April 2016 Case Shiller And What It Means Looking Forward
Yesterday morning Case-Shiller reported an average 5% gain in home prices across the country. Portland, Seattle and Denver lead the nation with gains year over year in the 10% range. Many of the 20 Cities used in by Case-Shiller, report at or above bubble peaks. By any measure this is good news for homeowners and while growing more expensive, hopeful news for home buyers. The question on everyone’s minds of course is, can it continue?
I hear talk amongst my fellow Realtors that they are concerned that values are too high. Are we in another bubble they ask? Obviously all anyone can do is guess, but some have more empirical data to guess than others. Case-Shiller bases their calculation on data from the 20 largest metropolitan statistical areas or MSA. This is a large swath of data and why so many watchers of real estate look so closely at it. Myself, I only have data on my little corner of the world, the Conejo Valley and the real estate along the Ventura/Los Angeles County line (search available inventory here). Thus my opinion reflects the unique idiosyncrasies therein.
The area I work has prices starting in the mid $200’s (a few condos) and venturing into the occasional 8 figure property.
When I run my numbers which I do monthly, I focus on the supply side. I look not at the prices but the inventory and the percent change month over month. Since in a normal year I list about 7 homes of every 10 I sell, supply is very important to me. Supply also is a great indicator on the direction of any market. In part because I’ve been tracking so long, I know for example that in fall of 2008 there were just over 1,300 homes on the market in my little valley and that 10.5% of the available homes were under contract. Last month available inventory stood at mid 500 units for sale and over 40% over the available homes were under contract. This is a picture of a healthy albeit tight market. By tight I mean not a lot of homes on the market. In fact, if we had more homes under $750, the % of homes under contract I predict, would be higher because this is the most popular price range here.
To the question of a bubble, Case-Shiller makes no such suggestion. Rather, they speak to the low interest rates environment, consumer confidence on the overall economy, low unemployment and of course, the shortage of available housing. My personal belief is that to have a bubble you have to have some type of artificial demand booster. Preceding the Great Recession, mortgages were easy to obtain with many buyers, particularly right before the crash, able to obtain a mortgage with little or no income, down or credit. Not exactly a solid foundation. In the late 1980’s, prior to that bubble burst, lots of money was coming in from Japan. Stories of Japanese investors showing up to model home complexes with a brief case filled with a couple hundred thousand dollars, are the stuff of legend. Some might point to the declining number of Chinese buyers as something to watch. I would imagine that Chinese money which has had little or no real impact on my market, would be of importance in cities like San Marino and Montebello where the Chinese population is significant. The strength of the dollar has slowed European and Russian money coming over and buying prize properties in New York, Miami, Beverly Hills and the like. Most of my colleagues from the Westside of Los Angeles report slowness in the trophy property market; the $10M+ range. My area has not experienced much of this kind of money so the impact has been minimal.
Moreover, if I were to hazard a guess, I would suggest that the majority of cities across the country have had little or no impact by foreign investors.
So back to the question of a bubble, the absence of artificial stimulus like easy money or foreign capital suggest the key component of bubble making is missing. This leaves me to conclude we are not in a bubble. Moreover, as Case-Shiller suggests, it is the economy and the availability of low interest rates that is driving this market, that and very low inventory. So what should we be watching for then as an indicator of what is yet to come? Clearly the strength of the economy is now and always will be the bell weather of the real estate market. When the economy falls into recession, housing should and will follow. This is healthy. What isn’t healthy is when the real estate market is the leader in the declining economy like it was in the two previous housing bubbles. The thing I can’t stop looking at is the simple demographics of our population. The population isn’t getting smaller. Homebuilders are still not building enough housing and certainly not enough apartments and lower price point homes. Heck, in areas like Coastal California and Ventura County in particular, (contact Tim here) slow growth ballot initiatives look to continue forever a slow-to-no development environment. The NIMBY (Not In My Back Yard) mentality keeps builders from building only furthering limited supply. Real Estate Investment Trusts (REIT’s) are holding huge numbers of homes off the potential “for sale” market by permanently or near permanently, converting their massive inventory into rental properties, further constricting supply. Baby boomers just now 70, are not selling in mass and by and large, are staying put. Another reason of constrained supply. And lastly, the Millennials are only now starting household formation and will be looking at buying homes, fueling the demand side of the housing equation for the next 15+ years, all the while in a tight inventory environment. Will Brexit bring down the US economy? Unlikely. If anything, it will only strengthen the dollar and the 10 year US Treasury which is the driving force behind mortgage rates. Strong US bonds mean low rates of return and this means even lower mortgage rates. So for as long as our economy continues to expand and unemployment remains static or declining, we should be in for a continuing climb upwards on home pricing. This is good news for would be sellers and encouraging news for would be homeowners in that the future is bright and home price appreciation, far from over.