We all know the story of Goldilocks and The Three Bears. Tasting the Bear’s 3 bowls of porridge Goldilocks remarked, “This one is too hot.” Then, “This one is too cold,” and finally, “But this one is just right.” So goes the story of Golidlocks and the 3 Real Estate Markets. In 2006 the real estate market was too hot. Fueled by easy lending practices that allowed anyone to obtain a mortgage and despite an average a 30 mortgage interest rate of 6.41%, homebuyers were abundant. That market was too hot and we saw what happened then. Nearly a decade of decline. In March 2009 the DOW Jones Industrial Average stood at 6,500 and home prices were down an average of 30%. No one wanted to buy. It was like trying to catch the falling knife as home values plummeted. If you were brave and had the money, you could pick up a fantastic property for a song. That market was too cold. To quote Warren Buffet, a smart investor should “Buy when there’s blood in the street.” Heck, the market was a bloody Mississippi River after Katrina. Which brings us to today’s market and this one is just right.
I have to admit, I’m loving this real estate market. (search for listings here) Every Realtor is. It’s strong but not crazy strong, though I’ve never been busier. Buyers are abundant so sales volume is up. Prices are rising, but they aren’t skyrocketing and inventory is gradually rising to meet the increasing demand. Yes, this market is just right from my vantage point.
To understand any real estate market, you have to consider first and foremost, the state of the national economy. We all see the news on unemployment, more people are working. Unemployment rates are the lowest since right before the real estate market collapse. So the winds of an improving economy are at our backs, propelling us forward. We also know the Federal Reserve has kept interest rates at all-time lows, though they are no longer “priming the pump” through their bond buying policy they called Quantitative Easing. So we have an improving economy and low rates. We also have more confidence. Confidence is paramount when it comes to real estate because as we saw in 2009, no one is buying if they aren’t confident they will be employed or be able to afford a mortgage. Low unemployment. Low rates. Consumer confidence. We also have improving inventory and increasing demand due to changing demographics: The Millennials have arrived; albeit in drips and drabs and largely confined to urban centers. Yes this market is just about right.
If you’re a buyer today, you are probably seeing that prices are rising just a bit. You’ll notice in our area along the Los Angeles/Ventura County line, you are having to pay about 2-3% more than you might have paid 4 months ago. Solid appreciation. This is different from spring 2013 when the market jumped 10-15% in a matter of 6 months. No, this is nice and easy. Constrained by naggingly slow wage inflation, prices have not been able to really jump like most sellers would like. We just aren’t making “that much” more money to buy “that much” more house.
If you are a prospective seller, you are seeing your neighbor sell their home for more than it would have a few months ago, but not quite where you might want it to be for you to become a seller. So you wait. Plus even if you wanted to sell, you don’t see many homes that you like better than the one you own now. Inventory is better but it’s still not great. Where are all the new homes you wonder? Naturally I can only comment on my immediate market. I’m not selling everywhere, but I suspect most coastal California communities are in the same boat. No new homes in the areas people want to move so inventory is limited to only those homes that people want to sell. This is why we are seeing appreciation. The standoff between buyers and sellers that I’ve written about in recent months is finally being won by the sellers, just as I predicted. It was only a matter of time with conditions so ripe for appreciation that the sellers finally won out. Thus buyers are begrudgingly paying that extra few percent to buy a home. At some point one side will always capitulate.
Exacerbating the inequity in the supply and demand equation is the skyrocketing rents. This frankly, comes as quite a surprise. You may have heard about the large Real Estate Investment Trusts or REIT’s like Blackstone for example, that purchased hundreds of thousands of distressed properties with Wall Street money at or near the bottom of the market, essentially monetizing the home rental industry. The expectation was that eventually the conversion of so many single family homes from principle owned residences to income property, was going to make property values rise because all these new rental properties could no longer be purchased. They were now and possibly forever, destined to be rentals. It was also a concern that all these rentals would drive down rental rates as this huge influx of rentals meant greater competition for renters and that would bring down rents. That has not happened. In fact rents are higher than ever. Hello Millennials and welcome to adulthood! Rising rents mean buying and owning is cheaper than renting and just paying. By the way, did you know that you can buy using an FHA loan, with just 3.5% down and that in Ventura County if you or you and your partner earn around $100,000 year, you can borrow as much as $603,750? That means you can buy a home valued at $625,600 with just $22,000 down plus closing costs and that your payment would only be around$3,600 including principle interest, taxes and insurance? After tax write offs, that’s the equivalent of $2,600/mo in rent but now you own! And parents, you can even gift the down payment to your kids too! That is unbelievable. And don’t forget that when your $625,000 home appreciates 10% it goes up $62,500. That means that your $22,000 investment just tripled in value and you own your own home to boot! That’s called leverage and that’s the power of home ownership. (Have questions? Ask Tim here.)
Demographers have been talking about the dawn of the Millennials, previously referred to as “Generation X,” for years. Their numbers exceed that of the Baby Boomers. This is the group of young people, the grandchildren of the Baby Boomers, that have been late to the party; They are staying in school longer; living in their parent’s basements into their late 20’s; not having children until their mid 30’s and frankly on the slow boat to China of adulthood. But guess what? They’ve arrived and they are going to keep arriving for the next 15 years. Yes this market is just right, but it won’t stay that way forever. At some point rates are going to rise in an effort to slow inflation. At some point the Millennials are going to decide urban living was great fun before kids, but urban schools will push them to the suburbs. At some point the economy will overheat and at some point it will slow and the market will slow along with it. For now however, this market is just right. It’s a great time to sell and it’s a great time to buy, yes indeed, this market is just right.