Wow, where to start. As is with communities across our great land, when a large employer announces substantive changes to the number of people they are going to employ in that area, every aspect of the local economy is affected. Such is the case here, along the Los Angeles/Ventura County line. When rumors began circulating that Amgen, the area’s largest employer, was preparing to lay off a large part of their workforce, you could almost hear the gears of the local economy, grinding to a halt. What would the impact be? Home prices would have to come down as all those laid off employees scramble to list and sell their homes as they’re forced to relocate to other biotech hubs like Boston and San Francisco, right? The sudden shadow that hung over our valley seemed to reach every corner and the attitude of home buyers moved from optimistic as inventory was increasing and prices appreciation stabilizing, to trepidatious and cautious.
At the time of the rumors, I focused on the math: how many people would actually be laid off locally, that would have to sell and move to find employment? The number kept running around 1,000. Then right when we were preparing for the worst, Amgen’s CEO announced an additional 1,100 people would lose their jobs and the market reacted as one might expect, it shut down right? Wrong. It is true, the market has softened, traffic at open houses slowed and the number of closed sales declined – somewhat. In fact given the time of year and the overall health of the real estate market nationally, we actually don’t seem all that different and are simply mirroring everyone else. We are not substantially slower, the sky has not fallen and if you ask my buyers, there’s still not very much on the market. So what gives, because that makes no sense at all?
One thing we can all agree on is that real estate is local. But to understand locally we must first look at the broader market to better frame our discussion. Nationally the market is slowing and appreciation, abating. It’s slowing because 2013 brought broad based and rapid property price appreciation as the attitude shifted from, “We’ll never see homes appreciate again,” to, “I think we can all agree we have already bounced off the bottom.” So the appreciation we experienced was a combination of large swaths of investors, be it “Mom and Pops” or institutional investors like Blackrock buying cheap homes and the herd mentality that “It must be safe to buy now.” This continued until June 2013 when Federal Reserve Chairperson Janet Yellen, announced the end of QE (Quantitative Easing) in the form of the Fed’s bond buying. Interest rates jumped nearly a full percentage point and the market cooled. There would be no “irrational exuberance” here, to borrow a phrase from Ms. Yellen’s predecessor Alan Greenspan. She put the brakes on the housing recovery and it worked. The market cooled, but it did not halt. In fact as the economy and consumer sentiment improved, property values and sales gently increased into 2014. Something however was missing. Traditional first time buyers (mid 20’s to early 30’s) in many parts of the country had been priced out of the market due to 2013’s rapid appreciation. Moreover, many of the Millennial’s were and are, still living in their parent’s basements. Household formation, the key component of first time home ownership, was not happening at the pace it historically does. In his article yesterday, syndicated columnist Lew Sichelman cites NAR statistics that less than 30% of 2014 buyers are first time buyers. The historical average he states is 40%. Without first time buyers buying the fixer/older homes he reasons, the market cannot achieve its full potential. He goes on to attribute this to the lack of move up buyers due to a shortage of new homes, often the catalyst for existing homeowners to sell: they want a new home. And while I agree with this idea, it doesn’t go far enough.
The reasons these first time buyers aren’t buying homes has as much to do with a lack of income growth as it does to available inventory. Moreover, analysts love to point to the fact that our young would-be buyers are saddled with student loan debt making qualifying more difficult. Add to this tighter lending standards in general, despite near historical low interest rates and a shift in where this demographic wants to live (ie: close in, not out in the burbs somewhere) and you get a buying foundation akin to sand. The lower end and first time buyer market is the foundation for all property values and appreciation, without them, the whole market is shaky. This means that typical first time buyer-fixer type homes are not only not appreciating, they may even be dropping. Thus inventory declines as sellers decide to wait for a higher prices or in many cases wait because they are still upside down having not yet climbed out of the hole from the housing crash and simply cannot sell. This in turn has changed what first time buyers look like. First time buyers are not late 20 and early 30 year olds as they once were at all, they are 35-40 with 2 small kids coming much later in life than in years past and they are dual income with no time nor interest in fixing a home up. So instead of buying older fixers where they can use their sweat equity to build equity, first time buyers are buying turnkey properties and these properties are far and few between as compared with older properties that need a little TLC. First time buyers look different and act different and this has changed the dynamic of homeownership. The impact of this is that we should expect prices to remain flat until such time as incomes grow, household formation gets back on track and builders start building more homes to motivate more homeowners to sell.
So back to our local market… It is true that there is great unease amongst buyers and we have already experienced a 5% drop in values since summer. But there are still buyers out there. In fact there are lots of them, even here where we are bracing for substantive job losses. How do I know? Ask a lender if they have any preapproval letters out and they will tell you they have files filled with them, but that those buyers just aren’t buying. I held an open house a couple of weekends ago and I had 4 noncontigent buyers come into my open house, none of whom worked for Amgen but all of them in the market for a home.
So what does this all mean? The way I see it, there will be pressure on prices until all those who were laid off either decide to sell or stay. I expect this to become clearer in the spring. In fact I expect that spring will bring a lot of new listings to the market place and this will offset the typical spring “bump” we get in prices. But that also means that there may be no better time to buy than now. It means as a buyer, you want to be a little more aggressive on your offers and if you’re a seller, a little more open to negotiate. Herein lies the key to navigating this market: be a participant, not an idle bystander. If you are a seller today, don’t wait until spring because you will have more competition and they’ll have the benefit of seeing how long you’ve sat and price their home accordingly. If you are a buyer, don’t be afraid to make your deal today if you find a home you want. One thing is certain, the future is never predictable whereas the present is, well, the present.