer will look at these same comps (Comparable Sales) to determine how much to write an offer.  The key today I believe is to look back farther than this past soft fall, all the way back to spring.  Here I believe, is where you will find the real value of property today.  (Contact Tim to get a free property assessment on your home.)  In other words I’m suggesting fall was the exception, not the rule.  ISIS, Ukraine, Ebola, pick your distraction but it’s apparent prices dipped in the fall but that they’ve already bounced back.  If you bought in fall, you got an especially good deal.  But that was yesterday, not tomorrow.

I’m no Svengali, though I play one on this blog, but with everything in the economy improving and home supply still very tight, I believe prices are going to rise.  The tug of war is happening, but I now predict the sellers are going to win this time around.  There’s just too much demand for the limited supply to satisfy hungry home shoppers.  To me it’s not so much a question of when, they have, rather how much more?  A month ago I didn’t think this was possible especially in light of our local economics where our largest employer announced major layoffs and restructuring.  The best I’d hoped for was a flat spring (no further dip) where the new listings from laid off people would come in late spring as school gets out and that would mitigate the pressure on prices that the improving economy would bring.  While I still think that is still probably the case, what I didn’t anticipate was that we would reclaim our fall drop in values and get back to last spring prices before we flatten out.  And that’s what I believe is happening.  Buyers who recognize this are going to find that they have to pay for quality.  This is the trick: recognizing value and making your offer.  If you snooze, you’ll lose, the past is past and tomorrow is here. Now the question is do you believe me?

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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